Q36PGA - Horngren'S Financial And Managerial Accounting

Question

Ocean Worthy uses three processes to manufacture lifts for personal watercraft: forming a lift’s parts from galvanized steel, assembling the lift, and testing the completed lift. The lifts are transferred to Finished Goods Inventory before shipment to marinas across the country.

Ocean Worthy’s Testing Department requires no direct materials. Conversion costs are incurred evenly throughout the testing process. Other information follows for the month of August:

UNITS
Beginning work-in-process inventory	2,000 units
Transferred in from assembling department during the period	7,000 units
Completed during the period	4,000 units
Ending work in process inventory (40% complete for conversion work)	5,000 units
COSTS
Beginning work in process inventory (transferred in costs, \(93,400, conversion costs, \)18,100)	$111,500
Transferred in from the assembly department during the period	672,000
Conversion cost added during the period	54,000

The cost transferred into Finished Goods Inventory is the cost of the lifts transferred out of the Testing Department. Ocean Worthy uses weighted-average

process costing. 

Requirements

1. Prepare a production cost report for the Testing Department.

2. What is the cost per unit for lifts completed and transferred out to Finished Goods Inventory? Why would management be interested in this cost?

Step-by-Step Solution

Answer

1. Production cost report

Production Cost Report  For the Testing Department
		Equivalent unit of production
UNITS	Physical units	Transferred in	Conversion costs	Total
Units to account for:
Beginning WIP	2,000
Transferred in from assembly department	7,000
Total units to account for	9,000
Units accounted for:
Completed and transferred	4,000	4,000	4,000
Ending WIP	5,000	5,000	2,000
Total units accounted for	9,000	9,000	6,000
COSTS		Transferred in	Conversion costs	Total costs
Costs to account for:
Beginning WIP		$93,000	$18,000	$111,000
Cost added during the period		672,000	54,000	726,000
Total cost to account for		765,000	72,000	837,000
Divided by: total EUP		9,000	6,000
Cost per equivalent unit		$85	$12
Costs accounted for:
-       Completed and transferred out		340,000 (4,000 x $85)	48,000 (4,000x$12)	388,000
-       Ending WIP		425,000 (5,000x $85)	24,000 (2,000x$12)	449,000
Total costs accounted for		765,000	72,000	837,000

2. The cost per unit of completed and transferred inventory is $97. The managers calculate it to determine the product’s sales price.

Step-by-Step Solution: Step 1: Production Cost Report

 The production cost report shows the cost bifurcation of the product's manufacturing cost. It is prepared by the companies in which process costing is used. It conveys both total costs and the per-unit cost of manufactured products. 

Step 2: Equivalent unit of production for transferred in

$$\begin{gathered} \mathbf{EUP}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{Transferred}\mathbf{ }\mathbf{in}\mathbf{=}(\mathbf{Completed}\mathbf{ }\mathbf{units}\mathbf{\times }\mathbf{Completion}\mathbf{\%})\mathbf{+}(\mathbf{Ending}\mathbf{ }\mathbf{WIP}\mathbf{ }\mathbf{units}\mathbf{\times }\mathbf{Completion}\mathbf{\%}) \\ \mathbf{=}(\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{100}\mathbf{\%})\mathbf{+}(\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{100}\mathbf{\%}) \\ \mathbf{=}\mathbf{9}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 3: Equivalent unit of production for conversion costs

$$\begin{gathered} \mathbf{EUP}\mathbf{ }\mathbf{for}\mathbf{ }\mathbf{Conversion}\mathbf{ }\mathbf{cost}\mathbf{=}(\mathbf{Completed}\mathbf{ }\mathbf{units}\mathbf{\times }\mathbf{Completion}\mathbf{\%})\mathbf{+}(\mathbf{Ending}\mathbf{ }\mathbf{WIPunits}\mathbf{\times }\mathbf{Completion}\mathbf{\%}) \\ \mathbf{=}(\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{100}\mathbf{\%})\mathbf{+}(\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{40}\mathbf{\%}) \\ \mathbf{=}\mathbf{6}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 4: Cost per EUP for the completed and transferred out to the finished goods inventory

$$\begin{gathered} \mathbf{Cost}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{EUP}\mathbf{=}\frac{\mathrm{Total} \mathrm{cost} \mathrm{incurred} \mathrm{on} \mathrm{completed} \mathrm{and} \mathrm{transferred} \mathrm{out} \mathrm{units}}{\mathbf{No}\mathbf{.}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{units}\mathbf{ }\mathbf{ }\mathbf{transferred}\mathbf{ }\mathbf{ }\mathbf{out}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$388,000}{4,000} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{97} \end{gathered}$$

Management is interested in identifying the total manufacturing cost for deciding the  product’s sale price.