Q43PGB - Horngren'S Financial And Managerial Accounting

Question

Sea Worthy uses three processes to manufacture lifts for personal watercrafts: forming a lift’s parts from galvanized steel, assembling the lift, and testing the completed lift. The lifts are transferred to finished goods before shipment to marinas across the country. Sea Worthy’s Testing Department requires no direct materials. Conversion costs are incurred evenly throughout the testing process. Other information follows for October 2018:

UNITS
Beginning work-in-process inventory	2,300 units
Transferred in from assembling department during the period	6,800 units
Completed during the period	4,100 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	671,000
Conversion cost added during the period	49,000

The cost transferred into Finished Goods Inventory is the cost of the lifts transferred out of the Testing Department. Sea 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	2,300
Transferred in from assembly department	6,800
Total units to account for	9,100
Units accounted for:
Completed and transferred	4,100	4,100	4,100
Ending WIP	5,000	5,000	2,000
Total units accounted for	9,100	9,100	6,100
COSTS		Transferred in	Conversion costs	Total costs
Costs to account for:
Beginning WIP		$93,400	$18,100	$111,500
Cost added during the period		671,000	49,000	720,000
Total cost to account for		764,400	67,100	831,500
Divided by: total EUP		9,100	6,100
Cost per equivalent unit		$84	$11
Costs accounted for:
Completed and transferred out		344,400 (4,100 x $84)	45,100 (4,100x$11)	389,500
Ending WIP		420,000 (5,000x $84)	22,000 (2,000x$11)	442,000
Total costs accounted for		764,400	67,100	831,500

2. The cost per unit for lift completed and transferred out to the finished goods inventory is $95. The managers calculate it to determine the product's sales price.

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

Production cost report is prepared by the companies using the process costing system while determining the total manufacturing cost. It shows the detailed costing of the products.

Step 2: Equivalent unit of production for transferred in

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

Step 3: Equivalent unit of production for conversion costs

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

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

$$\begin{gathered} \mathbf{Cost}\mathbf{ }\mathbf{per}\mathbf{ }\mathbf{EUP}\mathbf{=}\frac{\mathrm{Total} \mathrm{cost} \mathrm{incurred} \mathrm{on} \mathrm{completed} \mathrm{and} \mathrm{transferred} \mathrm{out} \mathrm{units}}{\mathbf{No}\mathbf{.}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{units}\mathbf{ }\mathbf{transferred}\mathbf{ }\mathbf{out}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\$389,500}{4,100} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{95} \end{gathered}$$

 Management is interested in identifying the total manufacturing cost for deciding the product's sales price.