APPLY THE CONCEPTS: Determine the Costs for Work in Process and Finished Goods

In a process cost system, the work in process at the end of the period is the sum of the costs remaining in each department account at the end of the period.

In the Doghouse produces a wooden doghouse with a shingled roof. Assume that there are three stages of production at In the Doghouse. The company produces the doghouses in "batches", with one batch equaling ten units. The costs for a batch of ten units at each process are shown in the following table.

Complete the table given below:

Process		A			B			C
Materials		$250			$200			$80
Labor		360			420			300
Overhead		108			126			90
	Process Total	$			$			$

Determine the following:

Costs transferred from process B to process C: $ (All production in processes A and B has been completed.)

Costs transferred from process C to Finished Goods: $ (All production in processes A, B and C has been completed.)

Equivalent Units and Unit Costs

Why do we need to know equivalent units? Recall that the unit cost can be determined by dividing the Selectlabormaterialsoverheadtotal costsCorrect 1 of Item 3 by the Selectnumber of processesnumber of unitsselling priceCorrect 2 of Item 3. If all units are complete, then the unit cost is accurate. But when some of the units are not yet complete, this formula would not determine an accurate cost per unit (unit cost). It would be distorted because the units used as the SelectdenominatornumeratorCorrect 3 of Item 3 are not 100% completed units.

Equivalent units corrects that distortion. A unit that is transferred to Finished Goods is complete; it is equivalent to one whole unit. Therefore, it is one equivalent unit. But a unit in ending Work in Process (EWIP) is not whole, therefore it is not one equivalent unit.

The total number of equivalent units must be determined before the unit cost can be calculated for the period. The first step is to determine the percentage complete for the EWIP. That percentage is applied to the number of units in ending inventory to determine the equivalent units in EWIP. Add that to the number of units completed during the period (if any) to determine equivalent units for the period. Next, recall that product costs (also called manufacturing costs) are direct materials, direct labor and overhead. Product costs divided by the number of units produced determines cost for each equivalent unit, which is unit cost. The formulas for these steps are illustrated as follows:

Step 1: Calculate equivalent units.

Units Completed

+ Units in EWIP X Percent Complete

Equivalent Units

Step 2: Calculate the per unit cost.

Product Costs	=	Unit Cost
Equivalent Units Produced

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Solution

APPLY THE CONCEPTS: Calculate equivalent units of production

Recall that In the Doghouse has three processes. The frame, floor and interior walls of a batch of doghouses is built in process A at In the Doghouse. It is estimated that process A completes 35% of the production process. In process B, the insulation, exterior walls and roof base are added. It is estimated that process B completes the next 40% of the production process. The shingles are added and the exterior is stained in process C, which completes the production process.

Consider each of the following scenarios independently.

Scenario 1: Assume that two batches of doghouses were started and completed during the current month. The total cost incurred for the completed units is $3,868. Four more batches were also placed into production during the month. These four batches were completed through process A for a cost of $287.20. Determine the equivalent units for the current month and the unit cost for the current month. (Don't forget that one batch is equal to ten doghouses.)

Step 1: Calculate equivalent units.

Units Completed
+ Units in EWIP X Percent Complete
Equivalent Units

Step 2: Calculate the per unit cost. (Round to the nearest cent.)

$	=	$

Scenario 2: Assume that three batches of doghouses were started and completed during the current month for a total cost of $5,802. Two more batches were also placed into production. These two batches were completed through process A and process B. The cost for those two batches is $2,928. Determine the equivalent units for the current month and the unit cost for the current month. (Don't forget that one batch is equal to ten doghouses.)

Step 1: Calculate equivalent units.

Units Completed
+ Units in EWIP X Percent Complete
Equivalent Units

Step 2: Calculate the per unit cost. (Round to the nearest cent.)

$	=	$

Scenario 3: Assume that one batch of doghouses was started and completed during the current month. Use the cost table for each process determined back in the first section of this problem to determine the cost of the completed batch. Four more batches were also placed into production during the month. The four batches were completed through process A and process B as well as part of process C. At the end of the month, it is estimated that the four batches in ending Work in Process are 90% complete. The total costs for these four batches is $6,984, which includes the costs transferred from process A and process B and the costs incurred in process C as of the end of the month. Determine the equivalent units for the current month and the unit cost for the current month. (Don't forget that costs listed in the table are for one batch of ten doghouses.)

Step 1: Calculate equivalent units.

Units Completed
+ Units in EWIP X Percent Complete
Equivalent Units

Step 2: Calculate the per unit cost. (Round to the nearest cent.)

$	=	$

Estimating the Degree of Completion

The estimate of the percentage complete must be done in good faith, that is, the estimate requires ethical behavior. Consider the impact if the estimate for the percentage complete was too high.

What impact would that have on equivalent units? SelectEquivalent units would not be affected.The number of equivalent units would be understated.The number of equivalent units would be overstated.Correct 1 of Item 5

How would that impact unit cost? SelectUnit cost would be understated.Unit cost would be overstated.Unit cost would not be affected.Correct 2 of Item 5

What is the effect of unit costs being misstated? Select "Yes" to all that apply.

1. Product price would not be at its optimal amount.	SelectYesNoCorrect 3 of Item 5
2. Inventory errors would be reported on the balance sheet.	SelectYesNoCorrect 4 of Item 5
3. Information used by managers for decision making would be inaccurate.	SelectYesNoCorrect 5 of Item 5
4. Break-even calculations would be distorted.	SelectYesNoCorrect 6 of Item 5
5. Cost of goods sold and net income would be misrepresented.	SelectYesNo