Exercise 8: Process Costing and Spoilage

Nation Lovers PLC produces several items to be used as replacement tools for various

types of machineries. The product costing system for NL which is used as spare part

for construction machineries has a single direct cost category (direct materials) and a

single indirect cost category (conversion costs). All direct materials are added at the

beginning of the process but conversion costs are added evenly during the cycle.

Some units are spoiled as a result of defects only detectable at inspection of finished

units. Normally, the spoiled units are 10% of the finished output of good units.

Summary data for January 20x7 are given below.

Physical Units for January 20x7:

WIP January 1, 20x7.....................................................3,000 units

Direct materials 100% complete

Conversion costs 60% complete

Started during January................................................9,000 units

Good units completed and transferred out......................8, 000 units

WIP inventory, January 31, 20x7....................................3,000 units

Direct materials (100% complete)

Conversion costs (50% complete)

Total Costs for January 20x7:

WIP January 1, 20x7

Direct materials.............................Br.15, 000

Conversion costs............................... 9,000..........Br.24, 000

Direct material costs added in January..................................67, 500

Conversion costs added in January.......................................51,000

Total costs to account for................................................ 142,500

Required: Prepare the Cost of Production Report and journalize the necessary entries

under (a) WA Method & (b) FIFO Method.