Question

Problem 8-57 (Static) Prepare a Production Cost Report and Adjust Inventory Balances: Weighted-Average Method (LO 8-3, 4)

The records of Fremont Corporation’s initial and unaudited accounts show the following ending inventory balances, which must be adjusted to actual costs.

	Units	Unaudited Costs
Work-in-process inventory	120,000	$	793,152
Finished goods inventory	20,000		337,560

As the auditor, you have learned the following information. Ending work-in-process inventory is 40 percent complete with respect to conversion costs. Materials are added at the beginning of the manufacturing process, and overhead is applied at the rate of 80 percent of the direct labor costs. There was no finished goods inventory at the start of the period. The following additional information is also available.

		Costs
	Units	Direct Materials			Direct Labor
Beginning inventory (80% complete as to labor)	80,000	$	240,000		$	546,000
Units started	400,000
Current costs			1,560,000			2,208,000
Units completed and transferred to finished goods inventory	360,000

Required:

a. Prepare a production cost report for Fremont using the weighted-average method. (Hint: You will need to calculate equivalent units for three categories: materials, labor, and overhead.)

b. Show the journal entry required to correct the difference between the unaudited records and actual ending balances of Work-in-Process Inventory and Finished Goods Inventory. Debit or credit Cost of Goods Sold for any difference.

c. If the adjustment in requirement (b) is not made, will the company’s income and inventories be overstated or understated?

Complete this question by entering your answers in the tabs below.

• Required A
• Required B
• Required C

Prepare a production cost report for Fremont using the weighted-average method. (Hint: You will need to calculate equivalent units for three categories: materials, labor, and overhead.) (Round "Cost per equivalent unit" to 2 decimal places.)

FREMONT CORPORATION Production Cost Report—Weighted-Average Physical Units Total Costs Materials Labor Overhead Flow of Production Units Units to be accounted for: Beginning WIP inventory Units started this period Total units to be accounted for Units accounted for: Units completed and transferred out: From beginning inventory Started and completed currently Total transferred out Units in ending WIP inventory Total units accounted for Costs to be accounted for: Costs in beginning WIP inventory Current period costs Total costs to be accounted for Cost per equivalent unit: Materials Labor Overhead Costs accounted for: Costs assigned to units transferred out: Materials Labor Overhead Total costs of units transferred out Costs assigned to ending WIP inventory: Materials Labor Overhead Total ending WIP inventory Total costs accounted for

• Required A
• Required B

Answer 1

A)

FREMONT CORPORATION
Production Cost Report—Weighted-Average
	Physical Units	Total Costs	Materials	Labor	Overhead
Flow of Production Units
Units to be accounted for:
Beginning WIP inventory	80000
Units started this period	400000
Total units to be accounted for	480000
Units accounted for:
Units completed and transferred out:
From beginning inventory	80000
Started and completed currently	(360000-80000)= 280000
Total transferred out	360000		360000	360000	360000
Units in ending WIP inventory	(480000-360000)= 120000		(120000*100%)= 120000	(120000*40%)= 48000	(120000*40%)= 48000
Total units accounted for	480000		480000	408000	408000
Costs to be accounted for:
Costs in beginning WIP inventory		$1222800	$240000	$546000	(546000*80%)= $436800
Current period costs		5534400	1560000	2208000	(2208000*80%)= 1766400
Total costs to be accounted for		$6757200	$1800000	$2754000	$2203200
Cost per equivalent unit:
Materials			$3.75
Labor				$6.75
Overhead					$5.40
Costs accounted for:
Costs assigned to units transferred out:
Materials		$1350000	(360000*$3.75)= 1350000
Labor		2430000		(360000*$6.75)= 2430000
Overhead		1944000			(360000*$5.40)= 1944000
Total costs of units transferred out		$5724000	$1350000	$2430000	$1944000
Costs assigned to ending WIP inventory:
Materials		$450000	(120000*$3.75)= 450000
Labor		324000		(48000*$6.75)= 324000
Overhead		259200			(48000*$5.40)= 259200
Total ending WIP inventory		$1033200	$450000	$324000	$259200
Total costs accounted for		$6757200	$1800000	$2754000	$2203200

Cost per equivalent unit:

Materials= $1800000/480000= $3.75

Labor= $2754000/408000= $6.75

Overhead= $2203200/408000= $5.40

B) Difference in Work in process= Unaudited accounts balance-Actual balances

Work in process= $793152-1033200= $-240048

Finished goods= $337560-($3.75+6.75+5.40)*20000= $19560

Event	Account titles and explanation	Debit	Credit
1	Work in process	$240048
	Finished goods		$19560
	Cost of goods sold (240048-19560)		$220488
	(To record difference between the unaudited records and actual ending balances of Work-in-Process Inventory and Finished Goods Inventory)

C)

Income	Understated
Work in process inventory	Understated
Finished goods inventory	Overstated

If the adjustment (B) is not made than it will also not effect the cost of goods sold by which the company's income will be understated.

As the unaudited ending work in process inventory is less than the actual ending work in process inventory and if the adjustment (B) is not made the company's work in process inventories must be understated.

As the unaudited ending finished goods inventory is greater than the actual ending finished goods inventory and if the adjustment (B) is not made the company's finished goods inventories must be overstated.