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Question 4

Real Pen Company (RP) manufactures fancy pens and uses process costing. One of its products - Bunny - is manufactured in department X. All material and conversion costs are added evenly throughout the process. Bunny pens are inspected at the 80% point. If the pen does not pass the inspection, it is discarded. At the end of the process, good pens are transferred to the warehouse for safe keeping.

There were 30,000 Bunny pens in work-in-process (WIP) at the beginning of May 2018. These pens were 30% complete. At the end of May 2018, there were 12,000 Bunny pens in the WIP in department X and the pens were 50% complete. During May 2018, 200,000 Bunny pens were started. At the end of May, 208,000 completed pens were transferred to the warehouse. Normal spoilage is set at 3% of inspected products. The following table summarises the cost of beginning WIP and new costs incurred in department X for May 2018:

	Cost incurred in Department X in May 2018	Beginning WIP
Direct Material	$1,918,000	$302,000
Conversion costs	$468,500	$86,500
Total	$2,386,500	$388,500

Required:

(a) Compute the units of normal and abnormal spoilage for May 2018. Explain why normal spoilage should be part of the product costs of good completed units. (7 marks(

(b) Using weighted average process costing, calculate the equivalent units of production for RP in the department X and calculate the cost per Bunny pen for May 2018 (Clearly show the costs per equivalent unit to the nearest cent for each cost category including abnormal spoilage if any). (9 marks)

(c) Write journal entries to record the costs in the WIP account, the transfer of goods completed, and abnormal spoilage (if any) during May 2018. Narrations are not required. (9 marks)

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