Management Accounting

Tutorial Set 3
Edspira

Questions:

Exercise 4.2 equivalent units

Direct material 20 000
=4 dkk /kg
5 000
Direct labour 10· 30 ·2 · 125
=15 dkk /kg
5000
Indirect Costs 60 000
=6 dkk /kg
10 000
Total Cost/ kg 25 dkk /kg
Transferred to the end product- wip-> finished goods 833….

Goods under production- wip

Our aim is to find the total number of units to account for

Flow of production

WIP, opening 500kg

Started during the period 8,000kg
To account for 8,500kg
FIFO:

Information from text

Direct materials Conversion costs
Finished from WIP, 500kg (1-1)*500=0 (1-0,3)*500=350
(the part from
opening)
Started and finished 8,500-1,000-500 = 7,000 7,000
during the period 7,000
Work in progress, 1,000 100%*1,000=1,000 50%*1000 = 500
closing
Accounted for (sum) 500+7,000+1,000=8,500
Total equivalent units 7,000+1,000=8,000 7,000+350+500=7,850

Flow of production
Total Direct materials Conversion costs
Work in progress, 2,000+3,000=5,000 2,000 3,000
opening
Costs added during 40,000+197,500= 40,000 197,500
the period 237,500
Equivalent units 8,000 7,850
Cost per equivalent 40,000/8,000=5kr/unit 197,500/7,850=26,15kr/unit
unit
Cost to account for 242,500
In FIFO when calculating the cost per unit we take the cost only added in the period.

COSTS
Finished goods in the beginning: 2,000+3,000=5,000
Finished started in previous, finished in this: 350 · 25 ,16=8 806
Finished goods started and finished in this 7 000 · 5+7 000 ·25 , 16=211120
period:
In production at the end: 1000 ·5+ 500· 25 , 16=17,580
Total costs allocated: 5 000+8 805 , 73+211114 , 65+17 579 , 62=242 500

Work in progress T-account

Beginning 5,000 Completed and transferred out
211114 , 65+8 805 , 73+5 000=224 920 , 38
Direct Materials 40,000
Conversion Costs 197,500

Ending 17,580

Ending WIP

5000+ 40 000+197 500−224 920 , 38 ≈17 579 , 62

Calculate the costs of units completed and transferred out and WIP, closing using WA

WEIGHTED AVERAGE

Flow of production

WIP, opening 500kg

Started during the period 8,000kg
To account for 8,500kg

WA:

Equivalent units
Direct materials Conversion costs
Completed and 7500kg 7500kg 7500kg
transferred out during
the period
Work in progress, 1,000 100%*1,000=1,000 50%*1000 = 500
closing
Accounted for (sum) 7,500+1,000=8,500
Total equivalent units 7,500+1,000=8,500 7,500+500=8,000

Direct materials Conversion Costs

Starting 500 500

Added in period 7,000 7,000

In production 1,000 0,5*1000 = 500
Total units to account for 8,500 8,000
Total costs 40,000+2,000 197,500+3,000
Cost per equivalent unit 42,000/8,500=4,94 200,500/8,000=25,06 30 total

COSTS
Finished goods in the beginning: 7 500 · 4,941+7 500 ·25,0625=225 026 , 25
In production at the end: 1 000 · 4,941+500· 25,0625=17 472 , 25
Total costs allocated: 42 000+ 200500=242 500
Usually, since WA takes costs from the last period and current period, it is more stable comparing to
FIFO which uses only the cost from the current period that is influenced by the changes (for instance
inflation).

The difference between FIFO, WA, and standard cost

We transfer a smaller cost to the finished goods by using FIFO, since the primo costs were smaller
than the costs added during the period. This is classical for FIFO, because you take the costs from the
opening WIP (DM and conversion costs). The previous costs are often cheaper than the current
period, due to inflation etc. In using WA we average the costs by mixing the costs from the previous
period with the costs added during the period.

Both FIFO and WA show a significantly higher cost per kg. salt, compared to standard costs. This is
due to standard costing presuming that the company utilizes its full capacity. An assumption that did
not hold for May, upon which we calculate FIFO and WA. If you do not continuously update the values
in standard costing, then this method can prove problematic, given that the gap between allocated
and actual costs increase.
Flow of production Physical units Direct Materials Conversion costs
Work in progres, 20 20 12
opening CC=60%
Started during 80
October
To account for 100
Completed and 90 90 90
transferred out in
October
Work in progress, 10 10 7
closing CC=70%
Accounted for 100 100 97
Work done to date 100 97

Cost per equivalent unit Direct materials Conversion costs

Total cost 2 460 000 1 055 000
Equivalent units 100 97
Cost per equivalent unit 24 600 10 876, 29
Summarize costs to Total cost Direct material Conversion costs
account for
Work in progress, 580 000 460 000 120 000
opening
Costs added during 2 935 000 2 000 000 935 000
October
Cost to account for 2 515 000 2 460 000 1 055 000

Assign costs Total Direct materials Conversion costs

Completed and 3 192 866 90*24 600 = 2 214 000 90*10 876,29=
transferred out, 978 866
90 units
Work in progres, closing 322 134 10*24 600 = 246 000 7*24 600 = 76 134
Costs accounted for 3 515 000