Sweet Harmony Ltd is a sole distributor of a reputable brand of headphones in this region. It imports completely knocked down kits (CKD) from an international headphone manufacturer and then assembles and packs these into finished products (earphones) before transferring them to the finished goods store for distributions in the region.
The CKD are issued and utilised at the beginning of the assembly
process. The other assembly costs are incurred evenly throughout
that process. When the assembly process is complete, the packing
process is undertaken.
Overhead is applied into the assembly and the packing, at a rate of
100% and 20% of direct labour cost respectively.
It is considered normal for some earphones to be spoiled during
assembly and packing. Quality control inspection is applied at the
end of the packing process to determine whether units are
spoiled.
It is accepted that spoilage is normal if spoiled units are no more
than 5% of the completed good units produced.
Despite vigilant security measures, it is common that some units
are lost, probably by pilferage. The cost of lost units is written
off as a loss of the period in which it occurs. This cost is
measured at the cost of the CKD kits plus the assembly process, but
no packing cost is charged. Sweet Harmony Ltd uses FIFO system of
costing.
The following data summarize the firm’s activities during
May.
Opening WIP
CKD kits $120,000
Direct labour cost (assembly) to 30 Apr $50,000
No. of units (60% assembled) 100,000 units
Cost incurred during May
CKD kits $240,000
Direct labour cost (assembly) $80,000
Direct labour cost (packing) $60,000
Production data for May
CKD kits received into assembly 224,000 units
Good earphones completed from packing 180,000 units
Spoiled units 20,000 units
Lost units 4,000 units
None of the opening work in process had at that stage entered the packing process. Similarly, there is no closing work in process at the end of the month in the packing process. However, the units in the closing work in process were on average, 25% complete as to assembly.
Required:
(a) Using the four-step approach:
(i) Calculate the number of units in the closing work in process
for assembly and packing.
(ii) Calculate the number of equivalent units processed in May,
distinguishing between assembly process and packing process.
(ii) Calculate the costs per equivalent units for each product cost
category processed in May for the assembly process and the packing
process, the costs of units transferred from the assembly process
to the packing process, the cost of completed units from the
packing process, the costs of abnormal spoilage, lost units and
closing WIP.
(b) Pass all the necessary journal entries.
(c) Use your answer to (a) to explain "transferred-in costs".
| Part 1 | ||||||||||||||||||||||
| Assembly | Packing | |||||||||||||||||||||
| Opening inventory in process | $1,00,000.00 | $- | ||||||||||||||||||||
| Goods started in May | $2,24,000.00 | $2,04,000.00 | ||||||||||||||||||||
| Goods completed and Transfer out | $2,04,000.00 | $1,80,000.00 | ||||||||||||||||||||
| Normal spoilage | $- | $11,000.00 | ||||||||||||||||||||
| Abnormal Spoilage | $- | $9,000.00 | ||||||||||||||||||||
| Loss unit | $- | $4,000.00 | ||||||||||||||||||||
| Closing inventory in work in progress | 120,.000 | |||||||||||||||||||||
|
Equaling unit computation. Computation of equaling units in may assembly Department. Equivalent units for Direct Material Equivalent units for Direct Material = Started completed during the year + Ending Working progress spoiled +Loss. Started and completed in this year = Total completed units – Beginning work in progress. =204,000-100,000 =104,000 Equivalent units of direct Material = 104,000+120,000=224000 Equivalent units for Conversion Cost (Assembly) Equaling units for Conversion Cost= portion of binging work in
progress to completed this year +Started and completed this year +
portion of ending work in progress completed this year. Equaling units for Conversion Cost= 40,000+104,000+30,000 = 174,000 Equivalent unit in packing process. AS there is no work in progress with packing process the equaling units will be Good units completed + spoiled unit + Loss for both Direct Material And Conversion. 180,000+20000+4000 = 204000 (iii)Equaling unit Cost computation. Assembly unit. Direct Material Total cost incurrent in current period/Equaling units of Direct Material Cost incurred = $240,000/224,000 =$1.07 Cost of conversion Direct Labor = 80,000 Overhead Cost =80,000 (100% of Direct labor) Total Conversion Cost = 80000+80000 =160,000 Number of Equaling units = $160,000/174000 = .91 Total Cost of goods transferred to Packing process Direct Material = $1.07* 80000= 85,600 Conversion Cost = .91*(80000+40000) =$109,200 Total Cost Current year Transferred to Processing Department = $194,800 (Conversion cost + Material) Cost transferred on beginning work in progress to packing Department = $120,000+$50,000 = $170,000 Total transfer out cost to packing department = Current year cost + Binging inventory cost =$ 364,800 Per unit computation in Packing process Total Conversion Cost Direct labor =$60,000 Overhead = $12,000 (20% of direct labor) Total Conversion Cost = $180,000 Cost per equaling unit =$180,000/204,000 =.88
Final Cost Cost of finished goods = Cost allocated to good unit+ Normal loss = $480,600+$24,030= $504,630 Abnormal loss = $29,370 Loss of unit = $10,680 Note. All values are rounded to nearest integrals |
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