FIFO Method, Physical Flow, Equivalent Units, Unit Costs, Cost Assignment
Swasey Fabrication, Inc., manufactures frames for bicycles. Each frame passes through three processes: Cutting, Welding, and Painting. In September, the Cutting Department of the Tulsa, Oklahoma, plant reported the following data:
| Activity | Rate | Actual Driver Usage | ||
|---|---|---|---|---|
| Inspection | $150 per inspection hour | 4,000 inspection hours | ||
| Maintenance | $750 per maintenance hour | 1,600 maintenance hours | ||
| Receiving | $300 per receiving order | 2,000 receiving orders |
Assume that the FIFO method is used.
3. Compute unit cost. Round unit costs & final answer to three decimal places.
4. Calculate the cost of goods transferred to Welding at the end of the month. In your calculations, round unit costs to three decimal places. Round your final answer to the nearest dollar.
Calculate the cost of ending inventory. In your calculations, round unit costs to three decimal places. Round your final answer to the nearest dollar.
Swasey Fabrication, Inc., a bicycle frame manufacturer in Tulsa, Oklahoma, employs cost accounting to manage its production processes efficiently. In this analysis, we will use the FIFO (First-In, First-Out) method to calculate unit costs, the cost of goods transferred to the Welding department, and the cost of ending inventory for the Cutting department in September. These calculations will provide valuable insights into the company’s cost management and performance.
To calculate the unit cost, we will first consider the costs incurred during the month. The FIFO method assumes that the costs associated with the beginning work in process are transferred out first. The total costs added during the month are as follows:
Direct Materials: $2,565,000
Direct Labor: $3,471,050
Applied Overhead: Determined using activity-based costing (ABC)
ABC assigns overhead based on the actual driver usage:
Inspection: $150 per inspection hour, with 4,000 inspection hours
Maintenance: $750 per maintenance hour, with 1,600 maintenance hours
Receiving: $300 per receiving order, with 2,000 receiving orders
Total Overhead = (150 * 4,000) + (750 * 1,600) + (300 * 2,000) = $600,000 + $1,200,000 + $600,000 = $2,400,000
Now, we can calculate the total costs for the month:
Total Costs = Direct Materials + Direct Labor + Applied Overhead Total Costs = $2,565,000 + $3,471,050 + $2,400,000 = $8,436,050
To determine the equivalent units, we’ll consider both the units in the beginning work in process and those started and completed during the month. The equivalent units are calculated as follows:
Equivalent Units = (Beginning Work in Process Units × Percentage Complete) + Units Started and Completed Equivalent Units = (40,000 × 20%) + 122,000 = 8,000 + 122,000 = 130,000
Unit Cost = Total Costs / Equivalent Units Unit Cost = $8,436,050 / 130,000 = $64.892 (rounded to three decimal places)
To calculate the cost of goods transferred to Welding, we’ll use the FIFO method. All 122,000 units transferred are assumed to be from the beginning work in process (40,000 units) and the current month’s production (82,000 units).
Cost of Goods Transferred = (Beginning Work in Process Units + Units Started and Completed) × Unit Cost Cost of Goods Transferred = (40,000 + 82,000) × $64.892 ≈ $8,678,848
The ending inventory consists of 14,000 units that are 25% complete. Using the FIFO method, we assume that these units are from the beginning work in process.
Cost of Ending Inventory = Ending Work in Process Units × Unit Cost Cost of Ending Inventory = 14,000 × $64.892 ≈ $908,488
In conclusion, using the FIFO method, we have calculated the unit cost, the cost of goods transferred to the Welding department, and the cost of ending inventory for the Cutting department in September. The unit cost is approximately $64.892, the cost of goods transferred to Welding is approximately $8,678,848, and the cost of ending inventory is approximately $908,488. These calculations provide valuable insights for Swasey Fabrication, Inc. to make informed decisions regarding cost management and performance evaluation in its manufacturing processes.
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