Question

A leather goods company has recently experienced declining profits. Management has decided to investigate the manufacturing operation (and costs) of its leather belts, that are produced in a single continuous process. During the process, the leather strips are sewn, punched, dyed, and then the buckles are added.

Leather is added at the beginning of the process, buckles are added at the 90% stage and conversion costs are added uniformly.

The belts sell for $20.50. Management uses cost data to determine if the production process needs modification or if a selling price increase is justified. The cost estimated at the beginning of the year for planning and control was $11.50 per unit. Management has decided to use June cost data for comparison. All months have very similar levels of production but materials costs are subject to market conditions.

Opening WIP for June consisted of 500 units that were 30% complete as to conversion. In June, materials for 8,000 belts were added to production, and 8,100 belts were completed in the month. Closing WIP was 50% complete as to conversion.

Cost data is provided below:

Opening WIP:

            Leather Strips             $ 1 500

            Buckles -

            Conversion Costs 2 780

            Total $ 4 280

Costs added in June:

            Leather Strips             $41 000

            Buckles 8 100

            Conversion Costs 55 320 (Labour $14 770 and Overhead $40 550)

            Total $104 420

REQUIRED:

1. Prepare the Cost of Production Report for June to determine the cost per unit, the cost allocated to units completed and the costs allocated to closing WIP under the Weighted Average method. (Show all calculations) (15 marks)
2. Prepare the journal entry required to add costs to the process in June. (4 marks)
3. Compare and contrast weighted average and FIFO methods for process costing and comment on which method is most accurate for inventory valuation in times of rising prices of inputs. (3 marks)

Answer 1

1 Production Cost Report - Weighted Average method For The Month Ended June Equivalent units % Physical Leather % Leather units Buckles strips Buckles % EUP Conversion Conversion strips 500 8,000 8,500 Quantities Units to be accounted for: Beginning WIP Inventory Transferred from Blending Dept Total Units Units accounted for: Units completed and transferred out Closing WIP Inventory Total physical units accounted for Total equivalent units Cost Information 8,100 400 8,500 100% 100% 8,100 400 100% 0% 8,100 0 100% 50% 8,100 200 8,500 8,100 8,300 Costs Opening Work in process Cost added in current period Total costs to account for Equivalent units Cost per Equivalent unit Leather strips $1,500 $41,000 $42,500 8,500 $5.00 Conversion Buckles Costs $0 $2,780 $8,100 $55,320 $8,100 $58,1001 8,100 8,300 $1.000 $7.00 Total Costs $4,280 $104,420 $108,700 A $13.00 A/B Leather strips Buckles Conversion Costs Total Costs 8,100 $5.00 8,100 $1.00 8,100 $7.00 $40,500 $8,100 $56,700 $105,300 Assignment of Total costs Completed and transferred out: Total Equivalent units Cost per equivalent unit Cost assigned to units completed and transferred out to Finished goods Ending work in process: Total Equivalent units Cost per equivalent unit Cost assigned to units in ending WIP Total costs accounted for 400 $5.00 $2,000 0 $1.000 $0 2001 $7.00 $1,400 $3,400 $108,700 2 Credit Date General Journal June 30 Work in process Inventory Raw material inventory Debit $49,100 $49,100 Date Credit General Journal June 30 Work in process Inventory Wages payable Debit $14,770 $14,770 Credit Date General Journal June 30 Work in process Inventory Manufacturing overheads Debit $40,550 $40,550 3 Weighted average method vs. FIFO method In weighted average method the cost of opening WIP and Current period cost is averaged out The equivalent units are computed for units completed and transferred out during the period and Closing WIP Weighted average method does not help in comparing prior period cost and current period In FIFO method current period cost is only used for computation of cost per equivalent unit The equivalent units are computed for unfinished work on opening WIP, units started and completed and closing WIP FIFO method helps in comparing prior month cost and current month cost incurred asut per equivalent unit level FIFO method is more accurate for inventory valuation when prices of inputs are rising the reason being closing inventory is valued at current market prices