Johanna Computer manufactures laptop computers under its own brand, but acquires

Question

Johanna Computer manufactures laptop computers under its own brand, but acquires all the components from outside vendors. No computers are assembled until the order is received online from customers, so there is no finished goods inventory. When an order is received, the bill of materials required to fill the order is prepared automatically and sent electronically to the various vendors. All components are received from vendors within three days and the completed order is shipped to the customer immediately when completed, usually on the same day the components are received from vendors. The number of units in process at the end of any day is negligible.

The following data are provided for the most recent month of operations:

(a) Assuming Johanna uses traditional cost accounting procedures:

1. How much cost was charged to Work-in-Process during the month?
$Answer

2. How much cost was charged to cost of goods sold during the month?
$Answer

(b) Assuming Johanna is a lean production company and uses backflush costing method:

1. How much cost was charged to Work-in-Process during the month?
$Answer

2. How much cost was charged to cost of goods sold during the month?
$Answer

Actual components costs incurred $ 1,850,000 Actual conversion costs incurred $ 406,000 Units in process, beginning of month -0- Units started in process during the month 5,500 Units in process, end of month -0-

Explanation / Answer

Under traditional cost accounting procedures, conversion costs are charged directly to WIP. They then move to finished goods and then to Cost of goods sold (sequential processing). So,

(a) 1. Cost charged to Work-in-process during the month = $406,000

2. Cost charged to Cost of goods sold during the month = $1,850,000 + $406,000 = $2,256,000

Under backflush costing method, conversion costs are moved directly to finished goods inventory or cost of goods sold. basic reason is that WIP is minimum and costs move rapidly. So,

(b) 1. Cost charged to Work-in-process during the month = $0

2. Cost charged to Cost of goods sold during the month = $1,850,000 + $406,000 = $2,256,000

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