Chapter 3, Problem 7PSB

1.

To determine

To prepare: Process cost summary.

Explanation of Solution

Prepare production cost summary:

B. Company-Cutting Department
Process Cost Summary (FIFO method)
For the month ended Oct. 31, 20XX
Particulars			Amount ($)	Amount ($)
Cost charged to Production
Cost of work in process (beginning)
Direct materials			16,800
Conversion			97,720	114,520
Cost incurred this period
Direct materials			223,200
Conversion			1,233,960	1,457,160
Total cost				1,571,680
Unit Information	Units				Units
Units to account for:		Units accounted for
Work in process (beginning)	10,000	Completed and transferred units			220,000
Unit started this period	250,000	Work in process (ending)			40,000
Total units to account for	260,000	Total units accounted for			260,000
Equivalent Unit of Production			Direct Materials	Conversion
Work in process (beginning)			2,500	4,000
Started and completed in this month			210,000	210,000
Work in process (ending)			20,000	12,000
Equivalent Unit of Production			232,500	226,000
Cost per EUP
Cost of work in process (beginning)			0	0
Cost incurred this period			223,200	1,233,960
Total cost			$223,200	$1,233,960
Equivalent unit of production			232,500	226,000
Cost per EUP			$0.96	$5.46
Cost Assignment			Amount ($)	Amount ($)
Cost of work in process (beginning)				114,520
Cost of completed units
Direct materials			204,000
Conversion			1,168,440	1,372,440
Cost of work in process (ending)
Direct materials			19,200
Conversion			65,520	84,720
Total cost				1,571,680

Table(1)

Hence, total cost of transferred goods and work in process (ending) is $1,486,960 and $81,160 respectively.

Working notes:

Calculation for EUP (direct material),

$\begin{array}{c}\text{Cost}\text{per}\text{EUP}\text{(direct}\text{material)}=\frac{\text{Total}\text{cost}}{\text{Equivalent}\text{unit}\text{of}\text{production}}\\ =\frac{\$223,200}{232,500}\\ =\$0.96\end{array}$

Calculation for EUP (Conversion),

$\begin{array}{c}\text{Cost}\text{per}\text{EUP}\text{(conversion)}=\frac{\text{Total}\text{cost}}{\text{Equivalent}\text{unit}\text{of}\text{production}}\\ =\frac{\$1,233,960}{226,000}\\ =\$5.46\end{array}$

2.

To determine

To prepare: Journal entry.

Explanation of Solution

Date	Account Title and Explanation	Post ref	Debit ($)	Credit ($)
Mar. 31	Work in Process-blending		1,486,960
	Work in Process-cutting			1,486,960
	(Being goods transferred from cutting to blendingdepartment )

Table(2)

• Work in process-blending is an asset. Since, goods is transferred from cutting to blending department, it increases work in process-blending account. Hence, debit work in process-blending account.
• Work in process-cutting is an asset. Since, goods is transferred from cutting to blending department, it decreases work in process-cutting account. Hence, credit work in process-cutting account.

3.

To determine

To explain: Effect on bonus from the overestimation of equivalent unit of production.

Explanation of Solution

If the equivalent unit of production is overstated then it will decrease the cost per equivalent unit of production because cost per equivalent unit of production is get by dividing total cost from equivalent unit of production.

• Since, cost per equivalent unit of production is decreased, it will increase the bonus of the department manager because higher the cost per equivalent unit of production lower will be the bonus and vice versa.
• If equivalent unit of production is higher in this month then next month equivalent unit of production will decrease and this will increase the cost per equivalent unit of production. Hence, it will decrease the bonus of department manager in the next month.

Hence, it will increase the bonus of plant manager for the month of March and decrease the bonus of the next month.