Question

Bandit Dog Food uses the weighted-average process costing method of accounting for production. Three primary ingredients included in each blend are vitamins, beef, and grain. Other components like food coloring and salt are insignificant in cost and are considered as indirect material elements in establishing the overhead allocation formulas. Factory overhead is applied on the basis of direct labor cost. The entire production process is completed within one department. All raw material is introduced at the beginning of the production process, while conversion costs occur uniformly throughout the production cycle.
Beginning work in process, at February 1, consisted of 90,000 pounds that were 80% complete, and had assigned costs as follows:
	Direct material	$          45,000
	Direct labor	20,000
	Factory overhead	15,000
February's production cycle resulted in the introduction of an additional 340,000 pounds. At the end end of February, 100,000 pounds were still in process, and were judged to be 40% complete. The cost of raw materials introduced during the month of February had the same per pound cost as the goods in beginning inventory.
Direct labor on the February cost of production report (weighted-average method) revealed a cost per equivalent unit of $0.25. The factory overhead application rate was consistent with that evident in the beginning work in process.
Finished goods inventory increased by $9,375, and sales were $500,000.
(a)	How many units were transferred to finished goods?
(b)	What are February's equivalent units of production for direct materials, direct labor, and factory overhead?
(c)	How much was the cost of direct material introduced into production during February?
(d)	How much was the cost of direct labor introduced into production in February?
(e)	What is the factory overhead application rate?
(f)	Of the total cost (beginning inventory plus additional production cost), how much is allocated to ending work in process?
(g)	Of the total cost (beginning inventory plus additional production cost), how much is transferred to finished goods inventory?
(h)	How much is February's gross profit?

Answer 1

Solution a:

Unit Transferred to finished goods = Opening WIP + Unit introduced - closing WIP = 90000 + 340000 - 100000 = 330000 units

Solution b:

Computation of Equivalent unit of Production - Weighted Average
Particulars	Physical Units	Material	Direct Labor	Factory Overhead
Unit completed & Transferred out (90000+340000-100000)	330000	330000	330000	330000
Closing WIP:	100000
Material (100%)		100000
Conversion (40%)			40000	40000
Equivalent units of production	430000	430000	370000	370000

Solution c:

Material cost per unit in opening WIP = $45,000 / 90000 = $0.50 per pound

Unit introduced in production = 340000 units

Direct material cost introduced in production = 340000*0.50 = $170,000

Solution d:

Direct labor cost per equivalent unit = $0.25 per unit

Nos of equivalent unit for direct labor = 370000 units

Total direct labor cost = 370000*0.25 = $92,500

Direct labor cost in opening WIP = $20,000

Direct labor cost introduced in production in Feburary = $92,500 - $20,000 = $72,500

Solution e:

Factory overhead application rate = factory overhead in opening WIP / Direct labor cost in opening WIP = $15,000 / $20,000 = 75%

Solution f & g:

Computation of Cost per equivalent unit of Production - Weighted Average
Particulars	Material	Direct Labor	Factory Overhead
Opening WIP	$45,000.00	$20,000.00	$15,000.00
Cost Added during Feburary	$170,000.00	$72,500.00	$54,375.00
Total cost to be accounted for	$215,000.00	$92,500.00	$69,375.00
Equivalent units of production	430000	370000	370000
Cost per Equivalent unit	$0.50	$0.25	$0.1875

Computation of Cost of ending WIP and units completed & transferred out - Weighted Average
Particulars	Material	Direct Labor	Factory Overhead	Total
Equivalent unit of Ending WIP	100000	40000	40000
Cost per equivalent unit	$0.50	$0.25	$0.1875
Cost of Ending WIP (Equivalent unit * Cost per equivalent unit)	$50,000	$10,000	$7,500	$67,500
Units completed and transferred	330000	330000	330000
Cost of units completed & Transferred to finished goods (Unit completed * cost per equivalent unit)	$165,000	$82,500	$61,875	$309,375

Solution h:

Cost of goods sold = Cost of goods transferred to finished goods - Increase in finished goods inventory

= $309,375 - $9,375 = $300,000

Sales = $500,000

Gross Profit = Sales - Cost of goods Sold = $500,000 - $300,000 = $200,000