5) Although the production manager said that the units in WIP at the end of May were 80% of the way through the process, the controller knows that figure is somewhat subjective. She has talked to the assistant production manager, who believes the units were only about 60% complete. She wants you to run your spreadsheet using 60% as the percent of completion to see what impact the estimate has on A) total cost per unit, and B) the company's income statement for the month.

IMPORTANT: BEFORE doing the analysis in Step 5, copy your May production cost report worksheet to a new tab and rename it "What-if 60%?" To do this, right click on the May tab at the bottom of the screen and choose "move or copy" then check the box, "make a copy". Then right click on the new copied spreadsheet and choose "rename".

5A) Calculate the total cost per unit, using 60% as the percentage of completion.

5B) Complete the company's income statement for the month, using 60% as the percentage of completion.

5C) Calculate the difference in operating income between the two possible percentages of completion (80% vs 60%)

5D) Briefly explain WHY the difference in income occurs.

5E) In general, if managers want to inflate earnings in a particular period, what could they do?

IF Ena FG 5A) Total cost per unit DM DL April conversion cost per equivalent unit April DM cost per equivalent unit Total cost per unit $ $ 5.25 3.18 0.60 1.50 10.53 5B) Henkel Industries Income Statement For the Month Ending May 31 Per unit Total 10.53 Gross Profit 5C) Difference in operating income: 60% is used? 5D) Briefly explain the reason for the difference. 5E) If managers want to inflate earnings in a particular period, what can they do? Department Data Production Cost Report: Blending Department - MAY Physical Units DM EU Conversion EU FLOW OF UNITS Units to account for: Beginning work in process Started in production Total units to account for Information about units: Units in Beginning WIP Started during month Units in Ending WIP 25,000 220,000 245,000 25,000 220,000 30,000 Percentage of completion: Direct materials Conversion 100% 60% Units accounted for: Completed and transferred out Ending WIP Total units accounted for 215,000 30,000 245,000 215,000 30,000 245,000 215,000 18,000 233,000 Costs in Beginning WIP DM in beginning WIP Conversion costs in beginning WIP 132500 Total DM Conversion 78300 FLOW OF COSTS Costs to account for: Beginning work in process Costs added during month Total costs to account for 210800 132500 1153750 1286250 1816350 2027150 78300 662600 740900 1153750 Cost information for the current month: DM traced to Dept during the month DL traced to Dept during the month MOH allocated to dept during the month 45000 617600 Cost per equivalent unit 8.43 5.25 3.18 Costs accounted for: Completed and transferred out Ending WIP Total costs accounted for 1812413.09 214736.91 2027150.00 1128750.00 157500.00 1286250.00 683663.09 57236.91 740900.00 $ 45,000 WIP-Blending Wages Payable (to record DL traced to the Blending Dept) $ 45,000 $ 1,153,750 WIP-Blending Raw materials inventory (to record DM traced to the Blending Dept) $ 1,153,750 $ 617,600 WIP-Blending MOH (to record MOH allocated to the Blending Dept) $ 617,600 $ 750,000 WIP- Forming Wages Payable (to record DL traced to the Forming Dept) $ 750,000 $ 45,000 WIP-Forming Raw materials inventory (to record DM traced to the Forming Dept) $ 45,000 $ 617,600 WIP-Forming MOH-Forming (to record MOH allocated to the Forming Dept) $ 617,600 $ 275,000 Salary Expense Wages Payable (to record salaries and wages of selling, general and admin. staff) $ 275,000 $ 25,000 Rent Expense Rent Payable (to record monthly rent) $ 25,000 $ 30,000 Insurance Expense Prepaid Insurance (to record Insurance on selling, general, and admin. Building) $ 30,000 $ 3,600,000 Accounts Receivable Sales Revenue (to record the sale of 180,000 units at a price of $20 per unit) $ 3,600,000 $ 10,000 Utilities Expense Utilities Payable (to record Insurance on selling, general, and admin. Building) $ 10,000 $ 120,000 Advertising expense Accounts Payable (to record advertising expenses) $ 120,000 IF Ena FG 5A) Total cost per unit DM DL April conversion cost per equivalent unit April DM cost per equivalent unit Total cost per unit $ $ 5.25 3.18 0.60 1.50 10.53 5B) Henkel Industries Income Statement For the Month Ending May 31 Per unit Total 10.53 Gross Profit 5C) Difference in operating income: 60% is used? 5D) Briefly explain the reason for the difference. 5E) If managers want to inflate earnings in a particular period, what can they do? Department Data Production Cost Report: Blending Department - MAY Physical Units DM EU Conversion EU FLOW OF UNITS Units to account for: Beginning work in process Started in production Total units to account for Information about units: Units in Beginning WIP Started during month Units in Ending WIP 25,000 220,000 245,000 25,000 220,000 30,000 Percentage of completion: Direct materials Conversion 100% 60% Units accounted for: Completed and transferred out Ending WIP Total units accounted for 215,000 30,000 245,000 215,000 30,000 245,000 215,000 18,000 233,000 Costs in Beginning WIP DM in beginning WIP Conversion costs in beginning WIP 132500 Total DM Conversion 78300 FLOW OF COSTS Costs to account for: Beginning work in process Costs added during month Total costs to account for 210800 132500 1153750 1286250 1816350 2027150 78300 662600 740900 1153750 Cost information for the current month: DM traced to Dept during the month DL traced to Dept during the month MOH allocated to dept during the month 45000 617600 Cost per equivalent unit 8.43 5.25 3.18 Costs accounted for: Completed and transferred out Ending WIP Total costs accounted for 1812413.09 214736.91 2027150.00 1128750.00 157500.00 1286250.00 683663.09 57236.91 740900.00 $ 45,000 WIP-Blending Wages Payable (to record DL traced to the Blending Dept) $ 45,000 $ 1,153,750 WIP-Blending Raw materials inventory (to record DM traced to the Blending Dept) $ 1,153,750 $ 617,600 WIP-Blending MOH (to record MOH allocated to the Blending Dept) $ 617,600 $ 750,000 WIP- Forming Wages Payable (to record DL traced to the Forming Dept) $ 750,000 $ 45,000 WIP-Forming Raw materials inventory (to record DM traced to the Forming Dept) $ 45,000 $ 617,600 WIP-Forming MOH-Forming (to record MOH allocated to the Forming Dept) $ 617,600 $ 275,000 Salary Expense Wages Payable (to record salaries and wages of selling, general and admin. staff) $ 275,000 $ 25,000 Rent Expense Rent Payable (to record monthly rent) $ 25,000 $ 30,000 Insurance Expense Prepaid Insurance (to record Insurance on selling, general, and admin. Building) $ 30,000 $ 3,600,000 Accounts Receivable Sales Revenue (to record the sale of 180,000 units at a price of $20 per unit) $ 3,600,000 $ 10,000 Utilities Expense Utilities Payable (to record Insurance on selling, general, and admin. Building) $ 10,000 $ 120,000 Advertising expense Accounts Payable (to record advertising expenses) $ 120,000