The costs charged to production during October were as follows — Leather Products Ltd manufactures goods company's profits have declined past nine months
Business & ManagementOperationsWorked Solution
Leather Products Ltd manufactures leather goods. The company's profits have declined during the past nine months. In an attempt to isolate the causes of poor profit performance, management is investigating the manufacturing operations of each of its products.
One of the company's main products is leather belts. The belts are produced in a single, continuous process in the Elizabeth plant. During the process, leather strips are sewn, punched and dyed. The belts then enter a final finishing stage to conclude the process. Labour and overhead are applied continually during the manufacturing process. All materials are introduced at the beginning of the process. The firm uses the weighted average method to calculate its unit costs.
The leather belts produced at the Elizabeth plant are sold wholesale for $22.95 each. Management want to compare the current manufacturing costs per unit with the market prices for leather belts. Top management has asked the Elizabeth plant accountant to submit data on the cost of manufacturing the leather belts for the month of October. These cost data will be used to determine whether modifications in the production process should be initiated or whether an increase in the selling price of the belts is justified. The cost per belt used for planning and control is $11.50.
The work in process inventory consisted of 500 partially completed units on 1 October. The belts were 30 per cent complete as to conversion. The costs included in the inventory on 1 October were as follows:
Leather strips……………………….$1650
Buckles……………………….……….350
Conversion costs…………………….2500
Total………………………………..$4500
During October, 8000 leather strips were placed into production. A total of 8100 leather belts were completed. The work in process inventory on 31 October consisted of 400 belts that were 40 per cent complete as to conversion.
The costs charged to production during October were as follows:
Leather strips……………………….$41,000
Buckles………………………………..8,000
Conversion costs…………………….55,320
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Total………………………………$104,320
Required:
1. In order to provide cost data on the manufacture of leather belts in the Elizabeth Plant to the top management of Leather Products Ltd, calculate the following amounts for the month of October:
(a) Equivalent units for material and conversion.
(b) Cost per equivalent unit for material and conversion.
(c) Assignment of production costs to the 31 October work in process inventory and to goods transferred out.
(d) Weighted average unit cost of the leather belts completed and transferred to finished good.
2. Comment on the cost per belt of $11.50 which the company has used for planning and control.
SOLUTION
1a
Equivalent units of material
8 500
Equivalent units of conversion
8 260
b
Cost per equivalent unit of material
$6.00
Cost per equivalent unit of conversion
$7.00
c
31 October work in process inventory
$3 520
Cost of goods completed and transferred out
$105 300
d
Weighted-average unit cost of completed leather belts
$13.00
These answers are supported by the following process costing schedules. The firm's cost per belt used for planning and control, $11.50, is substantially lower than the actual cost per belt incurred in October, $13.00. Management should investigate this situation to determine whether production costs can be reduced. If not, then the cost used for planning and control purposes should be changed to reflect the firm's actual experience.
Calculation of equivalent units: Leather Products Ltd – Elizabeth Plant Weighted average method
Physical units
Percentage of completion with respect to conversion
Equivalent units
Equivalent units
Physical units
Percentage of completion with respect to conversion
Direct material
Conversion
Work in process, 1 October
500
30%
Units started during October
8000
Total units to account for
8500
Units completed and transferred out during October
8100
100%
8100
8100
Work in process, 31 October
400
40%
400
160
Total units accounted for
8500
Total equivalent units
8500
8260
Calculation of costs per equivalent unit: Elizabeth Plant Weighted average method
Direct material
Conversion
Total
Total
Work in process, 1 October
$ 2 000
$ 2 500
$ 2 500
$ 4 500
Costs incurred during October
49 000
55 320
55 320
104 320
Total costs to account for
$51 000
$57 820
$57 820
$108 820
Equivalent units
8 500
8 260
8 260
Costs per equivalent unit
$6.00
$7.00
$7.00
$13.00
Analysis of total costs: Elizabeth Plant Weighted average method
Cost of goods completed and transferred out during October:
Cost of goods completed and transferred out during October:
8100$13.00
=
$105 300
Cost remaining in 31 October work in process inventory:
Cost remaining in 31 October work in process inventory:
Direct material:
400$6.00
=
$2 400
Conversion:
160$7.00
=
1 120
Total cost of 31 October work in process
Total cost of 31 October work in process
$3 520
Check: Cost of goods completed and transferred out
$105 300
Cost of 31 October work in process inventory
3 520
Total costs accounted for
$108 820
2
The cost of manufacturing the belt is $13 per unit, which is different to the $11.50 used for planning purposes. Using the incorrect cost the profit margin would be overstated. If management were to use the incorrect cost then it could result in wrong decisions.