Cost Accounting (14th Edition)

DECISION POINTS 729
Problem 2
Littlefield Company uses a backflush costing system with three trigger points:
Purchase of direct materials
Completion of good finished units of product
Sale of finished goods
There are no beginning inventories. Information for April 2011 is as follows:
Direct materials purchased $880,000 Conversion costs allocated $ 400,000
Direct materials used $850,000 Costs transferred to finished goods $1,250,000
Conversion costs incurred $422,000 Cost of goods sold $1,190,000
1. Prepare journal entries for April (without disposing of underallocated or overallocated
conversion costs). Assume there are no direct materials variances.
2. Under an ideal JIT production system, how would the amounts in your journal
entries differ from the journal entries in requirement 1?
Solution
1. Journal entries for April are as follows:
Required
Entry (A1) Materials and In-Process Inventory Control 880,000
Accounts Payable Control 880,000
(direct materials purchased)
Entry (A2) Conversion Costs Control 422,000
Various accounts (such as Wages Payable Control) 422,000
(conversion costs incurred)
Entry (C1) Finished Goods Control 1,250,000
Materials and In-Process Inventory Control 850,000
Conversion Costs Allocated 400,000
(standard cost of finished goods completed)
Entry (D1) Cost of Goods Sold 1,190,000
Finished Goods Control 1,190,000
(standard costs of finished goods sold)
2. Under an ideal JIT production system, if the manufacturing lead time per unit is very
short, there would be zero inventories at the end of each day. Entry (C1) would be
$1,190,000 finished goods production [to match finished goods sold in entry (D1)], not
$1,250,000. If the marketing department could only sell goods costing $1,190,000, the
JIT production system would call for direct materials purchases and conversion costs of
lower than $880,000 and $422,000, respectively, in entries (A1) and (A2).
Decision Points
The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a
key question related to a learning objective. The guidelines are the answer to that question.
Decision
1. What are the six categories
of costs associated with
goods for sale?
Guidelines
The six categories are purchasing costs (costs of goods acquired from suppliers),
ordering costs (costs of preparing a purchase order and receiving goods), carrying
costs (costs of holding inventory of goods for sale), stockout costs (costs
arising when a customer demands a unit of product and that unit is not on
hand), costs of quality (prevention, appraisal, internal failure, and external failure
costs), and shrinkage costs (the costs resulting from theft by outsiders,
embezzlement by employees, misclassifications, and clerical errors).