# Principles of Cost Accounting: Week 2 Homework (P2-1, P2-3, P2-8 and P2-12)

Principles of Cost Accounting
Week 2 Homework (P2-1, P2-3, P2-8 and P2-12)

P2-1
Economic order quantity; ordering and carrying costs Dolphin Company predicts that it will use 25,000 units of material during the year. The expected daily usage is 200 units, and there is an expected lead time of five days and a safety stock of 500 units. The material is expected to cost \$5 per unit. Dolphin anticipates that it will cost \$50 to place each order. The annual carrying cost is \$0.10 per unit. Required:
1. Compute the order point.
2. Determine the most economical order quantity by use of the formula.
3. Calculate the total cost of ordering and carrying at the EOQ point

P2-3 Inventory costing methods
The purchases and issues of rubber gaskets (Stores Ledger #11216) as shown in the records of Lowe Corporation for the month of November follow: Units Unit Price Nov. 1 Beginning balance 30,000 3.00 4 Received, Rec. Report No. 112 10,000 3.10 5 Issued, Mat. Req. No. 49 30,000 8 Received, Rec. Report No. 113 50,000 3.30 15 Issued, Mat. Req. No. 50 20,000 22 Received, Rec. Report No. 114 25,000 3.50 28 Issued, Mat. Req. No. 51 30,000

Required:
1. Complete a stores ledger card similar to Figure 2-9 (the "on order" columns should be omitted) for each of the following inventory costing methods, using a perpetual inventory system:
a. FIFO
b. LIFO
c. Moving average (carrying unit prices to five decimal places)
2. For each method, prepare a schedule that shows the total cost of materials transferred to Work in Process and the cost of the ending inventory.
3. If prices continue to increase, would you favor adopting the FIFO or LIFO method? Explain.
4. When prices continue to rise, what is the effect of FIFO versus LIFO on the inventory balance reported in the balance sheet? Discuss.

P2-8 JIT and cost control
Buskin Bolts, Inc. produces 50,000 units each day and the average number of units in work in process is 200,000. The average annual inventory carrying cost percentage is 20% and the average work in process is \$1,000,000.

Required:
1. Determine the throughput time.
2. Compute the annual carrying costs.
3. If the same daily output can be achieved while reducing the work in process by 75%, determine the new throughput time. 4. What has happened to the velocity of production in part 3?
5. Compute the annual carrying costs for part 3.

P2-12 Spoiled goods and defective work
Francona Inc. manufactures electrical equipment from specifications received from customers. Job X10 was for 1,000 motors to be used in a specially designed electrical complex. The following costs were determined for each motor: Materials 117 Labor 100 Factory overhead 83 Total 300 At final inspection, Francona discovered that 33 motors did not meet the exacting specifications established by the customer. An examination indicated that 15 motors were beyond repair and should be sold as spoiled goods for \$75 each. The remaining 18 motors, although defective, could be reconditioned as first-quality units by the addition of \$1,650 for materials, \$1,500 for labor, and \$1,200 for factory overhead.

Required:
Prepare the journal entries to record the following:
1. The scrapping of the 15 units, with the income from spoiled goods treated as a reduction in the manufacturing cost of the specific job.
2. The correction of the 18 defective units, with the additional cost charged to the specific job.
3. The additional cost of replacing the 15 spoiled motors with new motors.
4. The sale of the spoiled motors for \$75 each.