Question

Question 3 has two parts, Parts A and B. Both are compulsory.

Part A – Weighted Average

Cool Fizzy Ltd’s division A produces soft drinks in standard sizes. Set out below is information for the month of January:

Work-in-process inventory, 1 January = 4,000 units

Direct materials: 100% complete = $6,000

Conversion: 50% complete = $12,000

Units started during January = 8,000 units
Units completed and transferred out during January = 8000 units

Work-in-process inventory, 31 January

Direct materials: 100% complete

Conversion costs: 50% complete

Costs incurred during January

Direct materials = $ 12,000

Conversion = $128,000

Required: Show ALL your workings. Using the weighted average method complete the following:

(i) Calculate equivalent units of direct materials and conversion for the month of January.

(ii) Calculate direct material cost and conversion cost per equivalent unit for the month of January.

(iii) Prepare an analysis of total costs showing the cost of goods completed and transferred out during January and cost of WIP inventory on 31 January, as per Exhibit 5.4 (p.192) of the textbook.

Part B – FIFO

Cool Fizzy Ltd’s production manager Phil Palm has been under pressure from senior management to improve divisional profitability (which is also incidentally linked to his management performance bonus). Phil is required to attend an upcoming meeting to explain the average performance. He approaches the management accountant Rachel Murray with thefollowing request: “Rachel, I am under pressure to lift divisional performance. This is going to happen as the summer months approach, but I need a little time. I want you to do me a favour. Could you prepare the January monthlies using FIFO method instead of the weighted average method currently used? I know that it is just as acceptable a method, and the lift in profit itshows will give me the time I need to carry over to the profitable summer season.”

Required: Show ALL your workings. Using the FIFO method complete the following.

1. (i) Calculate equivalent units of direct materials and conversion for the month of January.

2. (ii) Calculate direct material cost and conversion cost per equivalent unit for the month of January.

3. (iii) Prepare an analysis of total costs showing the cost of goods completed and transferred out during January and cost of WIP inventory on 31 January, as per Exhibit 5.9 (p.195) of the textbook.

4. (iv) Explain clearly the difference in the dollar value of the cost of goods completed and transferred out obtained above using FIFO with the dollar value calculated using the weighted average in Part A (iii).

5. (v) If you were Rachel, would you agree to Phil’s request? Clearly explain your reasons for either agreeing or disagreeing. (Hint: Refer to the Appendix to Chapter 1 of the textbook).

Answer 1

• Please note that both Part A and Part B have several subparts.
• I’ll to cover the most I can.
• Part A

>Requirement (i)

EUP - Weighted Average Method	Units	% Material	EUP Materials	% Conversion	EUP - Conversion
Units TRANSFERRED	8,000	100%	8,000	100%	8,000
Units of ENDING WIP	4,000	100%	4,000	50%	2,000
Equivalent Units of Production			12,000		10,000

>Requirement (ii)

COST per EUP			Material		Conversion
Cost of Beginning WIP			$             6,000.00		$                                  12,000.00
Cost incurred during the period			$          12,000.00		$                                128,000.00
Total Costs		Costs	$          18,000.00	Costs	$                                140,000.00
Equivalent units of production		EUP	12,000	EUP	10,000
Cost per EUP			$              1.50		$                                   14.00

>Requirement (iii)

TOTAL COST ACCOUNTED FOR
Cost of Units Transferred Out	EUP	Cost per EUP	Total Cost
- Direct Materials	8,000	$                      1.50	$          12,000.00
- Conversion	8,000	$                    14.00	$        112,000.00
Total Cost transferred Out				$            124,000.00
Cost of ending WIP	EUP	Cost per EUP	Total Cost
- Direct Materials	4,000	$                      1.50	$             6,000.00
- Conversion	2,000	$                    14.00	$          28,000.00
Total cost of ending WIP				$              34,000.00
Total costs accounted for					$                                158,000.00

• Part ‘B’

>Requirement (i)

EUP - FIFO Method	Units	% Material	EUP Materials	% Conversion	EUP - Conversion
Units of ENDING WIP	4,000	100%	4,000	50%	2,000
Units STARTED & COMPLETED	4,000	100%	4,000	100%	4,000
Units of beginning WIP	4,000	0%	-	50%	2,000
Equivalent Units of Production			8,000		8,000

>requirement (ii)

COST per EUP			Material		Conversion
Cost incurred this period			$          12,000.00		$                  128,000.00
Total Costs		Costs	$          12,000.00	Costs	$                  128,000.00
Equivalent units of production		EUP	8,000	EUP	8,000
Cost per EUP			$             1.50		$                     16.00

>Requirement (iii)

COST ASSIGNMENT & RECONCILIATION
Cost Transferred out:	EUP	Cost per EUP	Total Cost
Cost of Beginning WIP			$          18,000.00
Cost to complete beginning WIP-
- Direct Materials	-	$                   1.50	$                         -
- Conversion	2,000	$                 16.00	$          32,000.00
Total cost to complete beginning WIP			$          50,000.00
Cost of Units started & completed this period:	EUP	Cost per EUP	Total Cost
- Direct Materials	4,000	$                   1.50	$           6,000.00
- Conversion	4,000	$                 16.00	$          64,000.00
Total costs started & Completed this period			$          70,000.00
Total cost of work finished this period				$             120,000.00
Costs of Ending WIP:	EUP	Cost per EUP	Total Cost
- Direct Materials	4,000	$                   1.50	$            6,000.00
- Conversion	2,000	$                 16.00	$          32,000.00
Total cost of ending WIP				$               38,000.00
Total costs accounted for				$             158,000.00