Business decision case A Bicycles Plus, Inc., produces bicycles. While the company has developed a per unit cost, it has not been able to break down its costs in each of its three departments: frames, assembling, and finishing. Karol Ring, the production manager, has been concerned with cost overruns during July in the frames department, which produces the bicycle frames.

On July 1, the frames department had 6,000 units in its work in process inventory. These units were 100 per cent complete as to materials and 40 per cent complete as to conversion. The department had incurred USD 12,000 in materials costs and USD 90,000 in conversion costs in processing these 6,000 units.

The department handled 30,000 units during the month, including the 6,000 units in beginning inventory on July 1. At the end of the month, the department's work in process included 3,600 units that were 100 per cent complete as to materials and 30 per cent complete as to conversion. The month's costs were allocated on the number of units processed during the month as follows:

Materials Conversion

 

Costs	$60,000	$300,216
Units handled during month	30,000	30,000
Cost per unit	$ 2	$ 10

The USD 12 per unit cost was assigned in a way that resulted in the following costs:

 

 

 

 

 

Cost per unit incurred during the month:

Beginning work

in process

Work started and completed

Ending work in process

Units 6,000 20,400 3,600

Cost per unit $12 $12 $12

Ring realized that this per unit cost is incorrect and asks you to develop a better method of computing these costs for the month ended July 31.

1. How would you recommend that July's costs be assigned to the units produced? How would this differ from the present method?

2. To justify your recommendation, recalculate July's costs using your recommendation. Present your analysis in a production cost report.