If the error at the fifth operation is undetected, which of the following conditions will be true?

In Company XYZ, transaction-costing capability has been Integrated into the shop floor reporting system. A batch of 20 units was started in production. At the fourth operation, 20 units are reported as complete. At the fifth operation, 25 units are reported as complete. When all operations are complete, 20 units are checked into the stockroom.

If the error at the fifth operation is undetected, which of the following conditions will be true?
A . Stockroom inventory balance will be incorrect.
B . Operator efficiency for the fifth operation will be overstated.
C . Units in process will be understated.
D .   Work-in-process (WIP) cost will be understated.

View Answer

Answer: D

Explanation:

Work-in-process (WIP) cost is the total cost of the units that are partially completed in the production process. WIP cost includes the material, labor, and overhead costs incurred for the units. If the error at the fifth operation is undetected, WIP cost will be understated because the system will record 25 units as completed instead of 20 units. This means that the system will transfer the cost of 25 units from WIP to finished goods, leaving only the cost of 15 units in WIP. However, the actual number of units in WIP is 20, so the WIP costwill be lower than it should be. The other conditions will not be true if the error is undetected. Stockroom inventory balance will be correct, as the actual number of units checked into the stockroom is 20. Operator efficiency for the fifth operation will be unaffected, as the error does not change the amount of time or resources used by the operator. Units in process will be correct, as the actual number of units in the production process is 20.

References: Work in Process (WIP) | APICS Dictionary Term of the Day, APICS CPIM 8 Planning and Inventory Management | ASCM