Question

The records of Fremont Corporation's initial and unaudited accounts show the following ending inventory balances, which must be adjusted to actual costs. Work-in-process inventory Finished goods inventory Units 210,000 25,000 Unaudited Costs $817,542 364,740 As the auditor, you have learned the following information. Ending work-in-process inventory is 40 percent complete with respect to conversion costs. Materials are added at the beginning of the manufacturing process, and overhead is applied at the rate of 80 percent of the direct labor costs. There was no finished goods inventory at the start of the period. The following additional information is also available. Units 92,000 580,000 Costs Direct Materials Direct Labor $ 376,800 $1,032,000 Beginning inventory (80% complete as to labor) Units started Current costs Units completed and transferred to finished goods inventory 1,740,000 2,244,000 462,000 Required: a. Prepare a production cost report for Fremont using the weighted average method. (Hint: You will need to calculate equivalent units for three categories: materials, labor, and overhead.) b. Show the journal entry required to correct the difference between the unaudited records and actual ending balances of Work-in- Process Inventory and Finished Goods Inventory. Debit or credit Cost of Goods Sold for any difference. c. If the adjustment in requirement (b) is not made, will the company's income and inventories be overstated or understated?

Answer 1

Answer-a:

	Physical Units	Total cost	Material	Labour	Overhead
Flow of production units
Units to be accounted for:
Beginning WIP inventory	92,000
Units started this period	580,000
Total units to be accounted for	672,000
Units accounted for
Units completed and transferred out:
From beginning inventory	92,000
Started and completed currently	370,000
Total transferred out	462,000		462,000	462,000	462,000
Units in ending WIP inventory	210,000		210,000	84,000	84,000
Total units accounted for	672,000		672,000	546,000	546,000
Cost to be accounted for
Cost in beginning WIP inventory		2,234,400	376,800	1,032,000	825,600
Current period cost		5,779,200	1,740,000	2,244,000	1,795,200
Total costs to be accounted for		$ 8,013,600	$ 2,116,800	$ 3,276,000	$ 2,620,800
Cost per equivalent unit:
Material			$          3.15
Labour				$          6.00
Overhead					$           4.80
Costs accounted for
Cost assigned to units transferred out
Material		1,455,300	1,455,300
Labour		2,772,000		2,772,000
Overhead		2,217,600			2,217,600
Total costs of units transferred out		$ 6,444,900
Cost assigned to ending WIP inventory
Material		661,500	661,500
Labour		504,000		504,000
Overhead		403,200			403,200
Total ending WIP inventory		$ 1,568,700
Total cost accounted for		$ 8,013,600	$ 2,116,800	$ 3,276,000	$ 2,620,800

Answer-b:

Event Credit Debit 15,990 1 General Journal Cost of goods sold Finished goods inventory WIP inventory Cost of goods sold 15,990 751,158 2 751,158

Answer-c:

Income would have been WIP would have been Finished goods would have been understarted understated overstated

Finished goods inventory WIP inventory Actual Cost Unaudited cost Results $ 348,750 $ 364,740 $15,990 overstated $ 1,568,700$ 817,542 $751,158 understated