Question

The records of Fremont Corporation’s initial and unaudited accounts show the following ending inventory balances, which must be adjusted to actual costs:

	Units	Unaudited Costs
Work-in-process inventory	120,000	$793,152
Finished goods inventory	20,000	337,560

As the auditor, you have learned the following information. Ending work-in-process inventory is 40 percent complete with respect to conversion costs. Materials are added at the beginning of the manufacturing process, and overhead is applied at the rate of 80 percent of the direct labor costs. There was no finished goods inventory at the start of the period. The following additional information is also available:

		Costs
	Units	Direct Materials	Direct Labor
Beginning inventory (80% complete as to labor)	80,000	$ 240,000	$ 546,000
Units started	400,000
Current costs		1,560,000	2,208,000
Units completed and transferred to finished goods inventory	360,000

Required

Prepare a production cost report for Fremont using the weighted-average method. (Hint: You will need to calculate equivalent units for three categories: materials, labor, and overhead.)

Show the journal entry required to correct the difference between the unaudited records and actual ending balances of Work-in-Process Inventory and Finished Goods Inventory. Debit or credit Cost of Goods Sold for any difference.

If the adjustment in requirement (b) is not made, will the company’s income and inventories be overstated or understated?

(CPA adapted)

Answer 1

FREMONT CORPORATION
Production Cost Report - Weighted Average
Flow of production units:	Physical Units	Equivalent Units
		Materials	Labor	Overhead
Units to be accounted for
Beginning WIP inventory	80000
Units started this period	400000
Total units to be accounted for	480000
Units accounted for
Units completed and transferred out
From beginning inventory	80000
Started and completed currently	280000
Total transferred out	360000	360000	360000	360000
Units in ending WIP inventory	120000	120000	48000	48000
Total units accounted for	480000	480000	408000	408000
		Details
Costs:	Total Costs	Materials	Labor	Overhead
Costs to be accounted for
Costs in beginning WIP inventory	1222800	240000	546000	436800
Current period costs	5534400	1560000	2208000	1766400
Total costs to be accounted for $	6757200	1800000	2754000	2203200
Costs per equivalent unit
Materials		3.75
Labor			6.75
Overhead				5.4
Costs accounted for
Costs assigned to units transferred out
Materials	1350000	1350000
Labor	2430000		2430000
Overhead	1944000			1944000
Total costs of units transferred out	5724000
Costs assigned to ending WIP
Materials	450000	450000
Labor	324000		324000
Overhead	259200			259200
Total ending WIP inventory	1033200
Total costs accounted for $	6757200	1800000	2754000	2203200

Part b. Adjustment required:

	Work in Process	Finished Goods
Per problem statement	793152	337560
Correct	1033200	318000
Difference $	-240048	19560
Account Title	Debit	Credit
Work in Process	240048
Finished Goods		19560
Cost of Goods Sold		220488

Part c.

	Overstated/ Understated
Income would have been	Understated
Work in process would have been	Understated
Finished goods would have been	Overstated