I'm having a hard time with this one. Can someone please break down the answer for me using the Becker methodology?
I don't see how they are coming up with using 100% of the beginning units in regard to direct materials.
A company employs a process costing system for its two-department manufacturing operation using the first-in-first-out (FIFO) inventory method. When units are completed in department 1, they are transferred to department 2 for completion. Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion. The specific identification method is used to account for lost units.
Generally the number of defective units (that is, those failing inspection) is below the normal tolerance limit of 4% of units inspected. Defective units have minimal value, and the company sells them without any further processing for whatever it can. Generally the amount collected equals, or slightly exceeds, the transportation cost. A summary of the manufacturing activity for department 2, in units for the current month, is presented below.
Physical flow (output units)
Beginning inventory
(60% complete with respect to conversion)..............20,000
Units transferred in from department 1..........................180,000
Total units to account for......................................200,000
Units completed in department 2 during the month.........170,000
Units found to be defective at inspection...........................5,000
Ending inventory
(80% complete with respect to conversion)................25,000
Total units accounted for..................................200,000
The equivalent units for direct materials for the current month would be
Answer: 195,000 units.
This alternative is the correct equivalent unit calculation for direct material. It appropriately provides for the recognition of the units that have to be added to both beginning and ending work-in-process as well as the units completed, but ignores the materials that would not be added to the defective units.
Supporting Calculations
Units completed
From beginning WIP 20,000
From current production 150,000
Defective units --
Ending WIP 25,000
Equivalent units 195,000