Using an old family recipe, Rachel Archer started a company that produces root beer. Archer opened the doors of Rachel’s Real Root Beer on January 1. The company struggled for the first few months, but by the end of September, the customer list was expanding rapidly. Archer realized that bottling by hand was becoming more and more difficult as the orders continued to come in. To purchase the automated equipment needed to expand further, Archer realized it would be necessary to borrow money.
Archer was disappointed to find that few banks were willing to make a loan to such a small company, but she finally found a bank that would consider her loan application. However, Archer was informed that she would have to supply up-to-date financial statements with her loan application.
Archer had not bothered with formal financial statements so far she felt that as long as the balance in the company’s chequing account kept increasing, the company was doing fine. She wondered how she was going to determine the value of the root beer in the work in process and finished goods inventories to put on her company’s balance sheet. Archer approached Ed Switzer, an old friend currently working for a local accounting firm. After talking with Archer and touring her production facility, Switzer suggested a process costing system (using the weighted-average method) since Archer’s company produces only one standard product in a continuous production process. During the plant tour, Switzer noted that Archer ran the operation as one department. At the beginning of the process, the various ingredients were checked for quality and then mixed and injected with carbon dioxide to create bulk root beer. Then bottles were checked for defects, filled with root beer, capped, visually inspected again for defects, and then packed into cases (12 bottles per case) for shipping. At this point, completed cases were transferred to finished goods.
Required:
Take on the role of Switzer and prepare the report for Archer. Be sure to provide all details, including a full production report, to help Archer understand how costs were calculated.