QUESTION 2 - Process costing (14 marks)

Kostadin Chemicals makes plant fertilizers to sell to nurseries across the country. It uses a process costing system to cost the production of its fertilizer. The fertilizer which consists of all dry ingredients is made in two departments: Mixing and Packaging. In the Mixing Department direct ingredients are added when 20% of the production has taken place. The first 20% of the process involves setting up the measuring, pouring and mixing equipment. Conversion costs are added evenly throughout the process.

The cost accountant is completing the production report for the month of April. At the beginning of the month there was 4,400 kilograms of fertilizer ingredients that had 25% of the work completed in March. 24,000 kilograms of fertilizer ingredients were added to production in the month of April. During the month, 23,000 kilograms of fertilizer were transferred out to the Packaging Department leaving 5,400 kilograms of fertilizer ingredients in ending inventory. At the end of the month the production team had just completed the setup and started a new batch to be completed in May. As such, the ending inventory was at 30% completion.

The cost accountant must determine how much of the following costs should be transferred to the Packaging Department and how much remains in ending inventory in the Mixing Department at the end of April.

Cost of beginning work-in-process:

Direct fertilizer ingredients$6,116

Conversion costs$1,012

Cost added during April:

Direct fertilizer ingredients$34,800

Conversion costs$21,168

Required:

a.Using the first-in, first-out (FIFO) method determine the assignment of the cost of fertilizer transferred-out to the Packaging Department and ending inventory for the Mixing department for the month of April. Use the form on the next page of this exam. (10 marks)

b.Kostadin has used First in First out costing for the last 15 years. The controller wants to know if it is beneficial to continue using this method instead of the weighted average method. Provide the controller with your recommendation. Include appropriate calculations to back up your recommendation. (4 marks)

STEP 1:

Units to be accounted for:

Quantity Schedule

Production report

Work in process, beginning

Started into production

Total units

Equivalent units

Units accounted for:

Ingredients

Conversion

STEP 2:

Cost to be accounted for:

Total Prod. Costs

Total costs

Ingredients

Conversion

Total cost (a)

Equivalent units of production (b) (Step 1 above)

Cost per equivalent unit (a / b)

STEP 3:

Cost Reconciliation

Equivalent units

Ingredients

Conversion

Total cost of goods completed

Total ending work in process

Total cost