Pantanal, Inc., manufactures car seats in a local factory. For costing purposes,
ID: 2357080 • Letter: P
Question
Pantanal, Inc., manufactures car seats in a local factory. For costing purposes, it uses a first-in, first-out (FIFO) process costing system. The factory has three departments: Molding, Assembling, and Finishing. Following is information on the beginning work-in-process inventory in the Assembling Department on August 1: Work-in-process beginning inventory (11,000 units). Transferred-in from Molding $99,000 cost with degree of completion 100%. Direct materials costs $168,200 with degree of completion 60%. Conversion costs $59,000 with degree of completion 40%. Total work-in-process balance (August 1) $326,200. During August, 100,000 units were transferred in from the Molding Department at a cost of $2,070,000 and started in Assembling. The Assembling Department incurred other costs of $925,920 in August as follows: August Costs where Direct materials costs $743,140, Conversion costs $182,780. Total August costs $ 925,920. At the end of August, 13,000 units remained in inventory that were 80 percent complete with respect to direct materials and 40 percent complete with respect to conversion. COMPUTE THE COST OF GOODS TRANSFERRED OUT IN AUGUST and THE COST OF WORK-IN-PROCESS ENDING INVENTORY. (Round the unit costs for prior department costs, materials, and conversion to 2 decimals and the final answers to the nearest dollar amount.)Explanation / Answer
Bart’s Beverages is a small, local operation that makes only one flavor of soft drink. The following data are available for operations in its Blending Department during October. Using weighted-average process costing, prepare a cost of production report for October. The solution to this question is at the end of the chapter on page 307. Percent Barrels Complete Costs Beginning work-in-process inventory, October 1 . . . . . . . . . . . 1,000 Materials costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25% $ 1,113 Conversion costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 194 Units started in October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 Costs incurred in October Materials costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,487 Conversion costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,056 Ending work-in-process inventory, October 1 . . . . . . . . . . . . . . 500 Materials costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 ? Conversion costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ? Assigning Costs Using First-In, First-Out (FIFO) Process Costing A disadvantage of weighted-average costing is that it mixes current period costs with the costs of products in beginning inventory, making it impossible for managers to know how much it cost to make a product this period. First-in, fi rst-out (FIFO) costing assumes that the fi rst units worked on are the fi rst units transferred out of a production department. Whereas weighted-average costing mixes current period costs and costs from prior periods that are in beginning inventory, FIFO separates current period costs from those in beginning inventory. FIFO costing transfers out the costs in beginning inventory in a lump sum (assuming that the units in beginning inventory were completed during the current period) but does not mingle them with current period costs. L.O. 5 Assign costs to products using fi rst-in, fi rst-out (FIFO) costing. 278 Part III Cost Management Systems FIFO gives managers better information about the work done in the current period. Managers benefi t from this separation of current period costs from costs in beginning inventory because they can identify and manage current period costs. If the production process is a FIFO process, the inventory numbers are more likely to refl ect reality under FIFO costing than under weighted-average costing because the units in ending inventory are likely to have been produced in the current period. FIFO costing assigns current period costs to those units, but weighted-average costing mixes current and prior period costs in assigning a value to ending inventory. To illustrate accounting for process costing using FIFO, we use the data from the 2T example introduced earlier. This enables you to compare FIFO and weighted-average costing and see how the results differ. Recall the following facts: 16,000b 96,000 Work in process, March 31 Transferred out Costs Costs 1 2 Units Materials 3 4 5 6 7 8 A Work in process, March 1 $ 16,160 84,640 20,000a Current costs (March) 92,000 Total B C D E $ 100,800 Conversion $ 8,126 213,634 $ 221,760 9 a 25% complete with respect to conversion costs. b 30% complete with respect to conversion costs. Computing product costs using a FIFO process costing system requires the same fi ve-step procedure as the weighted-average approach. The difference is in the application. For convenience, we repeat the fi ve steps here: 1. Measure the physical fl ow of resources. 2. Compute the equivalent units of production. 3. Identify the product costs for which to account. 