Chapter 4, Problem 20C

To determine

Case study of Process Costing System

In process costing, the cost is computed for each process/department.

In this process, first of all, total cost incurred in production process during a particular period is identified.

Thereafter, total equivalent units are computed. This helps in arriving at the cost per equivalent unit.

With this cost per equivalent unit, cost of goods sold is computed.

Answer 1:

: Cost of Goods Sold.

Answer to Problem 20C

Solution: Cost of Goods Sold = $ 59,294,000

Explanation of Solution

• Given:

Cost transferred from prior processing department

- $ 39,375,000

Cost incurred in the final processing department

- $ 20,807,500

Beginning Work-in-process units   - 0

Units transferred from prior processing department

- 210,000

Units Sold   - 200,000

• Formula:

  $\text{Total Cost = Cost transferred from prior processing department + Cost incurred in the final processing department}$

  $\text{Ending work-in-process = Beginning work-in-process units + Units transferred from prior processing department - Units Sold}$

  $\text{Equivalent Units = Units completed and Sold + Ending work-in-process}$

  $\text{Cost per Equivalent Unit = }\frac{\text{Total Cost Incurred}}{\text{Total Equivalent units}}$

  $\text{Cost of Goods Sold = Quantity Sold X Cost per Equivalent Unit}$

• Calculation:

  $\begin{array}{l}\text{Total Cost = \$ 39,375,000 + \$ 20,807,500}\\ \text{Total Cost = \$ 60,182,500}\end{array}$

  $\begin{array}{l}\text{Ending}\text{}\text{Work-in-Process = 0 + 210,000 - 200,000}\\ \text{Ending Work-in-Process = 10,000 units}\end{array}$

  $\begin{array}{l}\text{Equivalent Units = 200,000 + 10,000 units X 30\%}\\ \text{Equivalent Units = 203,000 units}\end{array}$

$\text{Cost per Equivalent Unit = }\frac{\text{\$ 60,182,500}}{203,000}$ = $ 296.47

  $\begin{array}{l}\text{Cost of Goods Sold = 200,000 X \$ 296}\text{.47}\\ \text{Cost of Goods Sold = \$ 59,294,000}\end{array}$

Conclusion

The Cost of Goods Sold is $ 59,294,000.

Answer 2:

To determine

Why Stevens wants to increase/ decrease the percentage completion

Answer to Problem 20C

Solution:

Gary Stevens wants the percentage to be increased so that higher profits may be shown resulting in higher bonus.

Explanation of Solution

• Given: Ending work-in-process inventory is 30% complete in respect of conversion cost

• Gary Stevens wants the percentage of completion to be increased. This is because if the percentage is increased, the equivalent units will increase. With increase in equivalent units but total cost remaining same, the cost per equivalent unit will come down. Lower cost per equivalent unit will result in lower cost of goods sold and hence higher profit.

Conclusion

Gary Stevens intends to increase profit by increasing percentage of completion.

Answer 3:

To determine

% completion which will give increase in operating profit by $ 200,000 over current operating profit when % completion is 30%.

Answer to Problem 20C

Solution:

Increase in profit means that the cost of goods sold is reduced by $ 200,000

(Profit increases by increasing selling price or reducing cost. Here, the selling price cannot be increased and as such, cost of goods sold is required to be reduced).

Cost of Goods Sold with 30% work-in-process completion (A)	$ 59,294,000
Increase in profit required (B)	$ 200,000
Cost of Goods Sold required (C = A - B)	$ 59,094,000
Units sold (D)	200,000
Cost per equivalent unit (E = C / D)	$ 295.47
Total Cost incurred during the year (F)	$ 60,182,500
Value of work-in process (F - C)	$ 1,088,500
Work-in-process inventory in units	10,000

Explanation of Solution

• Given :

Required profit is $ 200,000

Units sold is 200,000

Total Cost incurred during the year as $ 60,182,500

Cost of Goods Sold with 30% work-in-process completion has been computed as $ 59,294,000

• Formula :

  $\begin{array}{l}\text{Required Cost of Goods Sold = Cost of Goods Sold with 30\% completion percentage}\\ \text{ - Increase in Profit required}\end{array}$

  $\text{Cost per Equivalent Unit = }\frac{\text{Cost of Goods Sold required}}{\text{Units Sold}}$

  $\text{Value of Work-in-Process = Total Cost incurred - Cost of Goods Sold required}$

  $\text{Completion \% = }\frac{\text{Value of work-in-process}}{\text{WIP units X Cost per Equivalent Unit}}$

• Calculation:

  $\begin{array}{l}\text{Required Cost of Goods Sold = \$ 59,294,000 - \$ 200,000}\\ \text{Required Cost of Goods Sold = \$ 59,094,000}\end{array}$

  $\text{Cost per Equivalent Unit = }\frac{\text{\$ 59,094,000}}{\text{200,000 units}}$ = $ 295.47 per unit

  $\begin{array}{l}\text{Value of Work-in-Process = \$ 60,182,500 - \$ 59,094,000}\\ \text{Value of Work-in-Process = \$ 1,088,500}\end{array}$

  $\text{Completion \% = }\frac{\text{\$ 1,088,500}}{\text{(10,000 units X \$ 295}\text{.47)}}$ = 36.84%

Conclusion

At 36.84% completion, operating profit will increase by $ 200,000 over current operating profit when % completion is 30%.

Answer 4:

To determine

To determine: Whether % completion should be changed

Answer to Problem 20C

Solution:

Mary James should not accept this change in percentage completion to show higher profits. This is because it is against corporate ethics. Also, such type of financial fraud is considered unethical and illegal and exposes those involved to fines.

Explanation of Solution

:

1. Total cost is computed by adding cost transferred from prior department and additional cost incurred in the department for final processing;
2. For computing equivalent units, units sold and ending work-in-process are required. Units sold are given in question along with total units transferred from prior department.

This means that the difference of these two quantities would be closing work-in-process.

3. The question specifically states that no material is added during final processing. This means that only conversion cost gets incurred in this department.
4. The equivalent units are calculated with the help of formula and cost per equivalent unit is also computed which is then applied to units sold to arrive at Cost of Goods Sold.

Conclusion

:

The percentage of completion for ending work-in-process should not be changed as the same is against ethics and might lead to legal consequences.