Chapter 13, Problem 3PB

Lean accounting

Com-Tel Inc. manufactures and assembles two models of smartphones—the Tiger Model and the Lion Model. The process consists of a lean cell for each product. The data that follow concern only the Lion Model lean cell.

For the year, Com-Tel Inc. budgeted these costs for the Lion Model production cell:

Com-Tel plans 2,100 hours of production for the Lion Model cell for the year. The materials cost is $185 per unit. Each assembly requires 12 minutes of cell assembly time. There was no May 1 inventory for either Raw and In Process Inventory or Finished Goods Inventory.

The following summary events took place in the Lion Model cell during May:

1. A. Electronic parts were purchased to produce 900 Lion Model assemblies in May.
2. B. Conversion costs were applied for 875 units of production in May.
3. C. 850 units were completed and transferred to finished goods in May.
4. D. 800 units were shipped to customers at a price of $500 per unit.

Instructions

1. 1. Determine the budgeted cell conversion cost per hour.
2. 2. Determine the budgeted cell conversion cost per unit.
3. 3. Journalize the summary transactions (A) through (B).
4. 4. Determine the ending balance in Raw and In Process Inventory and Finished Goods Inventory.
5. 5. How does the accounting in a lean environment differ from traditional accounting?

To determine

The conversion cost per hour for the budgeted cell.

Explanation of Solution

Lean Manufacturing: Lean manufacturing aims at reducing the cost and minimizing the waste involved in the production, in order to optimize the value for the product or the service.

Lean Accounting: Lean accounting refers to the accounting standards that support the concepts of lean manufacturing. They record and reflect the transactions done to assist lean manufacturing.

Conversion Cost: The cost involved in the conversion of the raw material into the processed product is known as the conversion cost.

Calculate the conversion cost per hour for the budgeted cell.

$\begin{array}{c}\text{Conversion cost per hour = }\frac{\text{Total Conversion Cost}}{\text{Total Time Taken}}\\ \text{= }\frac{\text{\$189,000}}{\text{2,100 hours}}\\ \text{= \$90 per hour}\end{array}$

Hence, the conversion cost per hour for the budgeted cell is $90 per hour.

To determine

Calculate the conversion cost per unit for the budgeted cell.

Explanation of Solution

Calculate the conversion cost per unit for the budgeted cell.

$\begin{array}{c}\text{Conversion cost per unit = }\frac{\text{Time Taken per unit }}{\text{Minutes per hour}}\times \text{ Conversion cost per hour}\\ \text{= }\frac{\text{12 minutes}}{\text{60 minutes}}\times \text{ \$90}\\ \text{= \$18 per unit}\end{array}$

Hence, the conversion cost per hour for the budgeted cell is $18 per unit.

To determine

Journalize the given transactions.

Explanation of Solution

1. A.    Materials purchased to produce 900 units.

Date	Account Title	Debit ($)	Credit ($)
June	Raw and In-Process Inventory  (1)	$166,500
	Accounts payable		$166,500
	(Purchase of goods on account)

Table (1)

• • Raw materials are an asset, which is increased. Hence debit the raw and in-process inventory with $166,500.
• • Accounts payable is a liability, which is increased; hence credit the accounts payable account with $166,500.

Working Note:

(1) Calculate the amount of goods purchased.

    $\begin{array}{c}\text{Raw and In-Process Inventory = Cost per unit }\times \text{ Number of units}\\ \text{= \$185 }\times \text{ 900 units}\\ \text{= }\$166,500\end{array}$

The cost of raw and in-process inventory is $166,500.

1. B.     Conversion cost applied to 875 units.

Date	Account Title	Debit ($)	Credit ($)
June	Raw and In-Process Inventory  (2)	$15,750
	Conversion Costs		$15,750
	(The conversion costs involved in the production)

Table (2)

• • Value is added to the raw materials, increases the asset. Hence debit the raw and in-process inventory with $15,750.
• • Conversion cost is an expense which reduces the stockholder's equity; hence credit the conversion cost account with $15,750.

Working Note:

(2) Calculate the amount value added.

$\begin{array}{c}\text{Raw and In-Process Inventory= Conversion Cost per unit}\times \text{Number of units}\\ \text{= }\$18\times \text{875 units}\\ \text{= \$1}5,750\end{array}$

The cost of conversion for 875 units is $15,750.

