Chapter 3, Problem 18E

A. (1)

To determine

Prepare journal entry to record materials charged to production for casting department of Incorporation AC.

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.

Cost per unit

Total unit cost is the cost incurred by the company to produce one unit of product. The unit cost is calculated by dividing the units produced with the total cost.

Prepare the journal entry to record material charged to production for casting department of Incorporation AC as shown below:

Account title and Explanation	Debit	Credit
work in process - Casting Department	$350,000
Materials - Alloy		$350,000
(To record the materials used in production)

Table (1)

• • Work in process inventory – Casting department is a current asset, and increased. Therefore, debit work in process inventory – casting department account for $350,000.
• • Materials – Alloy is a current asset, and decreased. Therefore, credit materials – Alloy account for $350,000.

A. (2)

To determine

Prepare journal entry to record conversion costs charged to production for casting department of Incorporation AC.

Explanation of Solution

Prepare the journal entry to record conversion costs charged to production for casting department of Incorporation AC as shown below:

Account title and Explanation	Debit	Credit
work in process - Casting Department	$49,600
Wages payable		$19,840
Factory overhead		$29,760
(To record the conversion costs used in production)

Table (2)

• • Work in process inventory – Casting department is a current asset, and increased. Therefore, debit work in process inventory – casting department account for $49,600.
• • Wages payable is a current liability and increased. Therefore, credit wages payable account for $19,840.
• • Factory overhead is a component of stockholders’ equity and decreased it. Therefore, credit factory overhead account for $29,760.

Working note (1):

Calculate factory overhead costs for casting department as shown below:

$\begin{array}{c}\text{Factory overhead =}\text{Direct labor cost}\times \text{Factory overhead applied rate}\\ \text{=}\$19,840\times 150\%\\ =\$29,760\end{array}$

A. (3)

To determine

Prepare journal entry to record transferred out to Machining department of Incorporation AC.

Explanation of Solution

Prepare the journal entry to record transferred out to Machining department of Incorporation AC as shown below:

Account title and Explanation	Debit	Credit
Work in process – Machining  Department	$402,684
Work in process – Casting department (5)		$402,684
(To record completed production transferred from casting department to Machining department )

Table (3)

• • Work in process inventory – Machining department is a current asset, and increased. Therefore, debit work in process inventory – machining department account for $402,684.
• • Work in process inventory – Casting department is a current asset, and decreased. Therefore, credit work in process inventory – Casting department account for $402,684.

Working note (2):

Calculate equivalent units for production of casting department as shown below:

Figure (1)

Hints:

1. 1. Opening work in process inventory units for conversion costs is calculated by multiplying whole units of opening work in process inventory with percent to complete.
2. 2. A started and completed unit in May is calculated by deducting opening work in process inventory whole units from Transferred units to machining department.
3. 3. Ending work in process inventory whole units is calculated by adding  units produced during the period of May, and opening work in process inventory whole units and then deduct with transferred to machining department in May.
4. 4. Ending work in process inventory units for conversion costs is calculated by multiplying whole units of ending work in process inventory with percentage completed during the period of May.

Working note (3):

Calculate equivalent cost per unit for direct materials as shown below:

$\begin{array}{c}\text{Equivalent cost per unit of Materials =}\frac{\text{Direct materials cost}}{\text{Equivlaent units for direct materials}}\\ =\frac{\$350,000}{2,500\text{pounds}}\\ =\$140\text{per pound}\end{array}$

Working note (4):

Calculate equivalent cost per unit for conversion costs as shown below:

$\begin{array}{c}\text{Equivalent cost per unit of Conversion cost}\text{=}\frac{\text{Total conversion cost}}{\text{Equivalent units for conversion cost}}\\ =\frac{\$49,600}{2,480\text{pounds}}\\ =\$20\text{per pound}\end{array}$

Working note (5):

Calculate cost transferred out costs to Machining department as shown below:

Particulars	Pounds (A)	Per pound (B)	Amount (A × B)
Cost of 2,530 transferred out pounds:
Materials	230	$132	$30,360
Conversion	138	$18	$2,484
Add: Cost to complete, May 1:
Materials	0	$140	$0
Conversion	92	$20	$1,840
Add: Pounds started and completed in May:
Materials	2,300	$140	$322,000
Conversion	2,300	$20	$46,000
Transferred costs to Machining Department			$402,684

Table (4)

B.

To determine

Calculate the ending work in process balance for casting department of Incorporation AC.

Explanation of Solution

Calculate the ending work in process balance for casting department of Incorporation AC as shown below:

Particulars	Pounds (A)	Per pound (B)	Amount (A × B)
Ending work in process inventory:
Direct materials	200	$140	$28,000
Conversion costs	88	$20	$1,760
Total ending work in process inventory			$29,760

Table (5)

Conclusion

Therefore, ending work in process inventory balance for casting department of Incorporation AC is $29,760.

C.

To determine

Evaluate the changes in equivalent cost per unit of direct materials and conversion costs comparing with previous month.

Explanation of Solution

Calculate the changes in equivalent cost per unit of direct materials and conversion costs comparing with previous month as shown below:

Particulars	Per pound
Cost per unit for May	$140
Less: Cost per unit for April	$132
Increase in Direct material cost per unit	$8

Table (6)

Particulars	Per pound
Cost per unit for May	$20
Less: Cost per unit for April	$18
Increase in Conversion cost per unit	$2

Table (7)

Change in equivalent cost per unit for direct material is $8 per pound ($140 – $132). Hence, equivalent cost per unit for direct materials is increased by $8 per pound. A change in equivalent cost per unit for conversion cost is $2 per pound ($20 – $18). Hence, equivalent cost per unit for conversion cost is increased by $2 per pound. Incorporation AC might to scrutinize the reasons for increasing in direct material cost per unit and conversion cost per unit.