MicroMem is a fast-growing manufacturer of computer chips. Direct materials are
ID: 2571013 • Letter: M
Question
MicroMem is a fast-growing manufacturer of computer chips. Direct materials are added at the start of the production process. Conversion costs are added evenly during the process. Some units of this product are spoiled as a result of defects not detectable before inspection of finished goods. Spoiled units are disposed of at zero net disposal value. MicroMem uses the weighted-average method of process costing. Summary data for September 20142014 are as follows
Requirements
1.
For each cost category, compute equivalent units. Show physical units in the first column of your schedule.
2.
Summarize the total costs to account for; calculate the cost per equivalent unit for each cost category; and assign costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.
1.
For each cost category, compute equivalent units. Show physical units in the first column of your schedule.
2.
Summarize the total costs to account for; calculate the cost per equivalent unit for each cost category; and assign costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.
Physical Units (Computer Chips) Materials Costs Direct Conversion $160,640 100% $15,810 30% Work in process, beginning inventory (September 1) 1,000 Degree of completion of beginning work in proces:s Started during September Good units completed and transferred out during September Work in process, ending inventory (September 30) 2,780 2,600 500 100% 30% $572,680 $272,310 Degree of completion of ending work in process Total costs added during September Normal spoilage as a percentage of good units Degree of completion of normal spoilage Degree of completion of abnormal spoilage 15% 100% 100% 100% 100%Explanation / Answer
Solution:
Weighted Average (Average Cost) Method
Physical Units Count
Under this method the percentage completion done in the Beginning Inventory is ignored while calculating the equivalent completed units during the current period. Beginning Inventory Units are treated as fresh units introduced for production.
Cost Accounted for:
- The cost of opening work-in-progress and cost of the current period are aggregated and the aggregate cost is divided by output in terms of completed equivalent units.
- The units of Beginning Inventory of WIP and their cost are taken in full under this method
Ending Inventory
The Ending Inventory of WIP is valued at total cost i.e. Cost added during the month/period and Cost of Beginning WIP.
First of all we need to calculate the statement of physical unit
Statement of Physical Units
Input
Units
Output
Units
Work in process, beginning
1000
Good units completed and transferred out during September
2600
Started during September
2780
Normal Spoilage (Good Units 2600*15%)
390
Ending Work In Process, Sept.30
500
Abnormal Spoilage (3780 - 2600-390-500)
290
Total
3780
3780
Part 1 --- Calculation of Equivalent Unit of Production (EUP)
Physical Units
Equivalent Unit of Production for
Direct Materials
Conversion
Completed and Transferred Out
(100% Complete in all respect)
2,600
2,600
2,600
Normal Spoilage
390
0
0
Ending Work In Process, Sept.30
(100% complete as to direct materials cost and 30% complete as to conversion costs)
500
500
(500*100%)
150
(500*30%)
Abnormal Spoilage (100% complete in all respect)
290
290
290
Total
3,780
3,390
3,040
Output totals
7,560
6,780
6,080
Note -- Normal Spoilage is absorbed by the good units and realizable value from sale of normal spoilage unit is reduced from the costs.
Note – Abnormal Spoilage is the spoilage over and above normal spoilage. The cost of Abnormal Spoilage is calculated as the good units and the cost is transferred to Profit and Loss Account.
Part 2 -- the total costs to account for
First of all we need to calculate the Cost per Equivalent unit of production
Direct Materials
Conversion
Total
Cost of Beginning Inventory
$160,640
$15,810
$176,450
Cost added during the period into production
$572,680
$272,310
$844,990
Total Cost
$733,320
$288,120
$1,021,440
Equivalent Units of Production (As per part a)
3,390
3,040
Cost per Equivalent Unit of Production
$216.32
$94.78
Allocation of direct materials and conversion costs to output
Units
Direct Materials
Conversion
Total
Completed and Transferred Out
(100% Complete in all respect)
2,600
$562,432
(EUP 2600*216.32)
$246,428
(EUP 2600*94.78)
$808,860
Normal Spoilage
390
$0
$0
$0
Abnormal Spoilage
290
$62,733
(EUP 290*216.32)
$27,486
(EUP 290*94.78)
$90,219
Ending Work In Process
500
$108,160
(EUP 500*216.32)
$14,217
(EUP 150*94.78)
$122,377
Total
3,780
$733,325
$288,131
$1,021,456
Note – Difference in total cost is due to rounding off to 2 decimal places
Statement of Physical Units
Input
Units
Output
Units
Work in process, beginning
1000
Good units completed and transferred out during September
2600
Started during September
2780
Normal Spoilage (Good Units 2600*15%)
390
Ending Work In Process, Sept.30
500
Abnormal Spoilage (3780 - 2600-390-500)
290
Total
3780
3780