Chapter 8, Problem 54P

a.

To determine

Prepare a production cost report using FIFO.

Explanation of Solution

First in and first out (FIFO) method:

Under this method cost of units sold and units lying as ending inventory is ascertained on the first in and first out basis. It means units entered in the store first would be sold out first.

Compute the total units of prior department, materials, labor and manufacturing overhead:

Particulars	Physical units	Prior department	Materials	Labor	Manufacturing overhead
Beginning work-in-process inventory	75,000
Units started this period	375,000
Total units	450,000
Completed and transferred out
Beginning work-in-process inventory	75,000	-	-	30,000(1)	37,500(2)
Started and currently completed	225,000	225,000	225,000	225,000	225,000
Units in ending work-in-process inventory	150,000	150,000	135,000(3)	105,000(4)	52,500(5)
Total units	450,000	375,000	360,000	360,000	315,000

Table: (1)

Compute the cost per equivalent unit of prior department, materials, labor and manufacturing overhead:

Particulars	Total	Prior department	Materials	Labor	Manufacturing overhead
Costs in beginning work-in-process inventory	$ 382,800	$ 192,000	$ 120,000	$ 43,200	$ 27,600
Current period costs	$ 1,865,400	$ 960,000	$ 576,000	$ 216,000	$ 113,400
Total costs	$ 2,248,200	$ 1,152,000	$ 696,000	$ 259,200	$ 141,000
Cost per equivalent unit
Prior department		$ 2.56(6)
Materials			$ 1.60(7)
Labor				$ 0.60(8)
Manufacturing overhead					$ 0.36(9)

Table: (2)

Compute the total cost of prior department, materials, labor and manufacturing overhead:

Particulars	Total	Prior department	Materials	Labor	Manufacturing overhead
Transferred out:
Costs from beginning inventory	$ 382,800	$ 192,000	$ 120,000	$ 43,200	$ 27,600
Current costs beginning work-in-process inventory
Prior department	$ 0	$ 0
Materials	$ 0		$ 0
Labor	$ 18,000			$ 18,000(10)
Manufacturing overhead	$ 13,500				$ 13,500(11)
Total costs	$ 414,300
Current costs of units started and completed
Prior department	$ 576,000	$ 576,000(12)
Materials	$ 360,000		$ 360,000(13)
Labor	$ 135,000			$ 135,000(14)
Manufacturing overhead	$ 81,000				$ 81,000(15)
Total costs of units started and completed	$ 1,152,000
Total costs	$ 1,566,300	$ 576,000	$ 360,000	$ 153,000	$ 94,500
Current costs work-in-process ending inventory
Prior department	$ 384,000	$ 384,000(16)
Materials	$ 216,000		$ 216,000(17)
Labor	$ 63,000			$ 63,000(18)
Manufacturing overhead	$ 18,900				$ 18,900(19)
Total ending work-in-process inventory	$ 681,900
Total costs accounted for	$ 2,279,700	$ 1,152,000	$ 696,000	$ 277,200	$ 154,500

Table: (3)

Working note 1:

Compute the beginning inventory:

$\begin{array}{c}\text{Beginning}\text{inventory}\text{=}\left(\text{1-Completion}\text{rate}\right)\text{×}\text{Beginning}\text{inventory}\\ \text{=}\left(\text{1}\text{-}\text{60\%}\right)\text{×}\text{75,000}\\ \text{=}\text{40\%}\text{×}\text{75,000}\\ \text{=}\text{30,000}\end{array}$

Working note 2:

Compute the beginning inventory:

$\begin{array}{c}\text{Beginning}\text{inventory}\text{=}\left(\text{1-Completion}\text{rate}\right)\text{×}\text{Beginning}\text{inventory}\\ \text{=}\left(\text{1}\text{-}5\text{0\%}\right)\text{×}\text{75,000}\\ \text{=}5\text{0\%}\text{×}\text{75,000}\\ \text{=}\text{37,500}\end{array}$

Working note 3:

Compute the units in ending inventory:

$\begin{array}{c}\text{Ending}\text{inventory}\text{=}\text{Completion}\text{rate}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}\text{90\%}\times \text{150,000}\\ \text{=}\text{135,000}\end{array}$

Working note 4:

Compute the units in ending inventory:

$\begin{array}{c}\text{Ending}\text{inventory}\text{=}\text{Completion}\text{rate}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}7\text{0\%}\times \text{150,000}\\ \text{=}\text{105,000}\end{array}$

Working note 5:

