Abraham Company uses process costing to account for its production costs. Direct labor is added evenly throughout the process. Direct materials are added at the beginning of the process. During September, the production department transferred 80,000 units of product to finished goods. Beginning goods in process consisted of 2,000 units that were 100% complete with respect to direct materials and 85% complete with respect to direct labor. Of the 40,000 units completed, 2,000 were from beginning goods in process and 78,000 units were started and completed during the period. Beginning goods in process had $ 58,000 of direct materials and $86,400 of direct labor cost. At the end of September, the goods in process inventory consists of 8,000 units that are 25% complete with respect to labor. The direct materials cost added in September is $712,000, and direct labor cost added is $1,980,000.
Required:
1. Determine the equivalent units of production with respect to
(a) Direct labor
(b) Direct materials.
2. Compute both the direct labor cost and the direct materials cost per equivalent unit.
3. Compute both direct labor cost and direct materials cost assigned to
(a) Units completed and transferred out,
(b) Ending goods in process inventory.
Analysis Component:
4. The company sells and ships all units to customers as soon as they are completed. Assume that an error is made in determining the percentage of completion for units in ending inventory. Instead of being 25% complete with respect to labor, they are actually 75% complete. Write a one page memo to the plant manager describing how this error affects its September financial statements.