Novelty Products Ltd. makes a single product using two processes. Quality control check takes place during the process, at which point, rejected units are separated from good units.
The following details relate to production for the month of April 20X7, for Process 2.
(i) Work-in-process, beginning inventory: -0-
(ii) Transfer from Process 1: 15,000 units valued at $51.40 each
(iii) Other manufacturing costs incurred during April:
Direct material added $513,000
Direct labour $365,000
Manufacturing overhead $211,000
(iv) Normal losses were estimated to be 5% of input during the period. The scrap value of any loss is $40 per unit.
(v) At inspection 1,750 units were rejected as scrap. These units had reached the following degree of completion:
Input material 100%
Direct material added 50%
Conversion costs 30%
(vi) 12,000 units were completed and transferred to Finished Goods Inventory.
(vii) Work-in-process at the end of April had reached the following degree of completion:
Input material 100%
Direct material added 80%
Conversion costs 40%
(a) Prepare a statement of equivalent production to determine the equivalent units for direct materials (From Process 1 & Direct Material Added), and conversion costs and the cost per equivalent unit for
direct materials and conversion costs. (10 marks)
(b) Calculate the:
– Total cost of units completed and transferred to Finished Goods inventory
– Cost of abnormal losses
– Cost of ending work-in-process inventory in Process 2 (3 marks)
(c) Prepare Novelty’s Work-In-Process Inventory – Process 2 T-account, clearly showing the ending
balance. (5 marks)
(d) State the journal entries necessary to record the assignment of direct materials, direct manufacturing wages and manufacturing overhead applied to Process 2. Also give the journal entries to record the cost
of goods completed and transferred to finished goods. (5 marks)
(e) Given that 20% of the unexpected losses were as a result of pilferage, prepare the abnormal spoilage
statement, clearly showing Novelty Product’s true loss. (2 marks)