Addition of Materials - Increase in Units and Change in Unit Cost:
Learning Objective:
- What is the effect on the calculation in
the cost of production report when materials are added in a department
subsequent to the first and as a result number of units increase and unit
cost is decreased?
When additional materials result in
additional units, different computations are necessary. The greater number
of units causes a decrease in unit cost which necessitates an adjustment of
the preceding department's unit cost, since the increased number of units
will absorb the same total cost transferred from the preceding department.
Example:
To illustrate the situation of additional
units resulting from the addition of materials, assume that the Terminal
department of the Clonex Corporation cost for labor and factory overhead of
$32,400 and 19,800, respectively, an additional materials cost of $17,020,
and an increase of 8,000 units as the result of added materials. The effect
of these assumptions on the Terminal Department's cost of production report
is shown below:
The Clonex Corporation
Terminal Department (3rd Dept.)
Cost of Production Report
For the Month of January, 19
|
Quantity Schedule: |
|
|
|
Units received from the preceding
department |
40,000 |
|
|
Additional units put into process |
8,000 |
48,000 |
|
|
------- |
===== |
|
Units transferred to finished
goods storeroom |
44,000 |
|
|
Units still in process (1/4 labor and FOH) |
4,000 |
48,000 |
|
|
|
===== |
|
Cost Charged To the Department: |
Total
Cost |
unit
Cost |
| |
|
Cost from preceding department: |
|
|
|
Transferred in during the month
(40,000 units) |
$140,400 |
$3.51 |
|
Cost added by the department: |
|
|
|
Materials |
$17,020 |
$0.37 |
|
Labor |
32,400 |
0.72 |
|
Factory Overhead (FOH) |
19,800 |
0.44 |
|
|
------ |
----- |
|
Total cost added |
$69,220 |
$1.53 |
|
Adjusted units cost for additional
units |
|
2.925* |
|
------- |
------ |
|
Total cost to be accounted for |
$209,620 |
$4.455 |
|
====== |
====== |
|
Cost Accounted for as Follows: |
|
|
|
Transferred to finished goods
storeroom
(44,000 × $4.455) |
|
$196,020 |
|
Work in process - ending
inventory: |
|
|
|
Adjusted cost from preceding
department(4,000 × $2.925) |
$11,700 |
|
|
Materials
(4,000 × 1/2 × $0.37) |
740 |
|
|
Labor (4,000
× 1/4 × $0.72) |
720 |
|
|
Factory Overhead
(4,000 × 1/4 × $0.44) |
440
------ |
16,770
------ |
|
Total cost accounted for |
|
$209,620 |
|
|
====== |
|
|
|
|
Additional Computations:
Equivalent Production:
materials = 44,000 + 4,000 / 2 =
46,000 units
Labor and factory overhead =
44,000 + 4,000 / 4 = 45,000 units
Unit Costs:
Materials =
$17,020 / 46,000 = $0.37
Labor = $32,400 /
45,000 = $0.720 per unit
Factory overhead = $19,800 /
45,000 = 0.44 per unit
*Adjustment
for Additional Units
Formula:
Cost from
preceding department / (Units received from preceding department
+ Units added)
$140,400 /
48,000 = 2.925 per unit
|
When additional materials increase the
number o units being processed, it is still possible to have lost units.
However, should increase and lost units occur, no separate calculation
is required for the lost units; only net units added are used. In the
example above, 8,000 additional units resulted from added materials. It
is quite possible, though, that the materials added should have yielded
10,000 units. The difference between the 8,000 units and the anticipated
10,000 units could be due to the loss of 2,000 units. I this is the
case, the effect of the lost units is similar to that of units lost in
the first department; that is, the cost is absorbed within the
department as an increase in unit costs. However, if 10,000 additional
units should have resulted, the effect of losing units can be determined
as follows:
- Compute the unit cost of work done in
preceding departments and the Terminal Department as if no loss had
occurred.
- Compute the loss by multiplying the unit
cost obtained in the preceding computation by the 2,000 lost units.
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