Chapter 6, Problem 44P

1.

To determine

Calculate cost per bag of chemicals transferred to finished goods using the FIFO method.

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.

Calculate cost per bag of chemicals transferred out to finished goods.

$\begin{array}{c}\text{Cost per unit =}\frac{\text{Transferred out cost}}{\text{Equivalent units for transferred out units}}\\ =\frac{\left(\$147,500+\$825+\$22,500\right)}{500}\\ =\frac{\$170,825}{500}\\ =\$341.65\text{per bag}\end{array}$

Therefore, cost per bag of chemical transferred out to finished goods is $341.65.

Working notes:

Calculate physical flow schedule for baking department.

Particulars	Units	Workings
Units to account for:
Beginning work in process	10,000	(5,000 × 2)
Units started	100,000	(50,000 ×2)
Total units to account for	110,000
Units accounted for:
Units transferred out	100,000	(110,000 - 10,000)
Add: Normal spoilage	5,000
Abnormal spoilage	5,000
Total units accounted for	110,000

Table (1)

Prepare equivalent units of production for baking department

Particulars	Conversion costs	Transferred In
Units started and completed	90,000	90,000
Equivalent units in beginning work in process	7,500	0
Normal spoilage	2,500	5,000
Abnormal spoilage	2,500	5,000
Total equivalent units	102,500	100,000

Table (2)

Prepare equivalent cost per unit for baking department.

Particulars	Conversion	Transferred In
Cost (A)	$205,000	$250,000
Equivalent units of production (B)	102,500	100,000
Cost per unit (A ÷ B)	$2	$2.50

Table (3)

Calculate cost of goods transferred out.

Particulars	Amount	Amount
Started and completed (90,000 × ($2 + $2.50)		$405,000
Units from beginning work in process:
Prior period costs	$35,000
Cost to finished (7,500 × $2)	$15,000	$50,000
Normal spoilage (2,500 × $2)+ (2,500 × $2.50)		$17,500
Total		$472,500

Table (4)

Calculate abnormal spoilage loss for banking department.

$\begin{array}{c}\text{Abnormal spoilage loss = Conversion cost + Transferred in cost}\\ \text{=}\left(2,500\times \$2\right)+\left(5,000\times \$2.50\right)\\ =\$5,000+\$12,500\\ =\$17,500\end{array}$

Calculate physical flow schedule for grinding department.

Particulars	Units	Workings
Units to account for:
Beginning work in process	500	(25,000 ÷50)
Units started	2,000	(100,000 ÷50)
Total units to account for	2,500
Units accounted for:
Started and completed	2,000	(110,000 - 10,000)
Add: Beginning work in process	500
Total units accounted for	2,500

Table (5)

Prepare equivalent units of production for grinding

Figure (1)

Prepare equivalent cost per unit for grinding department.

Particulars	Direct Materials	Conversion	Transferred In
Cost in beginning work in process	$0	$15,000	$132,500
Add: Cost added (A)	$4,125	$172,500	$472,500
Total costs	$4,125	$187,500	$605,000
Equivalent units of production (B)	2,500	2,300	2,000
Cost per unit (A ÷ B)	$1.65	$75	$236.25

Table (6)

Calculate cost added for direct materials.

$\begin{array}{c}\text{Cost added for materials = }\left(\begin{array}{l}\text{Equivalent units of direct materials }\times \\ \frac{\text{Number of bags}}{\text{Number of bag sold}}\times \text{Cost per bag}\end{array}\right)\\ \text{=}\text{2,500}\times \frac{11}{10}\times \$1.50\\ =\$4,125\end{array}$

Calculate total prior costs for grinding department.

$\begin{array}{c}\text{Prior costs = Transferred in cost + Conversion cost}\\ \text{= \$132,500 +\$15,000}\\ \text{=}\text{\$147,500}\end{array}$

Calculate ending work in process inventory for direct materials.

$\begin{array}{c}\text{Ending work in process =}\text{Ending work in process units }\times \text{Cost per unit}\\ \text{=}\text{500}\text{units}\times \text{\$1}\text{.65}\\ \text{=}\text{\$825}\end{array}$

Calculate ending work in process inventory for conversion cost.

$\begin{array}{c}\text{Ending work in process =}\text{Ending work in process units }\times \text{Cost per unit}\\ \text{=}3\text{00}\text{units}\times \text{\$75}\\ \text{=}\text{\$22,500}\end{array}$

2.

To determine

Prepare journal entry to record to remove spoilage from the baking and grinding departments.

Explanation of Solution

Prepare journal entry to record to remove spoilage from the baking and grinding departments

Date	Account titles and Explanation	Debit	Credit
	Loss Due to spoilage	$17,500
	Work in process - Baking department		$17,500
	(To record remove spoilage for baking department)

Table (7)

• Loss due to spoilage is a component of stockholders’ equity, and it is decreased. Therefore, debit loss due to spoilage account for $17,500.
• Work in process inventory- Baking department is a current asset, and it is decreased. Therefore, credit work in process inventory – Baking department account for $17,500.