Problem
Pacific Beach Ltd. manufactures sun tan lotion, called Surtan, in 500 ml plastic bottles. Surtan is sold in a comptetitive 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 labour and manufacturing overhead occur uniformly throughout each process. Unit costs are based on the cost per litre of Surtan using the weighted average costing approach.
On June 30, 2011, Sara Simmons, the chief accountant for the past 20 years, opted to take early retirement. Her replacement, Ira Jacobs, had extensive accounting experience with motels in the area but only limited contact with manufacturing accounting. During July, Ira correctly accumulated the following production quantity and cost data for the Mising department.
Production quantities: Work in process, July 1, 8,000 litres 75% complete; started into production 100,000 litres; work in process, July 31, 5,000 litres 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 cost and $67,000 of conversion costs; incurred in July: materials $573,000, conversion costs $765,000.
Ira then prepared a production cost report on the basis of physical units started into production. Her report showed a production cost of $14.26 per litre of Surtan. The management of Pacific Beach was surprised at a high unit cost. The president comes to you, as Sara's top assistant, to review Ira's report and prepare a correct report if necessary.
Instructions:
a) Show how Ira arrived at the unit cost of $14.26 per litre of Surtan.
b) What errors did Ira make in preparing this production cost report
c) Prepare a correct production cost report for July.