Chapter 20, Problem 4APSA

To determine

Introduction:

In process costing cost of item produced and held in stock is determined based on their stage of completion. We first calculate Equivalent units to determine the number of units on which costs have to be allocated. The Equivalent units are calculated based on their stage of completion.

To Calculate:

Prepare the company’s process cost summary using the weighted average method.

Explanation of Solution

Solution and Explanation:

Process cost summary is given hereunder:

TAMAR CO.
PROCESS COST SUMMARY
		DIRECT MATERIAL
DETAILS	NO OF UNITS	% COMPLETE	EQUIVALENT UNIT	COST $
OPENING BALANCE	3,000			19,800
COST INCURRED DURING THE MONTH				496,800
				516,600
UNITS COMPLETED AND TRANSFERRED	22,200	100%	22,200
WORK IN PROGRESS	2,400	100%	2,400
			24,600
Per Unit cost of Equivalent units				21.00
COST OF UNITS COMPLETED AND TARNSFERRED				466,200
COST OF WORK IN PROGRESS				50,400
TOTAL				516,600
		CONVERSION COST			TOTAL MATERIAL AND CONVERSION
DETAILS	NO OF UNITS	% COMPLETE	EQUIVALENT UNIT	COST
OPENING BALANCE	3,000			221,940	241,740
COST INCURRED DURING THE MONTH				2,165,940	2,662,740
				2,387,880	2,904,480
UNITS COMPLETED AND TRANSFERRED	22,200	100%	22,200
WORK IN PROGRESS	2,400	80%	1,920
			24,120
Per Unit cost of Equivalent units				99.00
COST OF UNITS COMPLETED AND TARNSFERRED				2,197,800	2,664,000
COST OF WORK IN PROGRESS				190,080	240,480
TOTAL				2,387,880	2,904,480

Conclusion

Conclusion : Process cost summary is given above.

To determine

Introduction:

In process costing cost of item produced and held in stock is determined based on their stage of completion. We first calculate Equivalent units to determine the number of units on which costs have to be allocated. The Equivalent units are calculated based on their stage of completion.

To Calculate:

Prepare the Journal Entry to transfer the cost of completed units to Finished Goods Inventory.

Answer to Problem 4APSA

Solution: Journal Entry is as under:

Account Head	$	$
Finished Goods Inventory	2,664,000
Production cost account		2.664,000
Finished Goods transferred from Production process cost account

Explanation of Solution

Explanation:

Process cost summary is given hereunder:

TAMAR CO.
PROCESS COST SUMMARY
		DIRECT MATERIAL
DETAILS	NO OF UNITS	% COMPLETE	EQUIVALENT UNIT	COST $
OPENING BALANCE	3,000			19,800
COST INCURRED DURING THE MONTH				496,800
				516,600
UNITS COMPLETED AND TRANSFERRED	22,200	100%	22,200
WORK IN PROGRESS	2,400	100%	2,400
			24,600
Per Unit cost of Equivalent units				21.00
COST OF UNITS COMPLETED AND TARNSFERRED				466,200
COST OF WORK IN PROGRESS				50,400
TOTAL				516,600
		CONVERSION COST			TOTAL MATERIAL AND CONVERSION
DETAILS	NO OF UNITS	% COMPLETE	EQUIVALENT UNIT	COST
OPENING BALANCE	3,000			221,940	241,740
COST INCURRED DURING THE MONTH				2,165,940	2,662,740
				2,387,880	2,904,480
UNITS COMPLETED AND TRANSFERRED	22,200	100%	22,200
WORK IN PROGRESS	2,400	80%	1,920
			24,120
Per Unit cost of Equivalent units				99.00
COST OF UNITS COMPLETED AND TARNSFERRED				2,197,800	2,664,000
COST OF WORK IN PROGRESS				190,080	240,480
TOTAL				2,387,880	2,904,480

Conclusion

Conclusion:

Journal Entry is as under:

Account Head	$	$
Finished Goods Inventory	2,664,000
Production cost account		2.664,000
Finished Goods transferred from Production process cost account

To determine

Introduction:

In process costing cost of item produced and held in stock is determined based on their stage of completion. We first calculate Equivalent units to determine the number of units on which costs have to be allocated. The Equivalent units are calculated based on their stage of completion.

To Calculate:

We have to identify two major estimates that determine the cost per equivalent unit. We also have to identify if it will influence management bias in any way.

Answer to Problem 4APSA

Solution: Estimate of Work in progress Quantity and estimate of their degree of completion are two major estimates that influence the determination of Equivalent units and the cost per unit.

Explanation of Solution

Explanation:

The Equivalent units is dependent on the estimate of degree of completion of Closing Work in Progress with respect to material and with respect to Conversion. The estimate that closing work in progress is complete 100 % or 80% is very challenging as many times it is difficult to estimate the quantity of Work in progress itself and also to determine its degree of completion.

In some process industries like Paint / Edible Oils / Cocoa Processing – sometimes the Cocoa Beans are grind and assume the form for cocoa Liquor which is stored in different tanks. In each tank they may have gone through different stages of completion but in our estimation we are using one uniform stage of completion for entire work in progress. Estimation of closing work in progress quantity and degree of completion both are sometimes very difficult to estimate in process industry. Many times these industries work 24*7 and material movements is happening as we are doing stock taking also. So getting a fair estimate of Work in progress quantity and their degree of completion is based on certain management estimates.

When Management compensation is linked to any key parameter – say to show higher production and lower inventory then it can lead to under reporting of degree of completion to show lower Quantity. In such a situation bias can lead to distortion of estimates with respect to both quantity in work in progress and also in their degree of completion.

Conclusion

Conclusion:

Estimate of Work in progress quantity at the end of reporting period and also estimate of degree of completion are very subjective estimates.