Case Scenario:
Atlantic Beach Company manufactures suntan lotion, called Surtan, in 11-ounce plastic bottles. Surtan is sold in a competitive market. As a result, management is very cost-conscious. Surtan is manufactured through two processes: mixing and filling. Materials are entered at the beginning of each process and labor and manufacturing overhead occur uniformly throughout each process. Unit costs are based on the cost per gallon of Surtan using the weighted-average costing approach.
On June 30, 2005, Sara Simmons, the chief accountant for the past 20 years, opted to take early retirement. Her replacement, Ira Jacobs, had extensive accounting experience with motels in the area but only limited contact with manufacturing accounting. During July, Ira correctly accumulated the following production quantity and cost data for the Mixing Department.
Production quantities: Goods in process, July 1, 8,000 gallons 75% complete; started into production 100,000 gallons; Goods in process, July 31, 5,000 gallons 20% complete. Materials are added at the beginning of the process.
Production costs: Beginning Goods in process $88,000, comprised of $21,000 of materials costs and $67,000 of labor and overhead; incurred in July: materials $573,000, labor and overhead $765,000.
Ira then prepared a production cost report on the basis of physical units started into production. His report showed a production cost of $14.26 per gallon of Surtan. The management of Atlantic Beach was surprised at the high unit cost. The president comes to you, as Sara's top assistant, to review Ira's report and prepare a correct report if necessary.
Instructions:
1. Show how Ira arrived at the unit cost of $14.26 per gallon of Surtan.
2. What error(s) did Ira make in preparing his production cost report?
3. Prepare a correct production cost report for July.