Question

Equivalent units, zero beginning inventory. Nihon, Inc. is a manufacturer of digital cameras. It has two departments: Assembly and Testing. In January 2009, the company incurred $750,000 on direct materials and $798,000 on conversion costs, for a total manufacturing cost of $1,548,000.

1. Assume there was no beginning inventory of any kind on January 1, 2009. During January, 10,000 cameras were placed into production and all 10,000 were fully completed at the end of the month. What is the unit cost of an assembled camera in January?

2. Assume that during February 10,000 cameras are placed into production. Further assume the same total assembly costs for January are also incurred in February, but only 9,000 cameras are fully completed at the end of the month. All direct materials have been added to the remaining 1,000 cameras. However, on average, these remaining 1,000 cameras are only 50% complete as to conversion costs. (a) What are the equivalent units for direct materials and conversion costs and their respective costs per equivalent unit for February? (b) What is the unit cost of an assembled camera in February 2009?

3. Explain the difference in your answers to requirements 1 and 2.

Answer 1

Equivalent units, zero beginning inventory.

 

1.      

Direct materials cost per unit ($750,000 ÷ 10,000)           $ 75.00

Conversion cost per unit ($798,000 ÷ 10,000)                      79.80

Assembly Department cost per unit                                   $154.80

2a.    

Solution Exhibit 17-16A calculates the equivalent units of direct materials and conversion costs in the Assembly Department of Nihon, Inc. in February 2009.

Solution Exhibit 17-16B computes equivalent unit costs.

2b.    

Direct materials cost per unit                                            $ 75

Conversion cost per unit                                                      84

Assembly Department cost per unit                               $159

3.      

The difference in the Assembly Department cost per unit calculated in requirements 1 and 2 arises because the costs incurred in January and February are the same but fewer equivalent units of work are done in February relative to January. In January, all 10,000 units introduced are fully completed resulting in 10,000 equivalent units of work done with respect to direct materials and conversion costs. In February, of the 10,000 units introduced, 10,000 equivalent units of work is done with respect to direct materials but only 9,500 equivalent units of work is done with respect to conversion costs. The Assembly Department cost per unit is, therefore, higher.

 

SOLUTION EXHIBIT 17-16A

Steps 1 and 2: Summarize Output in Physical Units and Compute Output in Equivalent Units;

Assembly Department of Nihon, Inc. for February 2009.

 

*Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

SOLUTION EXHIBIT 17-16B

Compute Cost per Equivalent Unit,

Assembly Department of Nihon, Inc. for February 2009.

Equivalent units, zero beginning inventory.

 

1.      

Direct materials cost per unit ($750,000 ÷ 10,000)           $ 75.00

Conversion cost per unit ($798,000 ÷ 10,000)                      79.80

Assembly Department cost per unit                                   $154.80

2a.    

Solution Exhibit 17-16A calculates the equivalent units of direct materials and conversion costs in the Assembly Department of Nihon, Inc. in February 2009.

Solution Exhibit 17-16B computes equivalent unit costs.

2b.    

Direct materials cost per unit                                            $ 75

Conversion cost per unit                                                      84

Assembly Department cost per unit                               $159

3.      

The difference in the Assembly Department cost per unit calculated in requirements 1 and 2 arises because the costs incurred in January and February are the same but fewer equivalent units of work are done in February relative to January. In January, all 10,000 units introduced are fully completed resulting in 10,000 equivalent units of work done with respect to direct materials and conversion costs. In February, of the 10,000 units introduced, 10,000 equivalent units of work is done with respect to direct materials but only 9,500 equivalent units of work is done with respect to conversion costs. The Assembly Department cost per unit is, therefore, higher.

 

SOLUTION EXHIBIT 17-16A

Steps 1 and 2: Summarize Output in Physical Units and Compute Output in Equivalent Units;

Assembly Department of Nihon, Inc. for February 2009.

 

*Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

SOLUTION EXHIBIT 17-16B

Compute Cost per Equivalent Unit,

Assembly Department of Nihon, Inc. for February 2009.