Question

Franklin Corporation produces a single product. The product is both large and expensive, so few units are produced in any month. The production process requires all material to be brought to the shop floor before any work begins. The material is then processed and assembled and then transferred to finished goods inventory. Every unit is completely identical in specification and use, and no customization is possible. During March, only three units were started and these were labelled Unit 03-01, Unit 03-02, and Unit 03-03. There was no beginning inventory of any kind on March 1. Records from the raw material store and employee time records show the following requisitions and direct labor costs. Direct Material Direct Labor Unit 03-01 $ 11,800 $ 41,800 Unit 03-02 10,800 28,800 Unit 03-03 12,800 16,800 The difference in the material cost represent the historical cost of material purchased at different times. The difference in labor cost represent the difference in seniority (not skill) of the individual employees. Overhead for the month of March totaled $131,100. During March, Unit 03-01 and 03-02 were completed and transferred to finished goods. Unit 03-03 was still in process on March 31. Required: a. Suppose Franklin uses a job cost system and applies overhead to products based on direct labor cost. What will be the cost of the units transferred to finished goods? What will be the amount in Work-in-Process Ending Inventory? b. Suppose Franklin uses process costing and Unit 03-03 was 30 percent complete with respect to conversion cost (direct labor and overhead cost). Assume that direct materials cost is not traced to individual units. What will be the cost of the units transferred to finished goods? What will be the amount in Work-in-Process Ending Inventory? c. What system (job costing or process costing) would you recommend for Franklin?

Answer 1

Ans.

a)

TOTAL OVERHEAD	$           131,100.00
TOTAL LABOR COST	$             87,400.00
OVERHEAD PER $ OF LABOR	$                        1.50
FINISHED PRODUCTS	DIRECT MATERIAL	DIRECT LABOR	OVERHEAD	TOTAL COSTS
UNIT 03-01	$             11,800.00	$                         41,800.00	$          62,700.00	$                 116,300.00
UNIT 03-02	$             10,800.00	$                         28,800.00	$          43,200.00	$                   82,800.00
				$                 199,100.00
WORK IN PROGRESS INVENTORY	DIRECT MATERIAL	DIRECT LABOR	OVERHEAD	TOTAL COSTS
UNIT 03-03	$             12,800.00	$                         16,800.00	$          25,200.00	$                   54,800.00

b)

B
TOTAL OVERHEAD	$           131,100.00
TOTAL LABOR COST	$           126,600.00	=41800+28800+(16800/0.3)	UNIT 03-03 IS 30% COMPLETED, THEREFORE ITS EQUIVALENT UNITS ARE CALCULATED
OVERHEAD PER $ OF LABOR	$                        1.04
FINISHED PRODUCTS	DIRECT MATERIAL	DIRECT LABOR	OVERHEAD	TOTAL COSTS
UNIT 03-01	$             11,800.00	$                         41,800.00	$          43,472.00	$                   97,072.00
UNIT 03-02	$             10,800.00	$                         28,800.00	$          29,952.00	$                   69,552.00
				$                 166,624.00
WORK IN PROGRESS INVENTORY	DIRECT MATERIAL	DIRECT LABOR	OVERHEAD	TOTAL COSTS
UNIT 03-03	$             12,800.00	$                         16,800.00	$          17,472.00	$                   47,072.00

c)

Franklin should use Process Costing method as it gives better picture.