Cane’s Canvas makes wallets and purses. There are 2 departments. The Fabric Department takes salvaged fabric...
Cane’s Canvas makes wallets and purses. There are 2 departments. The Fabric Department takes salvaged fabric and converts it into 8 x 6 reams of usable fabric. Salvaged fabric is added to the Fabric Department in the beginning, while fabric conversion costs are added throughout the process. Wallets and purses only differ in how the spools are converted in the Finishing Department. There is never work-in-process inventory here and no difference between wallets or purses. The Finishing Department converts reams of fabric into wallets or purses. One ream produces 5,000 wallets OR 4,000 purses. They are then wrapped for shipping. The material and conversion cost of finishing and wrapping one product is the same for wallets and purses. Finishing conversion costs are added evenly during the process but Finishing Department raw materials for wrapping are added at the end.
There was no inventory to start in September. During the month, the Fabric Department converted 65,000 tons of fabric into 6,500 reams of fabric that was transferred to the Finishing Department. The cost of salvaged fabric was $12 per ton and there were 4,160 machine hours during the month of September.
The Finishing Department converted 3,500 reams of fabric into wallets that were all sold during September. 2,400 purses were completed but none of them sold in September and remained in finished goods inventory. The last 600 reams of fabric were converted into purses but not finished and only 80% through the Finishing Department. The Finishing Department had 5,680 actual machine hours during the month of September.
Wrapping costs were $260,000 and factory conversion costs were $4,850,000.
Allocation:Raw materials are direct costs at the department level and are allocated to individual units using actual costing based on the number of units. Conversion costs are indirect at the department level and are allocated to the 2 departments based on actual machine hours. These costs include labor, depreciation and running costs for the factory and the equipment. Estimation errors are not pro-rated to inventory. Conversion costs are allocated from the departments to the product using actual costing based on the number of units.
Budget for September
Raw Material
Salvaged Fabric (60,000 pounds @ $10 per pound) 600,000
Packaging Materials (30 million wallets/purses at 0.01 per item) 300,000
Conversion Costs
Factory (1) 4,500,000
(1) Fabric Department will use 4,000 machine hours and the Finishing Department will use 5,000.
1. What is the total cost of one ream of fabric transferred from the Fabric Department to the Finishing Department during the transfer?
2. What is the total cost of finished goods inventory at the end of September?
3. What is the total cost of work-in-process at the end of September?
4. What is the final Cost of Goods Sold on the September income statement?
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