Question

Question: Switch Co. manufactures a single product in one department. Direct labor and overhead are added evenly throughout the process. Direct materials are added as needed. The company uses monthly reporting periods for its weighted-average process costing. During January, Switch completed and transferred 220,000 units of product to finished goods inventory. Its 10,000 units of beginning work in process consisted of \(7,500 of direct materials and \)49,850 of conversion. In process at month-end are 40,000 units (50% complete with respect to direct materials and 30% complete with respect to conversion). During the month, the company used direct materials of \(112,500 in production and incurred conversion costs of \)616,000.

Required

• 1.Prepare the company’s process cost summary for January using the weighted-average method.
• 2.Prepare the journal entry dated January 31 to transfer the cost of completed units to finished goods inventory.

Analysis Component

• 3.The cost accounting process depends on several estimates.
  • a.Identify two major estimates that affect 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)Total cost accounted for$785,850
• 2)Finished goods inventory =$741,410
• 3)a)Overhead allocation rate and completion percentage for materials and conversion.

b) Underestimating the percentage of completion results in reducing the value of the dollar.

Step-by-step solution

Meaning of Equivalent Units

Equivalents units outline how much work has been done on certain units of products on which the manufacturing process starts but are partially completed at the end of the accounting period.

(a) Preparing Cost summary

Switch Co.

Production cost report

For the month of January

Physical

Equivalent units

	units
		Material	Conversion costs
Quantities
Units to be Accounted for
Work-in-process, beginning	10,000
Started into production	250,000
Total units	260,000
Units accounted for
Transferred out	220,000	220,000	220,000
Work-in-process ending	40,000	20,000 ( 40,000 x 50% )	12,000 ( 40,000 x 30% )

	240,000	232,000
Costs
Units’ costs
Beginning work-in-process inventory (A)	$7,500	$49,850	$57,350
During month (B)	$112,500	$616,000	$728,500
Total cost to be accounted (C=A+B)	$120,000	$665,850	$785,850
Equivalent Units (D)	240,000	$232,000
Units Costs (E=C/D)	$0.50	$2.87	$3.37
Cost assigned to transferred out	$110,000 (220,000 x $0.50)	$631,410 (220,000 x $2.87)	$741,410
The cost assigned to work-in-process (G)	$10,000 (20,000 x $0.50)	$44,440 (12,000 x $2.87)	$44,440
Total cost accounted for (I=F+G)			$785,850

(b) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
	Finished Goods inventory	741,410
	Work-in-Process inventory		741,410

(c) Explaining the analysis component

• a)The two main estimates are the overhead allocation rate and the percentage of completion for materials and conversion.
• b) We can expect underestimating of the percentage of completion because management would seek an overhead allocation rate that allocates the least amount of overhead to each production step. This quantity becomes challenging to "control" if materials are added at the start of the procedure. Usually, management will aim to overestimate the completion rate to lower the number of equivalent units needed for conversion. The monetary value given to certain parts of ending inventory is lowered.