Question

You are employed by Spirit Company, a manufacturer of digital watches. The company’s CFO is trying to verify the accuracy of the ending WIP and Finished Goods inventories prior to closing the books for the year. You have been asked to assist in this verification. The year-end balances shown on Spirit’s books are as follows:

	Units	Costs
WIP, 12/31 (conversion 50% complete)	300,000	$   660,960
Finished Goods, 12/31	200,000	$1,009,800

Materials are added to production at the beginning of the manufacturing process, and overhead is applied to each product at the rate of 60% of direct labor cost. There was no Finished Goods inventory at the beginning of the year (all prior year finished goods were sold). A review of Spirit’s inventory and cost records has disclosed the following data:

	Units	Materials	Labor
WIP, January 1 (conversion 80% complete)	200,000	$200,000	$315,000
Units started into production	1,000,000
Costs added during the year:
Materials cost		$1,300,000
Labor cost			$1,995,000
Units completed during the year	900,000

The company uses the weighted average method.

Required (support your work):

1. Determine the equivalent units and costs per equivalent unit for materials and conversion costs.
2. Are the ending cost balances in the WIP and Finished Goods inventory as shown? If they are not correct, what should the ending cost balances be? Prepare any necessary journal entries.
3. Determine the cost of goods sold for the year (assume no over- or under-applied overhead).

Answer 1