Sea Breeze Beach Company manufactures suntan lotion, called Surtan, in 11-ounce plastic bottles. Surtan is sold in a competitive market. As a result, management is very cost-conscious. Surtan is manufactured through two processes: mixing and filling. Materials are entered at the beginning of each process and labor and manufacturing overhead occur uniformly throughout each process. Unit costs are based on the cost per gallon of Surtan using the weighted-average costing approach. On June 30, 2012, Rita Jenz, the chief accountant for the past 20 years, opted to take early retirement. Her replacement, Neil Benton, had extensive accounting experience with motels in the area but only limited contact with manufacturing accounting. During July, Neil correctly accumulated the following production quantity and cost data for the Mixing Department.

Production quantities: Work in process, July 1, 8,000 gallons 75% complete; started into production 91,000 gallons; work in process, July 31, 5,000 gallons 20% complete. Materials are added at the beginning of the process.

Production costs: Beginning work in process $88,000, comprised of $21,000 of materials costs and $67,000 of conversion costs; incurred in July: materials $573,000, conversion costs $769,000.

Neil then prepared a production cost report on the basis of physical units started into production. His report showed a production cost of $15.71 per gallon of Surtan. The management of Sea Breeze Beach was surprised at the high unit cost. The president comes to you, as Rita’s top assistant, to review Neil’s report and prepare a correct report if necessary.

Instructions

With the class divided into groups, answer the following questions.

(a) Show how Neil arrived at the unit cost of $15.71 per gallon of Surtan.

(b) What error(s) did Neil make in preparing his production cost report?

(c) Prepare a correct production cost report for July.