Question

Process Costing for a Service Company

Madison Electric Company uses a fossil fuel (coal) plant for generating electricity. The facility can generate 900 megawatts (million watts) per hour. The plant operates 600 hours during March. Electricity is used as it is generated; thus, there are no inventories at the beginning or end of the period. The March conversion and fuel costs are as follows:

Conversion costs	$40,500,000
Fuel	10,800,000
Total	$51,300,000

Madison also has a wind farm that can generate 100 megawatts per hour. The wind farm receives sufficient wind to run 300 hours for March. The March conversion costs for the wind farm (mostly depreciation) are as follows:

Conversion costs

$2,700,000

a. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March.

	Cost Per Mega-watt Hour
Fossil plant		$	per MWh
Wind farm

b. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity?

c. What advantage does the fossil fuel plant have over the wind farm? Which of the following is true.

1. Fossil fuel is easily available.
2. Fossil fuel plant has a cost advantage over wind farm.
3. The wind farm is subject to the presence of wind and thus, not reliable.
4. The fossil fuel plant can be turned on and off on a schedule, while the wind farm is subject to the varieties of nature.

Answer 1

Madison Electric Company

Given:

Conversion costs = $40,500,000

+ Fuel cost = $10,800,000  

Total Fossil Plant Cost    = $51,300,000

The fossil fuel (coal) plant can generate 900 megawatts (million watts) per hour, operating at 600 hours during March.

Wind farm generates 100 megawatts per hour and receives sufficient wind to run 300 hours for March.

a. Calculation of the Cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March =

Cost per megawatt hour for the fossil fuel plant:

Cost per megawatt = Fossil plant cost Fossil plant megawatt hours $51,300,000 540,000 MWhs = $95 per MWh

Cost per megawatt hour for the the wind farm:

Cost per megawatt = Windfarm cost Windfarm megawatt hours $2,700,000 30,000 MWhs = $90 per MWh

Working Notes: Fossil Plant Megawatt hours = Megawatts x Hours = 900 x 600 = 540,000 MWhs Windfarm megawatt hours = Megawatts x Hours = 100 x 300 = 30,000 per MWhs

b. Usually, equivalent units for production are analysed when there are inventories at the beginning or at the end of the period which are partially completed to each conversion costs and materials. Equivalent units of production are not needed in determining the cost per megawatt hour (MWh) for generating electricity as there are no inventories at the beginning or end of the period given for Madison Electric Company.

c. What advantage does the fossil fuel plant have over the wind farm? Which of the following is true.

1. Fossil fuel is easily available. - True
2. Fossil fuel plant has a cost advantage over wind farm. - False
3. The wind farm is subject to the presence of wind and thus, not reliable. - True
4. The fossil fuel plant can be turned on and off on a schedule, while the wind farm is subject to the varieties of nature. - True