Question

Home & Gardening Depot makes decorative flower pots using three consecutive processes: Moulding, Baking & Spraying. Costs incurred in the Baking Department during June are summarized as follows:

WIP – Process 2 A/C

Debit	Credit
June 1 bAL $0
From Moulding    2000 $665,200
Direct Material Added    $195,200
Direct Manufacturing wages    $204,240
Manufacturing Overhead Applied    $306,360

Normal losses are estimated to be 5% of input during the period. Inspection takes place during the processing operation, at which point bad units are separated from good units and sold as scrap at $420 each.

At inspection, 300 units were rejected as scrap. These units had reached the following degree of completion:

From Moulding 100%

Direct materials added 50%

Conversion costs 40%

Work-in-progress at the end of June was 500 units and had reached the following degree of completion:

From Moulding 100%

Direct materials added 60%

Conversion costs 40%

Direct materials added and conversion costs are incurred uniformly throughout the process.

Required:

(a) Prepare a statement of equivalent production to determine the equivalent units for direct materials (From Moulding & Direct Material Added), and conversion costs and the cost per equivalent unit for direct materials and conversion costs.

(b) Calculate the: - Total cost of units completed and transferred out to the Spraying department - Cost of abnormal losses - Cost of ending work-in-process inventory in the Baking department

(c) Prepare Home & Gardening Depot’s Work-In-Process Inventory – Baking Department T-account, clearly showing the ending balance.

(d) State the journal entries necessary to record the assignment of direct materials, direct manufacturing wages incurred and manufacturing overhead applied to Process 2. Also give the journal entries to record the cost of goods completed and transferred to finished goods.

(e) Given that 25% of the unexpected losses were as a result of pilferage, prepare the abnormal spoilage statement, clearly showing Home & Gardening Depot’s true loss.

(f) Briefly explain the difference between job costing & process costing, giving examples of industries in which both methods of product costing may be used.

Answer 1

a Cost Flow Assumption

Opening inventory + Started or Transfer in= Transferred out +Spoilage +Closing Inventory

0+2000=1200+300+500

Moulding

Transferred Our	1200*100%	1200
Spoilage	300*100%	300
Ending WIP	500*100	500
Total Equivalent Units		2000

Direct Material

Transferred Our	1200*100%	1200
Spoilage	300*50%	150
Ending WIP	500*60%	300
Total Equivalent Units		1650

  

Conversion Cost

Transferred Our	1200*100%	1200
Spoilage	300*40%	120
Ending WIP	500*40%	200
Total Equivalent Units		1520

b.

Equivalent Cost

Cost Category	Cost ($)	Number of Equivalent Unit	Cost per Unit ($)
Direct Material	195,200	1650	118.30
Direct Labor	510,600	1520	335.92
Molding	665,200	2000	332.6

   

Cost Allocated To Abnormal Spoilage

Cost Category	EUP	Unit /EUP($)	Total
Molding	200	332.60	66,520
Material	100	118.30	11,830
Conversion	80	335.92	26,873.6
			105223.6

Cost Allocated to WIP

Cost Category	EUP	Unit /EUP ($)	Total
Molding	500	332.60	166,300
Material	300	118.30	35,490
Conversion	200	335.92	67,184
			268974

Normal Loss

Cost Category	EUP	Unit /EUP ($)	Total
Molding	100 (300*.34)	332.60	33,260
Material	50(150*.34	118.30	5,915
Conversion	40 (120*.34)	335.92	13,436.80
			52611.80

Its computation given at end

Finished Goods

Cost Category	EUP	Unit /EUP($)	Total ($)
Molding	1200	332.60	399,120
Material	1200	118.30	141,960
Conversion	1200	335.92	403,104
			944,184

Goods Transferred Out= Finished Good cost +Net Normal loss cost (Note 1) =

$944,184+$10611.80= $9544795.8

c. Work in Process inventory Account

Dr	Amount ($)	Cr	Amount (4)
Transferred In	665,200	Finished Goods	944,184
Direct Material	195,200	Normal loss	52,611.80
Conversion	510,600	Abnormal loss	105,223.6
		WIP	268,974

d Journal Entry’s

To transfer finished goods from Moulding Department to Baking Department

Dr WIP of Baking Department a/c $665,200

   Cr Moulding Department Finished Goods.   $665,200

Adding Direct Material And Conversion Cost

Dr WIP of Baking Department $705,800

Cr Direct Material                     $195,200

Cr Conversion Cost                        $510600

To transfer amount to Finished Goods Account

Dr Finished Goods Account $944,184

Cr WIP of Baking Department   $944,184

To Account normal and Abnormal loss

Dr Normal loss a/c $ 52,611.80

Dr Abnormal loss a/c $105,223.60

    Cr WIP of Baking Department $157,835.40

To transfer good units to spraying   Department

Dr WIP of Spraying Department a/c $954,795.80

Cr Finished goods of Banking Department $944,184

   Cr Normal loss   $106,11.80 (Net Amount)*

e. Actual abnormal loss computation

	$
Total loss on abnormal Spoilage	105,223.6
Amount received from scrap Sale	63,000
Net loss (Abnormal.)	989,236

f. Process costing classified based on process and cost is transferred from one process to another process example is Oil manufacturing factory in contrast in job order costing cost is absorbed by each job example is Wedding card printing press.

Notes.

Total los = 300 Unit

Normal loss = Total unit started *5% =2,000*15%=100

Abnormal loss = Total loss –Normal loss= 300-100=200

So out of total loss .33% is Normal loss and rest is abnormal loss all EUP computation are based on this.

Net Normal loss = Normal loss – revenue from scrap =$52,611.80- $42000($420*100)= $10,611.80

Revanue From abnormal loss = salable unit of abnormal loss *$420= (200*75%)420 = $63,000

As question says that 25% Not salable