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

Exercise 42

Prepare a Production Cost Report and Show Cost Flows through Accounts: FIFO Method

In its Department R, Recyclers, Inc., processes donated scrap cloth into towels for sale in local thrift shops. It sells the products at cost. The direct materials costs are zero, but the operation requires the use of direct labor and overhead. The company uses a process costing system and tracks the processing volume and costs incurred in each period. At the start of the current period, 300 towels were in process and were 60 percent complete. The costs incurred were $168.

During the month, costs of $10,800 were incurred, 2,700 towels were started, and 150 towels were still in process at the end of the month. At the end of the month, the towels were 20 percent complete.

Required

a.Prepare a production cost report; the company uses FIFO process costing.

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b.Show the flow of costs through T-accounts. Assume that current period conversion costs are credited to various payables.

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c.Management is concerned that production costs are rising and would like to hold them to less than $4.25 per unit. Has the company achieved this target? Write a short report to management stating your answer.

Step 1 of 3

Recyclers, Inc.Production Cost Report—FIFO

a.

FLOW OF PRODUCTION UNITS							(Section 2) Compute Equivalent Units
	(Section 1)Physical units							Conversion costs
Units to be accounted for:
?Beginning WIP inventory?		300
?Units started this period?		2,700
Total units to be accounted for?		3,000
Units accounted for:
?Units completed and transferred out:
??From beginning inventory?		300						120	(40%)a
??Started and completed currently?		2,550						2,550
?Units in ending WIP inventory?		150						30	(20%)
Total units accounted for?		3,000						2,700

a40% = 100% – 60% already done at the beginning of the period.

COSTS	Total costs		Conversioncosts
Costs to be accounted for: (Section 3)
?Costs in beginning WIP inventory?	$?? 168			$?? 168
?Current period costs?	10,800			10,800
Total costs to be accounted for?	$10,968			$10,968
Cost per equivalent unit: (Section 4)
?Conversion costs ($10,800 ¸ 2,700)?				$4.00
Costs accounted for: (Section 5)
?Costs assigned to units transferred out:
??Costs from beginning inventory?	$?? 168			$?? 168
??Current costs added to complete beginning                  WIP inventory:
???Conversion costs ($4.00 x 120)?	480			480
?Total costs from beginning inventory?	$?648
?Current costs of units started and completed:
??Conversion costs ($4.00 x 2,550)?	10,200			10,200
?Total costs of units started and completed?	$10,200
?Total costs of units transferred out?	$10,848
?Costs assigned to ending WIP inventory:
??Conversion costs ($4.00 x 30)?	120			120
?Total ending WIP inventory?	$?? 120
Total costs accounted for?	$10,968			$10,968