Backflush Costing, Conversion Rate Southward Company has implemented a JIT flexi

Question

Backflush Costing, Conversion Rate

Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of the company, has decided to reduce the accounting requirements given the expectation of lower inventories. For one thing, he has decided to treat direct labor cost as a part of overhead and to discontinue the detailed direct labor accounting of the past. The company has created two manufacturing cells, each capable of producing a family of products: the radiator cell and the water pump cell. The output of both cells is sold to a sister division and to customers who use the radiators and water pumps for repair activity. Product-level overhead costs outside the cells are assigned to each cell using appropriate drivers. Facility-level costs are allocated to each cell on the basis of square footage. The budgeted direct labor and overhead costs are as follows:

The predetermined conversion cost rate is based on available production hours in each cell. The radiator cell has 42,600 hours available for production, and the water pump cell has 28,700 hours. Conversion costs are applied to the units produced by multiplying the conversion rate by the actual time required to produce the units. The radiator cell produced 76,800 units, taking 0.50 hour to produce one unit of product (on average). The water pump cell produced 99,800 units, taking 0.25 hour to produce one unit of product (on average).

Other actual results for the year are as follows:

All units produced were sold. Any conversion cost variance is closed to Cost of Goods Sold.

Required:

1. Calculate the predetermined conversion cost rates for each cell. If required, round your answers to the nearest cent.

2. Prepare journal entries using backflush accounting. Assume two trigger points, with completion of goods as the second trigger point. Round amounts to the nearest dollar if rounding is required. For a compound transaction, if an amount box does not require an entry leave it blank. Prepare your entries in the following order: (a) purchase of raw materials, (b) incurrence of direct labor and overhead costs, (c) completion of goods, (d) sale of goods, and (e) recognition of the variance between applied and actual production costs.

3. Repeat Requirement 2, assuming that the second trigger point is the sale of the goods. Round amounts to the nearest dollar if rounding is required. For a compound transaction, if an amount box does not require an entry leave it blank. Prepare your entries in the following order: (a) purchase of raw materials, (b) incurrence of direct labor and overhead costs, (c) completion and sale of goods, and (d) recognition of the variance between applied and actual production costs.

5. Two variants of backflush costing were presented in which each used two trigger points, with the second trigger point differing. Suppose that the only trigger point for recognizing manufacturing costs occurs when the goods are sold. How would the entries be listed here? Round amounts to the nearest dollar if rounding is required. For a compound transaction, if an amount box does not require an entry leave it blank. Prepare your entries in the following order: (a) incurrence of direct labor and overhead costs, (b) completion and sale of goods, and (c) recognition of the variance between applied and actual production costs.

Direct materials purchased and issued $1,432,000 Direct labor costs 289,460 Overhead 1,690,120 Radiator Cell Water Pump Cell Direct labor costs Direct overhead Product sustaining Facility level $174,660 694,380 234,300 187,440 Total conversion cost 1,290,780 114,800 364,490 129,150 80,360 $ 688,800

Explanation / Answer

1= Predetermined conversion rate

radiator=1290780

water pump=688800

2j 3) 4) ournal entry

raw material 1432000

to cash 1432000

direct labour and overheads 1979580

to cash 1979580

goods

to cash

cash

to goods

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