Weighted-average costing: Normal and abnormal spoilage
Ranka Company manufactures high-quality leather products. The Company's profits hav declined during the past 9 months. Ranka has used unit cost data that were developed 18 months ago in planning and controlling its operations. In an attempt to isolate the causes of poor profit performance, management is investigating the manufacturing operations of each of its products.
One of Ranka's main products is fie leather belts. The belts are produced in a single, continuous process. During the process, leather strips are sewn, punched and dyed. Buckles are attached by rivets when the belts are 70% complete as to direct labour and overhead (conversion costs). The belts then enter a final finishing stage to conclude the process. Labour and overhead are applied continuously during the process.
The leather belts are inspected twice during the process: (1) right before the buckles are attached (the 70% point in the process) and (2) at the conclusion of the finishing stage (the 100% point in the process). Ranka uses the weighted-average method to calculate its unit costs. The cost per equivalent unit being used for planning and controlling purposes is $5.35 per unit
The work-in-process inventory consisted of 400 partially completed units on October.
1. The belts were 25% complete as to conversion costs. The costs included in the inventory on October 1 were as follows:
Leather strips $1,000
Conversion costs 300
During October, 7600 leather strips were placed in production. A total of 6800 good leather belts were completed. A total of 300 belts were identified as defective at the two inspection points: 100 at the first inspection (before buckle is attached) and 200 at the final inspection point (after finishing). This quantity of defective belts was considered normal. In addition, 200 belts were removed from the production line when the process was 40% complete as to conversion costs because they had been damaged as a result of a malfunction during the sewing operation. Since this malfunction was considered an unusual occurrence, the spoilage was classified as abnormal. Defective (spoiled) units are not reprocessed and have zero salvage value. The work-in-process inventory on October 31 consisted of 700 belts, which were 50% complete as to conversion costs.
The costs charged to production during October were as follows:
Leather strips $20,600
Conversion costs 20,700
a. Determine the equivalent units for each factor of production.
b. Calculate the cost per equivalent whole unit for each factor of production
c. Determine the assignment of total production costs to the work-in-process inventory and to goods transferred out
d. Calculate the average unit cost of the 6800 good leather belts completed and transferred to finished goods.