Question

1. The following information is available for the Crown for the month of January. All materials are added at the start of production. Spoilage in excess of 10% of completed units is abnormal and is detected by the final inspection at the end of the process.

Beginning work in process (80% complete)...................          8,000 units

Started........................................................................         35,000 units

Ending work in process (55% complete).......................         15,000 units

Transferred out............................................................         24,500 units

Beginning work-in-process costs:

        Materials.............................................................               $14,000

        Conversion..........................................................                 38,200

Current costs:

        Materials.............................................................             $ 50,750

        Conversion..........................................................               173,130

Assume that Crown uses the FIFO method.

Required:

1. What is the total cost of the units transferred out, the cost of ending inventory?
2. How much could Crown reasonably expect to save by reducing spoilage?

Answer 1

Requirement 1:

Total cost of Units transferred
		Materials	Conversion	Total
Equivalent units of units transferred out		16,500	18,100
x Cost per equivalent unit		$1.61	$6.57
= Total cost of units transferred		$26,583	$118,924	$145,508
Total cost of Ending units
		Materials	Conversion	Total
Equivalent units of ending inventory		15,000	8,250
x Cost per equivalent unit		$1.61	$6.57
= Total cost of ending units		$24,167	$54,206	$78,372

Calculations:

i

Beginning WIP	8,000
Started	35,000
Total units accounted for	43,000
Ending WIP	-15,000
Transferred out	-24,500
Total Loss	3,500

Transferred out	24,500
Beginning WIP	-8,000
Started and completed	16,500

10% of completed units (43,000 x 10%) = 4,300 units

Normal loss is lower than 10%. Hence no abnormal loss.

ii.Equivalent units:

		Equivalent units
	Total units	Materials	Conversion
Beginning WIP	8,000
8,000 X 0%		0
8,000 X 20%			1,600
Units Started and transferred out	16,500	16,500	16,500
Units transferred out	24,500	16,500	18,100
Ending WIP	15,000
15,000 x 100%		15,000
15,000 x 55%			8,250
Normal loss	3,500
Total	43,000	31,500	26,350

iii.Cost per equivalent unit:

		Materials	Conversion	Total
Current costs		$50,750	$173,130
÷ Equivalent units		31,500	26,350
= Cost per equivalent unit		$1.61	$6.57	$8.18

Requirement 2:

10% of completed units (43,000 x 10%)	4,300
Actual loss	-3,500
Saving in spoilage	800
x Total cost per equivalent unit	$8.80
Total cost of savings	$7,040.00

WIP - Work in process