Chapter 6, Problem 8CE

Gunnison Company had the following equivalent units schedule and cost information for its Sewing Department for the month of December:

Required:

1. 1. Calculate the unit cost for December, using the FIFO method.
2. 2. Calculate the cost of goods transferred out, calculate the cost of EWIP, and reconcile the costs assigned with the costs to account for.
3. 3. What if you were asked for the unit cost from the month of November? Calculate November’s unit cost and explain why this might be of interest to management.

To determine

Ascertain the unit cost for December using First-in-first-out (FIFO) method for company G.

Explanation of Solution

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.

Compute unit cost using FIFO method:

$\begin{array}{c}\text{Unit cost = unit material cost + unit conversion cost}\\ \text{=}\frac{\text{Cost of diect material}}{\text{Equivalent units of output}}+\frac{\text{conversion cost}}{\text{Equivalent units of output}}\\ =\frac{\$400,000}{50,000\text{units}}+\frac{\$184,000}{46,000\text{units}}\\ =\$8+\$4\\ =\$12\text{per equivalent unit }\end{array}$

Thus, the cost per equivalent unit for company G is $12 per equivalent unit.

To determine

Determine the cost of EWIP, compute the cost of goods transferred out, and reconcile the cost assigned with the costs to account for.

Explanation of Solution

Ascertain the cost of EWIP (Ending Work-In Process):

$\begin{array}{c}\text{EWIP = }\left[\begin{array}{l}\left(\text{unit materials cost }\times \left(\text{units in EWIP }\times \text{percentage complete }\right)\right)+\\ \left(\text{unit conversion cost}\times \left(\text{units in EWIP }\times \text{percentage complete}\right)\right)\end{array}\right]\\ =\left[\$8\times \left(10,000\times 100\%\right)+\$4\times \left(10,000\times 35\%\right)\right]\\ =\left[\left(\$8\times 10,000\right)+\left(\$4\times 3,500\right)\right]\\ =\$94,000\end{array}$

Calculate the cost of goods transferred out:

Particulars	Amount ($)
From BWIP	$ 45,000
To complete BWIP
$\text{Unit conversion cost × }\left(\text{units in BWIP × percentage complete}\right)$
$\text{\$4 × }\left(\text{5,000 × 50\% conversion cost}\right)$
$\text{\$4 × 2,500 units}$	$ 10,000
Started and completed
$\text{Unit cost × Units started and completed}$
$\text{\$12 × 40,000 units}$	$ 480,000
Total cost of goods transferred out	$ 535,000

Table (1)

Determine the total cost assigned.

$\begin{array}{c}\text{Total cost assigned = EWIP}\text{}\text{+ Cost of goods transferred out}\\ \text{=\$94,000+\$535,000}\\ \text{=\$629,000}\end{array}$

Reconcile the cost assigned with the costs to account for:

Particulars	Amount ($)
Cost to account for:
BWIP	$ 45,000
Current (December)	$ 584,000
Total	$ 629,000

Table (2)

To determine

Determine the unit cost for November and determine in what manner it might be of interest to management.

Explanation of Solution

There are 5,000 equivalent units of materials (100% complete) and 2,500 $\left(0.5\times 5,000\right)$ Equivalent units of conversion due to materials added at the beginning.

Therefore, November unit cost will be,

$\begin{array}{c}\text{Unit cost = }\frac{\text{Cost of direct material}}{\text{units in BWIP}}+\frac{\text{conversion cost}}{\left(\text{units in BWIP}\times \text{percentage complete}\right)}\\ =\frac{\$35,000}{5,000}+\frac{\$10,000}{\left(5,000\times \text{50\%conversion}\text{cost}\right)}\\ =\$7+\$4\\ =\$11\end{array}$

The managers can obtain the trends in cost and thereby they can implement better control over costs by recognizing last month’s unit cost. If costs are diminishing, it may disclose that continuous development effort is succeeding. If increasing, it may show obstacles that can be corrected.