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Chapter 18: Q6RQ (page 1005)

Question: What are equivalent units of production?

Short Answer

Expert verified

Answer:

The equivalent unit of production helps the company in evaluating the direct material, direct labor and manufacturing overhead incurred on partially completed units during the period and to express it in terms of finished units of output.

Step by step solution

01

Production

Production is defined as the process of combining various direct or indirect inputs to order to make something for consumption.

02

Equivalent unit of production

Equivalent unit should be identified by the company to know the direct cost and the manufacturing overhead incurred on work in process inventory and express it in completed unit of production.

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Most popular questions from this chapter

Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particle board division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber’s regional controller. All of High Mountain Lumber’s plants and divisions send Green their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, “Determining the percent complete always requires judgment.

Whatever the percent complete, we’ll finish the Work-in-Process Inventory first thing next year.”

Requirements

  1. How would inflating the percentage completion of ending Work-in-Process Inventory help Pines and Lopez get their bonus?
  2. The particle board division is the largest of High Mountain Lumber’s divisions. If Green does not correct the percentage completion of this year’s ending Work-in-Process Inventory, how will the misstatement affect High Mountain Lumber’s financial statements?
  3. Evaluate Lopez’s justification, including the effect, if any, on next year’s financial statements.
  4. Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green do?

Question: Evergreen Orange manufactures orange juice. Last month’s total manufacturing costs for the Tampa operation included:

Direct materials

$450,000

Direct labor

32,000

Manufacturing overhead

125,000

What was the conversion cost for Evergreen Orange’s Tampa operation last month?

Describe how the FIFO method is different from the weighted-average method.

Question: Why is the calculation of equivalent units of production needed in a process costing system?

Refer to your answers from Exercise E18-21.

Requirements

1. Prepare the journal entries to record the assignment of direct materials and direct labor and the allocation of manufacturing overhead to the Blending Department. Also, prepare the journal entry to record the costs of the gallons completed and transferred out to the Packaging Department. Assume labor costs are accrued and not yet paid.

2. Post the journal entries to the Work-in-Process Inventory—Blending T-account.

What is the ending balance?

3. What is the average cost per gallon transferred out of the Blending Department

into the Packaging Department? Why would the company managers want to

know this cost?
See all solutions

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