JIT/Lean Production and Product Costing Presented is information pertaining to t
ID: 2518140 • Letter: J
Question
JIT/Lean Production and Product Costing
Presented is information pertaining to the standard or budgeted unit cost of a product manufactured in
a JIT/Lean Production environment at CNN Systems Inc.:
Direct materials .......................................................... $40
Conversion .............................................................. 30
Total ................................................................... $70
All materials are added at the start of the production process. All raw materials purchases and conver-
sion costs are directly assigned to Cost of Goods Sold. At the end of the period, costs are backed out and
assigned to Raw Materials in Process (only for materials still in the plant) and Finished Goods Inventory
(for materials and conversion costs for completed units). Costs assigned to inventories are based on the
standard or budgeted cost multiplied by the number of units in inventory. Conversion costs are assigned
to inventories only for fully converted units. Since inventory levels tend to be small in this JIT envi-
ronment, partially completed units are assigned no conversion costs. CNN Systems had no beginning
inventories on August 1, 2017. During the month, it incurred the following manufacturing-related costs:
Purchase of raw materials on account..................................... $700,000
Factory wages ....................................................... 260,000
Factory supervision salaries............................................. 60,000
Utilities bill for month .................................................. 34,000
Factory supplies purchased............................................. 30,000
Depreciation ......................................................... 19,000
The end-of-month inventory included raw materials in process of 750 units and finished goods of 500
units. One hundred units of raw materials were zero percent converted; the other 650 units averaged
60 percent converted.
Required
a. Calculate the total cost charged to Cost of Goods Sold during August.
b. Calculate the balances in Raw Materials in Process, Finished Goods Inventory, and Cost of Goods
Sold at the end of August.
c. Assuming that August is a typical month, is it likely that using the company’s shortcut backflush
accounting procedures will produce misleading financial statements? Explain.
Explanation / Answer
Total Unit sold= Unit Produced+ Beginning Inventory- Ending Inventory
Here no information is given about total units produced or unit sold.
Total Raw material for units=$700,000/$40=17,500 units
As $700,000 is raw material purchased and $20 is the per unit raw material so total raw material for units produced=17,500 units
Finished Inventory=750+500=1,250 units.
Goods sold=17,500-1,250=16250
Cost of raw material =16,250*$40=$650,000
Wages=$260,000
Salaries=$60,000
Utilities bill=$34,000
Factory Supplies =$30,000
Deperciation=$19,000
a) Total cost=$650,000+$260,000+$60,000+$34,000+$30,000+$19,000=$819,000
b)
Raw material In proceeds=650*$40=$26,000
Finished Goods=500*$40=$20,000
COGS=$819,000
c)
Since COGS including the complete cost of processing without adjusting for 60% converted, processed goods resulted in the higher cost and lower income for the month of august.
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