Question

Tamar Co. manufactures a single product in one department. All direct materials are added at the beginning of the manufacturing process. Conversion costs are added evenly throughout the process. During May, the company completed and transferred 22,200 units of product to finished goods inventory. Its 3,000 units of beginning work in process consisted of \(19,800 of direct materials and \)221,940 of conversion costs. It has 2,400 units (100% complete with respect to direct materials and 80% complete with respect to conversion) in process at month-end. During the month, \(496,800 of direct material costs and \)2,165,940 of conversion costs were charged to production.

Required

1. Prepare the company’s process cost summary for May using the weighted-average method.

2. Prepare the journal entry dated May 31 to transfer the cost of completed units to finished goods inventory

Analysis Component

3. The costing process depends on numerous estimates.

a. Identify two major estimates that determine the cost per equivalent unit.

b. In what direction might you anticipate a bias from management for each estimate in part 3a (assume that management compensation is based on maintaining low inventory amounts)? Explain your answer.

Short answer

1. Cost per equivalent unit for direct material:$21 per unit, and for conversion: $99 per unit.
2. Goods costing$2,664,000 are transferred to finished goods inventory.
3. (a) Cost per equivalent unit is determined by using the total cost to account for equivalent units.

(b) The management might have reported higher completion percentage than actual to reduce the value of ending inventory.

Step-by-step solution

Definition of Finished Goods Inventory

A finished goods inventory is a current asset account reporting the goods ready for sale. The account reports the cost of the goods that remains unsold at the end period.

Process cost summary

Calculation of equivalent units:

Particular	Direct material	Conversion
Units completed and transferred	22,200	22,200
Add: Ending inventory	2,400	$\mathbf{(}\mathbf{2}\mathbf{,}\mathbf{400}\mathbf{\times }\mathbf{80}\mathbf{\%}\mathbf{)}$ 1,920
Equivalent units	24,600	24,120

Calculation of total cost to account for:

Particular	Direct material	Conversion
Beginning work in process	$19,800	$221,940
Add: Cost incurred during period	496,800	2,165,940
Total cost	$516,600	$2,387,880
Equivalent units	24,600	24,120
Cost per equivalent unit	$21 per unit	$99 per unit

Calculation of cost of units completed and transferred to finished goods inventory:

$\begin{array}{c}\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{finished}\mathbf{}\mathbf{goods}\mathbf{=}\mathbf{Units}\mathbf{}\mathbf{completed}\mathbf{}\mathbf{and}\mathbf{}\mathbf{trasferred}\mathbf{\times }\mathbf{Total}\mathbf{}\mathbf{of}\mathbf{}\mathbf{}\mathbf{cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{equivalent}\mathbf{}\mathbf{units}\\ \mathbf{=}\mathbf{22}\mathbf{,}\mathbf{200}\mathbf{\times }\mathbf{(}\mathbf{\$}\mathbf{99}\mathbf{+}\mathbf{\$}\mathbf{21}\mathbf{)}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{664}\mathbf{,}\mathbf{000}\end{array}$

Journal entry to record the transfer made to finished goods inventory

Date	Accounts and Explanation	Debit ($)	Credit ($)
31 may	Finished goods inventory	2,664,000
	Work-in-process inventory		2,664,000

Analysis

1. Two major estimates for determining cost per equivalent unit are total cost to account for and equivalent units. These values are identified for direct material and conversion separately.
2. We expect the management to overestimate the completion percentage to reduce the equivalent units required for conversion. It will reduce the value of the ending inventory.