Question

Victory Company uses weighted-average process costing to account for its production costs. Conversion cost is added evenly throughout the process. Direct materials are added at the beginning of the process. During November, the company transferred 700,000 units of product to finished goods. At the end of November, the work-in-process inventory consists of 180,000 units that are 30% complete with respect to conversion. Beginning inventory had \(420,000 of direct materials and \)139,000 of conversion cost. The direct material cost added in November is \(2,220,000, and the conversion cost added is \)3,254,000. Beginning work in process consisted of 60,000 units that were 100% complete with respect to direct materials and 80% complete with respect to conversion. Of the units completed, 60,000 were from beginning work in process and 640,000 units were started and completed during the period.

Required

1. Determine the equivalent units of production with respect to (a) direct materials and (b) conversion.

2. Compute both the direct material cost and the conversion cost per equivalent unit.

3. Compute the direct material cost and the conversion cost assigned to (a) units completed and transferred out and (b) ending work in process inventory.

Analysis Component

4. The company sells and ships all units to customers as soon as they are completed. Assume that an error is made in determining the percentage of completion for units in ending inventory. Instead of being 30% complete with respect to labor, they are actually 60% complete. Write a one-page memo to the plant manager describing how this error affects its November financial statements.

Short answer

1. Equivalent units of production for material:880,000 and for conversion:754,000.
2. Cost per equivalent unit for material:$3 and for conversion:$4.5.
3. Total cost for material:$2,640,000 and for conversion:$3,393,000.
4. The error willoverstate the cost of goods sold and understate the net income.

Step-by-step solution

Definition of Direct Material

Direct material can be defined as the material used in the production process that can be identified directly by physical inspection of the product.

Equivalent units of production for both material and conversion

Particular	Material	Conversion
Units completed and transferred out	700,000	700,000
Add: Ending inventory	180,000	54,000
Equivalent units of production	880,000	754,000

Calculation of cost per equivalent unit

Particular	Direct material	Conversion
Beginning work-in-process	$420,000	$139,000
Cost incurred this period	$2,220,000	$3,254,000
Total cost	$2,640,000	$3,393,000
Equivalent units	880,000	754,000
Cost per equivalent units	$3	$4.50

Assignment of direct material and conversion cost

Particular	Direct material ($3)	Conversion ($4.5)	Total
Units completed and transferred out	$2,100,000	$3,150,000	$5,250,000
Ending inventory	540,000	243,000	$783,000
Total cost	$2,640,000	$3,393,000	$6,033,000

Effect of an error on the financial statement

Date: XX/XX/XX

To: Plant manager

From: Accountant

Reason: Effect of an error on the financial statement

If the percentage of completion in respect of labor is understated than actual, then it will understate the ending inventory in respect of labor. Subsequently, it will understate the total units produced during the period. It will also report higher conversion costs because of higher units in the ending inventory.

Such understatement will affect the income statement by overstating the cost of goods sold and understating the net income.

Regards,