Chapter 20, Problem 2BP

1. (a)

To determine

Calculate the equivalent units of production with respect to conversion.

Explanation of Solution

Equivalents units for production: The activity of a processing department in terms of fully completed units is known as equivalent units. It includes the completed units of direct materials and conversion cost of beginning work in process, units completed and transferred out, and ending work in process.

Conversion cost:  Cost of changing the materials into a finished product. It includes direct labour costs and factory overhead costs.

Compute equivalent units of production with respect to conversion.

Given, work in process inventory at the end of September is 8,000 units and are 25% complete with respect to conversion.

Equivalent units of production	Conversion (EUP)
Units completed and transferred out	80,000
Ending work in process $\left(8,000\text{ units}\times \text{25\%}\right)$	2,000
Equivalent units of production	82,000

Table (1)

Conclusion

Therefore, the equivalent units of production with respect to conversion are 82,000 EUP..

1. (b)

To determine

Calculate the equivalent units of production with respect to direct materials.

Explanation of Solution

Equivalents units for production: The activity of a processing department in terms of fully completed units is known as equivalent units. It includes the completed units of direct materials and conversion cost of beginning work in process, units completed and transferred out, and ending work in process.

Direct materials cost: Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.

Compute equivalent units of production with respect to direct materials.

Given, work in process inventory at the end of September is 8,000 units and are 100% complete with respect to conversion.

Equivalent units of production	Direct Materials (EUP)
Units completed and transferred out	80,000
Ending work in process $\left(8,000\text{ units}\times \text{100\%}\right)$	8,000
Equivalent units of production	88,000

Table (2)

Conclusion

Therefore, the equivalent units of production with respect to direct materials are 88,000 EUP.

2.

To determine

Compute the conversion cost and the direct materials cost per equivalent unit.

Explanation of Solution

Cost per equivalents units of production: Cost per equivalents units of production refers to the costs incurred for each equivalent unit produced. The cost per equivalents units for production (EUP) is computed as follows:

$\text{Costs per EUP}=\frac{\text{Costs incurred for the current period}}{\text{Equivalent unit of production}}$

Compute the conversion cost and the direct materials cost per equivalent unit.

Cost per EUP	Direct Materials	Conversion
Cost of beginning work in process	$58,000	$86,400
Cost incurred during this period	$712,000	$1,980,000
Total costs (A)	$770,000	$2,066,400
Equivalent units of production (B)	88,000	82,000
Cost per EUP	$8.75 per EUP	$25.20 per EUP

Table (3)

Note: Refer table (1) and table (2) for equivalents units of production.

Conclusion

Therefore, the conversion cost and the direct materials cost per equivalent unit are $8.75 per EUP and $25.20 per EUP respectively.

3. (a)

To determine

Calculate conversion cost and direct materials costs assigned to units completed and transferred out.

Explanation of Solution

Direct materials cost: Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.

Conversion cost:  Cost of changing the materials into a finished product. It includes direct labour costs and factory overhead costs.

Calculate conversion cost and direct materials costs assigned to units completed and transferred out.

Cost assignment– Weighted average	Direct materials	Conversion
Costs transferred out
Direct materials $\left(80,000\text{ EUP}\times \text{\$8}\text{.75 per EUP}\right)$	$700,000
Conversion $\left(80,000\text{ EUP}\times \text{\$25}\text{.20 per EUP}\right)$	$2,016,000
Total costs transferred out		$2,716,000

Table (4)

Conclusion

Thus, the conversion cost and direct materials costs assigned to units completed and transferred out are $700,000 and $2,016,000 respectively.

3. (b)

To determine

Calculate conversion cost and direct materials costs assigned to ending inventory.

Explanation of Solution

Direct materials cost: Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.

Conversion cost:  Cost of changing the materials into a finished product. It includes direct labour costs and factory overhead costs.

Calculate conversion cost and direct materials costs assigned to ending inventory.

Cost assignment– Weighted average	Direct materials	conversion
Costs of ending work in process inventory
Direct materials $\left(8,000\text{ EUP}\times \text{\$8}\text{.75 per EUP}\right)$	$70,000
Conversion $\left(2,000\text{ EUP}\times \text{\$25}\text{.20 per EUP}\right)$	$50,400
Total cost of ending work in process inventory		$120,400

Table (5)

Conclusion

Thus, the conversion cost and direct materials costs assigned to units completed and transferred out are $70,000 and $50,400 respectively.

4.

To determine

Write a one page memo to the plant manager of Company A explaining the effects of the errors in percentage of completion in the financial statements.

Explanation of Solution

Memo

From

   XYZ

To

   ABC,

   Plant manager,

   Company A.

January 29, 2019

Subject: Percentage of completion error analysis.

The number of equivalent units in ending inventory with respect to conversion would be understated and the total equivalent units produced for the period would also be understated if the units in ending inventory are 75% complete instead of 25% with respect to conversion. Though, the conversion cost in ending work in process is higher due to the larger percentage of equivalent units remaining in the ending inventory.

Such errors would overstate the cost of goods sold and understate the net income on the income statement for the month of September. Subsequently, the work in process inventory (total assets) and the retained earnings (equity) would also be understated. Please revert back for further clarifications.

Regards,

XYZ