Q22E - Horngren'S Financial And Managerial Accounting

Question

Refer to your answers from Exercise E18-21.

Requirements

1. Prepare the journal entries to record the assignment of direct materials and direct labor and the allocation of manufacturing overhead to the Blending Department. Also, prepare the journal entry to record the costs of the gallons completed and transferred out to the Packaging Department. Assume labor costs are accrued and not yet paid.

2. Post the journal entries to the Work-in-Process Inventory—Blending T-account.

What is the ending balance?

3. What is the average cost per gallon transferred out of the Blending Department

into the Packaging Department? Why would the company managers want to

know this cost?

Step-by-Step Solution

Answer

1. The journal entries to record the assignment of the direct material costing $5,525 and direct labor of $1,500, allocation of manufacturing overhead of $2,547 and the cost of completed and transferred out gallon i.e. $7,930 is done in step 2.

2. The ending balance of the work-in-process inventory account is $1,642

3. The average cost per gallon transferred out of the blending department into the packaging department is $1.22

The management of the company compute this cost to decide the selling price of the product after adding the profit margin.

Step-by-Step Solution: Step 1: Costing system

A costing system is defined as the system used by the companies to determine the cost of goods manufactured during the year. It is classified as the process and job order costing systems.

Step 2: Journal entries

Date	Particulars	Debit ($)	Credit ($)
	Work-in-process inventory	5,525
	Direct material		5,525
	Work-in-process inventory	1,500
	Wages payable		1,500
	Work-in-process inventory	2,547
	Manufacturing overhead		2,547
	Finished goods inventory	7,930
	Work-in-process inventory		7,930

Step 3: Work-in-process inventory – Blending T-account

Particulars	Amount ($)	Particulars	Amount ($)
Beginning balance	0	Finished goods inventory	7,930
Direct material	5,525
Direct labor	1,500
Manufacturing overhead	2,547
		Ending balance	1,642

Step 4: Average cost per gallon transferred out of the blending department into the packaging department

$$\begin{gathered} \mathbf{Average}\mathbf{ }\mathbf{cost}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{gallon}\mathbf{=}\frac{\mathrm{Total} \mathrm{cost} \mathrm{of} \mathrm{the} \mathrm{completed} \mathrm{goods}}{\mathrm{Number} \mathrm{of} \mathrm{units}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$7,930}{6,500} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{.}\mathbf{22}\text{} \end{gathered}$$

The manager of Shea Winery want to know this cost for deciding the selling price of the product. Selling price is derived at by adding the profit margin with the total cost of the products.