Wisconsin Wire (WW) has implemented a just-in-time inventory system for the production of its insulated wire. Inventories of raw material and work in process are so small that WW uses a Raw and In-Process account. In addition, almost all labor operations are automated, and WW has chosen to cost products using standards for direct material and conversion costs. The following production standards are applicable at the beginning of 2010 for one roll of insulated wire:

Direct material (100 yards × $2.00) ....$200

Conversion (4 machine hours × $35) ..... 140

Total cost ...............$340

The conversion cost of $35 per machine hour was estimated on the basis of 500,000 machine hours for the year and $17,500,000 of conversion costs. The following activities took place during 2010:

1. Raw material purchased and placed into production totaled 12,452,000 yards. All except 8,000 yards were purchased at the standard price of $2.00 per yard. The other 8,000 yards were purchased at a cost of $2.06 per yard; the higher price was due to the placement of a rush order. The order was approved in advance by management.

All purchases are on account.

2. From January 1 to February 28, WW manufactured 20,800 rolls of insulated wire.

Conversion costs incurred to date totaled $3,000,000. Of this amount, $600,000 was for depreciation, $2,200,000 was paid in cash, and $200,000 was on account.

3. Conversion costs are applied to the Raw and In-Process account from January 1 to February 28 on the basis of the annual standard.

4. The Engineering Department issued a change order (ECO) to the operations flow document effective March 1, 2010. The change decreased the machine time to manufacture one roll of wire by 5 minutes per roll. However, the standard raised the amount of direct material to 100.4 yards per roll. The Accounting Department requires that the annual standard be continued for costing the Raw and In-Process Inventory for the remainder of 2010. The effects of ECOs should be shown in two accounts: Material Quantity ECO Variance and Machine Hours ECO Variance.

5. Total production for the remainder of 2010 was 103,200 rolls of wire. Total conversion costs for the remaining 10 months of 2010 were $14,442,000. Of this amount, $4,000,000 was depreciation, $9,325,000 was paid in cash, and $1,117,000 was on account.

6. The standard amount of conversion cost is applied to the Raw and In-Process Inventory for the remainder of the year.

a. Prepare entries for items 1, 2, 3, 5, and 6.

b. Determine the increase in material cost due to the ECO related to direct material.

c. Prepare a journal entry to adjust the Raw and In-Process Inventory account for the ECO cost found in (b).

d. Determine the reduction in conversion cost due to the ECO related to machine time.

e. Prepare a journal entry to reclassify the actual conversion costs by the savings found in (d).

f. Making the entry in (e) raises conversion costs to what they would have been if the ECO related to machine time had not been made. Are conversion costs under-or-overapplied and by what amount?

g. Assume that the reduction in machine time could not have been made without the corresponding increase in material usage. Is the net effect of these ECOs cost beneficial? Why?