Chapter 20, Problem 2APSA

To determine

Introduction:

In Process Costing we treat all units produced as having uniform cost of production based on their stage of completion. There is distinction being maintained in FIFO Basis and Weighted average basis by treatment of opening stock of WIP. In case of FIFO – opening WIP is considered based on its completion percentage while in Weighted average method – stage of completion of opening WIP units is ignored.

1. To Calculate:

Our objective is to calculate Equivalent units of production with respect to direct material and conversion.

Answer to Problem 2APSA

Solution:

Based on Explanation given below:

Equivalent units for Direct Material are 880000 Units and

Equivalent units for conversion are 754000.

Explanation of Solution

Victory Company
	Direct Material
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60000	100%	60000	420000
Introduced during the month	820000			2220000
Total	880000		880000	2640000	3
Completed - Opening	60000	100%	60000	180000
Started and Completed	640000	100%	640000	1920000
Closing	180000	100%	180000	540000
	Conversion				Total Material + Conversion
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60000	80%		139000	559000
Introduced during the month	820000			3254000	5474000
Total	880000		754000	3393000	6033000
Completed - Opening	60000	100%	60000	270000	450000
Started and Completed	640000	100%	640000	2880000	4800000
Closing	180000	30%	54000	243000	783000

Conclusion

Equivalent units with respect to Direct Material are 880000 units and for Conversion are 754000 units.

To determine

Introduction:

In Process Costing we treat all units produced as having uniform cost of production based on their stage of completion. There is distinction being maintained in FIFO Basis and Weighted average basis by treatment of opening stock of WIP. In case of FIFO – opening WIP is considered based on its completion percentage while in Weighted average method – stage of completion of opening WIP units is ignored.

2. To Calculate:

Our objective is to calculate Direct Material cost and conversion cost per Equivalent units of production.

Answer to Problem 2APSA

Solution:

Based on Explanation given below:

Direct Material cost per Equivalent units is $ 3 and

Conversion cost per Equivalent unit is $ 4.5

Explanation of Solution

Victory Company
	Direct Material
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60000	100%	60000	420000
Introduced during the month	820000			2220000
Total	880000		880000	2640000	3
Completed - Opening	60000	100%	60000	180000
Started and Completed	640000	100%	640000	1920000
Closing	180000	100%	180000	540000
	Conversion				Total Material + Conversion
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60000	80%		139000	559000
Introduced during the month	820000			3254000	5474000
Total	880000		754000	3393000	6033000
Completed - Opening	60000	100%	60000	270000	450000
Started and Completed	640000	100%	640000	2880000	4800000
Closing	180000	30%	54000	243000	783000

Direct Material cost per Equivalent unit = 2640000/880000 = $ 3

Conversion Cost per Equivalent unit = 3393000/754000 = $ 4.5

Conclusion

Direct Material Cost per Equivalent unit is $ 3 and Conversion cost per Equivalent unit is $ 4.5

To determine

Introduction:

In Process Costing we treat all units produced as having uniform cost of production based on their stage of completion. There is distinction being maintained in FIFO Basis and Weighted average basis by treatment of opening stock of WIP. In case of FIFO – opening WIP is considered based on its completion percentage while in Weighted average method – stage of completion of opening WIP units is ignored.

3. To Calculate:

Our objective is to compute the Direct Material Cost and conversion cost assigned to

1. Units completed and Transferred out
2. Ending WIP units.

Answer to Problem 2APSA

Solution:

Based on Explanation given below:

Direct Material cost assigned to units completed and transferred out is $ 2,100,000.

Direct Material Cost Assigned to WIP Units is $ 540,000

Conversion Cost Assigned to units completed and transferred out is $ 3,150,000.

Conversion cost assigned to WIP units is $ 243,000.

