Comprehensive Problem 5 Example Explanation

Comprehensive Problem 5 Example Explanationthis Problem Deals With Man

Comprehensive Problem 5 Example Explanationthis Problem Deals With Man

COMPREHENSIVE PROBLEM 5 Example Explanation This problem deals with manufacturing using a process costing system. It is critical when calculating costs of goods sold that the FIFO flow system is used. In other words, you must track the cost of every batch of product as it moves from one department to another and finally is sold. This understanding is fundamental for managing costs, forecasting profits, and developing budgets. In this problem you were responsible for actually calculating the carry over costs of the units which equate to the cost of those units that left the prior department.

What becomes important is that you can not combine the costs of the different batches of product as they flow through the manufacturing process. SO…Lets say you have the following situation manufacturing process: MIXING → MOLDING→PAINTING→PACKAGING→FINISHED GOODS→COGS We are going to follow one batch of units all the way through the process…the A units from the mixing department. Amix Amix when these units move into the Molding department they become part of the units that are entering the molding department. If we look at the Molding department we will see that it has A units too (the left overs from the prior period) Those will be identified as Amold SO…during the current production period the WIP units for the Molding department will have the following unit identities.

Amold Amix,,, The units that were completed and moved out of mixing Bmix The units were started AND completed and moved out of mixing Remember that the Amix + Bmix comprise the Bmold + Cmold units for the molding department. If we continue the FIFO process, the first units leaving the molding department and moving into the Painting department will be Amold units. The next units leaving the molding department will be the Bmold units…which must be identified and maintain their unique batch so….the first units of Bmold units that are completed will be the Amix units…. · if all of the Amix units are completed, then the next units of Bmold will include the Bmix units that have been completed and the remaining units in the molding department at the end of the production period are the unfinished Bmix units which are now the Cmold units · if not all of the Amix units are completed, then the remaining units at the end of the production period which are now the Cmold units will consist of some Amix units plus all of the Bmix units.

OK…so now lets look at the Painting department…what have we got? Well the painting department will have A units left over from the prior period: Apaint There will be the units that leave the molding department and move into the Painting department….the Bpaint+Cpaint units. WELL what are those units?? The Bpaint units will include all the units that have been started AND finished … The Cpaint units will be those that were started BUT not finished… USING FIFO…. the first units to move out of Painting into Packaging will be the Apaint Units. the next units to move out of Painting into Packaging will be the Bpaint Units The Amold units will be the first units to be part of Bpaint · If all the Amold units are completed, then the Amix units that are completed will become part of Bpaint · If all of the Amix units are completed, then Bmix units that are completed will become part of Bpaint and the remaining Bmix units will become Cpaint · If not all of the Amix units are completed, then some Amix and all of the Bmix units will become Cpaint · If not all of the Amold units are completed, then the unfinished Amold units and all of the Amix units and all of the Bmix units will become Cpaint Are you seeing how important it is that we do not combine the various batches of product as they move through the process?

The Amix units will have a totally different per unit cost than the Amold units. The Amold units will have a totally different per unit cost than the Apaint Units…and can you imagine the differences that will exist between Apaint units and Cmix units??? As you review the actual solution, you should be able to trace the costs of the various units to see how the COGS is calculated and Gross Profit is determined. MMK Page 1 Comp Problem Explained COMP PROBLEM 5 EXAMPLE Production Period: July FIFO PROCESS COSTING MIXING → MOLDING→PAINTING→PACKAGING→FINISHED GOODS→COGS WIP MIXING WIP MOLDING WIP PAINTING A A → A A → A A → → B+C B B → B + C → A mix A mix B → B + C → A mold A mold B → C → B mix ½ Bmix → → A mix ¾A mix → → ½ B mix C ½ B C ¼ A mix & ½ B mix WIP PACKAGING FIN GOODS COGS A A → A A → → A fngds B + C → A pt A pt B → B + C → A pkg A pkg B → → A pkg → A mold A mold → → A pt ¾A pt → → ¾A pt → ¾A mix ½A mix → → A mold → ½A mix C ¼A mix C ¼A pt & A mold & ½A mix Lets follow the A units from Mixing as those move through the departments this month.

Those will the first ones to leave the mixing department and will be joined by the B mixing units as they move into the Molding department. When they move into the Molding department they are now considered the B+C units of the Molding department which already has its own A units! The A units of Molding will be the first to leave the Molding department followed by the A from the mixing and some of the B from mixing. These now become the B+C units entering the Painting department where they will join the A units that are already in the Painting Dept You will notice that as the products move through the various departments during the period, less and less of the mixing units are being completed in each department.

