Question

Process Costing for a Service Company

Madison Electric Company uses a fossil fuel (coal) plant for generating electricity. The facility can generate 900 megawatts (million watts) per hour. The plant operates 600 hours during March. Electricity is used as it is generated; thus, there are no inventories at the beginning or end of the period. The March conversion and fuel costs are as follows:

Conversion costs	$40,500,000
Fuel	10,800,000
Total	$51,300,000

Madison also has a wind farm that can generate 100 megawatts per hour. The wind farm receives sufficient wind to run 300 hours for March. The March conversion costs for the wind farm (mostly depreciation) are as follows:

Conversion costs

$2,700,000

a. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March.

	Cost Per Mega-watt Hour
Fossil plant		$	per MWh
Wind farm

b. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity?

c. What advantage does the fossil fuel plant have over the wind farm? Which of the following is true.

1. Fossil fuel is easily available.
2. Fossil fuel plant has a cost advantage over wind farm.
3. The wind farm is subject to the presence of wind and thus, not reliable.
4. The fossil fuel plant can be turned on and off on a schedule, while the wind farm is subject to the varieties of nature.

Answer 1

a. Determine the cost per megawatt hour (MWh) for the fossil fuel plant and the wind farm to identify the lowest cost facility in March.

Answer:

Cost Per Mega-watt Hour
Fossil plant	95	per MWh
Wind farm	90	per MWh

Calculation

First we need to calculate the cost per megawatt hour for the Fossil fuel plant by dividing the cost by the megawatt hours.

Fossil Fuel Plant Cost = 51,300,000

We need to calculate the cost, for that we need to multiply the megawatts per hour with the march hours.

That is,

Fossil Fuel Plant Megawatt Hours = 900 * 600 = 540,000

Cost Per Megawatt = Fossil Fuel Plant Megawatt Cost / Fossil Fuel Plant Megawatt Hours = 51,300,000 / 540,000 =  $95

Then we need to calculate the cost per megawatt hour for the wind farm, by dividing the wind farm cost by the wind farm megawatt hours.

Fossil Fuel Plant Cost = 2,700,000

We need to calculate the cost, for that we need to multiply the megawatts per hour with the march hours.

That is,

Wind Farm Megawatt Hours = 100 * 300 = 30,000

Cost Per Megawatt = Wind farm Megawatt Cost / Wind farm Megawatt Hours = 2,700,000 / 30,000 =  $90

b. Why are equivalent units of production not needed in determining the cost per megawatt hour (MWh) for generating electricity?

Answer:

The equivalent units of production are not computed because the electricity itself is the finished product.

Explanation:

The production of electricity is not similar to factory production. Because the factory production is done by batches. But if electricity is generated from a source, it is the final product. So, there is no need to determine equivalent units of production, as electricity itself is a finished product.

c. What advantage does the fossil fuel plant have over the wind farm? Which of the following is true.

Answer:

1. Fossil fuel is easily available. - True
2. Fossil fuel plant has a cost advantage over wind farm. - False
3. The wind farm is subject to the presence of wind and thus, not reliable. - True
4. The fossil fuel plant can be turned on and off on a schedule, while the wind farm is subject to the varieties of nature. - True

Explanation:

The Fossil fuel plant generated 540,000 megawatts for March, but the Wind farm generate only 30,000 megawatts. The Fossil fuel plant can generate more electricity than the Wind farm. The main reasons are that the fossil fuels are easily available but the wind farm depends on the presence of wind. But wind farm has less cost, though the fossil fuel generate more and have more benefit over wind farm.