Question

Richards corporation uses the weighted-average method of process costing. The following information is available for October in its fabricating department:

Beginning work in process inventory: 80,000 units, 60

What is the complete question?

Answer 1

To determine the optimal production method, total costs for each method are compared by calculating the expenses from labor and capital inputs. Method 1 is the most cost-effective before and after the increase in the cost of labor. Accounting profit is calculated by subtracting total expenses from sales revenue, resulting in a profit of $50,000 for the firm.

Step-by-step explanation:

Optimal Production Method and Accounting Profit Calculation

When companies face decisions about production methods, costs of various inputs such as labor and capital are crucial factors that influence their choices. To analyze the cost of different production methods, firms must calculate the total cost incurred by each method by multiplying the units of labor and capital required by their respective costs and then compare the totals.

Calculating Production Method Costs: Given the unit costs of labor at $100 and capital at $400, the total cost for each production method can be calculated as follows:

• Method 1: (50 units of labor × $100/unit) + (10 units of capital × $400/unit) = $9,000
• Method 2: (20 units of labor × $100/unit) + (40 units of capital × $400/unit) = $18,000
• Method 3: (10 units of labor × $100/unit) + (70 units of capital × $400/unit) = $29,000

If the cost of labor rises to $200 per unit, the calculation changes as follows:

• Method 1: (50 units of labor × $200/unit) + (10 units of capital × $400/unit) = $18,000
• Method 2: (20 units of labor × $200/unit) + (40 units of capital × $400/unit) = $20,000
• Method 3: (10 units of labor × $200/unit) + (70 units of capital × $400/unit) = $30,000

Therefore, with the original costs, Method 1 is the best production method due to its lowest cost. If the cost of labor increases, Method 1 remains the best choice, though the cost advantage over Method 2 diminishes.

Regarding the question about accounting profit, it is calculated by subtracting total expenses from sales revenue. In the provided scenario:

• Sales revenue = $1,000,000
• Total expenses = $600,000 (labor) + $150,000 (capital) + $200,000 (materials) = $950,000

The firm's accounting profit is:

Accounting profit = Sales revenue - Total expenses = $1,000,000 - $950,000 = $50,000