Addition of Materials - Increase in Unit Cost:
Learning Objective:
- What is the effect on the
calculation in the preparation of a cost of production report when
materials are added in a department subsequent to the first and as a
result unit cost is increased but number
of units do not increase?
In the simplest case, added materials, such
as parts of an automobile, do not increase the number of units but increase
total cost and unit costs. A materials unit cost must be computed for the
department, and a materials cost must be included in the work in process
inventory. Example:
The cost of production report of the
terminal department of Clonex Corporation is used to illustrate the
effect of the addition of materials on total and unit costs of
department. 1. Materials Not Added:
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
====== |
|
Units transferred to finished
goods storeroom |
35,000 |
|
|
Units still in process (1/4 labor and FOH) |
4,000 |
|
|
Units lost in process |
1,000 |
40,000
====== |
|
Cost Charged To the Department: |
Total
Cost |
unit
Cost |
| |
|
Cost from preceding department: |
|
|
|
Transferred in during the month |
$140,400 |
$3.51 |
|
Cost added by the department: |
|
|
|
Labor |
32,400 |
0.90 |
|
Factory Overhead (FOH) |
19,800
------- |
0.55
----- |
|
Total cost added |
$52,500 |
$1.45 |
|
Adjusted for lost units |
|
0.09* |
|
------- |
------ |
|
Total cost to be accounted for |
$192,600 |
$5.05 |
|
====== |
====== |
|
Cost Accounted for as Follows: |
|
|
|
Transferred to finished goods
storeroom
(35,000 × $5.05) |
|
$176,750 |
|
Work in process - ending
inventory: |
|
|
|
Adjusted cost from preceding
department [4,000 × ($3.51 + $0.09)] |
$14,400 |
|
|
Labor (4,000 × 1/4 × $0.90) |
900 |
|
|
Factory Overhead (4,000 × 1/4 ×
$0.55) |
550
------ |
15,850
------ |
|
Total cost accounted for |
|
$192,600 |
|
|
====== |
|
|
|
|
Additional Computations:
Equivalent Production:
Labor and factory overhead = 35,000 + 4,000 / 4 = 36,000 units
Unit Costs:
Labor = $32,400 / 36,000 = $0.90 per unit
Factory overhead = $19,800 / 36,000 = 0.55 per unit
*Adjustment for lost units:
Method No.1: $140,400 / 39,000 = $3.60; $3.60 - $3.51 = $0.09
per unit
Method No.2: 1,000 units
×
$3.51 = $3,510; $3,510 / 39,000 = $0.09 per unit
|
2. Materials Added in Terminal Department
Assume that additional materials
costing $17,020 are placed in process and charged to the terminal
department. Assume further that the materials in work in process are
sufficient to complete 2,000 of the 4,000 units; that is, units are 50
percent complete as to materials cost. The effect of the additional
materials cost is shown in the cost of production report 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
====== |
|
Units transferred to finished
goods storeroom |
35,000 |
|
|
Units still in process (1/4 labor and FOH) |
4,000 |
|
|
Units lost in process |
1,000 |
40,000
====== |
|
Cost Charged To the Department: |
Total
Cost |
unit
Cost |
| |
|
Cost from preceding department: |
|
|
|
Transferred in during the month |
$140,400 |
$3.51 |
|
Cost added by the department: |
|
|
|
Materials |
$17,020 |
$0.46 |
|
Labor |
32,400 |
0.90 |
|
Factory Overhead (FOH) |
19,800
------- |
0.55
----- |
|
Total cost added |
$69,220 |
$1.91 |
|
Adjusted for lost units |
|
0.09* |
|
------- |
------ |
|
Total cost to be accounted for |
$209,620 |
$5.51 |
|
====== |
====== |
|
Cost Accounted for as Follows: |
|
|
|
Transferred to finished goods
storeroom
(35,000 × $5.51) |
|
$192,850 |
|
Work in process - ending
inventory: |
|
|
|
Adjusted cost from preceding
department
(4,000 × $3.60) |
$14,400 |
|
|
Materials
(4,000 × 1/2 × $0.46) |
920 |
|
|
Labor (4,000
× 1/4 × $0.90) |
900 |
|
|
Factory Overhead
(4,000 × 1/4 × $0.55) |
550
------ |
16,770
------ |
|
Total cost accounted for |
|
$209,620 |
|
|
====== |
|
|
|
|
Additional Computations:
Equivalent Production:
materials = 35,000 + 4,000 / 2 = 37,000 units
Labor and factory overhead =
35,000 + 4,000 / 4 = 36,000 units
Unit Costs:
Materials =
$17,020 / 37,000 = $0.46
Labor = $32,400 / 36,000 = $0.90 per unit
Factory overhead = $19,800 / 36,000 = 0.55 per unit
*Adjustment for lost units:
Method No.1: $140,400 / 39,000 = $3.60; $3.60 - $3.51 = $0.09
per unit
Method No.2: 1,000 units
×
$3.51 = $3,510; $3,510 / 39,000 = $0.09 per unit
|
The only difference in the two cost of
production reports (first, where materials are not added in terminal
department and second where additional materials are added in terminal
department) are the $17,020 materials cost charged to the department and
the $.46 materials unit cost ($17,020 / 37,000). The additional
materials cost is also reflected in the goods, and in the ending work in
process inventory.
|
