Case 4-20 (continued)
3. (continued)
Computation of the Cost of Goods Sold:
Transferred In
Conversion
Units completed and sold ………………….
200,000
200,000
Equivalent units in ending work in
process inventory:
Transferred in:
10,000 units x 100% complete ……….
10,000
Conversion:
10,000 units x 50% complete …………
5,000
Equivalent units of production…………….
210,000
205,000
Cost of beginning work in process ……….
Total cost (a) ………………………………….
Equivalent units of production (b) ……….
205,000
Cost of goods sold = 200,000 units × ($187.50 per unit + $101.50 per
unit) = $57,800,000
4. Mary is in a very difficult position. Collaborating with Gary Stevens in
subverting the integrity of the accounting system is unethical by almost
any standard. To put the situation in its starkest light, Stevens is
suggesting that the production managers lie in order to get their bonus.
Having said that, the peer pressure to go along in this situation may be
intense. It is difficult on a personal level to ignore such peer pressure.
Moreover, Mary probably prefers not to risk alienating people she might
need to rely on in the future. On the other hand, Mary should be careful
Case 4-20 (continued)
From a broader perspective, if the net profit figures reported by the
managers in a division cannot be trusted, then the company would be
foolish to base bonuses on the net profit figures. A bonus system based
on divisional net profits presupposes the integrity of the accounting
system.
The company should perhaps reconsider how it determines the bonus. It
is quite common for companies to pay an “all or nothing” bonus
contingent on making a particular target. This inevitably creates
powerful incentives to bend the rules when the target has not quite
been attained. It might be better to have a bonus without this “all or
nothing” feature. For example, managers could be paid a bonus of x%
of profits above target profits rather than a bonus that is a preset
percentage of their base salary. Under such a policy, the effect of
Appendix 4A
FIFO Method
Exercise 4A-1 (10 minutes)
FIFO Method
Materials
Equivalent units to complete beginning work in
process inventory:
Materials: 30,000 units × (100% − 65%) ………
10,500
Conversion: 30,000 units × (100% − 30%) ……
Units started and completed during October* ……
160,000
Equivalent units in ending work in process
inventory:
12,000
Equivalent units of production ……………………….
182,500
187,000
175,000 units started – 15,000 units in ending work in process
Exercise 4A-2 (10 minutes)
FIFO method
Materials
Labor
Overhead
Cost added during May (a) ……………
$193,320
$62,000
$310,000
Equivalent units of production (b) …..
27,000
25,000
25,000
Cost per equivalent unit (a) ÷ (b) …..
$7.16
$2.48
$12.40
Total
Labor ………………………………………………….
Overhead …………………………………………….
Total cost per equivalent unit ……………………
$22.04
Exercise 4A-3 (15 minutes)
1. and 2.
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units ………………………………
400
200
Cost per equivalent unit ……………………
$2.32
$0.75
Cost of ending work in process inventory
$928
$150
$1,078
Units transferred out:
Cost in beginning inventory ……………….
$3,200
$650
$3,850
Cost to complete the units in beginning inventory:
Equivalent units needed to complete
the beginning inventory ………………
600
1,200
Cost per equivalent unit ………………….
$2.32
$0.75
Cost to complete the units in beginning
inventory …………………………………
$1,392
$900
$2,292
Cost of units started and completed this period:
24,000
Cost per equivalent unit ………………….
$2.32
$0.75
Cost of units started and completed
Total cost of units transferred out ………
$79,822
Exercise 4A-4 (10 minutes)
Mixing Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory ..
$ 1,460
Costs added to production during the period .
36,540
Total cost to be accounted for …………………..
$38,000
Costs accounted for as follows:
Cost of ending work in process inventory …….
$ 3,120
Cost of units completed and transferred out ..
34,880
*
Total cost accounted for ………………………….
$38,000
*The cost of units completed and transferred out can be deduced as
follows:
Exercise 4A-5 (10 minutes)
Materials
Conversion
Equivalent units needed to complete beginning
work in process inventory:
Materials: 500 units x (100% – 80%) …………..
100
Conversion: 500 units x (100% – 40%) ………..
300
Units started and completed during the period
(153,600 units started – 400 units in ending
inventory) ………………………………………………
153,200
153,200
inventory:
Materials: 400 units x 75% complete ……………
Conversion: 400 units x 20% complete …………
153,600
153,580
Exercise 4A-6 (15 minutes)
FIFO Method
Materials
Labor &
Overhead
Equivalent units needed to complete the beginning
work in process inventory:
Materials: 20,000 pounds × (100% − 100%) …..
