Question

JIT/Lean Production and Product Costing

Presented is information pertaining to the standard or budgeted unit cost of a product manufactured in

a JIT/Lean Production environment at CNN Systems Inc.:

Direct materials .......................................................... $40

Conversion .............................................................. 30

Total ................................................................... $70

All materials are added at the start of the production process. All raw materials purchases and conver-

sion costs are directly assigned to Cost of Goods Sold. At the end of the period, costs are backed out and

assigned to Raw Materials in Process (only for materials still in the plant) and Finished Goods Inventory

(for materials and conversion costs for completed units). Costs assigned to inventories are based on the

standard or budgeted cost multiplied by the number of units in inventory. Conversion costs are assigned

to inventories only for fully converted units. Since inventory levels tend to be small in this JIT envi-

ronment, partially completed units are assigned no conversion costs. CNN Systems had no beginning

inventories on August 1, 2017. During the month, it incurred the following manufacturing-related costs:

Purchase of raw materials on account..................................... $700,000

Factory wages ....................................................... 260,000

Factory supervision salaries............................................. 60,000

Utilities bill for month .................................................. 34,000

Factory supplies purchased............................................. 30,000

Depreciation ......................................................... 19,000

The end-of-month inventory included raw materials in process of 750 units and finished goods of 500

units. One hundred units of raw materials were zero percent converted; the other 650 units averaged

60 percent converted.

Required

a. Calculate the total cost charged to Cost of Goods Sold during August.

b. Calculate the balances in Raw Materials in Process, Finished Goods Inventory, and Cost of Goods

Sold at the end of August.

c. Assuming that August is a typical month, is it likely that using the company’s shortcut backflush

accounting procedures will produce misleading financial statements? Explain.

Answer 1

Total Unit sold= Unit Produced+ Beginning Inventory- Ending Inventory

Here no information is given about total units produced or unit sold.

Total Raw material for units=$700,000/$40=17,500 units

As $700,000 is raw material purchased and $20 is the per unit raw material so total raw material for units produced=17,500 units

Finished Inventory=750+500=1,250 units.

Goods sold=17,500-1,250=16250

Cost of raw material =16,250*$40=$650,000

Wages=$260,000

Salaries=$60,000

Utilities bill=$34,000

Factory Supplies =$30,000

Deperciation=$19,000

a) Total cost=$650,000+$260,000+$60,000+$34,000+$30,000+$19,000=$819,000

b)

Raw material In proceeds=650*$40=$26,000

Finished Goods=500*$40=$20,000

COGS=$819,000

c)

Since COGS including the complete cost of processing without adjusting for 60% converted, processed goods resulted in the higher cost and lower income for the month of august.