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Calculate Cost Elements Using Weighted Average And FIFO Methods

Question

Colourful Paints manufactures quality paint sold at premium prices. It has gradually expanded its business. Management now believes that it is appropriate to further strengthen the Accounting Group within the business. It is considering separating out the roles of the Financial Accountant and the Management Accountant.

Required

As a consultant, you have been asked to prepare are port that clearly shows the different roles that could be played by each of these appointments within the organisation.

Suppose that Colourful Paints goes ahead with the separation of the duties and that a Financial Accountant and a Management Accountant are appointed. Mr V R Y Smart is appointed as the

Management Accountant. On taking up the position and doing a review of the Accounting system currently in place, he is currently considering whether the method of allocating overheads using the weighted average method as is currently used will be appropriate under the new process.

Required

Assume you are Mr V R Y Smart. Prepare a report that can be presented to management to show the possible advantages and disadvantages of moving from the weighted average method to the first in, first out (FIFO) method.

Currently Colourful Paints uses a single production department. Production begins with the blending of various chemicals, which are added at the beginning of the process, and ends with the canning of the paint. Canning occurs when the mixture reaches the 90 percent stage of completion. The litre cans are then transferred to the Shipping Department for crating and shipment. Labour and overhead are added continually throughout the process. Manufacturing overhead is applied on the basis of direct labour hours at the rate of $6 per hour. Now assume that management has decided to change from the current method of processing and has implemented the changes necessary. Prior to October, when the change in the process was implemented, work in process inventory was insignificant. The change in the process enables greater production but has resulted in significant amounts of work in process for the first time. Colourful Paints has always used the weighted average method to determine equivalent units of production and unit costs. Given the change in processing, management is now considering changing from the weighted average method to the first in, first out method of costing.

The following data relates to actual production during the month of October:

Costs for October

 

Work in process inventory 1 October (8000 litres; 25%complete)

 

Direct material (chemicals)

$91,200

Direct labour ($20 per hour)

12,500

Manufacturing overhead

3,750

Costs incurred in October

 

Direct materials (chemicals)

456,800

Direct materials (cans)

14,000

Direct labour ($20 per hour)

70,000

Manufacturing overhead

21,000

 

Production data for October

 

Work in process inventory 1 October (25% complete)

8,000

Started in October

42,000

Sent to Shipping Department

40,000

Work in process inventory 31 October (80% complete)

10,000

 Required:

i. Prepare a schedule of equivalent units for each cost element for the month of October using the weighted average method and also the first in, first out (FIFO) method.

ii. Calculate the cost (to the nearest cent) per equivalent unit for each cost element for the month of October using the weighted average method and also the first in, first out (FIFO) method.

 

Summary

The question belongs to Accounting and it discusses about preparing a schedule of equivalents for each cost elements using weighted average method and First In First Out method.

Total Word Count 296

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