Chapter 8, Problem 57P

a.

To determine

Prepare a production cost report using the weighted-average method.

Explanation of Solution

Weighted average cost method:

Weighted average cost method is the method to find out the equivalent units in the process costing. Under this method work done on all completed units taken as 100% whether these units are from beginning inventory or units introduced in the process. The work done on the ending inventory is calculated as per work done on it with respect to the completed units.

Compute the total units for materials, labor and overhead:

Particulars	Physical units	Materials	Labor	Overhead
Beginning work-in-process inventory	80,000
Units started this period	400,000
Total units	480,000
Completed and transferred out
Beginning work-in-process inventory	80,000
Started and currently completed	280,000
Total transferred out	360,000	360,000	360,000	360,000
Units in ending work-in-process inventory	120,000	120,000	48,000(1)	48,000 (2)
Total units	480,000	480,000	408,000	408,000

Table: (1)

Compute the cost per equivalent for materials, labor and overhead:

Particulars	Total	Materials	Labor	Overhead
Costs in beginning work-in-process inventory	$ 1,222,800	$ 240,000	$ 546,000	$ 436,800
Current period costs	$ 5,534,400	$ 1,560,000	$ 2,208,000	$ 1,766,400
Total costs	$ 6,757,200	$ 1,800,000	$ 2,754,000	$ 2,203,200
Cost per equivalent unit
Materials		$ 3.75(3)
Labor			$ 6.75(4)
Overhead				$ 5.40(5)

Table: (2)

Compute the total costs of materials, labor and overhead:

Particulars	Total	Materials	Labor	Overhead
Transferred out:
Materials	$ 1,350,000	$ 1,350,000(6)
Labor	$ 2,430,000		$ 2,430,000(7)
Overhead	$ 1,944,000			$ 1,944,000(8)
Total costs	$ 5,724,000
Work-in-process ending inventory
Materials	$ 450,000	$ 450,000(9)
Labor	$ 324,000		$ 324,000(10)
Overhead	$ 259,200			$ 259,200(11)
Total ending work-in-process inventory	$ 1,033,200
Total costs	$ 6,757,200	$ 1,800,000	$ 2,754,000	$ 2,203,200

Table: (3)

Working note 1:

Compute the units in ending work-in-process inventory:

$\begin{array}{c}\text{Ending}\text{inventory}\text{=}\text{Completion}\text{rate}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}\text{40\%}\times \text{120,000}\\ \text{=}\text{48,000}\end{array}$

Working note 2:

Compute the units in ending work-in-process inventory:

$\begin{array}{c}\text{Ending}\text{inventory}\text{=}\text{Completion}\text{rate}\text{×}\text{Units}\text{in}\text{ending}\text{inventory}\\ \text{=}\text{40\%}\times \text{120,000}\\ \text{=}\text{48,000}\end{array}$

Working note 3:

Compute the cost per equivalent unit:

$\begin{array}{c}\text{Cost}\text{per}\text{unit}\text{=}\frac{\text{Total}\text{cost}\text{accounted}\text{for}}{\text{Total}\text{units}\text{accounted}\text{for}}\\ \text{=}\frac{\text{\$1,800,000}}{\text{480,000}}\\ \text{=}\text{\$3}\text{.75}\end{array}$

Working note 4:

Compute the cost per equivalent unit:

$\begin{array}{c}\text{Cost}\text{per}\text{unit}\text{=}\frac{\text{Total}\text{cost}\text{accounted}\text{for}}{\text{Total}\text{units}\text{accounted}\text{for}}\\ \text{=}\frac{\text{\$2,754,000}}{\text{408,000}}\\ \text{=}\text{\$6}\text{.75}\end{array}$

Working note 5:

Compute the cost per equivalent unit:

$\begin{array}{c}\text{Cost}\text{per}\text{unit}\text{=}\frac{\text{Total}\text{cost}\text{accounted}\text{for}}{\text{Total}\text{units}\text{accounted}\text{for}}\\ \text{=}\frac{\text{\$2,203,200}}{\text{408,000}}\\ \text{=}\text{\$5}\text{.40}\end{array}$

