Question

Agro Business operates several production processes including the production of bulk animal feed for cattle. One such product is produced in three separate process operations – Testing, Mixing & Packaging. The information below is of the costs incurred in, and output from the Mixing Process during the period just completed.

(i) Input from Testing: 120,000 kilos valued at an average cost of $24.05 per kilo

(ii) Other manufacturing costs incurred during the period: Direct material added Direct labour Manufacturing overhead $790,500 $380,400 $788,520

(iii) Normal losses of materials, which occurs in the early stages of the Mixing Process (after all materials have been added), is expected to be 3⅛% of input.

(iv) At inspection, a batch of 5,000 kilos of the feed was discarded. The feed had all the materials but was estimated to be 40% complete for labour and overhead. Losses from this process are stored in piles & sold as scrap to local farmers at $25.60 per kilo.

(v) 112,000 kilos were completed and transferred to the Packaging Process.

(vi) Closing work in process was 100% complete, apart from Mixing Process conversion costs, which were 70% complete.

(vii) The equipment was cleaned at the end of the previous period hence there were no units in process at the beginning of the period.

Required:

(a) Prepare a statement of equivalent production to determine the equivalent units and conversion costs and the cost per equivalent unit for direct materials (From Testing & Direct Material Added), and conversion costs.

(b) Calculate the: - Total cost of feed mixed and transferred to the Packaging Process - Cost of unexpected losses - Cost of ending work-in-process inventory in the Mixing Process

(c) Prepare the Work-In-Process Inventory – Mixing Process T-account, clearly showing the ending balance.

(d) State the journal entries necessary to record the assignment of direct materials, direct manufacturing wages and manufacturing overhead applied to Process 2. Also give the journal entries to record the cost of the feed mixed and transferred to the Packaging Department.

Answer 1

Answer-(a):

STATEMENT OF EQUIVALENT PRODUCTION UNITS Equivalent production Input Output Units | Material Direct labour Manufacturing overhead (units) Qty % Qty % Qty % 120,000 Normal loss 3750 Abnormal loss (5000 - 3750)| 1250 1250 100 500 400 500 401 Finished production 112000 112000 100 112000 112000 100 W-I-P 3000 3000 100 2100 2100 70 120,000 Total 120000 116250 114600 114600 100 70

Cost per (units) STATEMENT OF COST PER EQUIVALENT UNIT Equivalent Element of Cost Cost ($) production (units) Materials Input from testing process $ 2,886,000 Direct Materials added $ 790,500 $ 3,676,500 Less: Scrap value of normal loss $ 96,000 $ 3,580,500 116250 $ Direct labour 380,400 114600 $ Manufacturing overhead $ 788,520 114600 $ $ 4,749,420 $ $ 380, 30.80 3.32 6.88 41.00

Answer-(b):

Production Total Cost Unexpected losses STATEMENT OF VALUATION Equivalent production Cost per Element of cost (units) / unit Material 1250 $ 30.80 $ Direct labour 500 $ 3.32 $ Manufacturing overhead 500 $ 6.88 $ Material 112000 $ 30.80 $ Direct labour 112000 $ 3.32 $ Manufacturing overhead 112000 $ 6.88 $ Material 3000 $ 30.80 $ Direct labour 2100 $ 3.32 $ Manufacturing overhead 2100 $ 6.88 $ $ 43,600 Transferred to packaging Cost 38,500 1,660 3,440 3,449,600 371,770 770,630 92,400 6,971 14,449 $4,592,000 Ending W-I-P Inventory $ 113,820

Answer-(c):

Units Units Input from testing process Direct Material added Direct labour Manufacturing overhead W-I-P INVENTORY-MIXING PROCESS ACCOUNT Amount ($) 120000 $ 2,886,000 Normal loss $ 790,500 Unexpected loss $ 380,400 Unit transferred to packaging $ 788,520 Ending W-I-P inventory 120000 $ 4,845,420 Amount ($) 3750 $ 96,000 1250 $ 43,600 112000 $ 4,592,000 3000 $ 113,820 120000 $ 4,845,420