Analysis of Equivalent Cost per Unit in Job-Order Costing- Scenario Evaluation and Calculations

Analysis of Equivalent Cost per Unit in Job-Order Costing- Scenario Evaluation and Calculations

The equivalent cost per unit, assuming the ending inventory is considered to be 40 percent complete.

5,500 + 94,500 = 100,000 (Work in Progress)

100,000 – 90,000= 10,000

90,000 * 100% = 90,000

10,000 * 40% = 4,000

90,000 + 10,000 = 100,000

100,000 + 4,000 = 104,000

90,000 – 4,000= 86,000

902,400 / 86,000 = $10.49

Cost per unit = $10.49

Compute the equivalent cost per unit, assuming the ending inventory is considered to be 60 percent complete.

5,500 + 94,500 = 100,000 WIP

100,000 – 90,000= 10,000 WIP

90,000 * 100% = 90,000

10,000 * 60% = 6,000

90,000 + 6,000 = 96,000

902,400/96,000 = $9.40

Cost per unit = $9.40

Summary

Rene Alverez is a cost accounting officer assigned to the finishing department of the Standard Tool Company. Alverez knew well the cost expectations on her head immediately after she joined the company. Nonetheless, an opportunity came once, and she was ready to take it whenever it came about.

On the other hand, Bill Sawyer, the head of the finishing department, knows his work too well. For the past three years, he has headed the finishing department, and the cost per unit of all inventory moved from his department has continued to fall. For this and other reasons, his input is highly valued. As a result of his tremendous contribution to cost management, Mr. Sawyer is due to be promoted to manager of the plant once the current manager becomes the company’s vice president. Mr. Sawyer needs just one year, and his deal will be as good as sealed.

Ms. Alvarez’s altercation with Mr. Sawyer arises from their disagreement over the right estimate for inventory. While Mr. Sawyer felt that the inventory was 60% complete, Ms. Alvarez felt that it was only 40% complete (Edmonds et al., 2000). However, Ms. Alvarez could not contend with Mr. Sawyer due to his longstanding reputation. She knows she is right, but she does not know how to defend herself. After all, she felt it could be unwise to challenge Sawyer’s decision, yet he is about to be named as the company’s manager.

The department initially had 5,500 units of inventory at the beginning of the period. It then added 94,500 units during the period bringing the total to 100,000 units. The department also transferred 90,000 units during that time. The cost of total transfer and production during the period was $902,400.The cost is inclusive of the cost at the beginning of the period and throughout the inventory period.

The cause of the differences between the two costs per unit is the work-in-progress inventory. Mr. Sawyer transferred 90,000 of inventory into finished goods, leaving 10,000 of inventory in work in progress. That resulted in a slightly lower cost per unit ($9.4) rather than the 10.49 proposed by Ms. Alverez. The motive of balancing the figures in the two scenarios was to ensure that he got his job as a manager (Edmonds et al., 2000). The case would have been different if the figures were to conflict.

Reference

Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2000). Fundamental managerial accounting concepts. Irwin/McGraw-Hill.

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Assignment Content
Refer to the scenario located in the “Analyze, Think, Communicate” section 12-5 of Ch. 12, “Job-Order, Process, and Hybrid Costing Systems” of Fundamental Managerial Accounting Concepts. This scenario involves an altercation between Rene Alverez and Bill Sawyer and requires you to weigh in with calculations and comments on the matter.

Read the scenario in the textbook and complete the activity below.

Compute the equivalent cost per unit, assuming the ending inventory is considered to be 40 percent complete.

Compute the equivalent cost per unit, assuming the ending inventory is considered to be 60 percent complete.

Write a 350-word summary of your calculations and findings. Comment on Mr. Sawyer’s motives for establishing the percentage of completion at 60 percent rather than 40 percent.