Question

Randall Inc. manufactures pocket protectors and uses the FIFO method of process costing. Direct materials are added at the beginning of the production process. Conversion costs are incurred evenly throughout production. Inspection takes place at the end of the production process. After inspection, some units are spoiled due to defects. Spoiled units generally constitute 1% of the good units transferred out (this is normal spoilage). Assume all spoilage is from the current month’s production. Data provided for February is as follows: Units: WIP, beginning inventory (70% complete) 84,300 WIP, ending inventory (40% complete) 75,400 Started in February 354,500 Good units completed and transferred out 357,000 Costs: WIP, beginning inventory: Direct material cost $ 36,950 Conversion costs $ 15,730 Costs added: Direct material costs added $141,800 Conversion costs added $100,365 How many units will be included in abnormal spoilage for February? What cost would be associated with normal and abnormal spoilage, respectively, in February? What costs are allocated to the good units transferred out during February?

Answer 1

Step for solution
Step 1	Equivalent Units of production = Physical units multiplied by % of competition
Step 2	Calculate total cost to be accounted for
Step 3	Cost per Equivalent Unit =Cost incurred during Month / Equivalent Units of production
Step 4	Cost assigned to units transferred out = Cost in beginning WIP + Cost incurred for complete beginning WIP + Cost of units in Started and completed
Step 5	Cost assigned to units ending work in progress = equivalent units in ending WIP inventory * Cost per Equivalent Unit
For direct material 100% unit completed in previous period. It means remaining 0% completed in this month.
For conversion cost 70% unit completed in previous period. It means remaining 30% completed in this month.
Summary of answer
Units will be included in abnormal spoilage for February	2,830
Cost would be associated with normal spoilage (This cost added to goods transferred out)	2,499
Cost would be associated with abnormal spoilage (This cost not added to goods transferred out. Abnormal spoilage should write off.)	1,981
Costs are allocated to the good units transferred out during February	253,656

Randall Inc.
Assembly Department production Report
First in First out (FIFO) Method
Month ended February
Summary of Physical units
Units in beginning WIP inventory			84,300
Units started during month			354,500
Total unit to be accounted for			438800
Normal spoilage (357000*1%)			3570
Abnormal spoilage (438800-3570-357000-75400)			2830
Units completed and transferred out			357,000
Units in ending WIP inventory			75,400
Total unit accounted for			438,800
Equivalent Units of production
Particulars	Physical units	Direct material		Conversion Cost
		%	Units	%	Units
Units in beginning WIP inventory	84300	0%	0	30%	25290
Normal spoilage	3570	100%	3570	100%	3570
Abnormal spoilage	2830	100%	2830	100%	2830
Units in Started and completed (357000-84300)	272700	100%	272700	100%	272700
Units in ending WIP inventory	75400	100%	75400	40%	30160
Equivalent Units of production			354500		334550
Summary of cost to be accounted
	Direct material	Conversion Cost	Total
Cost in beginning WIP	36,950	15,730	52680
Cost incurred during Month (Add)	141,800	100,365	242165
Total cost to be accounted for	178750	116095	294845
Cost per Equivalent Unit
Cost incurred during Month	141800	100365
Equivalent Units of production	354500	334550
Cost per Equivalent Unit	0.40	0.30	0.70
Assign costs to units transferred out and units in ending WIP inventory
Cost assigned to units transferred out
Direct material	36950
Conversion Cost	15730
Cost in beginning WIP		52680
Direct material (0*0.4)	0
Conversion Cost (25290*0.3)	7587
Cost incurred for complete beginning WIP		7587
Normal spoilage
Direct material (0.40*3570)	1428
Conversion Cost (0.30*3570)	1071	2499
Direct material (272700*0.4)	109080
Conversion Cost (272700*0.3)	81810
Cost of units in Started and completed		190890
Cost assigned to units transferred out		253656
Abnormal spoilage
Direct material (0.40*2830)	1132
Conversion Cost   (0.30*2830)	849
Cost allocated to Abnormal spoilage		1981
Cost assigned to units ending work in progress
Direct material (75400*0.4)	30160
Conversion Cost (30160*0.3)	9048
Cost assigned to units ending work in progress		39208
Total cost assigned		294845