Compute the units in ending inventory:

$\begin{array}{c}\text{Ending}\text{inventory}\text{=}\text{Completion}\text{rate}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}35\text{\%}\times \text{150,000}\\ \text{=}52\text{,500}\end{array}$

Working note 6:

Compute the cost per equivalent unit:

$\begin{array}{c}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{=}\frac{\text{Current}\text{period}\text{costs}}{\text{Total}\text{units}\text{accounted}\text{for}}\\ =\frac{\$960,000}{375,000}\\ =\$2.56\end{array}$

Working note 7:

Compute the cost per equivalent unit:

$\begin{array}{c}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{=}\frac{\text{Current}\text{period}\text{costs}}{\text{Total}\text{units}\text{accounted}\text{for}}\\ =\frac{\$576,000}{360,000}\\ =\$1.60\end{array}$

Working note 8:

Compute the cost per equivalent unit:

$\begin{array}{c}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{=}\frac{\text{Current}\text{period}\text{costs}}{\text{Total}\text{units}\text{accounted}\text{for}}\\ =\frac{\$216,000}{360,000}\\ =\$0.60\end{array}$

Working note 9:

Compute the cost per equivalent unit:

$\begin{array}{c}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{=}\frac{\text{Current}\text{period}\text{costs}}{\text{Total}\text{units}\text{accounted}\text{for}}\\ =\frac{\$113,400}{315,000}\\ =\$0.36\end{array}$

Working note 10:

Compute the current costs added to complete beginning work-in-process inventory:

$\begin{array}{c}\text{Labor}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Beginning}\text{inventory}\\ =\$0.60\times 30,000\\ =\$18,000\end{array}$

Working note 11:

Compute the current costs added to complete beginning work-in-process inventory:

$\begin{array}{c}\text{Manufacturing}\text{overhead}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Beginning}\text{inventory}\\ \text{=}\text{\$0}\text{.36}\text{×}\text{37,500}\\ \text{=}\text{\$13,500}\end{array}$

Working note 12:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Prior}\text{department}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{started}\text{and}\text{completed}\\ \text{=}\text{\$2}\text{.56}\times \text{225,000}\\ \text{=}\text{\$576,000}\end{array}$

Working note 13:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Materials}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{started}\text{and}\text{completed}\\ \text{=}\text{\$1}\text{.60}\text{×}\text{225,000}\\ \text{=}\text{\$360,000}\end{array}$

Working note 14:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Labor}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{started}\text{and}\text{completed}\\ \text{=}\text{\$0}\text{.60}\text{×}\text{225,000}\\ \text{=}\text{\$135,000}\end{array}$

Working note 15:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Manufacturing}\text{overhead}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{started}\text{and}\text{completed}\\ \text{=}\text{\$0}\text{.36}\text{×}\text{225,000}\\ \text{=}\text{\$81,000}\end{array}$

Working note 16:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Prior}\text{department}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}\text{\$2}\text{.56}\text{×}\text{150,000}\\ \text{=}\text{\$384,000}\end{array}$

Working note 17:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Materials}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}\text{\$1}\text{.60}\text{×}\text{135,000}\\ \text{=}\text{\$216,000}\end{array}$

Working note 18:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Labor}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}\text{\$0}\text{.60}\text{×}\text{105,000}\\ \text{=}\text{\$63,000}\end{array}$

Working note 19:

Compute the current costs of units started and completed:

$\begin{array}{c}\text{Prior}\text{department}\text{=}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}\text{\$0}\text{.36}\text{×}52\text{,500}\\ \text{=}\text{\$18,900}\end{array}$

b.

To determine

Determine whether the targets assigned by the management have been achieved or not. Write a short report on the same.

Explanation of Solution

Computed cost per equivalent units:

Particulars	Cost per equivalent unit
Materials	$ 1.60
Labor	$ 0.60
Manufacturing overhead	$ 0.36

Table: (4)

Targeted cost per equivalent units:

Particulars	Cost per equivalent unit
Materials	$ 1.60
Labor	$ 0.80
Manufacturing overhead	$ 0.36

Table: (5)

Relevance of reported computed result and targeted result for materials, labor and manufacturing overhead:

The target determined by the management for materials and manufacturing overhead have been achieved. Only for labor the cost per equivalent unit has not achieved. The targeted cost per equivalent unit for labor was $0.80 but the actual cost per equivalent unit has been computed to $0.60. Thus, the target has been achieved and reduced further when computed using FIFO method for the computation.