Tech-Tonie Sports Drink” ‘The Western Beverage Company is marketing a new product; Tech-tonic sports drink syrup. The product sells for $15 per gallon, and in recent months the company has had sales of more than 500000 gallons per month. Consumers mix I part syrup with 5 parts, water to make a drink that “replenishes vital bodily fluids following exertion” Atthe start of April, there were 150000 gallons in beginning Work in Progress. The product was 100 percent complete with respect to material and 50 percent complete with respect to conversion costs. The value of Work in progress is as follows: Material: $105000, Labour $45000, Overhead $9000. During April 600000 gallons were started. OF the 750000 units to account for, 150000 gallons remained in process at the end of April. These units were 100 percent complete with respect to material and 20 percent complete with respect to conversion costs; The costs are as follows: Material: $420000, Labour: $387000, Overheads: $774000 300000 gallons were completed during April and unfortunately 300000 gallons were lost owing to worker error. The production process calls for Sodium to be added to the start of the process. On two separate occasions, a new worker added too much sodium and batches were ruined. The errors were not identified until the end of the production process when batches were tested for quality assurance. Needless to say, the worker was fired. ‘The Controller of Western Beverages, Gunther Bergman, is considering two ways to treat the cost of the “lost” units. One approach, is to “bury” the cost in the units completed and the units in process. A second approach involves identifying the lost units in the cost per equivalent unit calculation and assigning part of production cost to them. This cost would then be charged to Cost of Goods sold expense for April, since there is obviously no future value to the lost units. Required: a) Which approach is most appropriate from a conceptual standpoint? b) Assume that 80 percent of the units completed in April are sold in that month. ‘What Will be the difference in reported profit between the two approaches? ©) Senior managers at Western Beverage receive monthly bonuses determined as a percent of profit in excess of a targeted level of profit. Which method will they favour? * Source: James Jiambalvo, Managerial Accounting, John Wiley & Sons, Inc, 2003,