Q1TIAT - Horngren'S Financial And Managerial Accounting

Question

PepsiCo, Inc. is a global food and beverage company that manufactures brands such as Frito-Lay, Gatorade, Pepsi-Cola, Quaker, and Tropicana. One of the products PepsiCo, Inc. manufactures is Mountain Dew. The first process in manufacturing Mountain Dew consists of clarifying the water to remove impurities such as organic materials and bacteria. The clarification process involves mixing the water with aluminum sulfate (an indirect material) to remove the impurities. 

Assume PepsiCo uses the weightedaverage method of process costing. 

Requirements

1. During the month of June, the Clarification Department incurred the following costs in processing 100,000 liters:

Wages of workers operating the clarification equipment	$20,000
Manufacturing overhead allocated to clarification	24,000
Water	160,000

PepsiCo had no beginning Work-In-Process Inventory in the Clarification Department in June. Compute the June conversion costs in the Clarification Department.

2. Assume that water is added at the beginning of the clarification process and conversion costs are added evenly throughout the process. The Clarification Department completed and transferred out 60,000 liters during June. The 40,000 liters remaining in Clarification’s ending Work-in-Process Inventory were 100% complete for direct materials and 60% complete for conversion costs. Compute the equivalent units of production for direct materials and conversion costs for the Clarification Department.

3. Compute the cost per equivalent unit for direct materials and conversion costs for the Clarification Department.

Step-by-Step Solution

Answer

1. The conversion costs in the clarification department are $44,000

2. The equivalent unit of production for direct material is 100,000 liters, and the conversion cost is 84,000 liters 

3. The cost per equivalent unit for direct material is $1.60 and the conversion cost is $0.524.

Step-by-Step Solution: Step 1: Conversion Costs

when the manufacturing companies produce finished goods from the raw material, so the cost incurred while doing this conversion is known as the conversion cost. It is the total of only two costs, i.e., direct labour and works overheads.

Step 2: Calculation of June conversion costs in the clarification department

$$\begin{gathered} \mathbf{Conversion}\mathbf{ }\mathbf{cost}\mathbf{=}\mathbf{Wages}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{workers}\mathbf{+}\mathbf{Manufacturing}\mathbf{ }\mathbf{overhead} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{000} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{44}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 3: Equivalent unit of production for direct materials

$$\begin{gathered} \mathbf{EUP}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{Directmaterials}\mathbf{=}(\mathbf{Completed}\mathbf{ }\mathbf{units}\mathbf{\times }\mathbf{Completion}\mathbf{\%})\mathbf{+}(\mathbf{Ending}\mathbf{ }\mathbf{WIP}\mathbf{ }\mathbf{units}\mathbf{\times }\mathbf{Completion}\mathbf{\%}) \\ \mathbf{=}(\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{100}\mathbf{\%})\mathbf{+}(\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{100}\mathbf{\%}) \\ \mathbf{=}\mathbf{100}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 4: Equivalent unit of production for conversion cost

$$\begin{gathered} \mathbf{EUP}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{Conversion}\mathbf{ }\mathbf{cost}\mathbf{=}(\mathbf{Completed}\mathbf{ }\mathbf{units}\mathbf{\times }\mathbf{Completion}\mathbf{\%})\mathbf{+}(\mathbf{Ending}\mathbf{ }\mathbf{WIPunits}\mathbf{\times }\mathbf{Completion}\mathbf{\%}) \\ \mathbf{=}(\mathbf{60}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{100}\mathbf{\%})\mathbf{+}(\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{60}\mathbf{\%}) \\ \mathbf{=}\mathbf{84}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 5: Cost per EUP for direct materials

$$\begin{gathered} \mathbf{Cost}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{EUP}\mathbf{=}\frac{\mathrm{Total} \mathrm{directmaterial} \mathrm{costs}}{\mathrm{EUP} \mathrm{for} \mathrm{directmaterial}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$160,000}{100,000} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{60} \end{gathered}$$

Step 6: Cost per EUP for conversion costs

$$\begin{gathered} \mathbf{Cost}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{EUP}\mathbf{=}\frac{\mathrm{Total} \mathrm{Conversion} \mathrm{costs}}{\mathrm{EUP} \mathrm{for} \mathrm{conversion} \mathrm{costs}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$44,000}{84,000} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{524} \end{gathered}$$