Question

Corruption, Inc., uses process costing, they have overstated the percentage of work completed with respect to conversion cost on the ending work-in-process inventory. What is the effect of this overstatement on (1) Conversion-cost equivalent units, (2) Conversion-cost cost per equivalent unit and (3) Actual physical units manufactured, respectively?

Answer 1

Answer:

(1) understated

(2) understaded

(3) unchanged

Explanation:

The amount of equivalent units will be higher as the ending inventory of work in process will be above of what it should be.

As we have more equivalent untis the cost per equivalent unit will be lower:

$\frac{cost}{equivalent \:units}$

So both, conversion cost and total cost per equivalent untis will e lower than it should be as are getting divided over a larger amount.

the physical amount of units worked during the month and those which are complete will not be affected as the percentage of completion is an accounting tool to calculate the cost not to count the amount of units in possession