Question

Question #1:

Leslie Limited is a manufacturing company that makes a single product – the “Whatchamacallit” Whatchamacallits go through two processing departments – Department #1 and Department #2.

The cost to manufacture a “Whatchamacallit” has historically been in the range of $2.94 to $3.00, with 80% of the cost being from Department #1. However, due to increased competition putting a squeeze on sales prices, Leslie’s management has realized that the cost to manufacture “Whatchamacallits” must be reduced. In recent months, several cost-cutting strategies have been put into place, particularly in Department #1. Leslie’s senior management team is anxiously awaiting the production report for Department #1 for the month of January to see whether the cost cutting strategies have worked.

Leslie Limited hired a new accountant in January of 2014. Her name is Emma. Emma, a Dal co-op student, only has a little experience with Process Costing, recently prepared a report that summarizes production and costs for Department #1 for January.

Here it Emma’s report:

Work in progress inventory Jan 1st – 8,000 units: materials 100% complete, conversion costs 80% complete	$20,000 (of which $5,000 is materials and $15,000 is conversion costs)
Materials costs added in January:	$27,000
Conversion costs added in January:	$75,000
Total costs of Department #1:	$122,000
Department #1 costs assigned to:
Units completed and transferred to Dept #2: 50,000 units at $2.44 each.	$122,000
Work in progress inventory, Jan 31st – 5,000 units: materials 100% complete, conversion 75% complete	_

The President of Leslie Limited reads the above report and becomes quite frustrated and confused. He does not understand how unit costs assigned in Dept. #1 could have increased despite the cost cutting efforts that have been made.

Required #1: Prepare a report for Department #1 showing how much cost should have been assigned to the units completed and transferred to Department #2 and to the ending WIP inventory.

Required #2: Explain to the President why the unit cost appearing on Emma’s report was higher than anticipated. Have the cost cutting strategies worked?

Answer 1

Required 1.

Cost of Production Report for the month of January

Equivalent Units

Flow of Units		Direct Material	Conversion
Beginig Work in Process (Jan 1)	8,000 units
Started into Production (note)	47,000 units
Total units into Production	55,000 units
Completed and Transferred to Department 2	50,000 units	50,000 units	50,000 units
Ending Work in progress (Jan 31)	5,000 units	5,000 unis	3,750 units (5,000 * 75%)
Total Units Reconciled	55,000 units	55,000 units	53,750 units

Note : Units started into production = Ending WIP + Units Completed - Begining WIP

= 5,000 units + 50,000 units - 8,000 units

= 47,000 units

Cost Per Equivalent units

	Total Cost	Direct Material Cost	Conversion Cost
Begining Work in Progress	$20,000	$5,000	$15,000
Started into Production	$102,000	$27,000	$75,000
Total Cost	$122,000	$32,000	$90,000
Equivalent Units from above		55000 units	53750 units
Cost Per Equivalent Unit	$ 2.26	$0.58	$1.67

Cost Allocation/Assignment

	Total Cost	Direct Material	Conversion
Completed &Transferrd to Department 2 (50000 units * $2.26 each)	$112,811	50000 units	50000 units
Ending Work in Process
Incurred Material (5000 units*$ 0.58)	$ 2,909	5000 units	5000 units
Incurred Conversion (3750 units * $1.67)	$ 6,279	3750 units	3750 units
Total Cost Allocation	$122,000

Required 2

Explain to the President why the unit cost appearing on Emma’s report was higher than anticipated. Have the cost cutting strategies worked?

Ans.

The units cost appearing on Emma's report is higher than anticipated, because Emma has not taken into consideration the calculation of equivalent units with respect to conversion cost, she has simply taken into consideration only completed and transferred units leaving behind the partially completed ending work in progress. Hence her cost per unit is not reliable.

The total cost per unit is coming approximately to $2.26 which is lower than the historical price range of $2.95 to $3.00. Hence, it is evident that cost cutting strategies has actually worked.