Question

A leather goods company has recently experienced declining profits. Management has decided to investigate the manufacturing operation (and costs) of its leather belts, that are produced in a single continuous process. During the process, the leather strips are sewn, punched, dyed, and then the buckles are added.

Leather is added at the beginning of the process, buckles are added at the 90% stage and conversion costs are added uniformly.

The belts sell for $22.95. Management uses cost data to determine if the production process needs modification or if a selling price increase is justified. The cost estimated at the beginning of the year for planning and control was $11.50 per unit. Management has decided to use June cost data for comparison. All months have very similar levels of production but materials costs are subject to market conditions.

Opening WIP for June consisted of 500 units that were 30% complete as to conversion. In June, materials for 8,000 belts were added to production, and 8,100 belts were completed in the month. Closing WIP was 40% complete as to conversion.

Cost data is provided below:

Opening WIP:

            Leather Strips             $ 1 500

            Buckles -

            Conversion Costs 2 500

            Total $ 4 000

Costs added in June:

            Leather Strips             $41 000

            Buckles 8 100

            Conversion Costs   55 320 (Labour $14 770 and Overhead $40 550)

            Total $104 420

REQUIRED:

1. Prepare the Cost of Production Report for June to determine the cost per unit, the cost allocated to units completed and the costs allocated to closing WIP under the Weighted Average method. (Show all calculations)
2. Prepare the journal entry required to add costs to the process in June.
3. Compare and contrast weighted average and FIFO methods for process costing and comment on which method is most accurate for inventory valuation in times of rising prices of inputs.

Answer 1