Question

The records of Fremont Corporation’s initial and unaudited accounts show the following ending inventory balances, which must be adjusted to actual costs.

	Units	Unaudited Costs
Work-in-process inventory	160,000	$	803,992
Finished goods inventory	19,000		349,640

As the auditor, you have learned the following information. Ending work-in-process inventory is 40 percent complete with respect to conversion costs. Materials are added at the beginning of the manufacturing process, and overhead is applied at the rate of 80 percent of the direct labor costs. There was no finished goods inventory at the start of the period. The following additional information is also available.

		Costs
	Units	Direct Materials			Direct Labor
Beginning inventory (80% complete as to labor)	82,000	$	327,000		$	805,000
Units started	480,000
Current costs			1,640,000			2,224,000
Units completed and transferred to finished goods inventory	402,000

Required:

a. Prepare a production cost report for Fremont using the weighted-average method. (Hint: You will need to calculate equivalent units for three categories: materials, labor, and overhead.) (Round "Cost per equivalent unit" to 2 decimal places.)

b. Show the journal entry required to correct the difference between the unaudited records and actual ending balances of Work-in-Process Inventory and Finished Goods Inventory. Debit or credit Cost of Goods Sold for any difference. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

c. If the adjustment in requirement (b) is not made, will the company’s income and inventories be overstated or understated?

Answer 1

a.

	Physcial units	Materials	Conversion
Work in Process Beginning	82000
Started during the period	480000
To account for	562000
Units transferred to finished goods	402000	402000	402000
Conversion	160000	160000	64000
Accounted for	562000
Equivalent units		562000	466000
	Materials	Conversion	Total
Cost of Beginning Work in Process	$      3,27,000	$ 14,49,000	$ 17,76,000
Cost added during the period	$    16,40,000	$ 40,03,200	$ 56,43,200
Total Cost	$    19,67,000	$ 54,52,200	$ 74,19,200
Equivalent units of Production	562000	466000
Cost per equivalent unit	$              3.50	$        11.70	$          15.20
	Materials	Conversion	Total
Ending work in Process Inventory
Equivalent units of Production	160000	64000
Cost per equivalent unit	$              3.50	$        11.70
Cost of Ending work in Process Inventory	$      5,60,000	$   7,48,800	$ 13,08,800
Units Completed and transferred out
Units transferred to next department	402000	402000
Cost per equivalent unit	$              3.50	$        11.70
Cost of units transferred out	$    14,07,000	$ 47,03,400	$ 61,10,400
Reconciliation
Costs to be accounted for :
Cost of beginning work in process inventory	$    17,76,000
Costs added to the production during the year	$    56,43,200
Total Costs to be accounted for	$   74,19,200
Cost of Ending work in Process Inventory	$    13,08,800
Cost of units transferred out	$    61,10,400
Total Costs accounted for	$   74,19,200

b.
Ending Finished Goods Inventory = 19000 x $15.20 = $288800

Account Titles	Debit	Credit
Work in process Inventory	$      5,04,808		=1308800-803992
Finished Goods Inventory		$      60,840	=349640-288800
Cost of Goods Sold		$   4,43,968	=504808-60840

c.
If adjustment is not made
Inventory will be understated, and income will also be understated