Question

Abam Sdn Bhd (ASB) produces Cewee Hand Sanitizer and uses process costing system. Cewee Hand Sanitizer passes through two processing departments: Mixing and Bottling. Liquid materials are blended in the Mixing Department and the resulting product is sent to Bottling Department, where its filled into 100 gram-plastic bottle. ASB uses the FirstIn, First-Out (FIFO) method in its process costing system. The information relates to the Mixing Department for the month of February 2020 is as follows: Beginning inventory of Work in Process Physical unit 6,000 units Percentage of Completion: Conversion Costs 60% Total units to account for: 22,000 units Ending inventory of Work in Process: Physical unit 4,000 units Percentage of Completion: Conversion Costs 40% REQUIRED: (a) Calculates the equivalent units (Direct materials and Conversion costs) if the Direct materials are added at the beginning of the process. (b) Calculates the equivalent units (Direct materials ONLY) based on the following assumptions: (i) Direct materials are added uniformly throughout the process. (1 Mark) (ii) Direct materials are added after 50 percent completed. (1 Mark) (iii) Direct materials are added after 30 percent completed. (1 Mark) (c) In the era of Industrial Revolution 4.0 (IR4.0), ASB plans to adopt Just-In-Time (JIT) system. Explain FOUR (4) points how the adoption of a JIT system to manufacturing affects process costing.

Answer 1

a)
Equivalent unit if direct materials are added at the beginning of process using FIFO Method
Particular	Equivalent completed Unit
Unit completed and transfered (22,000*100%)	22,000
Closing WIP Units (4000*40%)	1,600
	23,600
Less: Opening WIP Unit (6000*60%)	3,600
Number of equivalent unit	20,000
Working notes:
1) Assumed total unit to account means unit completed and transferred as 22,000 .
b)
(i) Equivalent unit if direct materials are added uniformally throughout the process
Particular	Equivalent completed Unit
Unit completed and transfered (22,000*100%)	22,000
Closing WIP Units (4000*50%)	2,000
	24,000
(ii) Equivalent unit if direct materials are added at 50% completed
Particular	Equivalent completed Unit
Unit completed and transfered (22,000*100%)	22,000
Closing WIP Units (4000*50%)	2,000
	24,000
Less: Opening WIP Unit (6000*50%)	3,000
Number of equivalent unit	21,000
(iii) Equivalent unit if direct materials are added at 30% completed
Particular	Equivalent completed Unit
Unit completed and transfered (22,000*100%)	22,000
Closing WIP Units (4000*30%)	1,200
	23,200
Less: Opening WIP Unit (6000*30%)	1,800
Number of equivalent unit	21,400
c) JIT system effect process costing in manufacturing as following:
(i) Reduction in obsolete inventory as stock level kept at low in JIT inventory system .
(ii) Lower wastage as identification and management of inventory shall be simpler.
(iii) Risk of stop the production, it is more likely that some times any issue from supplier
side to deliver the goods and stocl level is already empty
(iv) Less wip inventory due to manageable inventory in JIT system