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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 300 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

Work in process costs

It is the cost of production process that is used to manufacture partly completed products. It comprises the cost of raw materials, labor, and overhead that incurred for the production process of the products at various phases.

Direct materials cost

Manufacturing products arise with raw materials that are altered into finished products. The cost of any material that is an important part of the finished product is categorized as a direct materials cost.

Conversion cost

Cost of changing the materials into a finished product. It includes direct labor costs and factory overhead costs.

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

Explanation

Calculate the cost per megawatt hour for the fossil fuel plant of the Company ME as shown below:

Cost per megawattFossil plant costFossil plant megawatt hours=$51,300,000540,000Mwhs=$95per MWh

Working notes:

Calculate fossil plant cost for the Company ME as shown below:

Fossil plant costs =Conversion costs +Fuel cost=$40,500,000+$10,800,000=$51,300,000

Calculate fossil plant megawatt hours for the Company ME as shown below:

Fossil plant megawatt hours = Megawatts ×Hours=900×600=540,000MWhs

Calcula

(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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