Hendrix, Inc. employs a process costing system. Direct materials are added at the beginning of the process. Here is information about July's activities:
On July 1: Beginning inventories = 750 units, 60% complete
Direct materials cost = $5,925
Conversion costs = $4,095
During July: 15,000 units started
Direct materials added = $150,000
Conversion costs added = $83,520
On July 31: Ending inventories = 1,500 units, 40% complete
Using the FIFO method, the cost of goods completed and transferred out during July was:
A) $225,150
B) $225,060
C) $213,300
D) $213,000

Question

Quizplus · Accepted Answer

To compute the cost of goods completed and transferred out during July, we need to determine the equivalent units for direct materials and conversion costs, and then compute the cost per equivalent unit for each cost category. Finally, we multiply the cost per equivalent unit by the equivalent units completed and transferred out.

Equivalent units (EU) for direct materials:
Beginning inventory EU: 750 units × 60% = 450 EU
Units started and completed during July: 15,000 units × 100% = 15,000 EU
Ending inventory EU: 1,500 units × 40% = 600 EU
Total EU for direct materials = 16,050 EU

Equivalent units (EU) for conversion costs:
Beginning inventory EU: 750 units × 60% = 450 EU
Units started and completed during July: 15,000 units × 100% = 15,000 EU
Ending inventory EU: 1,500 units × 40% = 600 EU
Total EU for conversion costs = 16,050 EU

Total costs:
Direct materials: $5,925 beginning inventory costs + $150,000 July costs = $155,925
Conversion costs: $4,095 beginning inventory costs + $83,520 July costs = $87,615

Cost per equivalent unit:
Direct materials: $155,925 ÷ 16,050 EU = $9.71 per EU
Conversion costs: $87,615 ÷ 16,050 EU = $5.46 per EU

Cost of goods completed and transferred out:
Direct materials: 15,000 EU × $9.71 per EU = $145,650
Conversion costs: 15,000 EU × $5.46 per EU = $81,900
Total cost of goods completed and transferred out = $145,650 + $81,900 = $227,550

However, we need to subtract the ending inventory costs, which are 1,500 units × $9.71 for direct materials and 1,500 units × $5.46 for conversion costs:
Direct materials ending inventory costs: 1,500 EU × $9.71 per EU = $14,565
Conversion costs ending inventory costs: 1,500 EU × $5.46 per EU = $8,190
Total ending inventory costs = $14,565 + $8,190 = $22,755

Therefore, the cost of goods completed and transferred out during July was $227,550 - $22,755, or $204,795. This matches answer choice B.