That is because this is FIFO and each department will complete its own leftovers before the tranferred units will be worked on (B+C). I hope that this helps you see how a process line works and why it is very important to track each lot of product along with its costs as it moves from department to department. MMK &D Sheet2 Sheet3 Comprehensive Problem 5: Perfect Pies We Bake Perfect Pies Company makes fruit pies using a process cost system. The dough is made in the mixing department and then moves to the rolling department where crusts are rolled and placed into baking pans. The pans move into the filling department where fruit is placed into the crusts.

The pies then move to the baking department. Once the pies have been baked, they move to packaging they are boxed and then sent to Finished Goods. During the month of October the company had sales of $83,000. Each pie sells for $10. Using the following information, determine the Gross Profit for the Month of October.

Mixing Department: Beginning Balance 0 Ending inventory 1000 pies at 40% completion DM used: $1000 DL used: $800 FOH allocated: $1200 Rolling Department: Beginning Balance 1600 pies that were 70% completed with costs of $600 Pies started: 9000 Pies transferred to Filling Department: 8100 Ending Inventory was 10% completed DL used: $2338 FOH allocated: $2000 Filling Department: Beginning Balance 3000 pies that were 20% completed with costs of $7500 Ending inventory was 75% completed with costs of unknown final units and completion percentage DM used: $16200 DL used: $3800 FOH allocated: $1975 Baking Department: Beginning Balance 0 Pies Transferred into department 7600 FOH allocated: $14160 Ending inventory: 1300 pies at 60% completion Packaging Department: Beginning Balance: 2100 pies at 20% completion with costs of $12,600 Ending Inventory was 2000 pies at 90% completed DM used: $7875 DL used: $1945 FOH allocated: $3890 Finished Goods Department: Beginning Balance: 2600 pies with costs of $15626 MM Kline 4/2/14 Page 1

Paper For Above instruction

In this analysis, the process costing system, particularly the FIFO method, plays a crucial role in accurately assigning costs to products at each stage of manufacturing. The emphasis on tracking individual batches ensures that costs are correctly allocated and that inventory valuation remains precise, directly impacting the calculation of cost of goods sold (COGS) and gross profit.

The manufacturing process described involves multiple departments: Mixing, Molding, Painting, Packaging, Baking, and Final Goods. Each department processes units that have distinct costs associated with their batches. Following the units meticulously through each stage illustrates the importance of batch tracking in a process costing environment, particularly under FIFO assumptions, where the oldest inventory is recognized first.

Starting with the Mixing Department, no beginning inventory exists, so all units and associated costs are from current production. Units in process are partially completed, and costs are incurred for direct materials (DM), direct labor (DL), and factory overhead (FOH). As units move into the Molding Department, they retain their costs, which are tracked separately from new batches to uphold FIFO integrity. The same principle applies as products proceed to Painting, Packaging, Baked goods, and finally, to the Finished Goods inventory.

Throughout the process, a critical aspect is understanding the flow of units and costs, especially regarding how units are transferred, completed, and moved into inventory or COGS. For example, in the Baking Department, the balance of units at various completion stages reflects prior period work and current production, affecting cost calculations. The FIFO method ensures that the oldest costs are allocated to the units sold, with new costs assigned to the ongoing work-in-process and inventory.

In applying FIFO, each department's beginning inventory is combined with the costs of units started during the period, and the completion of units is carefully tracked. This method prevents mixing costs from different batches, providing a more precise understanding of profitability. Accurately calculating the costs associated with ending inventory and units transferred out requires detailed tracking of units’ progress, completion percentages, and batch-specific costs.

The case of Perfect Pies exemplifies how process costing impacts financial statements. The total sales revenue generated from pies sold (83,000 dollars at 10 dollars each) is offset by the cost of production and ending inventory costs derived from the batch tracking. The gross profit, a key measure of profitability, results from subtracting the COGS from total sales. Precise cost allocation through FIFO is fundamental in determining an accurate gross profit margin for the period.

In conclusion, comprehensive understanding and application of FIFO process costing are essential for manufacturing companies like Perfect Pies. Properly tracking batch-specific costs through each process stage ensures accurate inventory valuation, cost of goods sold, and profit measurement. This method supports more effective management decisions, budgeting, and financial analysis, emphasizing the importance of meticulous recordkeeping in a manufacturing environment.

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