Hanson Corp uses a process costing system. Materials are added at the start of the process. Beginning inventory for January consisted of 1,900 units (40% complete for conversion) with a cost of $15,000. 10,900 units were started and completed during January. On January 31, the inventory consisted of 510 units that were 70% complete for conversion. Material cost per unit was calculated to be $5.7; conversion cost per unit was calculated to be $7.2. What would be the cost transferred to finished goods using the FIFO method?
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To determine the cost transferred to finished goods using the FIFO (First-in, First-out) method in a process costing system, we need to calculate the equivalent units completed and the total cost incurred in the process.
Step 1: Calculate equivalent units of production:
- Beginning inventory units: 1,900 units
- Units started and completed during January: 10,900 units
- Ending inventory units: 510 units
For units completed during January:
- 1,900 units were 40% complete for conversion, so 40% of 1,900 = 760 equivalent units of production for conversion.
- 10,900 units were completed, so all of them (100%) are considered complete units.
For ending inventory units:
- 510 units were 70% complete for conversion, so 70% of 510 = 357 equivalent units of production for conversion.
Total equivalent units of production for conversion = Equivalent units of production for completed units + Equivalent units of production for ending inventory
= (760 equivalent units + 10,900 units) + 357 equivalent units
= 11,660 equivalent units.
Step 2: Calculate the dollar amount for materials and conversion costs incurred:
- Material cost per unit = $5.7
- Conversion cost per unit = $7.2
For the completed units:
- Material cost for completed units = Material cost per unit * Units completed
= $5.7 * 10,900 units
= $62,130
- Conversion cost for completed units = Conversion cost per unit * Units completed
= $7.2 * 10,900 units
= $78,480
For the ending inventory units:
- Material cost for ending inventory units = Material cost per unit * Ending inventory units
= $5.7 * 510 units
= $2,907
- Conversion cost for ending inventory units = Conversion cost per unit * Ending inventory units
= $7.2 * 510 units
= $3,672
Step 3: Calculate the total cost transferred to finished goods using the FIFO method:
- Total cost transferred to finished goods = Cost of completed units + Cost of ending inventory
= (Material cost for completed units + Conversion cost for completed units) + (Material cost for ending inventory units + Conversion cost for ending inventory units)
= ($62,130 + $78,480) + ($2,907 + $3,672)
= $146,580 + $6,579
= $153,159.
Therefore, using the FIFO method, the cost transferred to finished goods would be $153,159.