Hello Guys!
I have a question about this Becker's MCQ- CPA-03641.
I know that conversion costs are equal to indirect labor + manufacturing overhead.
In this problem, direct labor was added to factory overhead to arrive to the conversion costs.
Is that correct?
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May …………..100,000
Completed production during May …………….92,000
Ending work-in-process inventory, May 31 24,000
The beginning inventory was 60% complete for materials and 20% complete for conversion costs. The ending inventory was 90% complete for materials and 40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
• Costs incurred during May are: materials used, $468,000; DIRECT LABOR, $182,880; AND FACTORY OVERHEAD, $391,160.
Using the FIFO method, the equivalent unit conversion cost for May is:
a. $5.83
b. $6.00
c. $5.65
d. $6.20
Explanation
Choice “a” is correct. $5.83 equivalent unit conversion cost using the FIFO method.
Direct labor costs incurred $182,880
Factory overhead incurred 391,160
Conversion costs incurred $574,040
Equivalent units…………… ÷ 98,400 [Note A]
Equivalent unit cost of materials $5.83
Note A:
Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of units on hand at the beginning of the period, the units started and completed during the period, and the units partially completed at the end of the period. Applying these principles to the given fact pattern, the total equivalent units of production for conversion costs is determined as follows:
Equivalent units for the first quarter:
Work in process, beginning
(16,000 units × 80% to complete) ……………..12,800
Units started and completed:
Units completed and transferred out 92,000
Units in beginning inventory ……………(16,000) 76,000
Work in process, ending
(24,000 units × 40% complete) ……………………..9,600
Equivalent units of production ……………………98,400
Choices “c”, “b”, and “d” are incorrect, per the above explanation.
.