Addition of Materials - Increase in Unit Cost:

Learning Objective:

1. What is the effect on the calculation in the preparation of a cost of production report when materials are added in a department subsequent to the first and as a result unit cost is increased but number of units do not increase?
2. In the simplest case, added materials, such as parts of an automobile, do not increase the number of units but increase total cost and unit costs. A materials unit cost must be computed for the department, and a materials cost must be included in the work in process inventory.
   
   
   

   Example:

   The cost of production report of the terminal department of Clonex Corporation is used to illustrate the effect of the addition of materials on total and unit costs of department.
   
   
   
   

   1. Materials Not Added:

   The Clonex Corporation
   Terminal Department (3rd Dept.)
   Cost of Production Report
   For the Month of January, 19        

   Quantity Schedule:
   Units received from the preceding department		40,000 ======
   Units transferred to finished goods storeroom	35,000
   Units still in process (1/4 labor and FOH)	4,000
   Units lost in process	1,000	40,000 ======
   Cost Charged To the Department:	Total Cost	unit Cost
   Cost from preceding department:
   Transferred in during the month	$140,400	$3.51
   Cost added by the department:
   Labor	32,400	0.90
   Factory Overhead (FOH)	19,800 -------	0.55 -----
   Total cost added	$52,500	$1.45
   Adjusted for lost units		0.09*
   	-------	------
   Total cost to be accounted for	$192,600	$5.05
   	======	======
   Cost Accounted for as Follows:
   Transferred to finished goods storeroom (35,000 × $5.05)		$176,750
   Work in process - ending inventory:
   Adjusted cost from preceding department [4,000 × ($3.51 + $0.09)]	$14,400
   Labor (4,000 × 1/4 × $0.90)	900
   Factory Overhead (4,000 × 1/4 × $0.55)	550 ------	15,850 ------
   Total cost accounted for		$192,600
   		======
   Additional Computations: Equivalent Production: Labor and factory overhead = 35,000 + 4,000 / 4 = 36,000 units Unit Costs: Labor = $32,400 / 36,000 = $0.90 per unit Factory overhead = $19,800 / 36,000 = 0.55 per unit *Adjustment for lost units: Method No.1: $140,400 / 39,000 = $3.60; $3.60 - $3.51 = $0.09 per unit Method No.2: 1,000 units × $3.51 = $3,510; $3,510 / 39,000 = $0.09 per unit

   2. Materials Added in Terminal Department

   Assume that additional materials costing $17,020 are placed in process and charged to the terminal department. Assume further that the materials in work in process are sufficient to complete 2,000 of the 4,000 units; that is, units are 50 percent complete as to materials cost. The effect of the additional materials cost is shown in the cost of production report below:
   
   
   
   
   The Clonex Corporation
   Terminal Department (3rd Dept.)
   Cost of Production Report
   For the Month of January, 19        

   Quantity Schedule:
   Units received from the preceding department		40,000 ======
   Units transferred to finished goods storeroom	35,000
   Units still in process (1/4 labor and FOH)	4,000
   Units lost in process	1,000	40,000 ======
   Cost Charged To the Department:	Total Cost	unit Cost
   Cost from preceding department:
   Transferred in during the month	$140,400	$3.51
   Cost added by the department:
   Materials	$17,020	$0.46
   Labor	32,400	0.90
   Factory Overhead (FOH)	19,800 -------	0.55 -----
   Total cost added	$69,220	$1.91
   Adjusted for lost units		0.09*
   	-------	------
   Total cost to be accounted for	$209,620	$5.51
   	======	======
   Cost Accounted for as Follows:
   Transferred to finished goods storeroom (35,000 × $5.51)		$192,850
   Work in process - ending inventory:
   Adjusted cost from preceding department (4,000 × $3.60)	$14,400
   Materials (4,000 × 1/2 × $0.46)	920
   Labor (4,000 × 1/4 × $0.90)	900
   Factory Overhead (4,000 × 1/4 × $0.55)	550 ------	16,770 ------
   Total cost accounted for		$209,620
   		======
   Additional Computations: Equivalent Production: materials = 35,000 + 4,000 / 2 = 37,000 units Labor and factory overhead = 35,000 + 4,000 / 4 = 36,000 units Unit Costs: Materials = $17,020 / 37,000 = $0.46 Labor = $32,400 / 36,000 = $0.90 per unit Factory overhead = $19,800 / 36,000 = 0.55 per unit *Adjustment for lost units: Method No.1: $140,400 / 39,000 = $3.60; $3.60 - $3.51 = $0.09 per unit Method No.2: 1,000 units × $3.51 = $3,510; $3,510 / 39,000 = $0.09 per unit

   The only difference in the two cost of production reports (first, where materials are not added in terminal department and second where additional materials are added in terminal department) are the $17,020 materials cost charged to the department and the $.46 materials unit cost ($17,020 / 37,000). The additional materials cost is also reflected in the goods, and in the ending work in process inventory.