Year 2

The ending inventories from Year 1 would be carried forward to Year 2. Assume that due to further reduction in the expected demand, S&S revises the budgeted production from 500 units in Year 1 to 200 units in Year 2 but its budgeted costs (1,000) of fixed overhead would remain the same. The predetermined fixed overhead application rate would now be 5 per unit (1,000 / 200 units), a 150% increase the rate of 2 per unit in Year 1.

The ending inventory of Year 1 in the front-end process will become the beginning inventory of Year 2. Assume that 200 units were added to production, i.e., a total of 400 units were processed. Of these, assume that 250 were transferred out to the back-end process. The back- end process started with 100 units from the beginning inventory (brought forward from Year 1) and received 250 units in Year 2 from the front-end inventory. Of the 350 units available for sale, 150 units are sold to customers, and 200 units will remain in the finished goods inventory of the back-end process at the end of Year 2.

How one assigns the cost to inventory in the two processes will depend on the cost flow assumption adopted. As noted in Section 1 (Inventory Valuation for Financial Reporting) of the case, Toshiba uses the Average Cost Method to determine the cost of its inventory. Using the average cost method, and assuming that the fixed overhead application rate was revised for both processes9, the costs should have been assigned as shown in Table 5 below:

9 Note how the new per unit cost is calculated under the average cost method when new production is added to beginning inventory.

Item

Units

Amount

Proportion of total amount

Allocation of 300 variance

Total cost including variance

Per Unit Cost

Amounts reported in

(a)

(b)

(c) =(b) /700

(d)=300 X (c)

(e) = (b) + (d)

(f) = (e)/(a)

Work-in-progress inventory, front-end process

200

400.00

0.5714

171.43

571.43

2.86

Balance sheet

Cost of Finished goods sold to customers

200

200.00

0.2857

85.71

285.71

1.43

Income St.

Finished goods inventory, back-end process

100

100.00

0.1429

42.86

142.86

1.43

Balance sheet

Total 500 700.00 1.0000 300.00 1,000.00

8

Table 5: Cost calculations -Year 2- Overhead rate revised for both processes

Front-end process

Back-end process

Units

Amount

Per unit

Units

Amount

Per unit

To account for:

To account for:

Beginning WIP inventory

200

400.00

2.00

Beginning FG inventory

100

200.00

2.00

Production

200

1,000.00

5.00

Units transferred-in from front-end process

250

875.00

3.50

Total (Note 1) 400 1,400.00 3.50

Total (Note 2) 350 1,075.00 3.07

Accounted for:

Accounted for:

Units transferred out to back-end process 250 875.00 3.50

Cost of goods sold 150 460.71 3.07

Work-in-progress inventory, front-end process 150 525.00 3.50

Finished goods inventory, back-end process 200 614.29 3.07

Total 400 1,400.00

Total 350 1,075.00

Note 1: Per unit cost = 1,400 / 400 = 3.50

Note 2: Per unit cost = 1,075 / 350 = 3.07

S&S Company's accounting for costs was, however, different. As mentioned earlier, it revised the overhead allocation rate for the front-end process (from 2 per unit to 5 per unit) but continued to use the original predetermined rate (of 1 per unit) for assigning fixed overhead costs in the back-end process. This approach results in significantly different costs being assigned to the inventory accounts and the cost of goods sold. The average cost calculations per S&S Company's cost accounting approach are illustrated in Table 610 below:

Table 6: Cost calculations -Year 2- Overhead rate revised only for the front-end process

Front-end process

Back-end process

Units

Amount

Per unit

Units

Amount

Per unit

To account for:

To account for:

Beginning WIP inventory

200

571.43

2.86

Beginning FG inventory

100

142.86

1.43

Production

200

1,000.00

5.00

Units transferred-in from front-end process

250

982.14

3.93

Total (Note 3) 400 1,571.43 3.93

Total (Note 4) 350 1,125.00 3.21

Accounted for:

Accounted for:

Units transferred out to back-end process

250

982.14

3.93

Cost of goods sold

150

150.00

1.00

Work-in-progress inventory, front-end process

150

589.29

3.93

Finished goods inventory, back-end process

200

200.00

1.00

Unallocated cost variance

775.00

Total 400 1,571.43

Total 350 1,125.00

Note 3: Per unit cost = 1,571.43 / 400 = 3.93

Note 4: Per unit cost = 1,125 / 350 = 3.2143

S&S Company's approach created a cost variance in Year 2 resulting from the difference between the total cost of goods available for sale (1,125), and the total costs assigned to finished goods inventory and cost of goods sold (350). S&S Company allocated this variance of 775 (1,125 - 350) to (a) work-in-progress inventory of the front-end process, (b) cost of goods sold to customers, and (c) finished goods inventory using the method demonstrated earlier (in Table 4).

Requirement 2

a. For Year 2, using S&S Company's allocation method (overhead allocation rate revised only for the front-end process), calculate the year-end balances (total and per unit) for the work-in-progress inventory of the front-end process, cost of goods sold to customers, and finished goods inventory of the back-end process. Present your answer in the format below:

Item

Units

Amount

Proportion of total amount

Allocation of 775 variance

Total cost including variance

Per Unit Cost

Amounts reported in

Work-in-progress inventory, front-end process

Cost of Finished goods sold to customers

Finished goods inventory, back-end process

Total