Explanation of Solution

Victory Company
	Direct Material
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60000	100%	60000	420000
Introduced during the month	820000			2220000
Total	880000		880000	2640000	3
Completed - Opening	60000	100%	60000	180000
Started and Completed	640000	100%	640000	1920000
Closing	180000	100%	180000	540000
	Conversion				Total Material + Conversion
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60000	80%		139000	559000
Introduced during the month	820000			3254000	5474000
Total	880000		754000	3393000	6033000
Completed - Opening	60000	100%	60000	270000	450000
Started and Completed	640000	100%	640000	2880000	4800000
Closing	180000	30%	54000	243000	783000

Direct Material cost assigned to units completed and transferred = $ 180000+1,920,000.00= $2,100,000

Conversion cost assigned to units completed and transferred = $ 270,000+ $2,880,000 = $3,150,000

Conclusion

Type of cost	Units completed and transferred	WIP Units
Direct Material	$2100000	$540000
Conversion	$ 3150000	$243000

To determine

Introduction:

In Process Costing we treat all units produced as having uniform cost of production based on their stage of completion. There is distinction being maintained in FIFO Basis and Weighted average basis by treatment of opening stock of WIP. In case of FIFO – opening WIP is considered based on its completion percentage while in Weighted average method – stage of completion of opening WIP units is ignored.

To Calculate:

The Closing units are 60% complete with Labour in place of 30%. Determine its impact on Nov Financial Statements.

Answer to Problem 2APSA

Solution:

Because of the error – conversion Equivalent units changed from 754000 units to 808000 units. The per unit cost of conversion of equivalent units should be $ 4.2 in place of $4.5 reported earlier. The costs of units completed and transferred was reported higher by $ 210520 and Work in Progress units were stated at lower value of $ 783000 in place of $ 993,520.

Explanation of Solution

Victory Company
	Direct Material
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60,000	100%	60,000	420,000
Introduced during the month	820,000			2,220,000
Total	880,000		880,000	2,640,000	3
Completed - Opening	60,000	100%	60,000	180,000
Started and Completed	640,000	100%	640,000	1,920,000
Closing	180,000	100%	180,000	540,000
	Conversion				Total Material + Conversion
	No of Units	% complete	Equivalent Units	Cost
Opening WIP Units	60,000	80%		139,000	559,000
Introduced during the month	820,000			3,254,000	5,474,000
Total	880,000		808,000	3,393,000	6,033,000
Completed - Opening	60,000	100%	60,000	251,955	431,955
Started and Completed	640,000	100%	640,000	2,687,525	4,607,525
Closing	180,000	60%	108,000	453,520	993,520

Impact of wrong estimation of degree of completion in conversion charges in Closing Work In Progress is calculated as under:

Impact on Conversion Cost		EARLIER	Now	Difference
No of Equivalent units		754,000	808,000	54,000
Cost of Units completed and transferred		$	$	$
Opening Units		270,000	251,955	(18,045)
Started and Completed		2,880,000	2,687,525	(192,475)
Closing WIP		243,000	453,520	210,520

Conclusion

Note for Plant manager:

The Plant Manager

Victory Company

Hi

It has come to our notice that Work in progress units were erroneously reported as 30% complete for conversion cost in place of them to be 60% complete. In view of the error – our units Equivalent units calculation was short reported by 54000 units. This further resulted in higher per unit cost of each equivalent unit cost of conversion to $ 4.5 in place of $ 4.2. As a result our cost of Units completed and transferred were reported at higher cost by $ 210520 lowering the profitability of November Month by $ 210520. The closing Work in Progress value was under reported by $ 210520 and therefore our aggregate Current Asset was also under reported by $ 210520. We have summarized the impact in following table:

Impact on Conversion Cost		EARLIER	Now	Difference
No of Equivalent units		754,000	808,000	54,000
Cost of Units completed and transferred		$	$	$
Opening Units		270,000	251,955	(18,045)
Started and Completed		2,880,000	2,687,525	(192,475)
Closing WIP		243,000	453,520	210,520

Nov Profitability should be higher by $ 210520 and Nov Current Assets would be higher by $ 210520.

We should take strict measures so that these errors are not repeated in future and cost estimates submitted to Accounts and Finance department are accurate to ensure correct information and reports to all concerned.

Thanks

Vijay Gupta