Question

Question: Abraham Company uses process costing to account for its production costs. Conversion is added evenly throughout the process. Direct materials are added at the beginning of the process. During September, the production department transferred 80,000 units of product to finished goods. Beginning work in process consisted of 2,000 units that were 100% complete with respect to direct materials and 85% complete with respect to conversion. Of the units completed, 2,000 were from beginning work in process and 78,000 units were started and completed during the period. Beginning work in process had \(58,000 of direct materials and \)86,400 of conversion cost. At the end of September, the work-in-process inventory consists of 8,000 units that are 25% complete with respect to conversion. The direct materials cost added in September is \(712,000, and conversion cost added is \)1,980,000. The company uses the weighted average method.

Required

• 1.Determine the equivalent units of production with respect to (a) conversion and (b) direct materials.
• 2.Compute both the conversion cost and the direct materials cost per equivalent unit.
• 3.Compute both conversion cost and direct materials 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 25% complete with respect to conversion, they are actually 75% complete. Write a one-page memo to the plant manager describing how this error affects its September financial statements.

Short answer

• 1)Conversion EUP =82,000

Direct material EUP =88,000

• 2)The cost per EUP for direct material and conversion is$8.75 EUP and$25.20 per EUP
• 3) Units completed and transferred out =$2,716,000

Ending work in process inventory =$120,400

• 4) Such an error would result in the income statement for September overstating the cost of goods sold andunderstating the net income.

Step-by-step solution

Meaning of Work-in-Process

Materials that have already been substantially finalized during the production process are termed work-in-progress inventory. Even though they may be kept to one side in a cushion storage area, these goods are generally found in the manufacturing area.

(a) Determining the equivalent production units concerning conversion and direct materials

Calculating Conversion EUP

Equivalent units of production	Conversion (EUP)
Units completed and transferred out	80,000
Ending work in process $(8,000units\times 25\%)$	2,000
Ending work in process $(8,000units\times 25\%)$	82,000

Calculating Direct material (EUP)

Equivalent units of production	Direct material (EUP)
Units completed and transferred out	80,000
Ending work in process	8,000
Equivalent units of production	88,000

(b) Computing the conversion and direct materials costs per equivalent unit

Cost per EUP	Direct materials	Conversion
Cost of beginning work-in-process	$58,000	$86,400
Costs incurred during this period	$712,000	$1,980,000
Total costs (A)	$770,000	$2,066,400
Equivalent units of production (B)	88,000	82,000
Cost per EUP	$8.75 per EUP	$25.20 per EUP

(c) Compute both conversion cost and direct materials cost

Units completed and transferred out

Cost assignment-Weighted average	Direct material	Conversion
Costs transferred out
Direct materials $(80,000EUP\times \$8.75perEUP)$	$700,000
Conversion $(80,000EUP\times \$25.20perEUP)$	$2,016,00
The total cost of ending work in process inventory		$2,716,000

Ending work in process inventory.

Cost assignment-Weighted average	Direct material	Conversion
Costs transferred out
Direct materials (8,000 EUP x $8.75 per EUP)	$70,000
Conversion (2,000 EUP x $25.20 per EUP)	$50,400
The total cost of ending work in process inventory		$120,400

(d) Writing a memo

From: ABC

To: Plant manager

Subject: Percentage of completion error analysis.

If the units in ending inventory are 75 percent complete instead of 25 percent concerning conversion, it will understate the number of equivalent units in ending inventory concerning conversion. It would similarly understate the overall number of equivalent units produced during the period. However, the conversion cost in finishing work is higher because more comparable units are left in the ending inventory.

Such a mistake would result in the income statement for September, overstating the cost of goods sold and understating the net income. As a result, both the retained earnings (equity) and the work-in-process inventory (total assets) would be overstated.

Regards,

ABC.