Chapter 20, Problem 4BP

1.

To determine

Prepare a process cost summary.

Explanation of Solution

Process cost summary: Process cost summary is prepared separately for each production department or for each process. A process cost summary describes the costs charged to each department, determines the costs assigned to each department outputs and reports the equivalent units of production achieved by each department. It is also known as production report.

Prepare process cost summary for Company S using weighted average method.

Company S
Process Cost Summary – Weighted average method
For Month Ended January 31
Costs Charged to Production
Particulars	Amount	Amount
Costs of beginning work in process
Direct material	$7,500
Conversion	$49,850	$57,350
Costs incurred this period
Direct materials	$112,500
Conversion	$616,000	$728,500
Total costs to account for		$785,850
Unit cost information		(In Units)
Units to account for
Beginning work in process		10,000
Units started this period (Refer Working Note 1)		250,000
Total units to account for		260,000
Units accounted for
Completed & transferred out		220,000
Ending work in process		40,000
Total units accounted for		260,000
Equivalent units of production	Direct Materials (EUP)	Conversion (EUP)
Units completed and transferred out	220,000	220,000
Ending work in process
Direct materials $\left(40,000\text{ units}\times 50\%\right)$	20,000
Conversion $\left(40,000\text{ units}\times 30\%\right)$		12,000
Equivalent units of production	240,000 EUP	232,000 EUP
Cost per EUP	Direct Materials	Conversion
Cost of beginning work in process	$7,500	$49,850
Cost incurred during this period	$112,500	$616,000
Total cost (A)	$120,000	$665,850
Equivalent units of production (B)	240,000 EUP	232,000 EUP
Cost per EUP (C)$\left(\text{A}\right)÷\left(\text{B}\right)$	$0.50 per EUP	$2.87 per EUP
Cost assignment and reconciliation
Particulars	Amount	Amount
Cost transferred out
Direct material $\left(220,000\text{ units}\times \$0.50\text{ per EUP}\right)$	$110,000
Conversion $\left(220,000\text{ units}\times \$2.87\text{ per EUP}\right)$	$631,400	$741,400
Costs of ending work in process
Direct material $\left(20,000\text{ units}\times \$0.50\text{ per EUP}\right)$	$10,000
Conversion $\left(12,000\text{ units}\times \$2.87\text{ per EUP}\right)$	$34,440	$44,440
Total costs accounted for		$775,840

Table (1)

Working Note:

1. Determine the units started during the period.

$\begin{array}{c}\begin{array}{l}\text{Units started during}\\ \text{ the period}\end{array}\}=\left(\begin{array}{l}\text{Ending }\\ \text{inventory}\end{array}\right)+\left(\begin{array}{l}\text{Units completed }\\ \text{and transferred}\end{array}\right)-\left(\begin{array}{l}\text{Beginning }\\ \text{inventory}\end{array}\right)\\ =40,000\text{ units}+220,000\text{ units}-10,000\text{ units}\\ \text{=}260,000\text{ units}-10,000\text{ units}\\ \text{=250,000 units}\end{array}$

2.

To determine

Prepare journal entries to transfer the cost of completed units to finished goods inventory.

Explanation of Solution

Process Costing: Process costing is method of cost accounting in which all the costs that are incurred production process are recorded. Output of one process becomes input for next process. This method is used to apply cot to similar products that are mass-produced in uninterrupted manner.

Prepare journal entries.

Date	Account title and explanation	Post. Ref.	Amount $
			Debit	Credit
January 31	Finished goods Inventory		741,400
	Work in Process Inventory			741,400
	(To record the transfer of finished goods.)

Table (2)

To record the transfer of finished goods:

• Finished goods inventory is an asset account. Transfer of units to finished goods inventory from production increases the asset account by $741,400. Thus it, is debited.
• Work in process inventory is an asset account. Transfer of units from production to finished goods inventory decreases the asset account by $741,400. Thus it, is credited.

3.(a)

To determine

Ascertain the two major estimates that determine the 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 two estimates for determining the cost per equivalent unit are as follows:

1. Overhead allocation rate.

2. Percentage of completion for materials and conversion.

3.(b)

To determine

Ascertain the anticipated bias of management for each estimate in part 3a and explain the reasons.

Explanation of Solution

The management might require an overhead allocation rate that would minimize the amount of overhead applied to the respective production process and analyst would possibly under estimate the percentage of completion. In case the materials are added at the beginning of the process then, it would be difficult to manage.

In general, the management would reduce the equivalent units for conversion by under estimating the percentage of completion that would lower the dollar value assigned to the components of ending inventory.