Process Costing and Activity-Based Costing Beaumont Specialty Chemicals (BSC) is a manufacturer of specialty chemicals sold to manufacturers, hospitals, and other users. BSC produces about 1 million gallons of its main product, BSC-22, each month. The data for BSC-22 for July follow. The chemical direct materials are added at the beginning of processing.
Each month BSC averages 100 batches of BSC-22 with approximately 12,000 gallons per batch, though some batches are as large as 50,000 gallons or more, and some are as small as a few hundred gallons. The pattern of customer orders is that large orders come in at all times of the month, while small orders tend to cluster around the last few days of the month. The small orders are due to salespersons trying to meet monthly sales quotas and the buying patterns of smaller customers who want their shipments early in the following month. As a result, in the average month, three-fourths of the total orders are started in the last few days of the month, and most are not completed until early in the following month. For example, in July, 100 batches were in process, and 70 were still in the ending Work-in-Process Inventory at the end of the month. Ted Brown, plant controller for BSC, thinks that the current costing method, using weighted-average process costing, underestimates the cost of the ending Work-in-Process Inventory as well as the cost of smaller jobs.
Required
1. Prepare the production cost report using the weighted-average method. 2. Assume that $28,500 of the $79,000 current conversion costs and $3,700 of the $7,250 beginning WIP conversion costs could be traced to batch-related activities such as equipment setup. Further, assume that these batch-related costs are all incurred when the batch is started. Ted has asked you to prepare an alternate production cost report that separates the batch-related costs from total conversion costs. How do the results differ from the method in requirement 1? Is Ted right about underestimating the cost of ending WIP Inventory?