A manufacturing company employs a process cost system. The company’s product passes through both Department 1 and Department 2 in order to be completed. Conversion costs are incurred uniformly throughout the process in Department 2. The direct material is added in Department 2 when conversion is 80% complete. This direct material is a preservative that does not change the volume. Spoiled units are discovered at the final inspection and are recognized then for costing purposes. The physical flow of units for the current month is presented below.
Beginning work in process in Department 2 (90% complete with respect to conversion costs) | 14,000 |
| Transferred in from Department | 176,000 |
| Completed and transferred to finished goods | 80,000 |
| Spoiled units—all normal | 1,500 |
Ending work in process in Department 2 (60% complete with respect to conversion costs) | 8,500 |
If the manufacturing company uses the weighted-average method, the equivalent units for direct materials in Department 2 for the current month would be
A. 81,500
B. 90,000
C. 80,000
D. 67,500
Answer:A
A is corrent. This is the correct calculation for direct material equivalent units.
80,000+1,500=81,500
B is incorrect. This response is the actual physical flow for the month. In addition, it represents the inclusion of direct materials in the ending work in process, which is not correct because the ending inventory has not reached the 80% point for addition of direct material.
C is incorrect. This response only considers the direct material in the units transferred out and ignores the direct material in the spoiled units.
D is incorrect. This response is the equivalent units for direct material calculated using the FIFO method.
