Chapter 13, Problem 13E

Lean accounting

Modern Lighting Inc. manufactures lighting fixtures, using lean manufacturing methods. Style Omega has a materials cost per unit of $16. The budgeted conversion cost for the year is $308,000 for 2,200 production hours. A unit of Style Omega requires 18 minutes of cell production time. The following transactions took place during June:

1. 1. Materials were acquired to assemble 620 Style Omega units for June.
2. 2. Conversion costs were applied to 620 Style Omega units of production.
3. 3. 600 units of Style Omega were completed in June.
4. 4. 580 units of Style Omega were sold in June for $100 per unit.
5. A. Determine the budgeted cell conversion cost per hour.
6. B. Determine the budgeted cell conversion cost per unit.
7. C. Journalize the summary transactions (1)–(4) for June.

To determine

Calculate the conversion cost per hour for the budgeted cell.

Explanation of Solution

Lean Manufacturing: Lean manufacturing aims at reducing the cost and minimizing the waste involved in the production, in order to optimize the value for the product or the service.

Lean Accounting: Lean accounting refers to the accounting standards that support the concepts of lean manufacturing. They record and reflect the transactions done to assist lean manufacturing.

Conversion Cost: The cost involved in the conversion of the raw material into the processed product is known as the conversion cost.

Calculate the conversion cost per hour for the budgeted cell.

$\begin{array}{c}\text{Conversion cost per hour = }\frac{\text{Total Conversion Cost}}{\text{Total Time Taken}}\\ \text{= }\frac{\text{\$308,000}}{\text{2,200 hours}}\\ \text{= \$140 per hour}\end{array}$

Hence, the conversion cost per hour for the budgeted cell is $140 per hour.

To determine

Calculate the conversion cost per unit for the budgeted cell.

Explanation of Solution

Calculate the conversion cost per unit for the budgeted cell.

$\begin{array}{c}\text{Conversion cost per unit = }\frac{\text{Time Taken per unit }}{\text{Cost per unit}}\times \text{ Conversion cost per hour}\\ \text{= }\frac{\text{18 minutes}}{\text{\$60}}\times \text{ \$140}\\ \text{= \$42 per unit}\end{array}$

Hence, the conversion cost per hour for the budgeted cell is $42 per unit.

To determine

Journalize the given transactions.

Explanation of Solution

1. 1. Materials purchased to produce 620 units.

Date	Account Title	Debit ($)	Credit ($)
June	Raw and In-Process Inventory  (1)	$9,920
	Accounts payable		$9,920
	(Purchase of goods on account)

Table (1)

• • Raw materials are purchased, which is an asset increased. Hence debit the raw and in-process inventory with $9,920.
• • Accounts payable is a liability increased; hence credit the accounts payable account with $9,920.

Working Note:

(1) Calculate the amount of goods purchased.

    $\begin{array}{c}\text{Raw and In-Process Inventory = Cost per unit }\times \text{ Number of units}\\ \text{= \$16 }\times \text{ 620 units}\\ \text{= }\$9,920\end{array}$

The cost of raw and in-process inventory is $9,920.

2. Conversion cost applied to 620 units.

Date	Account Title	Debit ($)	Credit ($)
June	Raw and In-Process Inventory  (2)	$26,040
	Conversion Costs		$26,040
	(The conversion costs involved in the production)

Table (2)

• • Value is added to the raw materials, which is an asset increased. Hence debit the raw and in-process inventory with $26,040.
• • Conversion cost is an expense which reduces the stockholder's equity; hence credit the conversion cost account with $26,040.

Working Note:

(2) Calculate the amount value added.

$\begin{array}{c}\text{Raw and In-Process Inventory = Conversion Cost per unit}\times \text{Number of units}\\ =\$42\times 620\text{units}\\ =\$26,040\end{array}$

The cost of conversion for 500 units is $26,040.

3. Completion of 600 units of Style Omega.

Date	Account Title	Debit ($)	Credit ($)
June	Finished Goods Inventory  (3)	$34,800
	Raw and In-Process Inventory		$34,800
	(The completion of 600 units placed in finished goods)

Table (3)

• • Value is added to the finished goods, which is an asset increased. Hence debit the finished goods inventory with $34,800.
• • Value of the raw materials, which is an asset, is decreased. Hence credit the raw and in-process inventory with $34,800.

Working Note:

(3) Calculate the amount value added.

    $\begin{array}{c}\text{Finished Goods Inventory= }\left(\begin{array}{l}\text{Cost per unit }+\\ \text{Conversion Cost per unit}\end{array}\right)\times \text{Number of units}\\ \text{= }\left(\$16+\$42\right)\times \text{600 units}\\ \text{= \$58}\times \text{600 units}\\ \text{= \$34,800}\end{array}$

The cost of conversion for 600 units is $34,800.

4. Sold580 units of Style Omega.

Date	Account Title	Debit ($)	Credit ($)
June	Accounts receivable	$58,000
	Sales   (4)		$58,000
	(Sold 480 units of Style Omega)

Table (4)

• • Accounts receivable, which is an asset, is increased. Hence debit the accounts receivable account with $58,000.
• • Sales are revenue generated, which increases stockholder's equity. Hence credit the sales with $58,000.

Working Note:

(4) Calculate the amount value added.

    $\begin{array}{c}\text{Sales = Price per unit}\times \text{Number of units}\\ \text{= \$100}\times \text{580 units}\\ \text{= \$58,000}\end{array}$

The sales price for 580 units is $58,000.

5. Record the cost of goods sold.

Date	Account Title	Debit ($)	Credit ($)
June	Cost of Goods sold  (5)	$33,640
	Finished Goods Inventory		$33,640
	(The cost of goods sold is recorded)

Table (5)

• • Cost of goods sold, is an asset decreased. Hence debit the cost of goods sold with $33,640.
• • Finished goods inventory, which is an asset, is decreased. Hence credit the finished goods inventory with $33,640.

Working Note:

(5) Calculate the amount value added.

    $\begin{array}{c}\text{Cost of Goods sold } \text{= }\left(\begin{array}{l}\text{Cost per unit }+\\ \text{Conversion Cost per unit}\end{array}\right)\times \text{Number of units}\\ \text{= }\left(\$16+\$42\right)\times \text{580 units}\\ \text{= \$58}\times \text{480 units}\\ \text{= \$33,640}\end{array}$

The cost of goods sold for 580 units is $33,640.