Question

You are employed by Spirit Company, a manufacturer of digital watches. The company’s CFO has asked that you determine the costing information for past year. You have the following information available to you to complete this process.

Materials are added to production at the beginning of the manufacturing process, and overhead is applied to each product at the rate of 60% of direct labor cost. The ending WIP inventory is 50% complete as to conversion costs. There was no Finished Goods inventory at the beginning of the year (all prior year finished goods were sold) and 200,000 units at the end of the current year. A review of Spirit’s inventory and cost records has disclosed the following data:

                        Costs

                                                                            Units         Materials         Labor

WIP, January 1 (conversion 80% complete)      200,000           $200,000      $315,000

Units started into production                           1,000,000

Costs added during the year:

     Materials cost                                                                     $1,300,000

     Labor cost                                                                                               $1,995,000

Units completed during the year                       900,000

The company uses the weighted average method.

Required (support your work):

Determine the equivalent units and costs per equivalent unit for materials and conversion costs.

What are the ending cost balances in the WIP and Finished Goods inventory?

Determine the cost of goods sold for the year (assume no over- or under-applied overhead).

Answer 1

Solution:

Computation of Equivalent unit of Production
Particulars	Physical Units	Material	Conversion
Unit completed & Transferred out	900000	900000	900000
Closing WIP (200000+ 1000000 - 900000) :	300000
Material (100%)		300000
Conversion (50%)			150000
Equivalent units of production	1200000	1200000	1050000

Computation of Cost per equivalent unit of Production
Particulars	Material	Conversion (160% of Direct labor)
Opening WIP	$200,000.00	$504,000.00
Cost Added during jan	$1,300,000.00	$3,192,000.00
Total cost to be accounted for	$1,500,000.00	$3,696,000.00
Equivalent units of production	1200000	1050000
Cost per Equivalent unit	$1.25	$3.52

Computation of Cost of ending WIP, units completed & transferred out, Ending inventory and Cost of goods Sold
Particulars	Material	Conversion	Total
Equivalent unit of Ending WIP	300000	150000
Cost per equivalent unit	$1.25	$3.52
Cost of Ending WIP (Equivalent unit * Cost per equivalent unit)	$375,000.00	$528,000.00	$903,000.00
Units completed and transferred	900000	900000
Cost of units completed & Transferred (Unit completed * cost per equivalent unit)	$1,125,000.00	$3,168,000.00	$4,293,000.00
Finished Goods Inventory	200000	200000
Cost of finished goods inventory (Ending inventory * cost per equivalent unit)	$250,000.00	$704,000.00	$954,000.00
Inventory Sold (Units completed - Finished Goods Inventory)	700000	700000
Cost of Goods Sold (Sold Inventory * cost per equivalent unit)	$875,000.00	$2,464,000.00	$3,339,000.00