Question

Belda Co. makes organic juice in two departments: cutting 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 March, the cutting department completed and transferred 220,000 units to the blending department. Of the units completed, 10,000 were from beginning inventory and the remaining 210,000 were started and completed during the month. Beginning work in process was 75% complete with respect to direct materials and 60% complete with respect to conversion. The company has 40,000 units (50% complete with respect to direct materials and 30% complete with respect to conversion) in process at month-end. Information on the cutting 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	\( 16,800	\) 97,720
Added during the month	223,200	1,233,960

Required

1. Prepare the cutting department’s process cost summary for March using the FIFO method.
2. Prepare the journal entry dated March 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 the production department overestimates the percentage of completion for units in ending inventory with the result that its equivalent units of production for March are overstated. What impact does this error have on bonuses paid to the managers of the production department? What impact, if any, does this error have on these managers’ April bonuses?

Short answer

1. EUP for conversion, 226,000
2. Cost transferred out, $1,486,960
3. The managers who are only responsible for production in their department will get fewer bonuses in April compared to march; the error has no impact on the bonus paid to any other manager if they are not related to the production department.

Step-by-step solution

Meaning of Process Costing

Process costing is a technique of cost accounting used where similar products are produced in bulk, which helps charge the costs incurred to various processes.

(1) Preparing Process cost summary

Belda Co Process Cost Summary-FIFO Method For the Month Ended March 31
Costs charged to production.
Cost of beginning work-in-process
Direct material	$16,800
Conversion	97,720	$114,520
The cost incurred during this period
Direct materials	223,200
Conversion	1,233,960	1,457,160
Total costs to account for		$1,571,680
Unit cots information
Unit accounted for		Unit accounted for
Beginning work-in-process	10,000	Completed & transferred out	220,000
The unit started this period.	250,000	Ending work-in-process	40,000
Total units to account for	260,000	Total units accounted for	260,000
Equivalent unit of production	Direct materials	Conversion
Units to be completed beginning WIP
Direct materials	2,500 EUP
Conversion		4,000 EUP
Units started and completed	210,000 EUP	210,000 EUP
Units of ending work-in-process
Direct materials	20,000 EUP
Conversion		12,000 EUP
Equivalent unit of production	232,500 EUP	226,000 EUP
Cost per EUP	Direct materials	Conversion
The cost incurred this period	$223,200	$1,233,960
EUP	232,500	226,000
Cost per EUP	$0.96 per EUP	$5.46 per EUP
Cost assignment and reconciliation
Cost transferred out		$114,520
Cost to complete beginning work-in-process
Direct materials	$2,400
Conversion	21,840	24,240
Cost of units started and completed this period.
Direct materials	201,600
Conversion	1,146,600	1,348,200
The total cost of goods finished this period.		1,486,960
Cost of ending work-in-process
Direct materials	19,200
Conversion	65,520	84,720
Total cost accounted for		$1,571,680

(2) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
March 31	Work-in-Process-Blending	1,486,960
	Work-in-Process-Cutting		1,486,960

(3) Explaining the analysis component

Suppose the production department overestimates the equivalent units of production for closing work in progress in March. In that case, it will decrease the cost per equivalent unit of production; if the cost structure decreases, managers get a bonus.

Similarly, overestimated equivalent units of production for closing work in progress in March and the percentage of completion of opening work in progress, then the cost per equivalent unit for April is also overstated; as a result, managers will get less bonus.