DELAWARE COMPANY ...... produces yarn made from imported wool. It is done in three processes: processing, spinning and finishing. Raw wool is processed, spun, and finished before being shipped out to knitting and weaving companies. In the processing department, material is added in the beginning of processing, and conversion costs are added evenly throughout processing. The company uses normal costing to apply overhead to production. In the Processing Department (the first department), they began the month of August with 10,000 units in process which were 70 percent complete as to conversion (labor and overhead). It started 70,000 units into production during the month of August of which 20,000 remained in ending Work in Process inventory which were 40 percent complete as to conversion costs. The cost data for the Production Department is as follows: MAT'L CONV TOTAL BWIP $10,000 $3,500 $13,500 CURRENT ADDED 126,000 30,500 156,500 TOTAL COSTS $136,000 $34,000 $170,000

Required 1. Answer the following questions: a) What is process costing? What are the typical characteristics of a company that should use a process costing system? b) What is meant by the term continuous processing? Give an example. c) What are the primary differences between job costing and process costing? d) What is an equivalent unit? Why is it necessary in process costing? Why dont we use equivalent units in job costing? Why not just physical units? e) Why is it necessary to compute separate per-unit costs for materials and conversion costs? 2. Prepare a production cost report for the month of August using the FIFO method, as follows: a) Reconcile the physical units (units to account for and units accounted for). b) Why do you think its important for a business to reconcile the physical units in (a) above if were going to do the rest with equivalent units? c) Determine TOTAL costs to account for. d) Which costs will be traced? Which costs will be the blob(s) which will be allocated and form the cost pool(s)? e) Compute the allocation base the equivalent units of production for both materials and conversion f) Compute the allocation rate the cost per equivalent unit for both materials and conversion g) Determine the cost of goods transferred and ending work-in-process inventory 3. Make the appropriate journal entries for the following events: a) Record raw materials used b) Record conversion costs incurred (assume $4,500 in direct labor and $26,000 of overhead). c) Record cost of goods completed and transferred. 4. In the case above, how would the cost per unit be different if beginning WIP inventory for the month was only 50% complete, instead of 70%?