Product costs may be useful for a wide range of decisions ranging from price setting to making decisions regarding continuing or dropping of a product or service.
Select an organization with which you are familiar. Using your own words as much as possible, and in not more than 1,500 words,
(a) Provide a brief description of the organisation – background, the organizational structure, the nature of business, the industry and the environment it is operating in, its products/services, etc.
(b) Describe the costing system adopted and how it is used to arrive at the cost of products or services.
(c) Does the costing system meet the needs of the organization? Discuss.
Many managerial decisions (such as production, marketing, pricing decisions and cost management) require a good understanding and application of cost terminologies.
Based on the organization that you have chosen for Question 1, explain and provide one (1) example of the following cost terminologies:
Direct and indirect costs.
Variable and fixed costs.
Committed and discretionary costs.
Controllable and uncontrollable costs.
Upstream and downstream costs.
Venus Brewery is a craft brewery that produces a special light beer for ladies. The beer are processed sequentially in two departments (Department X and Department Y) before the final products are transferred to the finished goods store.
On 1 February 2016, the work in process in Department Y consisted of 12,000 litres which were 80% completed. During the month, a total of 160,500 litres were started and 148,500 litres were completed and transferred out. On 29 February 2016, 15,000 litres remained uncompleted. The ending work in process was 60% complete.
The cost information for Department Y for the month of February:
Work in process, 1 February 2016
Cost transferred in from Department X during February
Manufacturing costs added in Department Y during February
Total manufacturing costs, Department Y
In Department Y, direct material and transferred-in costs are added at the beginning of the manufacturing process. However, conversion costs are incurred evenly throughout the manufacturing process.
Inspection at Department Y takes place when the products are 75% complete.
Normal spoilage averages at 5% of the good units produced.
The firm uses the FIFO method of process costing.
(a) (i) Compute the cost per equivalent unit for each product cost category in Department Y for the month of February.
(ii) Calculate the cost of goods transferred to the finished goods store at the end of February from Department Y.
(iii) Calculate the cost of abnormal spoilage for Department Y in February.
(iv) Calculate the cost of ending work in process in Department Y at the end of February.
(b) Pass all the necessary journal entries.
(c) Define “equivalent unit”. Explain how the concept is used in process costing. State the circumstances under which it may be appropriate to ignore the concept of equivalent unit. Give two (2) examples.