Working note 6:

Compute the costs assigned to units transferred out:

$\begin{array}{c}\text{Transferred}\text{out}\text{=}\text{Cost}\text{per}\text{unit}\text{×}\text{Transferred}\text{out}\text{units}\\ \text{=}\text{\$3}\text{.75}\text{×}\text{360,000}\\ \text{=}\text{\$1,350,000}\end{array}$

Working note 7:

Compute the costs assigned to units transferred out:

$\begin{array}{c}\text{Transferred}\text{out}\text{=}\text{Cost}\text{per}\text{unit}\text{×}\text{Transferred}\text{out}\text{units}\\ \text{=}\text{\$6}\text{.75}\text{×}\text{360,000}\\ \text{=}\text{\$2,430,000}\end{array}$

Working note 8:

Compute the costs assigned to units transferred out:

$\begin{array}{c}\text{Transferred}\text{out}\text{=}\text{Cost}\text{per}\text{unit}\text{×}\text{Transferred}\text{out}\text{units}\\ \text{=}\text{\$5}\text{.40}\text{×}\text{360,000}\\ \text{=}\text{\$1,944,000}\end{array}$

Working note 9:

Compute the costs assigned to ending work-in-process inventory:

$\begin{array}{c}\text{Ending}\text{work-in-process}\text{inventory}\text{=}\text{Cost}\text{per}\text{unit}\text{×}\text{Ending}\text{inventory}\\ \text{=}\text{\$3}\text{.75}\times \text{120,000}\\ \text{=}\$\text{450,000}\end{array}$

Working note 10:

Compute the costs assigned to ending work-in-process inventory:

$\begin{array}{c}\text{Ending}\text{work-in-process}\text{inventory}\text{=}\text{Cost}\text{per}\text{unit}\text{×}\text{Ending}\text{inventory}\\ \text{=}\text{\$6}\text{.75}\times 48\text{,000}\\ \text{=}\$324\text{,000}\end{array}$

Working note 11:

Compute the costs assigned to ending work-in-process inventory:

$\begin{array}{c}\text{Ending}\text{work-in-process}\text{inventory}\text{=}\text{Cost}\text{per}\text{unit}\text{×}\text{Ending}\text{inventory}\\ \text{=}\text{\$5}\text{.40}\times 48\text{,000}\\ \text{=}\$259,200\end{array}$

b.

To determine

Show the journal entry required to rectify the balances of work-in-process inventory and finished goods.

Explanation of Solution

Journal entries:

It is the important part of accountancy. A journal entry consists of recording which is either a debit or credit. The total of both debit and credit must be equal.

Compute the difference between the correct computation and the information given in the statement:

Particulars	Work-in-process	Finished goods
As per statement	$ 793,152	$ 337,560
Correct	$ 1,033,200	$ 318,000
Difference	($ 240,048)	$ 19,560

Table: (4)

Journal entry of passing the correctly computed information:

Particulars	Post Ref.	Debit	Credit
Work-in-process		$ 240,048
Finished goods			$ 19,560
Cost of goods sold			$ 220,488

Table: (5)

Working note 12:

Compute the correct value of finished goods:

$\begin{array}{c}\text{Finished}\text{goods}\text{=}\left(\begin{array}{c}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{of}\text{material}\\ \text{+}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{of}\text{labor}\\ \text{+}\text{Cost}\text{per}\text{equivalent}\text{unit}\text{of}\text{overhead}\\ \end{array}\right)\text{×}\text{Finished}\text{goods}\text{inventory}\\ \text{=}\left(\$3.75\left(3\right)+\$6.75\left(4\right)+\$5.40\left(5\right)\right)\times 20,000\\ =\$15.90\times 20,000\\ =\$318,000\end{array}$

c.

To determine

Determine the effect of adjustment not being made with respect to inventories being overstated or understated.

Explanation of Solution

If the adjustments are not made with respect to inventories being overstated or understated the following effects will appear on the costing of the process:

• • Finished goods would have remained overstated.
• • Work-in-process would have remained understated.
• • Income would have remained understated.