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Process costing for a service company Madison Electric Company uses a fossil fuel (coal) plant for generating electricity. The facility can generate 900 megawatts (million watts) per hour. The plant operates 600 hours during March. Electricity is used as it is generated; thus, there are no inventories at the beginning or end of the period. The March conversion and fuel costs are as follows: Conversion costs $40,500,000 Fuel 10,800,000 Total $51,300,000 Madison also has a wind farm that can generate 100 megawatts per hour. The wind farm receives sufficient wind to run 500 hours for March. The March conversion costs for the wind farm (mostly depreciation) are as follows: Conversion costs $2,700,000 A. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March. B. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity? C. What advantage does the fossil fuel plant have over the wind farm?

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Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207

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Chapter
Section
BuyFindarrow_forward

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207
Chapter 17, Problem 17.20EX
Textbook Problem
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Process costing for a service company

Madison Electric Company uses a fossil fuel (coal) plant for generating electricity. The facility can generate 900 megawatts (million watts) per hour. The plant operates 600 hours during March. Electricity is used as it is generated; thus, there are no inventories at the beginning or end of the period. The March conversion and fuel costs are as follows:

Conversion costs $40,500,000
Fuel 10,800,000
Total $51,300,000

Madison also has a wind farm that can generate 100 megawatts per hour. The wind farm receives sufficient wind to run 500 hours for March. The March conversion costs for the wind farm (mostly depreciation) are as follows:

Conversion costs $2,700,000

A. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March.

B. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity?

C. What advantage does the fossil fuel plant have over the wind farm?

(A)

To determine

Equivalents units for production

The activity of a processing department in terms of fully completed units is known as equivalent units. It includes the completed units of direct materials and conversion cost of beginning work in process, units completed and transferred out, and ending work in process.

Cost per unit

Total unit cost is the cost incurred by the company to produce one unit of product. The unit cost is calculated by dividing the units produced with the total cost.

To Determine: The cost per megawatt hour for the fossil fuel plant and wind farm of the Company ME.

Explanation of Solution

Cost per megawatt hour for fossil fuel plant is calculated by dividing fossil plant cost by fossil plant megawatt hours. Hence, cost per megawatt hour for fossil fuel plant is $95 per MWh...

(B)

To determine

To Explain: Why the equivalent units for production do not used to find out cost per megawatt hour for generating electricity.

(C)

To determine

To State: The advantages do the fossil fuel plant over the wind farm.

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Chapter 17 Solutions

Financial & Managerial Accounting
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