Question

managerial accounting question

Sweet Harmony Ltd is a sole distributor of a reputable brand of headphones in this region. It imports completely knocked down kits (CKD) from an international headphone manufacturer and then assembles and packs these into finished products (earphones) before transferring them to the finished goods store for distributions in the region.

The CKD are issued and utilised at the beginning of the assembly process. The other assembly costs are incurred evenly throughout that process. When the assembly process is complete, the packing process is undertaken.

Overhead is applied into the assembly and the packing, at a rate of 100% and 20% of direct labour cost respectively.
It is considered normal for some earphones to be spoiled during assembly and packing. Quality control inspection is applied at the end of the packing process to determine whether units are spoiled.

It is accepted that spoilage is normal if spoiled units are no more than 5% of the completed good units produced.
Despite vigilant security measures, it is common that some units are lost, probably by pilferage. The cost of lost units is written off as a loss of the period in which it occurs. This cost is measured at the cost of the CKD kits plus the assembly process, but no packing cost is charged.

Sweet Harmony Ltd uses FIFO system of costing.
The following data summarize the firm’s activities during May.

Opening WIP
CKD kits $120,000
Direct labour cost (assembly) to 30 Apr $50,000
No. of units (60% assembled) 100,000 units

Cost incurred during May
CKD kits $240,000
Direct labour cost (assembly) $80,000
Direct labour cost (packing) $60,000

Production data for May
CKD kits received into assembly 224,000 units
Good earphones completed from packing 180,000 units
Spoiled units 20,000 units
Lost units 4,000 units

None of the opening work in process had at that stage entered the packing process. Similarly, there is no closing work in process at the end of the month in the packing process. However, the units in the closing work in process were on average, 25% complete as to assembly.

Required:
(a) Using the four-step approach:
(i) Calculate the number of units in the closing work in process for assembly and packing.

(ii) Calculate the number of equivalent units processed in May, distinguishing between assembly process and packing process.

(ii) Calculate the costs per equivalent units for each product cost category processed in May for the assembly process and the packing process, the costs of units transferred from the assembly process to the packing process, the cost of completed units from the packing process, the costs of abnormal spoilage, lost units and closing WIP.

Answer 1

(i)Unitflowcomputation.

	Assembly ($)	Packing
Opening inventory in process	100,000	0
Goods started in May	224,000	204,000
Goods completed and Transfer out	204,000	180,000
Normal spoilage	0	11,000
Abnormal Spoilage	0	9,000
Loss unit	0	4,000
Closing inventory in work in progress	120,.000

Note.

Good completed and transferred out of one process will be transferred in of the next process

(ii) Equaling unit computation.

Computation of equaling units in may assembly Department.

Equivalent units for Direct Material

Equivalent units for Direct Material = Started completed during the year + Ending Working progress spoiled +Loss.

Started and completed in this year = Total completed units – Beginning work in progress.

                                        =204,000-100,000 =104,000

Equivalent units of direct Material = 104,000+120,000=224000

Equivalent units for Conversion Cost (Assembly)

Equaling units for Conversion Cost= portion of binging work in progress to completed this year +Started and completed this year + portion of ending work in progress completed this year.
       Equaling units for Conversion Cost=(100,000*40%) + 104,000+(120,000*25%)

      Equaling units for Conversion Cost= 40,000+104,000+30,000 = 174,000

Equivalent unit in packing process.

AS there is no work in progress with packing process the equaling units will be

Good units completed + spoiled unit + Loss for both Direct Material And Conversion.

180,000+20000+4000 = 204000

(iii)Equaling unit Cost computation.

Assembly unit.

Direct Material

Total cost incurrent in current period/Equaling units of Direct Material

Cost incurred = $240,000/224,000 =$1.07

Cost of conversion

Direct Labor = 80,000

Overhead Cost =80,000 (100% of Direct labor)

Total Conversion Cost = 80000+80000 =160,000

Number of Equaling units = $160,000/174000 = .91

Total Cost of goods transferred to Packing process

Direct Material = $1.07* 80000= 85,600

Conversion Cost = .91*(80000+40000) =$109,200

Total Cost Current year Transferred to Processing Department = $194,800 (Conversion cost + Material)

Cost transferred on beginning work in progress to packing Department = $120,000+$50,000 = $170,000

Total transfer out cost to packing department =   Current year cost + Binging inventory cost =$ 364,800

Per unit computation in Packing process

Total Conversion Cost

Direct labor =$60,000

Overhead = $12,000 (20% of direct labor)

Total Conversion Cost = $180,000

Cost per equaling unit =$180,000/204,000 =.88

	Transfer in cost ($)	Process cost ($)	Total ($)
Cost allocated to good unit	322,200	158,400	480,600
Abnormal loss	19,690	9,680	29,370
Normal loss	16,110	7,920	24,030
Loss of unit	7,160	3,520	10,680

Final Cost

Cost of finished goods = Cost allocated to good unit+ Normal loss = $480,600+$24,030= $504,630

Abnormal loss = $29,370

Loss of unit = $10,680

Note.

All values are rounded to nearest integrals