[lz221476]

A company employs a process costing system for its two-department manufacturing operation using the first-in-first-out (FIFO) inventory method. When units are completed in department 1, they are transferred to department 2 for completion. Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion. The specific identification method is used to account for lost units.

Generally the number of defective units (that is, those failing inspection) is below the normal tolerance limit of 4% of units inspected. Defective units have minimal value, and the company sells them without any further processing for whatever it can. Generally the amount collected equals, or slightly exceeds, the transportation cost. A summary of the manufacturing activity for department 2, in units for the current month, is presented below.

Physical flow

(output units)

Beginning inventory

(60% complete with respect to conversion)

20,000

Units transferred in from department 1

180,000

Total units to account for

200,000

Units completed in department 2 during the month

170,000

Units found to be defective at inspection

5,000

Ending inventory

(80% complete with respect to conversion)

25,000

Total units accounted for

200,000

The equivalent units for direct materials for the current month would be:

200,000 units.

• 175,000 units.

• 195,000 units.

• 181,500 units.

Right answer is 195,000. My calculation is like this：20,000*0.4+（170,000-20,000）+25,000*0.8=178,000

I didn’t get why the answer is 175,000. Where is the mistake?

[stoleway]

@lz221476

Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion.

NOTE: Direct Materials will not be considered or added if Conversion cost has not reached the 70% threshold.

EUP for DM (FIFO) = Units Completed + Ending WIP x %completed – Begining WIP x %Completed

=170000 + 25000 (EWIP)

=195000

NOTE: I added 100% of the Direct Material Ending WIP since Conversion cost (80%) is equal or greater than the threshold set by the company.

NOTE: I did not include Direct Material Begining WIP in the calculation above because Conversion Cost (60%) is below the threshold set by the company.

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Mass-CPA

[stoleway]

@lz221476

Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion.

NOTE: Direct Materials will not be considered or added if Conversion cost has not reached the 70% threshold.

EUP for DM (FIFO) = Units Completed + Ending WIP x %completed – Begining WIP x %Completed

=170000 + 25000 (EWIP)

=195000

NOTE: I added 100% of the Direct Material Ending WIP since Conversion cost (80%) is equal or greater than the threshold set by the company.

NOTE: I did not include Direct Material Begining WIP in the calculation above because Conversion Cost (60%) is below the threshold set by the company.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[M.O.D.]

@lz

your percents are for conversion, but the problem is asking for direct materials

So you make two percents for each number: C for conversion and M for materials

BI 20000 C 40% M 100%(needed to complete)

Produced 150000 C100% M100%

EI 25000 C80% M 100%

So your answer would be right if the problem were asking for equiv units for conversion instead of DM.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

@lz

your percents are for conversion, but the problem is asking for direct materials

So you make two percents for each number: C for conversion and M for materials

BI 20000 C 40% M 100%(needed to complete)

Produced 150000 C100% M100%

EI 25000 C80% M 100%

So your answer would be right if the problem were asking for equiv units for conversion instead of DM.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[lz221476]

@stoleway

The explanation given by Wiley did include Direct Material Beginning WIP in the calculation. Here is their explanation:

“Units completed

From beginning WIP 20,000

From current production 150,000

Defective units —

Ending WIP 25,000

Equivalent units 195,000″

I just didn't get why they didn't time the percentage.

[lz221476]

@stoleway

The explanation given by Wiley did include Direct Material Beginning WIP in the calculation. Here is their explanation:

“Units completed

From beginning WIP 20,000

From current production 150,000

Defective units —

Ending WIP 25,000

Equivalent units 195,000″

I just didn't get why they didn't time the percentage.

[lz221476]

@M.O.D

Why DM's percentage is different from Conversion?

[lz221476]

@M.O.D

Why DM's percentage is different from Conversion?

[stoleway]

@lz221476

Hmm.. thats weird, I use Gleim and what I have described above is my understanding of the concept and how it should be solved.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

@lz221476

Hmm.. thats weird, I use Gleim and what I have described above is my understanding of the concept and how it should be solved.

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[M.O.D.]

DM = Direct Materials

Conversion= DL + overhead

Let's say you make baseball bats.

You bring in the wood first (100% DM), then shape the wood using labor (DL) and electricity (OH), thus converting the wood into a bat. This conversion process is gradual, or continuous over the month, so at the end of the month the bats in ending inventory are only half-finished, say 50% completed for conversion.

But the material (the wood) was all added at the beginning. Otherwise there would be nothing to convert into a bat.

So the ending inventory is 100% completed for materials.

In this case, in the department 2, the material (let's say varnish) is added when the bats are 70% complete for conversion, and the varnishing process takes up the last 30% of the conversion.

If the bat is at 60% converted, the varnishing does not yet begin, so the varnish material is at 0%. But as soon at it reaches 70%, and above, you can be certain that varnish was added and the DM is at 100%.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

DM = Direct Materials

Conversion= DL + overhead

Let's say you make baseball bats.

You bring in the wood first (100% DM), then shape the wood using labor (DL) and electricity (OH), thus converting the wood into a bat. This conversion process is gradual, or continuous over the month, so at the end of the month the bats in ending inventory are only half-finished, say 50% completed for conversion.

But the material (the wood) was all added at the beginning. Otherwise there would be nothing to convert into a bat.

So the ending inventory is 100% completed for materials.

In this case, in the department 2, the material (let's say varnish) is added when the bats are 70% complete for conversion, and the varnishing process takes up the last 30% of the conversion.

If the bat is at 60% converted, the varnishing does not yet begin, so the varnish material is at 0%. But as soon at it reaches 70%, and above, you can be certain that varnish was added and the DM is at 100%.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[infinity]

This was very helpful, I made the same mistake by calculating for conversion rather than direct materials. Thanks!

BEC 74

Never give up, never surrender.

[infinity]

This was very helpful, I made the same mistake by calculating for conversion rather than direct materials. Thanks!

BEC 74

Never give up, never surrender.

[Author]

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