Please help on this Mc from Wiley TestBank. How come I can not simply apply BGN (20K)+Comp 170K+defective 5K+END 25K=180K for the equivalent units for direct materials.....? I am getting panic...any hints or explanations will be very very appreciated!!

Q: COST-0030
A company employs a process costing system for its two-department manufacturing operation using the first-in-first-out (FIFO) inventory method. When units are completed in department 1, they are transferred to department 2 for completion. Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion. The specific identification method is used to account for lost units.

Generally the number of defective units (that is, those failing inspection) is below the normal tolerance limit of 4% of units inspected. Defective units have minimal value, and the company sells them without any further processing for whatever it can. Generally the amount collected equals, or slightly exceeds, the transportation cost. A summary of the manufacturing activity for department 2, in units for the current month, is presented below.

Physical flow (output units)
Beginning inventory
(60% complete with respect to conversion) 20,000
Units transferred in from department 1 180,000
Total units to account for 200,000

Units completed in department 2 during the month 170,000
Units found to be defective at inspection 5,000
Ending inventory
(80% complete with respect to conversion) 25,000
Total units accounted for 200,000

The equivalent units for direct materials for the current month would be

Answers

A: 175,000 units.
B: 181,500 units.
C: 195,000 units.
D: 200,000 units.

Answer C is correct. This alternative is the correct equivalent unit calculation for direct material. It appropriately provides for the recognition of the units that have to be added to both beginning and ending work-in-process as well as the units completed, but ignores the materials that would not be added to the defective units.
Supporting Calculations
Altrn. c
Units completed
From beginning WIP 20,000
From current production 150,000
Defective units --
Ending WIP 25,000
Equivalent units 195,000

Answer A is incorrect. This alternative is incorrect because it omits the direct materials that have to be added to the beginning work in process inventory.

Answer B is incorrect. This alternative represents the equivalent unit calculation for conversion costs, not direct materials.

Answer D is incorrect. This alternative is incorrect because it includes units that would be added to the defective units; if the units were discovered to be defective, direct materials would not be added to these units.

Since the materials are added once in the process, so units are either
0% equivalent units or 100% equivalent units. it depends on level of conversion.
If conversion percent is before 70%, they will be 0% completed of  materials, if after 70% connversion they will be 100% completed of materials.

Defects have no equivalent units with respect to materials, as inspection takes place before adding the materials, so any defects are not further processed and hence no materials added.

let's continue,

Since this is FIFO,
1- units completed from beginning WIP = 20,000 equivalent units
(as they were 60%, so 100% of materials were added this period)

2- units added and completed this period = 170,000 - 20,000 = 150,000

3- WIP ending = 25,000 X 100% = 25,000
(as they are completed 80% conversion, so they are completed 100% of materials, because materials added at 70%).

I hope this helps.

Hey cpa_punk, sorry I'm late..

Sorry also, I couldn't understand your way,

For FIFO:

You calculate equivalent units for 3 categories mainly:

- Completed work in Beg.WIP (100 - %completed) * physical units.

- Completed physical units - Beg. WIP physical units.

- Ending WIP physical units * % of completion.

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Always test your understanding in questions, write a rule, and when you meet a relevant question apply your rule, if worked it is good, if it fails, see if it is wrong or need adjustment, or there is exception.

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for spoiled units, I don't remember it well,

but I guess, if normal spoilage, ignore it

if abnormal, you need to account for separately, to be recorded as expense.

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Sorry again if I'm late