71 8. Exercises (Part 3) FIFO
Short Answer Questions
1. Show the differences between computing equivalent units of production using the average cost method and FIFO cost method (Appendix 19A).
Problem D A bottling company bottles soft drinks using a process cost system. Following are cost and production data for the mixing department for June:
| Units | Materials
costs |
Conversion
costs |
|
| Inventory, June 1 | 56,000 | $11,620 | $16,240 |
| Placed in production in June | 133,000 | 29,960 | 41,720 |
| Inventory, June 30 | 63,000 | ? | ? |
The June 30 inventory was 100% complete as to materials and 30% complete as to conversion.
Prepare a production cost report for the month ended June 30 using the average cost method.
Problem E Refer to the facts given in the previous problem. Assume the beginning inventory on June 1 was 100% complete as to materials and 25% complete as to conversion.
- Prepare a production cost report for the month ended June 30, using FIFO. Round unit costs to the nearest cent.
- Why are ending inventory amounts different than those for the previous problem?
Beyond the numbers – Critical thinking
Business decision case A Bicycles Plus, Inc., produces bicycles. While the company has developed a per unit cost, it has not been able to break down its costs in each of its three departments: frames, assembling, and finishing. Karol Ring, the production manager, has been concerned with cost overruns during July in the frames department, which produces the bicycle frames.
On July 1, the frames department had 6,000 units in its work in process inventory. These units were 100% complete as to materials and 40% complete as to conversion. The department had incurred $12,000 in materials costs and $90,000 in conversion costs in processing these 6,000 units.
The department handled 30,000 units during the month, including the 6,000 units in beginning inventory on July 1. At the end of the month, the department’s work in process included 3,600 units that were 100% complete as to materials and 30% complete as to conversion. The month’s costs were allocated on the number of units processed during the month as follows:
| Materials | Conversion | |
| Costs | $60,000 | $300,216 |
| Units handled during month | 30,000 | 30,000 |
| Cost per unit | $ 2 | $ 10 |
The $12 per unit cost was assigned in a way that resulted in the following costs:
| Beginning work
in process |
Work started
and completed |
Ending work
in process |
|
| Cost per unit incurred during the month: | |||
| Units | 6,000 | 20,400 | 3,600 |
| Cost per unit | $12 | $12 | $12 |
Ring realized that this per unit cost is incorrect and asks you to develop a better method of computing these costs for the month ended July 31.
- How would you recommend that July’s costs be assigned to the units produced?How would this differ from the present method?
- To justify your recommendation, recalculate July’s costs using your recommendation. Present your analysis in a production cost report.
Financial analysis C Suppose a bottling company made an error in estimating the stage of completion of its work in process inventory. Suppose the costs in beginning inventory and the costs transferred in were correct, but the company overstated the stage of completion for both materials and conversion costs in ending Work in Process Inventory causing ending Work in Process Inventory to be $100,000 too high. The beginning and ending Finished Goods Inventory amounts are correct. What effect would this error have on the company’s last year’s financial statements?
