Question

– Process costing

Thompson’s Tea makes tea kettles. It uses a process costing system to cost its products. The company makes kettles in three departments: Assembly, Coating, and Packaging. In the Assembly department the direct materials along with conversion costs are added evenly throughout the process.

The cost accountant is completing the production report for April. At the beginning of the month 3,500 kettles had 60% of the work completed in March. 19,000 kettles were started in April and 2,500 remain in ending inventory at the end of April. This ending inventory is 20% complete. The rest were completed and transferred to the Coating Department in April.

The cost accountant must determine how much of the following costs should be transferred to the Coating Department and how much remains in ending inventory.

Cost of beginning work-in-process:

• Direct materials                           $ 4,830
• Conversion costs                       $ 2,625

Cost added during April:

• Direct material                             $42,320
• Conversion costs                       $23,000

Required:

1. Using the first-in, first-out (FIFO) method determines the assignment of the cost of tea kettles transferred-out to the Coating and ending inventory for the Assembly Department for April. Use the form on the last page of this exam.
   
   
   
   
2. Thompson’s Tea has used First in First out costs for the last 15 years. The controller wants to know if it is beneficial to continue using this method instead of the weighted average method. Provide the controller with your recommendation. Include appropriate calculations to back up your recommendation.

Answer 1

a.

Material transferred to coating department	$
opening stock 3500 units	7455
Balance 40 % of opening stock	4970
April month 16500 units	58575
Total	71000
Ending Inventory 2500x3.55x0.20	1775

working:

	Assembly Department
	Units	Cost
01-Apr	3500
	Direct material	4830	60%
	Conversion cost	2625	60%
	3500	7455
	100% of 3500 Direct Material	8050
	100% of 3500 Conversion cost	4375
	Total	12425
	Difference	4970
	40% of Direct material	3220
	40% of Conversion cost	1750
April	19000
	Direct material(42320-3220)	39100
	Conversion cost(23000-1750)	21250
		60350
	Working:
	(16500*1)+(2500*0.2) =	60350
	Hence per unit cost	3.55
	60350/(16500*1)+(2500*.2)
	Transferred of April 16500@ 3.55	58575

b)

1. FIFO method saves money and time in calculating the exact cost of the inventory being sold because the cost will depend upon the most former cash flows of purchases to be used first.
2. It is a simple concept which is easy to understand. Even a layman can grab the idea with little explanation. The managers with little to no accounting information would be able to understand it easily.
3. It is a fairly practical approach to use, as sometimes it becomes difficult to identify the costs of the products sold at the point of sale and FIFO rectifies the matter.
4. It is a widely used and accepted approach of valuation which increases its comparability and consistency.
5. It makes manipulation of the income reported in financial statements difficult, as under FIFO policy there remains no vagueness about the values to be used in cost of sales figure of profit/loss statement.
6. FIFO will show increased gross and net profits in times of increasing prices of goods.
   Cost of sales = opening stock + Purchases – closing stock
   This is because the “cost of sales” consists of figure of inventory and as first inventories will have less cost than recent inventories during inflation, the profits reported would be higher.