[Anonymous]

Please help on this Mc from Wiley TestBank. How come I can not simply apply BGN (20K)+Comp 170K+defective 5K+END 25K=180K for the equivalent units for direct materials…..? I am getting panic…any hints or explanations will be very very appreciated!!

Q: COST-0030

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

Answers

A: 175,000 units.

B: 181,500 units.

C: 195,000 units.

D: 200,000 units.

Answer C is correct. This alternative is the correct equivalent unit calculation for direct material. It appropriately provides for the recognition of the units that have to be added to both beginning and ending work-in-process as well as the units completed, but ignores the materials that would not be added to the defective units.

Supporting Calculations

Altrn. c

Units completed

From beginning WIP 20,000

From current production 150,000

Defective units —

Ending WIP 25,000

Equivalent units 195,000

Answer A is incorrect. This alternative is incorrect because it omits the direct materials that have to be added to the beginning work in process inventory.

Answer B is incorrect. This alternative represents the equivalent unit calculation for conversion costs, not direct materials.

Answer D is incorrect. This alternative is incorrect because it includes units that would be added to the defective units; if the units were discovered to be defective, direct materials would not be added to these units.

[jamesjohnson11]

Thats a tough question. When I'm ever faced with a tough question like this I usually just skip it. Number one if it's going to take me a while to figure out I'd rather spend my time on remembering something else and also I enjoy gambling so I always think that there is a strong possibility it wont even show up on your exam.

R PASS
A PASS
B PASS
F AUGUST

[Anonymous]

thank you for your reply, jamesjohnson11. I totally agree what you meant to say. well, I am at final preparation stage so that I just did not want to miss any MCs. Good luck.

[iPass]

I've wasted so much time on this type of questions on my exam, I should've just guessed and move on…

Anyway, I'll try to explain Wiley's calculations.

Step 1:

Since “direct materials are added when the process is 70% complete with respect to conversion”, then we'll be adding 100% of DM, which is 20,000 units.

Step 2:

Units from current production = Units completed in department 2 during the month 170,000 – Beginning WIP 20,000 = 50,000

Step 3:

Ending inventory (80% complete with respect to conversion), 80%>70% therefore we've added 100% of DM to these units during the month/current production. We account for ALL 25,000 units.

Step 4:

20,000+150,000+25,000=195,000

Note: “Inspection takes place in department 2 immediately before the direct materials are added” => you do not need to account for those units.

Hope it makes sense.

BEC - 10/12/2011 - 78
AUD - 11/23/2011 - 84
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REG - 08/31/2012

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[Anonymous]

Thank you so much for your explanation, iPass! I was relieved finally, lol. Next will be my second try. i remember I just took a guess on this type of question at my last exam..thus, I was trying to prepare well for this time..thank you and good luck!

[Anonymous]

My answer is A.

Solution:

Actual Materials

Units Completed: WD EP

IP. Beg 20,000 100% —-

Received And Completed 150,000 100% 150,000

IP. End 25,000 100% 25,000

Unit lost 5,000

---

___________

175,000 units

my solution is this based on what i have understood.

Please do correct my solution if wrong. I need your answers.

thanks.

[Author]

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