Objective: Demonstrate Application Of Process Costing Of A M

Objective Demonstrate Application Of Process Costing Of A Manufactur

Objective: Demonstrate application of Process Costing of a manufacturing company including the following: Determine Department WIP inventory Calculation of Equivalent Units Determine Finished Goods Inventory Calculation of COGS Determination of Gross Profit Adam’s Apple Company makes homemade applesauce using Grandma Adam’s special recipe. The company uses a FIFO process cost system. The process starts in the Kettle Room where apples are cored, cut and added to the Kettles along with Grandma’s special spices. After several hours of slow simmering, the sauce is cooled as it moves to the Canning department where the sauce is poured into jars and sealed. After the jars are sealed they move to the packing department where they are placed into boxes and moved to finished goods where they are ready for sale. During the month of March the company sold 5,000 boxes of sauce with each box holding a dozen jars. A jar of sauce sells for $4.00.

Paper For Above instruction

Introduction

Process costing is a vital accounting method for manufacturing firms that produce homogeneous products through continuous processes. It enables the allocation of production costs accurately across units, making it easier to determine inventory values, costs of goods sold (COGS), and ultimately, gross profit. In this case, Adam’s Apple Company employs a FIFO process costing system to trace the flow of costs through its production departments—Kettle Room, Canning Department, Packing Department, and Finished Goods. This paper will detail the calculation of work-in-progress (WIP) inventories for each department, equivalent units, finished goods inventory, and COGS for March, culminating in the gross profit calculation.

1. Work In Progress (WIP) Inventory Calculation for Each Department

The initial step involves establishing the WIP inventory values at the beginning and end of March, considering the percentage of completion for direct materials (DM), direct labor (DL), and manufacturing overhead (FOH). For each department, the WIP inventory is computed by summing the costs of beginning inventory, adding costs incurred during the period, and adjusting for the percentage of completion.

Kettle Department

• Beginning Balance: 16,000 jars at 90% complete with costs of $13,600
• Costs added during March: DM = $21,280, DL = $8,000, FOH = $6,560
• Ending Inventory: 4,000 jars at 20% complete

To evaluate WIP, we first determine equivalent units and then allocate costs proportionally based on the percentage of completion. Since the beginning inventory is already 90% complete, only 10% of the costs need to be added to the beginning WIP to reach the current period’s cost. For ending inventory, at 20% completion, only 20% of the costs are attributable to the units remaining in process.

2. Calculation of Equivalent Units

Using FIFO, the equivalent units are calculated based on units transferred out and ending WIP, considering the degree of completion for each input. The total units transferred out in March are 5,000 boxes x 12 jars = 60,000 jars, with adjustments for beginning and ending inventory to determine the units completed during the period.

3. Finished Goods Inventory and COGS

The units transferred into finished goods encompass the completed units from each department, with the total units being 60,000 jars. The finished goods inventory consists of units completed in March and transferred to finished goods, with costs assigned based on the FIFO method, which considers the costs of the oldest inventory first.

To compute the COGS, we subtract the ending finished goods inventory from the total cost of units transferred out, reflecting the cost of inventory sold during March.

4. Gross Profit Calculation

The revenue for sales during March is calculated as 5,000 boxes x 12 jars/box x $4.00 per jar = $240,000. The COGS derived from process costing calculations is deducted from this to determine gross profit.

Gross Profit = Sales Revenue - COGS

Application of FIFO Process Costing

The FIFO process ensures that costs associated with beginning inventory are recorded first, providing an accurate reflection of the current period’s costs. The detailed process involves allocating costs proportionally to units transferred out and units remaining in ending inventory, based on their stages of completion for each department. This approach accurately traces costs through each process and improves inventory valuation, enabling better decision-making regarding production efficiency and profitability.

Conclusion

Applying FIFO process costing to Adam’s Apple Company highlights the importance of precise inventory and cost calculations in manufacturing. Through detailed WIP analysis, equivalent units, and cost flow assumptions, the company can accurately determine COGS and gross profit, ensuring sound financial reporting and strategic planning. Proper application of these methods is essential for firms engaged in continuous production of homogeneous goods like applesauce, as it ensures transparency, accuracy, and compliance with accounting standards.

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