Chapter 6, Problem 67P

Benson Pharmaceuticals uses a process-costing system to compute the unit costs of the over-the-counter cold remedies that it produces. It has three departments: mixing, encapsulating, and bottling. In mixing, the ingredients for the cold capsules are measured, sifted, and blended (with materials assumed to be uniformly added throughout the process). The mix is transferred out in gallon containers. The encapsulating department takes the powdered mix and places it in capsules (which are necessarily added at the beginning of the process). One gallon of powdered mix converts into 1,500 capsules. After the capsules are filled and polished, they are transferred to bottling, where they are placed in bottles that are then affixed with a safety seal, lid, and label. Each bottle receives 50 capsules.

During March, the following results are available for the first two departments:

Overhead in both departments is applied as a percentage of direct labor costs. In the mixing department, overhead is 200% of direct labor. In the encapsulating department, the overhead rate is 150% of direct labor.

Required:

1. 1. Prepare a production report for the mixing department using the weighted average method. Follow the five steps outlined in the chapter. (Note: Round to two decimal places for the unit cost.)
2. 2. Prepare a production report for the encapsulating department using the weighted average method. Follow the five steps outlined in the chapter. (Note: Round to four decimal places for the unit cost.)
3. 3. CONCEPTUAL CONNECTION Explain why the weighted average method is easier to use than FIFO. Explain when weighted average will give about the same results as FIFO.

To determine

Present a production report for the mixing department using weighted average method.

Explanation of Solution

Weighted Average Method:

Weighted average method is an inventory valuation method. In this method, cost is divided by equivalent units to obtain unit cost. This unit cost is used to value the inventory units.

Step 1: Physical flow analysis:

Particulars	Units
Units to account for:
Units in beginning WIP	10
Add: Units started during the period1	150
Units to account for	160
Units accounted for:
Units completed and transferred	140
Add: Units in ending WIP	20
Units accounted for	160

Table (1)

Step 2: Computation of equivalent units:

Particulars	Units
Units completed and transferred	140
Equivalent units from ending inventory $\left(20\times 50\%\right)$	10
Equivalent units	150

Table (2)

Step 3: Computation of unit cost:

Particulars	Amount ($)
Cost of beginning inventory:
Material	252
Labor	282
Overhead $\left(200\%\times \$282\right)$	564
Total cost of beginning inventory (A)	1,098
Cost incurred:
Material	3,636
Labor	4,618
Overhead $\left(200\%\times \$4,618\right)$	9,236
Total cost incurred (B)	17,490
Total manufacturing cost $\left(\text{A}+\text{B}\right)$	18,588
Unit cost $\left(\frac{\text{Total}\text{manufacturing}\text{cost}}{\text{Equivalent}\text{units}}\right)$	$\left(\frac{\$18,588}{150}\right)$ 123.92

Table (3)

Step 4: Valuation of inventories:

Particulars	Amount ($)
Cost of goods transferred $\left(140\times \$123.92\right)$	17,348.8
Cost of ending WIP $\left(10\times \$123.92\right)$	1239.2
Total value	18,588

Table (4)

Step 5: Cost reconciliation:

Particulars	Amount ($)
Cost of goods transferred $\left(140\times \$123.92\right)$	17,348.8
Cost of ending WIP $\left(10\times \$123.92\right)$	1239.2
Total value	18,588
Total cost of beginning inventory	1,098
Total cost incurred	17,490
Total manufacturing cost	18,588

Table (5)

Working Notes:

1. Computation of units started during the period:

$\begin{array}{c}\text{Units}\text{started}=\text{Units}\text{started}\text{and}\text{completed}+\text{Units}\text{in}\text{ending}\text{WIP}\\ =\left(\begin{array}{l}\text{Units}\text{completed}\text{and}\text{transferred}\\ -\text{Units}\text{in}\text{beginning}\text{WIP}\end{array}\right)+\text{Units}\text{in}\text{ending}\text{WIP}\\ =\left(140-10\right)+20\\ =150\end{array}$

To determine

Present a production report for the encapsulating department using weighted average method.

Explanation of Solution

Step 1: Physical flow analysis:

Particulars	Units
Units to account for:
Units in beginning WIP	4,000
Add: Units started during the period1	210,000
Units to account for	214,000
Units accounted for:
Units completed and transferred	208,000
Add: Units in ending WIP	6,000
Units accounted for	214,000

Table (6)

Step 2: Computation of equivalent units:

Particulars	Units
Units completed and transferred	208,000
Equivalent units from ending inventory $\left(6,000\times 40\%\right)$	2,400
Equivalent units	210,400

Table (7)

Step 3: Computation of unit cost:

Particulars	Amount ($)
Cost of beginning inventory:
Material	32
Labor	20
Overhead $\left(150\%\times \$20\right)$	30
Transferred in	140
Total cost of beginning inventory (A)	222
Cost incurred:
Material	1,573
Transferred in	17,348.8
Labor	1,944
Overhead $\left(150\%\times \$1,944\right)$	2,916
Total cost incurred (B)	23,781.8
Total manufacturing cost $\left(\text{A}+\text{B}\right)$	24,003.8
Unit cost $\left(\frac{\text{Total}\text{manufacturing}\text{cost}}{\text{Equivalent}\text{units}}\right)$	$\left(\frac{\$24,003.8}{210,400}\right)$ 0.1141

Table (8)

Step 4: Valuation of inventories:

Particulars	Amount ($)
Cost of goods transferred $\left(208,000\times \$0.1141\right)$	23,732.8
Cost of ending WIP $\left(2,400\times \$0.1141\right)$	273.84
Total value	24,006.64

Table (9)

Step 5: Cost reconciliation:

Particulars	Amount ($)
Cost of goods transferred	23,732.8
Cost of ending WIP	273.84
Total value	24,006.64
Total cost of beginning inventory	222
Total cost incurred	23,781.8
Total manufacturing cost	24,003.8

Table (10)

Working Notes:

1.

Computation of units started during the period:

$\begin{array}{c}\text{Units}\text{started}=\text{Units}\text{started}\text{and}\text{completed}+\text{Units}\text{in}\text{ending}\text{WIP}\\ =\left(\begin{array}{l}\text{Units}\text{completed}\text{and}\text{transferred}\\ -\text{Units}\text{in}\text{beginning}\text{WIP}\end{array}\right)+\text{Units}\text{in}\text{ending}\text{WIP}\\ =\left(208,000-4,000\right)+6,000\\ =210,0000\end{array}$

To determine

Discuss whether or not weighted average method is easier than FIFO. Also, discuss the situation in which weighted average will give about the same results as FIFO.

Explanation of Solution

It is easier to compute unit cost in case of weighted average method, because all equivalent units are categorized in one class.

Weighted average would provide similar result from FIFO, in case, costs are not much fluctuating and are similar from previous periods.