1. C.     Completed the production of 850 units.

Date	Account Title	Debit ($)	Credit ($)
June	Finished Goods Inventory  (3)	$172,550
	Raw and In-Process Inventory		$172,550
	(The completion of 850 units placed in finished goods)

Table (3)

• • Value is added to the finished goods, increases the asset. Hence debit the finished goods inventory with $172,550.
• • Raw materials are an asset, which is decreased. Hence credit the raw and in-process inventory with $172,550.

Working Note:

(3) Calculate the amount value added.

$\begin{array}{c}\text{Finished Goods Inventory= }\left(\begin{array}{l}\text{Cost per unit }+\\ \text{Conversion Cost per unit}\end{array}\right)\times \text{Number of units}\\ \text{= }\left(\$185+\$18\right)\times \text{850 units}\\ \text{= \$203}\times \text{850 units}\\ \text{= \$172,550}\end{array}$

The cost of conversion for 850 units is $172,550.

1. D.    Sold 800 units.

Date	Account Title	Debit ($)	Credit ($)
June	Accounts receivable	$400,000
	Sales   (4)		$400,000
	(Sold 800 units)

Table (4)

• • Accounts receivable, which is an asset, is increased. Hence debit the accounts receivable account with $400,000.
• • Sales are revenue generated, which increases stockholder's equity. Hence credit the sales with $400,000.

Working Note:

(4) Calculate the amount value added.

    $\begin{array}{c}\text{Sales = Price per unit}\times \text{Number of units}\\ \text{= \$500}\times 80\text{0 units}\\ \text{= \$400,000}\end{array}$

The sales price for 800 units is $400,000.

1. E.     Record the cost of goods sold.

Date	Account Title	Debit ($)	Credit ($)
June	Cost of Goods sold  (5)	$162,400
	Finished Goods Inventory		$162,400
	(The cost of goods sold is recorded)

Table (5)

• • Cost of goods sold is an asset, which is decreased. Hence debit the cost of goods sold with $162,400.
• • Finished goods inventory is an asset, which is decreased. Hence credit the finished goods inventory with $162,400.

Working Note:

(5) Calculate the amount value added.

    $\begin{array}{c}\text{Cost of Goods sold } \text{= }\left(\begin{array}{l}\text{Cost per unit }+\\ \text{Conversion Cost per unit}\end{array}\right)\times \text{Number of units}\\ \text{= }\left(\$185+\$18\right)\times 800\text{ units}\\ \text{= \$203}\times \text{800 units}\\ \text{= \$162,400}\end{array}$

The cost of goods sold for 800 units is $162,400.

To determine

Calculate the closing balance for Raw in Process Inventory and Finished Goods inventory.

Explanation of Solution

1. 1. Calculate the closing balance for Raw in Process Inventory.

$\begin{array}{c}\text{Raw in Process Inventory = Purchase Cost + Conversion Cost}-\text{Finished goods }\\ \text{=}\left(\text{\$166,500 + \$15,750}\right)-\$172,550\\ =\$182,250-\$172,550\\ =\$9,700\end{array}$

Hence, the closing balance for Raw in Process Inventory is $9,700.

1. 2. Calculate the closing balance for finished goods inventory.

$\begin{array}{c}\text{Finished goods inventory = Finished goods inventory}-\text{Cost of goods sold}\\ \text{= \$172,550 }-\text{ \$162,400}\\ \text{= \$10,150}\end{array}$

Hence, the closing balance for finished goods inventory is $10,150.

To determine

Explain the difference between the lean accounting and traditional accounting.

Explanation of Solution

The lean accounting is created to support the lean philosophy; hence it is obviously different from the traditional accounting in the ways mentioned below.

• • There are very few work in-process control points in lean accounting, whereas there are many control points in the traditional accounting. This reduces the number of transactions involved in the Lean accounting.
  • ■ In Lean accounting the raw materials and work in progress are shown together as raw and in process inventory, hence unlike traditional accounting there are very few transactions shown.
  • ■ In lean manufacturing, the direct labor cost is a part of the indirect labor cost. Hence, the direct labor cost and indirect labor cost are shown together in lean manufacturing whereas in traditional accounting they are shown separately under various heads.

These are some of the differences between the lean accounting and traditional accounting.