Chapter 6, Problem 21E

Dama Company produces women’s blouses and uses the FIFO method to account for its manufacturing costs. The product Dama makes passes through two processes: Cutting and Sewing. During April, Dama’s controller prepared the following equivalent units schedule for the Cutting Department:

Costs in beginning work in process were direct materials, $20,000; conversion costs, $80,000. Manufacturing costs incurred during April were direct materials, $240,000; conversion costs, $320,000.

Required:

1. 1. Prepare a physical flow schedule for April.
2. 2. Compute the cost per equivalent unit for April.
3. 3. Determine the cost of ending work in process and the cost of goods transferred out.
4. 4. Prepare the journal entry that transfers the costs from Cutting to Sewing.

To determine

Prepare the schedule of physical flow.

Explanation of Solution

Process Costing: It is a method of cost accounting used by an enterprise with processes categorised by continuous production. The cost for manufacturing those products are assigned to the manufacturing department before the averaged over units are being produced.

Prepare the schedule of physical flow.

Particulars	Units
Units to account for:
Units, beginning work in process	10,000
Units started	60,000
Total units to account for	70,000
Units accounted for:
Units  started completed	40,000
Units, beginning work in process	10,000
Units, ending work in process	20,000
Total units accounted for	70,000

(Table 1)

To determine

Calculate the cost per equivalent unit for the month April.

Explanation of Solution

Calculate the cost per equivalent unit for the month April.

$\begin{array}{c}\text{Unit cost per equivalent unit = Unit material costs (1) +Unit conversion cost (2)}\\ \text{=\$4}\text{.00+\$6}\text{.40}\\ \text{=\$10}\text{.40 per equivalent unit}\end{array}$

Working note 1: Calculate the unit material cost.

$\begin{array}{c}\text{Unit material cost=}\frac{\left(\text{Current cost of direct materials}\right)}{\text{Equivalent unit output of direct materials}}\\ =\frac{\$240,000}{60,000}\\ =\$4.00\end{array}$

Working note 2: Calculate the unit conversion cost.

$\begin{array}{c}\text{Unit conversion cost=}\frac{\text{Current cost of conversion}}{\text{Equivalent unit output of conversion}}\\ =\frac{\$320,000}{50,000}\\ =\$6.40\end{array}$

To determine

Ascertain the value of cost of EWIP and the cost of goods transferred out.

Explanation of Solution

Ascertain the value of cost of EWIPs.

Particulars	Amount in $
Ending work in process:
Direct materials (3)	80,000
Conversion cost (4)	32,000
Total cost of ending work in process	112,000

(Table 2)

Ascertain the cost of goods transferred out.

Particulars	Amount in $
Cost of goods transferred out:
Units started and completed (5)	416,000
Units, beginning work in process:
Prior-period cost	100,000
Current costs to finish (6)	32,000
Total cost of goods transferred out	548,000

(Table 3)

Working note 3: Calculate the units of direct materials during ending work in process.

$\begin{array}{c}\begin{array}{l}\text{Ending work}\\ \text{ in process of direct}\\ \text{materials}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Units of material cost}\times \text{ units in ending}\\ \text{ work in process of material}\end{array}\right)\\ \text{=\$4}\text{.00}\times 20\text{,000}\\ \text{=\$80,000}\end{array}$

Working note 4: Calculate the units of conversion cost during ending work in process.

$\begin{array}{c}\begin{array}{l}\text{Ending work}\\ \text{ in process of conversion cost}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Units of conversion cost}\times \text{ units in ending}\\ \text{ work in process of conversion cost}\end{array}\right)\\ \text{=\$6}\text{.40}\times 5,000\\ \text{=\$32,000}\end{array}$

Working note 5: Calculate the value of the units that were started and completed.

$\begin{array}{c}\text{Units started and completed}\}\text{ = }\left(\begin{array}{l}\text{Units started and completed for }\\ \text{direct materials and conversion cost}\times \\ \text{Total cost of equivalent units}\end{array}\right)\\ \text{=40,000}\times \text{\$10}\text{.40}\\ \text{=\$416,000}\end{array}$

Working note 6: Calculate the current cost to finish.

$\begin{array}{c}\text{Current cost to finish = }\left(\begin{array}{l}\text{Beginning work in process }\\ \text{of conversion cost}\times \text{Cost per equivalent }\\ \text{unit of conversion cost }\end{array}\right)\\ \text{=5,000}\times \text{\$6}\text{.40}\\ =\$32,000\end{array}$

To determine

Journalize the given transaction.

Explanation of Solution

Journalize the given transaction.

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Work in process (Sewing)	548,000
	Work in process (Cutting)		548,000
	(To record transfer of cost from cutting to sewing)

(Table 4)

• Work in (sewing) is an asset and there is an increase in the value of an asset. Hence, debit the work in process account by $548,000.
• Work in process (cutting) is an asset and there is a decrease in the value of an asset. Hence, credit the work in process account by $548,000.