Question 3 has two parts, Parts A and B. Both are compulsory.

Part A Weighted Average

Cool Fizzy Ltds division A produces soft drinks in standard sizes. Set out below is information for the month of January:

Work-in-process inventory, 1 January = 4,000 units

Direct materials: 100% complete = $6,000

Conversion: 50% complete = $12,000

Units started during January = 8,000 units Units completed and transferred out during January = 8000 units

Work-in-process inventory, 31 January

Direct materials: 100% complete

Conversion costs: 50% complete

Costs incurred during January

Direct materials = $ 12,000

Conversion = $128,000

Required: Show ALL your workings. Using the weighted average method complete the following:

(i) Calculate equivalent units of direct materials and conversion for the month of January.

(4 marks)

(ii) Calculate direct material cost and conversion cost per equivalent unit for the month of January. (8 marks)

(iii) Prepare an analysis of total costs showing the cost of goods completed and transferred out during January and cost of WIP inventory on 31 January, as per Exhibit 5.4 (p.192) of the textbook. (4 marks)

Part B FIFO

Cool Fizzy Ltds production manager Phil Palm has been under pressure from senior management to improve divisional profitability (which is also incidentally linked to his management performance bonus). Phil is required to attend an upcoming meeting to explain the average performance. He approaches the management accountant Rachel Murray with thefollowing request: Rachel, I am under pressure to lift divisional performance. This is going to happen as the summer months approach, but I need a little time. I want you to do me a favour. Could you prepare the January monthlies using FIFO method instead of the weighted average method currently used? I know that it is just as acceptable a method, and the lift in profit itshows will give me the time I need to carry over to the profitable summer season.

Required: Show ALL your workings. Using the FIFO method complete the following.

1. (i) Calculate equivalent units of direct materials and conversion for the month of January.

   (4 marks)

2. (ii) Calculate direct material cost and conversion cost per equivalent unit for the month of January. (4 marks)

3. (iii) Prepare an analysis of total costs showing the cost of goods completed and transferred out during January and cost of WIP inventory on 31 January, as per Exhibit 5.9 (p.195) of the textbook. (10 marks)

4. (iv) Explain clearly the difference in the dollar value of the cost of goods completed and transferred out obtained above using FIFO with the dollar value calculated using the weighted average in Part A (iii). (3 marks)

5. (v) If you were Rachel, would you agree to Phils request? Clearly explain your reasons for either agreeing or disagreeing. (Hint: Refer to the Appendix to Chapter 1 of the textbook). (6 marks)