Problem:
(EUP computation; normal and abnormal loss; FIFO) Arkansas Foods manufactures corn meal in a continuous, mass-production process. Corn is addedat the beginning of the process. Losses are few and occur only when foreign materials are found in the corn meal. Inspection occurs at the 95 percent completion point as to conversion. During May, a machine malfunctioned and dumped salt into 18,000 pounds of corn meal. This abnormal loss occurred when conversion was 70 percent complete on those pounds of product. The error was immediately noticed, and those pounds of corn meal were pulled from the production process. An additional 1,000 pounds of meal were detected as unsuitable at the inspection point. These lost units were considered well within reasonable limits. May production data are shown below:
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Beginning work in process (85% complete)
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50,000 pounds
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Started during the month
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425,000 pounds
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Ending work in process (25% complete)
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10,000 pounds
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a. Determine the number of equivalent units for direct material and for conversion assuming a FIFO cost flow.
b. If the costs per equivalent unit are $2.50 and $4.50 for direct material and conversion, respectively, what is the cost of ending inventory?
c. What is the cost of abnormal loss? How is this cost treated in May?