For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process in the first production department. If Jones applies a higher completion rate (e. g., 40%) for ending Work in Process inventory than the actual completion rate (e. g., 30%) with respect to both materials and conversion cost, what is the impact of this error on equivalent units of production, cost per equivalent units, costs of units transferred out, and cost of ending work in process inventory

Answer in explanation

Explanation:

In this question, we have Mr Jones applying a higher completion rate than the actual completion rate. We now want to find what is the impact of this error.

Due to the fact that the actual completion rate 30% is less than the applied rate, we can say that this error is error based on the overestimation of equivalent units.

Now let’s calculate the impact that this have;

On production units

Actual equivalent unit completed is 10,000 + 10000+(5000*30%)= 11500. But recorded as 10000+(5000*40%) 12000. Hence OVERESTIMATED.

On Cost per Equivalent unit: Since the overall equivalent units ie 12000 is higher than actual ie 11500, the cost per unit will come down. Hence UNDERESTIMATED.

On cost of units completed or transferred: Since the units transferred remain constant and ending inventory is hiked up, a portion of costs get transferred to the closing units. Hence UNDERESTIMATED.

On cost of ending inventory: Since the overall inventory is estimated high, that portion of expense of the goods transferred will be burdened by equivalents in inventory. Hence OVERESTIMATED.