Problem C Shine Company uses a process cost system to account for the costs incurred in making
its single product, a hair conditioner. This product is processed in Department A and then in
Department B. Materials are added in both departments. Production for May was as follows:
| Department A | Department B | |
| Units started or transferred in | 200,000 | 160,000 |
| Units completed and transferred out | 160,000 | 120,000 |
| Stage of completion of May 31 inventory: | ||
| Materials | 100% | 80% |
| Conversion | 50% | 40% |
| Costs incurred this month: | ||
| Direct materials costs | $200,000 | $304,000 |
| Conversion costs | $540,000 | $272,000 |
There was no May 1 inventory in either department.
1. Prepare the production cost report for Department A in May.
2. Prepare the production cost report for Department B in May.
Shine Company, a hair conditioner manufacturer, employs a process cost system to track costs in its production process. This system involves two departments, Department A and Department B, through which the product passes before completion. The company’s May production data and costs incurred provide the basis for preparing production cost reports for both departments.
Production Cost Report for Department A: Department A is the initial stage of production, where 200,000 units were started or transferred in during May. Out of these, 160,000 units were completed and transferred to Department B, while 40,000 units remained in process at the end of the month. The May 31 inventory in Department A was 100% complete for materials and 50% complete for conversion.
To determine the equivalent units for materials and conversion in Department A, we need to account for both completed units and partially completed units in the ending inventory.
Equivalent Units for Materials: Completed units: 160,000 units Ending inventory: 40,000 units × 100% = 40,000 equivalent units Total equivalent units for materials: 160,000 + 40,000 = 200,000 equivalent units
Completed units: 160,000 units × 50% = 80,000 equivalent units Ending inventory: 40,000 units × 50% = 20,000 equivalent units Total equivalent units for conversion: 80,000 + 20,000 = 100,000 equivalent units
Cost per Equivalent Unit: Total direct materials costs: $200,000 Total conversion costs: $540,000 Cost per equivalent unit for materials: $200,000 / 200,000 equivalent units = $1 per equivalent unit Cost per equivalent unit for conversion: $540,000 / 100,000 equivalent units = $5.40 per equivalent unit
Cost Allocation: Cost of completed units transferred to Department B: Materials cost: 160,000 units × $1 per equivalent unit = $160,000 Conversion cost: 160,000 units × $5.40 per equivalent unit = $864,000 Total cost transferred: $160,000 + $864,000 = $1,024,000
Materials cost: 40,000 equivalent units × $1 per equivalent unit = $40,000 Conversion cost: 20,000 equivalent units × $5.40 per equivalent unit = $108,000 Total cost of ending inventory: $40,000 + $108,000 = $148,000
Equivalent Units Calculation: Equivalent Units for Materials: Completed units: 120,000 units Ending inventory: 40,000 units × 80% = 32,000 equivalent units Total equivalent units for materials: 120,000 + 32,000 = 152,000 equivalent units
Equivalent Units for Conversion: Completed units: 120,000 units × 40% = 48,000 equivalent units Ending inventory: 40,000 units × 40% = 16,000 equivalent units Total equivalent units for conversion: 48,000 + 16,000 = 64,000 equivalent units
Cost per Equivalent Unit: Total direct materials costs: $304,000 Total conversion costs: $272,000 Cost per equivalent unit for materials: $304,000 / 152,000 equivalent units = $2 per equivalent unit Cost per equivalent unit for conversion: $272,000 / 64,000 equivalent units = $4.25 per equivalent unit
Cost Allocation: Cost of completed units transferred to finished goods: Materials cost: 120,000 units × $2 per equivalent unit = $240,000 Conversion cost: 120,000 units × $4.25 per equivalent unit = $510,000 Total cost transferred: $240,000 + $510,000 = $750,000
Cost of ending inventory: Materials cost: 32,000 equivalent units × $2 per equivalent unit = $64,000 Conversion cost: 16,000 equivalent units × $4.25 per equivalent unit = $68,000 Total cost of ending inventory: $64,000 + $68,000 = $132,000
The production cost reports for Department A and Department B provide a comprehensive overview of the production process at Shine Company. These reports help the company allocate costs accurately, assess work-in-progress inventory, and make informed decisions to improve efficiency and control production costs. By following this process, Shine Company can effectively manage its operations and continue producing high-quality hair conditioner products.
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