Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Question

Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Edition 3ISBN: 0073527114

Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Edition 3ISBN: 0073527114

Exercise 20

Compute Equivalent Units: Ethical Issues

Aaron Company has a process costing system. All materials are introduced when conversion costs reach 50 percent. The following information is available for physical units during March.

Work in process, March 1 (60% complete as to conversion costs)	150,000
Units started in March	600,000
Units transferred to Finishing Department in March	630,000
Work in process, March 31 (40% complete as to conversion costs)	120,000

Required

a.Compute the equivalent units for materials costs and for conversion costs using the weighted- average method.

b.Compute the equivalent units for materials costs and for conversion costs using the FIFO method.

c.The company president has been under considerable pressure to increase income. He tells the controller to change the estimated completion for ending work in process to 60 percent (from 40 percent).

1. What effect will this change have on the unit costs of units transferred to finished goods in March?

2. Would this be ethical?

3. Is this likely to be a successful strategy for affecting income over a long period of time?

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Answer 1

Inventory cost flow system

The cost of identical inventory lying in the stock may be different. Cost of inventory changes due to fluctuations in the purchase prices of inventory in the market. Hence inventory stock may have similar inventory with different prices and when the inventory is issued its cost is also sent to cost of goods sold.

There are different methods being used to transfer inventory cost to the cost of goods sold like FIFO (first in first out), LIFO (last in first out), weighted average method etc.

Under FIFO method inventory purchased first is issued first. Under LIFO method inventory purchased last is issued first.

Under weighted average method inventory is issued at weighted average unit cost. Weighted average cost is calculated by dividing the total inventory cost with total inventory counts.