Question

Paragraph AaBbCcDdEe List Paragraph 21 1. The following information is available for the Red Co. 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 Red Co. 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 Red reasonably expect to save by reducing spoilage?

Answer 1

	1. Calculate equivalent units for materials and conversion costs.
	FIFO Method
	Red Co.
	Cost of Production Report
	UNITS			Equivalent Units
		Physical Units	% complete	Materials	% complete	Conversion Costs
	Units to be accounted for:
	Work in process, beginning	8000
	Started into production	35000
	Total units	43000
	Units accounted for:
	Good units Completed and Transferred out
	From beginning Work in process	8000	0%	0	20%	1600
	Started and Completed (24500-8000)	16500	100%	16500	100%	16500
	Normal Spoilage (10% of completed units i.e. 24500*10%)	2450	100%	2450	100%	2450
	Abnormal Spoilage (Bal. Fig.) (43000-8000-16500-2450-15000)	1050	100%	1050	100%	1050
	Work in process, Ending	15000	100%	15000	55%	8250
	Total units to be assigned costs	43000		35000		29850
	2.. costs per equivalent unit.
	COSTS	Costs
		Direct Materials	Conversion	Total
	Unit Costs
	Total Costs added during period	$            50,750	$          173,130	$           223,880
		÷	÷
	Equivalent units	35000	29850
	Cost per equivalent unit	$1.45	$5.80	$7.25
	Assignment of Cost of units completed and Transferred out (incuding normal spoilage), to Abnormal spoilage and to units in Ending Work in proces inventory :-
		Equivalent units	Cost per equivalent unit		Total
	Cost of Beginning Work in proces inventory (14000+38200)				$             52,200
	Cost added into Beginning Work in proces inventory
	Materials	0	$1.45	$                      -
	Conversion Costs	1,600	$5.80	$               9,280	$               9,280
	Cost of Complete beginning WIP (a)				$             61,480
	Cost of units started and completed (b)	16500	$7.25		$119,625
	Cost of normal spoilage ( c)	2450	$7.25		$17,763
	Cost of units completed Transferred out (incuding normal spoilage) (a+b+c)				$           198,868
	Cost of Abnormal Spoilage	1050	$7.25		$7,613
	Cost of Ending Work in proces inventory
	Materials	15000	$1.45	$21,750
	Conversion Costs	8250	$5.80	$47,850	$69,600
	Total costs accounted for				$           276,080
	Red Co.
	Cost Reconciliation Schedule
		Total
	Total Cost to be accounted for:
	Cost of beginning Work in process	$            52,200
	Costs added into production during May	$          223,880
	Total Cost to be accounted for	$          276,080
	Cost accounted for as follows:
	Cost of units completed Transferred out (incuding normal spoilage)	$          198,868
	Cost of Abnormal Spoilage	$               7,613
	Cost of Ending Work in proces inventory	$            69,600
	Total costs accounted for	$          276,080
1	Cost of units completed Transferred out (incuding normal spoilage)	$          198,868
	Cost of Ending Work in proces inventory	$            69,600
2	Cost of Abnormal Spoilage	$               7,613
	$7613 would be saved by reducing spoilage

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