Addition of Materials – Increase in Unit Cost

Addition of Materials – Increase in Unit Cost

Learning Objective:

  1. What is the effect on the calculation in the preparation of a cost of production report when materials are added in a department subsequent to the first and as a result unit cost is increased but number of units do not increase?

In the simplest case, added materials, such as parts of an automobile, do not increase the number of units but increase total cost and unit costs. A materials unit cost must be computed for the department, and a materials cost must be included in the work in process inventory.

Example:

The cost of production report of the terminal department of Clone x Corporation is used to illustrate the effect of the addition of materials on total and unit costs of department.

1. Materials Not Added:

The Clone x Corporation
Terminal Department (3rd Dept.)
Cost of Production Report
For the Month of January, 19        

Quantity Schedule:
Units received from the preceding department 40,000
======
Units transferred to finished goods storeroom 35,000
Units still in process (1/4 labor and FOH) 4,000
Units lost in process 1,000 40,000
======
Cost Charged To the Department: Total
Cost
unit
Cost
Cost from preceding department:
Transferred in during the month $140,400 $3.51
Cost added by the department:
Labour 32,400 0.90
Factory Overhead (FOH) 19,800
——-
0.55
—–
Total cost added $52,500 $1.45
Adjusted for lost units 0.09*
——- ——
Total cost to be accounted for $192,600 $5.05
====== ======
Cost Accounted for as Follows:
Transferred to finished goods storeroom (35,000 × $5.05) $176,750
Work in process – ending inventory:
Adjusted cost from preceding department [4,000 × ($3.51 + $0.09)] $14,400
Labour (4,000 × 1/4 × $0.90) 900
Factory Overhead (4,000 × 1/4 × $0.55) 550
——
15,850
——
Total cost accounted for $192,600
======

Additional Computations:

Equivalent Production:

Labour and factory overhead = 35,000 + 4,000 / 4 = 36,000 units

Unit Costs:

Labour = $32,400 / 36,000 = $0.90 per unit

Factory overhead = $19,800 / 36,000 = 0.55 per unit

*Adjustment for lost units:

Method No.1: $140,400 / 39,000 = $3.60; $3.60 – $3.51 = $0.09 per unit

Method No.2: 1,000 units × $3.51 = $3,510; $3,510 / 39,000 = $0.09 per unit

2. Materials Added in Terminal Department

Assume that additional materials costing $17,020 are placed in process and charged to the terminal department. Assume further that the materials in work in process are sufficient to complete 2,000 of the 4,000 units; that is, units are 50 percent complete as to materials cost. The effect of the additional materials cost is shown in the cost of production report below:

The Clone x Corporation
Terminal Department (3rd Dept.)
Cost of Production Report
For the Month of January, 19        

Quantity Schedule:
Units received from the preceding department 40,000
======
Units transferred to finished goods storeroom 35,000
Units still in process (1/4 labour and FOH) 4,000
Units lost in process 1,000 40,000
======
Cost Charged To the Department: Total
Cost
unit
Cost
Cost from preceding department:
Transferred in during the month $140,400 $3.51
Cost added by the department:
Materials $17,020 $0.46
Labour 32,400 0.90
Factory Overhead (FOH) 19,800
——-
0.55
—–
Total cost added $69,220 $1.91
Adjusted for lost units 0.09*
——- ——
Total cost to be accounted for $209,620 $5.51
====== ======
Cost Accounted for as Follows:
Transferred to finished goods storeroom (35,000 × $5.51) $192,850
Work in process – ending inventory:
Adjusted cost from preceding department (4,000 × $3.60) $14,400
Materials (4,000 × 1/2 × $0.46) 920
Labour (4,000 × 1/4 × $0.90) 900
Factory Overhead (4,000 × 1/4 × $0.55) 550
——
16,770
——
Total cost accounted for $209,620
======

Additional Computations:

Equivalent Production:

materials = 35,000 + 4,000 / 2 = 37,000 units

Labour and factory overhead = 35,000 + 4,000 / 4 = 36,000 units

Unit Costs:

Materials = $17,020 / 37,000 = $0.46

Labour = $32,400 / 36,000 = $0.90 per unit

Factory overhead = $19,800 / 36,000 = 0.55 per unit

*Adjustment for lost units:

Method No.1: $140,400 / 39,000 = $3.60; $3.60 – $3.51 = $0.09 per unit

Method No.2: 1,000 units × $3.51 = $3,510; $3,510 / 39,000 = $0.09 per unit

The only difference in the two cost of production reports (first, where materials are not added in terminal department and second where additional materials are added in terminal department) are the $17,020 materials cost charged to the department and the $.46 materials unit cost ($17,020 / 37,000). The additional materials cost is also reflected in the goods, and in the ending work in process inventory.

You may also be interested in other useful articles from “process costing system – addition of materials and beginning inventory” chapter:

  1. Increase in Unit Cost Due to Addition of Materials
  2. Addition of Materials – Increase in units and Change is Unit Cost
  3. Beginning Work in Process Inventories – Average Costing Method
  4. Cost of Production Report FIFO
  5. Average Costing Method Versus FIFO Costing Method – Process Costing
  6. Difficulties Encountered in Process Costing Procedure
  7. Discussion Questions and Answers
  8. Similarities and Differences between Job Order and Process Costing System

  9. Operation Costing /Hybrid Costing System

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