4. Compute the costs per equivalent unit. 5. Assign product cost to batches of work. Exhibit 8.12 is a production cost report for March using FIFO process costing. We present it now and will refer to it as we go through the fi ve steps, which will reduce the need to repeat the material that is unchanged from the weighted-average method. Step 1: Measure the Physical Flow of Resources As with the weighted-average method, we begin the costing process with information on the production of adhesive during March in the Compounding Department. As we would expect, the choice of accounting for production costs does not change the physical fl ow of production, so this part of the report is identical to that for the weighted-average method. Step 2: Compute the Equivalent Units of Production Computing equivalent units is different in FIFO costing than in weighted-average costing. Recall that FIFO costing separates what was in beginning inventory from what occurs this period. The FIFO equivalent unit computation is confi ned only to what was produced this period. Under FIFO, we compute equivalent units in three parts for both direct materials and conversion costs: 1. Equivalent units to complete beginning work-in-process inventory. 2. Equivalent units of goods started and completed during the current period. 3. Equivalent units of goods still in ending work-in-process inventory. For the Compounding Department, 20,000 units in beginning inventory were 100 percent complete for materials and 25 percent complete for conversion costs at the beginning Chapter 8 Process Costing 279 G TORRANCE TAPE, INC. Physical Units Material Costs Costs (Section 1) (Section 2) Flow of Units Units to be accounted for In work-in-process beginning inventory Units started this period Total units to account for Total units accounted for Units accounted for Completed and transferred out From beginning work in process Started and completed Total completed and transferred out In work-in-process ending inventory Costs in work-in-process beginning inventory Less work from beginning work in process New work done in March Total costs accounted for Costs per equivalent unit (Section 4) Costs accounted for (Section 5) Costs assigned to units transferred out Costs from beginning work-in-process inventory Current period costs Total costs to be accounted for Current costs to complete beginning work-in-process inventory Current costs of units started and completed Total costs from beginning work-in-process Total costs transferred out Costs assigned to work-in-process ending inventory inventory (Current period cost New work done) Flow of Costs Costs to be accounted for (Section 3) Costs: Equivalent Units Costs (Sections 3 through 5) 92,000 20,000 112,000 76,000 76,000 20,000 20,000 20,000 Total $ 24,286 $ 16,160 $ 8,126 $ 24,286 $ 16,160 $ 8,126 $ 57,736 $ 16,160 $ 41,576 239,400 69,920g 169,480h $ 322,560 $ 100,800 $ 221,760 298,274 84,640 213,634 $ 0.92d $ 2.23e 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 A B C D E F $ 322,560 $ 100,800 $ 221,760 33,450 – 33,450f $ 297,136 $ 86,080 $ 211,056 25,424 14,720i 10,704j Conversion Materials Costs Conversion Costs For the Month Ending March 31 Compounding Department 76,000 96,000 96,000 96,000 92,000 92,000 95,800 16,000 16,000a 112,000 112,000 100,800 20,000 20,000 5,000c 4,800b a 100% complete with respect to materials. b 30% complete with respect to conversion. c 5,000 20,000 units 25% complete. d $0.92 $84,640 92,000 equivalent units (EU). e $2.23 $213,634 95,800 EU f $33,450 15,000 EU $2.23 per EU g $69,920 76,000 EU $0.92 per EU h $169,480 76,000 EU $2.23 per EU i $14,720 16,000 EU EU $0.92 per EU j $10,704 4,800 EU $2.23 per EU Exhibit 8.12 Production Cost Report—FIFO Process Costing 280 Part III Cost Management Systems of the period. Completing the beginning inventory required no additional equivalent units for materials [ (100% 100%) 20,000 units], and 15,000 equivalent units for conversion costs [ (100% 25%) 20,000 units]. The units started and completed can be derived by examining the physical fl ow of units. Because 92,000 units were started and 16,000 of them remain in ending inventory, according to the FIFO method, the remaining 76,000 were completed. Thus, 76,000 units were started and completed. Another way to get the same result is to observe that of the 96,000 units completed during March, 20,000 came from beginning inventory (according to the FIFO method), so the remaining 76,000 units completed must have been started during March. Either way you view the physical fl ow, 76,000 units were started and completed. Because these 76,000 units are 100 percent complete when transferred out of the department, the units started and completed represent 76,000 equivalent units produced during the current period for both direct materials and conversion costs. Finally, we have the equivalent units of production in ending inventory. 1 Ending inventory of 16,000 units is 100 percent complete with respect to materials and 30 percent complete for conversion costs. Thus, there are 16,000 equivalent units ( 100% 16,000) for materials in ending work-in-process inventory and 4,800 equivalent units ( 30% 16,000) for conversion costs in ending work-in-process inventory. These equivalent unit results appear in section 2 of the production cost report in Exhibit 8.12. You will note that the equivalent units under FIFO are less than or equal to those under weighted average because the FIFO computations refer to the current period’s production only. Weighted-average equivalent units consider all units in the department, whether produced this period or in a previous period. (If the department has no beginning inventory, the weighted-average and FIFO equivalent units are equal.
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