Question

Dengo Co. makes a trail mix in two departments: roasting and blending. Direct materials are added at the beginning of each process, and conversion costs are added evenly throughout each process. The company uses the FIFO method of process costing. During October, the roasting department completed and transferred 22,200 units to the blending department. Of the units completed, 3,000 were from beginning inventory and the remaining 19,200 were started and completed during the month. Beginning work in process was 100% complete with respect to direct materials and 40% complete with respect to conversion. The company has 2,400 units (100% complete with respect to direct materials and 80% complete with respect to conversion) in process at month-end. Information on the roasting department’s costs of beginning work in process inventory and costs added during the month follows

Cost	Direct Materials	Conversion
Of beginning work in process inventory	\( 9,900	\) 110,970
Added during the month	248,400	1,082,970

Required

1. Prepare the roasting department’s process cost summary for October using the FIFO method.
2. Prepare the journal entry dated October 31 to transfer the cost of completed units to the blending department.

Analysis Component

3. The company provides incentives to department managers by paying monthly bonuses based on their success in controlling costs per equivalent unit of production. Assume that a production department underestimates the percentage of completion for units in ending inventory with the result that its equivalent units of production for October are understated. What impact does this error have on the October bonuses paid to that department’s managers? What impact, if any, does this error have on November bonuses?

Short answer

1. Unit per cost is $58.75
2. Cost of unit transferred is $1,333,920
3. The Ending and beginning WIP is overstated; therefore, the production manager will receive fewer bonuses.

Step-by-step solution

Meaning of FIFO

According to the FIFO inventory valuation concept, the first things purchased are the first goods sold. The most conceptually acceptable method of valuing inventories is based on the premise that it closely resembles the actual flow of goods in most organizations.

(a) Preparing the roasting department’s process cost summary

Statement of equivalent units
Particular	Whole units	Materials	Conversion
		%	Units	%	Units
Beginning WIP	3,000			60	1,800
Started and completed	19,200	100	19,200	100	19,200
Ending WIP	2,400	100	2,400	80	1,920
Equivalent Units			21,600		22,920
Cost per equivalent units
Cost incurred during month	$248,400	$1,082,970	$1,331,370
Equivalent units	21,600	22,920
Cost per equivalent units	$11.50	$47.25	$58.75

(b) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
	WIP Blending department	$1,333,920
	WIP Roasting department		$1,333,920

Working note:

Cost assignment and reconciliation

Cost transferred out (Cost of beginning goods in process):		$120,870
Cost to complete beginning work in process:
Direct material	$0
Conversion	$85,050	$85,050
Costs of units started and completed:
Direct material	$220,800
Conversion	$907,200	$1,128,000
Total cost accounted for		$1333,920