Question

Problem 8-57 (Static) Prepare a Production Cost Report and Adjust Inventory Balances: Weighted-Average Method (LO 8-3, 4)

The records of Fremont Corporation’s initial and unaudited accounts show the following ending inventory balances, which must be adjusted to actual costs.

	Units	Unaudited Costs
Work-in-process inventory	120,000	$	793,152
Finished goods inventory	20,000		337,560

As the auditor, you have learned the following information. Ending work-in-process inventory is 40 percent complete with respect to conversion costs. Materials are added at the beginning of the manufacturing process, and overhead is applied at the rate of 80 percent of the direct labor costs. There was no finished goods inventory at the start of the period. The following additional information is also available.

		Costs
	Units	Direct Materials			Direct Labor
Beginning inventory (80% complete as to labor)	80,000	$	240,000		$	546,000
Units started	400,000
Current costs			1,560,000			2,208,000
Units completed and transferred to finished goods inventory	360,000

Required:

a. Prepare a production cost report for Fremont using the weighted-average method. (Hint: You will need to calculate equivalent units for three categories: materials, labor, and overhead.)

b. Show the journal entry required to correct the difference between the unaudited records and actual ending balances of Work-in-Process Inventory and Finished Goods Inventory. Debit or credit Cost of Goods Sold for any difference.

c. If the adjustment in requirement (b) is not made, will the company’s income and inventories be overstated or understated?

Answer 1

Process Cost Report Beginning work-in-process Costs added during the period Total Costs to Account For Divided by Total Equivalent units (EUP) Average Cost / Equivalent Unit Materials Conversion Total $240,000 $982,800 $1,222,800 $1,560,000 $3,974,400 $5,534,400 $1,800,000 $4,957,200 $6,757,200 480,000 408,000 $3.75 $12.15 Cost of units transferred out: Direct materials Conversion Cost of Goods Manufactured Total cost $1,350,000 $4,374,000 $5,724,000 Ending Inventory: Direct materials Conversion Cost of Ending Inventory Total cost $450,000 $583,200 $1,033,200 Total Costs Allocated $6,757,200 ($5724000 + $1033200)

Workings: Under weighted average method, equivalent units are to be calculated only for units completed & transferred out and units lying as ending work in process as it is assumed that the units once entered into the process become integral part of total units and no segregation between units transferred from beginning work in process and introduced during current process. Conversion cost includes Labor + Overheads. So, Physical units of production: Units in beginning inventory Add: Units started during current period Less: Units completed and transferred out Units in ending inventory 80,000 400,000 -360,000 120,000 % Equivalent Units of Production (EUP) Whole EUP- Particulars Units Materials Materials Completed and transferred 360,000 100% 360,000 Ending work in process 120,000 100% 120,000 Equivalent Units of Production (EUP) 480,000 480,000 EUP- Conversion Conversion 100% 360,000 [360000 units x 100%; 360000 units x 100%] 40% 48,000 ][120000 units x 100%; 120000 units x 40%] 408,000 NOTE: As the materials are added at the beginning of the process itself, its % of completion in ending inventory for materials shall be 100%.

Cost per equivalent units of production Cost of beginning work in process Cost added during the period Total Materials Costs & Conversion Costs Divided by Equivalent units of Production (EUP) Cost per Equivalent units of Production Materials Conversion $240,000 $982,800 [Conversion = Direct labor + Overhead --> $546,000 + ($546,000 x 80%)] $1,560,000 $3,974,400 [Conversion = Direct labor + Overhead --> $2,208,000 + ($2,208,000 x 80%)] $1,800,000 $4,957,200 480,000 408,000 [As computed EUP schedule presented above] $3.75 $12.15 ($1800000 / 480000 units = $3.75; $4957200 / 408000 units = $12.15] Totals Cost of goods completed & transferred Cost per EUP EUP Materials 360,000 $3.75 Conversion 360,000 $12.15 Total Cost of goods completed & transferred to finished goods $1,350,000 [360000 units x $3.75] $4,374,000 [360000 units x $12.15] $5,724,000 Cost of ending work-in-process EUP Totals Cost per EUP $3.75 $12.15 Materials Conversion Total cost of ending work-in-process 120,000 48,000 $450,000 [120000 units x $3.75] $583,200 [48000 units x $12.15] $1,033,200

b) Ending work in process: Direct materials $450,000 Conversion $583,200 Adjusted cost of work in process $1,033,200 Unadjusted cost of work in process $793,152 Adjustment entry required to correct the cost $240,048 ($1033200 - $793152) Ajusting journal entry shall be: Finished goods: Direct materials $75,000 [20000 x $3.75] Conversion $243,000 [20000 x $12.15] Adjusted cost of finished goods $318,000 Unadjusted cost of finished goods $337,560 Adjustment entry required to correct the cost $19,560 ($318000 - $337560) Account titles and explanation Debit Credit Work in process $240,048 [Work in process account is debited because unadjusted cost shall be increased to correct cost calculated] Finished goods $19,560 (Finished goods account is credited because unadjusted cost shall be decreased to correct cost calculated] Cost of goods sold $220,488 [$240048 - $19560] (To correct the cost of ending work in process and finished goods) C) If the adjustment in requirement (b) is not made, company's income will be understated by $220,488 and inventories will be understated by $220,488.