Question
Milk Milk is one of the few remaining dairy farms that still supplies fresh milk for sale to customers through direct farm purchase, home delivery
Milk Milk is one of the few remaining dairy farms that still supplies fresh milk for sale to customers through direct farm purchase, home delivery or selected store outlets. Milk is obtained from the cattle under sanitary conditions
and stored into the dairy's bulk tank.
The milk is then subjected to the pasteurizing process and once completed, the pasteurized milk is bottled into standard 500ml bottles and transferred to the finished goods store for deliveries to customers.
Milk is issued at the beginning of the pasteurizing process. The other pasteurizing costs are incurred evenly throughout that process. Similarly, bottles are added at the beginning of the bottling process while other costs are
incurred evenly.
Overhead is applied into the pasteurizing and the bottling, at a rate of 80% and 50% of direct labour cost respectively.
It is considered normal for some of the milk to be "lost" due to evaporation during pasteurizing and some bottles of milk to be rejected during bottling. Quality control inspection is applied at the end of the bottling process to
determine whether completed products are safe for consumption. Bottles of milk which are deemed unsafe are rejected and considered as spoilt. It is accepted that spoilage is normal if rejected bottles of milk are no more than 3% of the completed good bottles produced.
The loss due to evaporation is assumed to take place at the end of the pasteurizing process. The cost of lost milk is written off as a loss of the period in which it occurs. This cost is measured at the cost of the milk plus the costs of
the pasteurizing process, but no bottling cost is charged.
Milk uses FIFO system of costing.
The following data summarize the firm's activities during September:
Opening WIP Milk $100,000
Direct labour cost (pasteurizing) to 31 Aug $20,000
Milk (40% pasteurized) 125,000 litres
Costs incurred during September
Milk $224,000 Bottles $48,000
Direct labour cost (pasteurizing) $110,000
Direct labour cost (bottling) $96,000
Production data for September
Milk received into pasteurizing 280,000 litres
Good bottles completed from bottling 450,000 bottles
Spoiled units 30,000 bottles
Lost units 5,000 litres
None of the opening and closing work in process had at that stage entered the bottling process. The units in the closing work in process were on average 50% complete as to pasteurizing
Using the four step approach: (i) Calculate the closing work in process for the pasteurizing process in litres and for the bottling process in bottles.
(ii) Calculate the number of equivalent units processed in September, distinguishing between pasteurizing process and bottling process.
iii) Calculate the costs per equivalent unit for each product cost category processed in September for the pasteurizing process and the bottling process, the costs of pasteurized milk per litre transferred from the pasteurizing process to the bottling process, the cost of each unit bottled milk from the bottling process, the costs of abnormal spoilage, lost and closing WIP.
(b) Pass all the necessary journal entries.
(c) Use your answer to (a) to explain "transferred-in costs".
Step by Step Solution
There are 3 Steps involved in it
Step: 1
a i Calculation of closing work in process Pasteurizing Process Closing WIP in litres 280000 125000 155000 litres Closing WIP is 50 complete so equiva...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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