Question

Daosta Inc. uses the FIFO method in its process costing system. The following data concern the operations of the company's first processing department for a recent month. Required: Using the FIFO method: Required: Using the FIFO method:

a. Determine the equivalent units of production for materials and conversion costs.
b. Determine the cost per equivalent unit for materials and conversion costs.
c. Determine the cost of ending work in process inventory.
d. Determine the cost of units transferred out of the department during the month.

Answer 1

To ascertain Daosta Inc.'s cost structure, total fixed and variable costs are calculated to determine total cost, average variable cost, average total cost, and marginal cost. The same cost structure then helps to re-evaluate production costs when machine costs change, leading to a recommendation for the most cost-effective production method.

Step-by-step explanation:

Cost Structure and Production Cost Analysis

To determine the cost structure of Daosta Inc., the following steps are performed based on the provided information:

1. Calculate the total cost by adding total fixed costs to total variable costs.
2. Find the average variable cost (AVC) by dividing total variable costs by the quantity of output.
3. Compute the average total cost (ATC) by dividing total cost by the quantity of output.
4. Derive the marginal cost (MC), which is the change in total cost that arises from producing an additional unit of output.

Once the cost structure is established, it can be used to make further calculations.

Production Cost with Different Machine Cost

If the cost of labor remains at $40 and the cost of a machine decreases to $50, the total cost of each method of production is recalculated. The firm should choose the method with the lower total cost, considering factors such as efficiency and capacity for their operations.

Answer 2

To determine the equivalent units of production and cost per equivalent unit for materials and conversion costs using the FIFO method, you need to calculate the percentage of completion and multiply it by the number of units. The cost of ending WIP inventory can be found by multiplying the cost per equivalent unit by the remaining equivalent units in the ending WIP inventory. The cost of units transferred out of the department can be found by multiplying the cost per equivalent unit by the equivalent units in the units transferred out.

Step-by-step explanation:

Using the FIFO method:

a. To determine the equivalent units of production for materials, you need to calculate the percentage of completion for the units in the beginning work in process (WIP) inventory and the units started and completed during the month. Then, multiply these percentages by the number of units for each category and sum them up. The same process applies to calculate the equivalent units for conversion costs.

b. To determine the cost per equivalent unit for materials, divide the total cost of materials by the equivalent units of production for materials calculated in step a. Similarly, divide the total cost of conversion costs by the equivalent units of production for conversion costs.

c. To determine the cost of ending WIP inventory, multiply the cost per equivalent unit for materials and conversion costs calculated in step b by the remaining equivalent units of production for materials and conversion costs respectively in the ending WIP inventory.

d. To determine the cost of units transferred out of the department during the month, multiply the cost per equivalent unit for materials and conversion costs calculated in step b by the equivalent units of production for materials and conversion costs in the units transferred out of the department.