A leather goods company has recently experienced declining profits. Management has decided to investigate the manufacturing operation (and costs) of its leather belts, that are produced in a single continuous process. During the process, the leather strips are sewn, punched, dyed, and then enter a final finishing process where the buckles are added Leather is added at the beginning of the process, buckles added at the 90% stage and conversion costs are added uniformly. The company uses the weighted average method of process costing. The belts are sold for $22.95. Cost data is needed so management can determine if the production process needs modification or if a selling price increase is justified. The cost estimated at the beginning of the year for planning and control was $11.50 per unit. Management has decided to use June cost data for comparison. All months have very similar levels of production but materials costs are subject to market conditions Opening WIP for June consisted of 500 units that were 30% complete as to conversion. In June, materials for 8,000 belts were added to production, and 8,100 belts were completed in the month. Closing WIP was 40% complete as to conversion V Cost data is provided below Opening WIP: Leather Strips Buckles Conversion Costs $1 650 2 500 $4 150 Total Costs added in June: Leather Strips Buckles $41 000 8 100 55 320 $104 420 Conversion Costs Total Required: (a) Prepare a Cost of Production Report for June to determine the cost per unit and the costs assigned to closing WIP and to units completed and transferred out. (10 marks) (b) Comment briefly on the cost of $11.50 management has used for planning and control indicating whether weighted average is the appropriate method to use for their comparison and analysis. (hint: consider the cost of leather in May vs June) (5 marks) (c) Assume now that the company experiences some spoilage because of the dying process. Management believes any spoilage is unacceptable. If spoilage is detected during inspection at the end of the process, and 50 belts were found to be spoiled in June, how would this spoilage be treated in the accounting process? Would it affect the calculations and allocations prepared in requirement (a) above? Explain the treatment briefly and provide the journal to transfer costs out of WIP for this scenario. (5 marks) A leather goods company has recently experienced declining profits. Management has decided to investigate the manufacturing operation (and costs) of its leather belts, that are produced in a single continuous process. During the process, the leather strips are sewn, punched, dyed, and then enter a final finishing process where the buckles are added Leather is added at the beginning of the process, buckles added at the 90% stage and conversion costs are added uniformly. The company uses the weighted average method of process costing. The belts are sold for $22.95. Cost data is needed so management can determine if the production process needs modification or if a selling price increase is justified. The cost estimated at the beginning of the year for planning and control was $11.50 per unit. Management has decided to use June cost data for comparison. All months have very similar levels of production but materials costs are subject to market conditions Opening WIP for June consisted of 500 units that were 30% complete as to conversion. In June, materials for 8,000 belts were added to production, and 8,100 belts were completed in the month. Closing WIP was 40% complete as to conversion V Cost data is provided below Opening WIP: Leather Strips Buckles Conversion Costs $1 650 2 500 $4 150 Total Costs added in June: Leather Strips Buckles $41 000 8 100 55 320 $104 420 Conversion Costs Total Required: (a) Prepare a Cost of Production Report for June to determine the cost per unit and the costs assigned to closing WIP and to units completed and transferred out. (10 marks) (b) Comment briefly on the cost of $11.50 management has used for planning and control indicating whether weighted average is the appropriate method to use for their comparison and analysis. (hint: consider the cost of leather in May vs June) (5 marks) (c) Assume now that the company experiences some spoilage because of the dying process. Management believes any spoilage is unacceptable. If spoilage is detected during inspection at the end of the process, and 50 belts were found to be spoiled in June, how would this spoilage be treated in the accounting process? Would it affect the calculations and allocations prepared in requirement (a) above? Explain the treatment briefly and provide the journal to transfer costs out of WIP for this scenario