0
Labor and overhead:
20,000 pounds × (100% − 30%) ………………..
14,000
Pounds started and completed during July*………..
355,000
355,000
Exercise 4A-7 (20 minutes)
FIFO Method
1.
Materials
Labor
Overhead
Equivalent units needed to complete
beginning work in process inventory:
Materials: 5,000 units ×
(100% − 80%) …………………………
1,000
Labor: 5,000 units ×
(100% − 60%) …………………………
2,000
Overhead: 5,000 units ×
(100% − 60%) …………………………
2,000
Units started and completed during the
37,000
37,000
37,000
Equivalent units in ending work in
4,000
Equivalent units of production …………..
44,000
43,000
43,000
2.
Materials
Labor
Overhead
Cost added during the period (a) ……….
$52,800
$21,500
$32,250
Equivalent units of production (b) ………
44,000
43,000
43,000
Cost per equivalent unit (a) ÷ (b) ………
$1.20
$0.50
$0.75
Exercise 4A-8 (15 minutes)
FIFO Method
1.
Tons of Pulp
Work in process, June 1 …………………………..………..
20,000
Started into production during the month ………………
190,000
Total tons in process …………………………………………
210,000
Deduct work in process, June 30 …………………………
30,000
Completed and transferred out during the month ……
180,000
2.
Equivalent Units
Materials
Labor and
Overhead
Equivalent units needed to complete
beginning work in process inventory:
Units started and completed during the
month* …………………………………………..
Equivalent units in ending work in process
Equivalent units of production ……………….
190,000 tons started into production – 30,000 tons in ending
Exercise 4A-9 (45 minutes)
FIFO Method
1. Computation of the total cost per equivalent unit:
Cost per equivalent unit for material …………………………….
$25.40
Cost per equivalent unit for conversion …………………………
18.20
Total cost per equivalent unit ……………………………………..
$43.60
2. Computation of equivalent units in ending inventory:
Materials
Conversion
Units in ending inventory (a) ……………..
Percentage completed (b) …………………
%
%
Equivalent units (a) × (b) …………………
3. Computation of equivalent units required to complete the beginning
inventory:
Materials
Conversion
Units in beginning inventory (a) …………
%*
Equivalent units (a) × (b) …………………
4.
Units transferred to the next department …………
3,100
Units from the beginning inventory ………………..
400
Units started and completed during the period ….
2,700
Exercise 4A-9 (continued)
5. and 6.
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units …………………………….
210
180
Cost per equivalent unit ………………….
$25.40
$18.20
Cost of ending work in process
inventory …………………………………..
$5,334
$3,276
$8,610
Units transferred out:
Cost from the beginning work in
process inventory………………………..
$8,120
$2,920
$11,040
Cost to complete the units in beginning
work in process inventory:
Equivalent units needed to complete
the beginning inventory ……………
80
240
$25.40
$18.20
Cost to complete the units in
beginning inventory …………………
$2,032
$4,368
$25.40
$18.20
$117,720
Total cost of units transferred out ……..
$135,160
Problem 4A-10 (45 minutes)
FIFO method
1.
Equivalent units of production
Materials
Conversion
Equivalent units needed to complete beginning
work in process inventory:
Materials: 10,000 units x (100% − 100%) ..
0
Conversion: 10,000 units x (100% − 30%)
7,000
150,000
Materials: 20,000 units x 100% complete …
Conversion: 20,000 units x 40% complete ..
Equivalent units of production ……………………
165,000
2.
Cost per equivalent unit
Materials
Conversion
Cost added during the period (a) …………..
$139,400
$244,200
Equivalent units of production (b) ………….
170,000
165,000
Cost per equivalent unit (a) ÷ (b) ………….
$0.82
$1.48
3. and 4. See the next page.
5.
Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($8,500 + $4,900) ……………………………………….
$ 13,400
Costs added to production during the period
($139,400 + $244,200) …………………………………
383,600
Total cost to be accounted for …………………………...
Costs accounted for as follows:
Cost of ending work in process inventory …………….
$ 28,240
Costs of units transferred out …………………………...
368,760
Total cost accounted for …………………………………..