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# Management Accounting: Concepts, Techniques & Controversial Issues Chapter 5 Class Problem Solution

James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

This problem is very similar to Example 5-2 in Chapter 5, but it shows how a process cost problem might appear on a multiple choice exam.

The Bath Company uses normal historical full absorption process costing. The following information represents one month's activity in process #1. Material is added at the beginning of the process and the inspection point is at the end of the process. Assume all spoilage comes from the units started during the period.

 Stage WIP Process # 1 BWIP 1,000 80% Beginning Material \$3,100 Started 9,000 Beginning Conversion 2,320 Completed (good) 6,200 Material added 27,000 EWIP 2,500 40% Conversion added 23,100 Normal Spoilage 1,240 Total \$55,520 Abnormal Spoliage 60

1. The unit material cost using FIFO is

a. 3.0000

\$27,000/(6,200 - 1,000 + 2,500 + 1,300) = \$27,000/9,000 = \$3

2. The unit conversion cost using FIFO is

d. 3.0000

\$23,100/(6,200 - .8(1,000) +.4(2,500) + 1,300 = \$23,100/7,700 = \$3

3. Now ignore the unit costs you calculated above and assume that the unit costs using FIFO are material = \$2 and conversion = \$4. The completed costs of the 1,000 units in the beginning inventory (using the FIFO assumption) is

b. 6,220

3,100 + \$2,320 + (\$4)(.2)(1,000) = \$6,220

4. Using the same unit costs given in question 3, what would be the completed costs of the good units started and finished during the period (i.e., excluding spoilage) using the FIFO assumption?

a. 31,200

(\$6)(6,200 - 1,000) = \$31,200

5. Using the same unit costs given in question 3, what amount of costs would be transferred to the loss account based on the FIFO assumption.

c. 360

(\$6)(60) = \$360

6. Using the same unit costs given in question 3, what amount of costs would be assigned to the ending inventory of work in process?

c. 9,000

(\$2)(2,500 + (\$4)(.4)(2,500) = \$9,000

7. Now assume the company uses weighted average. The unit material cost using the weighted average assumption is

b. 3.0100

(\$3,100 + \$27,000)/(6,200 + 2,500 + 1,300) = \$30,100/ 10,000 = \$3.01

8. The unit conversion cost using the weighted average assumption is

d. 2.9906

(\$2,320 + \$23,100)/(6,200 + .4(2,500) + 1,300 = 25,420/8,500 = 2.990588

9. Now ignore the unit costs you calculated above and assume that the unit costs using weighted average are: material = \$3 and conversion = \$3. The cost transferred to the next department is

b. 44,640

(\$6)(6,200 +1,240) = \$44,640

10. Using the unit costs given in question 9, what amount of costs would be assigned to the ending inventory of work in process?

b. 10,500

(\$3)(2,500) + (\$3)(.4)(2,500) = \$10,500