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Chapter 18: Q8RQ (page 1005)

Question: What are conversion costs? Why do some companies using process costing systems use conversion costs?

Short Answer

Expert verified

Answer:

Conversion cost means the total of direct labor cost and the factory overhead costs.

Some companies using the process costing system use the conversion cost because the companies using the process costing system are highly automated, so the direct labor is a small part of total manufacturing cost. For simplifying the accounting in this case, direct labor is combined with manufacturing overhead.

Step by step solution

01

Conversion cost

The conversion cost means the total cost incurred by the company for converting the raw material into the useful products.

02

Company using process costing use the conversion cost

The automated companies in which labor cost is negligible may use the conversion cost while using the process costing system for simplifying the accounting procedures.

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Most popular questions from this chapter

Question: Spring Fresh produces premium bottled water. Spring Fresh purchases artesian water, stores the water in large tanks, and then runs the water through two processes: filtration and bottling.

During February, the filtration process incurred the following costs in processing

200,000 liters:

Wages of workers operating filtration equipment

$34,950

Manufacturing overhead allocated to filtration

19,050

Water

110,000

Spring Fresh had no beginning Work-in-Process Inventory in the Filtration Department in February.

Requirements

1. Use the FIFO method to compute the February conversion costs in the Filtration Department.

2. The Filtration Department completely processed 200,000 liters in February. Use

the FIFO method to determine the filtration cost per liter.

Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber鈥檚 particle board division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber鈥檚 regional controller. All of High Mountain Lumber鈥檚 plants and divisions send Green their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, 鈥淒etermining the percent complete always requires judgment.

Whatever the percent complete, we鈥檒l finish the Work-in-Process Inventory first thing next year.鈥�

Requirements

  1. How would inflating the percentage completion of ending Work-in-Process Inventory help Pines and Lopez get their bonus?
  2. The particle board division is the largest of High Mountain Lumber鈥檚 divisions. If Green does not correct the percentage completion of this year鈥檚 ending Work-in-Process Inventory, how will the misstatement affect High Mountain Lumber鈥檚 financial statements?
  3. Evaluate Lopez鈥檚 justification, including the effect, if any, on next year鈥檚 financial statements.
  4. Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green do?

Cheerful Colors manufactures crayons in a three-step process: mixing, molding, and packaging. The Mixing Department combines the direct materials of paraffin wax and pigments. The heated mixture is pumped to the Molding Department, where it is poured into molds. After the molds cool, the crayons are removed from the molds and are transferred to the Packaging Department, where paper wrappers are added and the crayons are boxed.

In the Mixing Department, the direct materials are added at the beginning of the

process and the conversion costs are incurred evenly throughout the process. Work in process of the Mixing Department on March 1, 2018, consisted of 800 batches of crayons that were 10% of the way through the production process. The beginning balance in Work-in-Process Inventory鈥擬ixing was \(32,800, which consisted of \)14,000 in direct materials costs and $18,800 in conversion costs. During March, 5,200 batches were started in production. The Mixing Department transferred 3,000 batches to the Molding Department in March, and 3,000 were still in process on March 31. This ending inventory was 80% of the way through the mixing process. Cheerful Colors uses FIFO process costing.

At March 31, before recording the transfer of costs from the Mixing Department

to the Molding Department, the Cheerful Colors general ledger included the following account:

Work-in-process inventory 鈥� Mixing

Balance, March 1

32,800

Direct materials

42,000

Direct labor

24,610

Manufacturing overhead

65,830

Requirements

1. Prepare a production cost report for the Mixing Department for March. Round

equivalent unit of production costs to four decimal places. Round all other costs to the nearest whole dollar.

2. Journalize all transactions affecting the Mixing Department during March, including the entries that have already been posted. Assume labor costs are accrued and not yet paid.

Question: Refer to Short Exercises S18-8 and S18-9. Use Complete Foods鈥檚 costs per equivalent unit of production for direct materials and conversion costs that you calculated in Short Exercise S18-9.

Calculate the cost of the 38,000 units completed and transferred out and the

24,000 units, 20% complete, in the ending Work-in-Process Inventory.

The Finishing Department started the month with 500 units in process, received 2,000 units from the Assembly Department, and transferred 2,100 units to the finished goods storage area. All direct materials are added at the beginning of the process. The units in process at the end of the month are 45% complete concerning conversion costs. The department uses the weighted-average method. The Finishing Department incurred the following costs:

Beginning WIP

Added this month

Total

Transferred in

\(6,250

\)25,000

\(31,250

Direct materials

500

2,000

2,500

Conversion cost

1,250

5,590

6,840

Total

\)8,000

\(32,590

\)40,590

8. How many units are still in process at the end of the month?

9. Compute the equivalent units of production for the Finishing Department.

10. Determine the cost per equivalent unit for transfer, direct materials, and conversion costs.

11. Determine the cost to be transferred to Finished Goods Inventory.
See all solutions

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