Question

1. Backflush Costing, Conversion Rate

   Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of the company, has decided to reduce the accounting requirements given the expectation of lower inventories. For one thing, he has decided to treat direct labor cost as a part of overhead and to discontinue the detailed direct labor accounting of the past. The company has created two manufacturing cells, each capable of producing a family of products: the radiator cell and the water pump cell. The output of both cells is sold to a sister division and to customers who use the radiators and water pumps for repair activity. Product-level overhead costs outside the cells are assigned to each cell using appropriate drivers. Facility-level costs are allocated to each cell on the basis of square footage. The budgeted direct labor and overhead costs are as follows:

   	Radiator Cell		Water Pump Cell
   Direct labor costs		$153,650		$81,920
   Direct overhead		689,230		320,000
   Product sustaining		254,620		104,960
   Facility level		193,160		79,360
   Total conversion cost		$1,290,660		$586,240

   The predetermined conversion cost rate is based on available production hours in each cell. The radiator cell has 43,900 hours available for production, and the water pump cell has 25,600 hours. Conversion costs are applied to the units produced by multiplying the conversion rate by the actual time required to produce the units. The radiator cell produced 80,400 units, taking 0.50 hour to produce one unit of product (on average). The water pump cell produced 82,400 units, taking 0.25 hour to produce one unit of product (on average).

   Other actual results for the year are as follows:

   Direct materials purchased and issued	$1,501,000
   Direct labor costs	235,570
   Overhead	1,641,330

   All units produced were sold. Any conversion cost variance is closed to Cost of Goods Sold.

   Required:

   1. Calculate the predetermined conversion cost rates for each cell. If required, round your answers to the nearest cent.

   Radiator Cell	$	per hour
   Water Pump Cell	$	per hour

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   2. Prepare journal entries using backflush accounting. Assume two trigger points, with completion of goods as the second trigger point. Round amounts to the nearest dollar if rounding is required. For a compound transaction, if an amount box does not require an entry leave it blank. Prepare your entries in the following order: (a) purchase of raw materials, (b) incurrence of direct labor and overhead costs, (c) completion of goods, (d) sale of goods, and (e) recognition of the variance between applied and actual production costs.

   a.	Accounts Payable Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable
   b.	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory
   	Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable
   c.	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable
   	Accounts Payable Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory
   d.	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable
   e.	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory Wages Payable

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   3. Repeat Requirement 2, assuming that the second trigger point is the sale of the goods. Round amounts to the nearest dollar if rounding is required. For a compound transaction, if an amount box does not require an entry leave it blank. Prepare your entries in the following order: (a) purchase of raw materials, (b) incurrence of direct labor and overhead costs, (c) completion and sale of goods, and (d) recognition of the variance between applied and actual production costs.

   a.	Accounts Payable Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Raw Materials and In Process Inventory Wages Payable
   b.	Accounts Payable Conversion Cost Control Cost of Goods Sold Raw Materials and In Process Inventory Wages Payable
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Raw Materials and In Process Inventory
   	Conversion Cost Control Cost of Goods Sold Raw Materials and In Process Inventory Wages Payable
   c.	Accounts Payable Conversion Cost Control Cost of Goods Sold Raw Materials and In Process Inventory Wages Payable
   	Accounts Payable Cost of Goods Sold Finished Goods Inventory Raw Materials and In Process Inventory
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Finished Goods Inventory
   d.	Accounts Payable Conversion Cost Control Cost of Goods Sold Raw Materials and In Process Inventory Wages Payable
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Raw Materials and In Process Inventory Wages Payable

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   4. Why is there no need to have a work-in-process inventory account?

   • Lead times are longer, making it unnecessary.
   • There are no departments and lead times are short.
   • Tracking work in process by department is time consuming and costly.

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   5. Two variants of backflush costing were presented in which each used two trigger points, with the second trigger point differing. Suppose that the only trigger point for recognizing manufacturing costs occurs when the goods are sold. How would the entries be listed here? Round amounts to the nearest dollar if rounding is required. For a compound transaction, if an amount box does not require an entry leave it blank. Prepare your entries in the following order: (a) incurrence of direct labor and overhead costs, (b) completion and sale of goods, and (c) recognition of the variance between applied and actual production costs.

   a.	Accounts Payable Conversion Cost Control Cost of Goods Sold Wages Payable
   	Accounts Payable Conversion Cost Control Cost of Goods Sold
   	Conversion Cost Control Cost of Goods Sold Wages Payable
   b.	Accounts Payable Conversion Cost Control Cost of Goods Sold Wages Payable
   	Accounts Payable Cost of Goods Sold Wages Payable
   	Cash Conversion Cost Control Cost of Goods Sold Wages Payable
   c.	Accounts Payable Conversion Cost Control Cost of Goods Sold Wages Payable
   	Accounts Payable Conversion Cost Control Cost of Goods Sold Wages Payable

Answer 1

1. Predetermined conversion cost rate = Total budgeted conversion cost/Available production hours

Radiator Cell ($1290660/43900)	$               29.40	per hour
Water Pump Cell ($586240/25600)	$               22.90	per hour

2.

	Accounts	Debit	Credit
a.	Raw materials and in process inventory	1501000
	Accounts payable		1501000
b.	Conversion cost control	1876900
	Accounts payable		1641330
	Wages payable		235570
c.	Finished goods inventory	3154620
	Raw materials and in process inventory		1501000
	Conversion cost control*		1653620
d.	Cost of goods sold	3154620
	Finished goods inventory		3154620
e.	Cost of goods sold	223280
	Conversion cost control**		223280

*Conversion cost applied = (80400 x 0.50 x $29.40) + (82400 x 0.25 x $22.90) = $1181880 + $471740 = $1653620

**Conversion cost variance = $1876900 - $1653620 = $223280

3.

	Accounts	Debit	Credit
a.	Raw materials and in process inventory	1501000
	Accounts payable		1501000
b.	Conversion cost control	1876900
	Accounts payable		1641330
	Wages payable		235570
c.	Cost of goods sold	3154620
	Raw materials and in process inventory		1501000
	Conversion cost control		1653620
d.	Cost of goods sold	223280
	Conversion cost control		223280

4. Answer: There are no departments and lead times are short.

5.

	Accounts	Debit	Credit
a.	Conversion cost control	1876900
	Accounts payable		1641330
	Wages payable		235570
b.	Cost of goods sold	3154620
	Accounts payable		1501000
	Conversion cost control		1653620
c.	Cost of goods sold	223280
	Conversion cost control		223280