199687936 ch4 manual of managerial accounting 14e garrison noreen brewer

Chapter 4 Process Costing

Chapter 4Process Costing

Solutions to Questions

4-1 A process costing system should be used in situations where a homogeneous product is produced on a continuous basis.

4-2 Job-order and processing costing are similar in the following ways:1. Job-order costing and process costing have the same basic purposesto assign materials, labor, and overhead cost to products and to

provide a mechanism for computing unit product costs.2. Both systems use the same basic manufacturing accounts.3. Costs flow through the accounts in basically the same way in both systems.

4-3 Cost accumulation is simpler under process costing because costs only need to be assigned to departmentsnot individual jobs. A company usually has a small number of processing departments, whereas a job-order costing system often must keep track of the costs of hundreds or even thousands of jobs.

4-4 In a process costing system, a Work in Process account is maintained for each processing department.

4-5 The journal entry to record the transfer of work in process from the Mixing Department to the Firing Department is:

Work in Process, Firing........ XXXXWork in Process, Mixing XXXX

4-6 The costs that might be added in the Firing Department include: (1) costs transferred in from the Mixing Department; (2) materials costs added in the Firing Department; (3) labor costs added in the Firing Department; and (4) overhead costs added in the Firing Department.

4-7 Under the weighted-average method, equivalent units of production consist of units transferred to the next department (or to finished goods) during the period plus the equivalent units in the departments ending work in process inventory.

4-8 The company will want to distinguish between the costs of the metals used to make the medallions, but the medals are otherwise identical and go through the same production processes. Thus, operation costing is ideally suited for the companys needs.

4-1


Exercise 4-1 (20 minutes)a. To record issuing raw materials for use in production:

4-2


Work in ProcessMolding Department 28,000Work in ProcessFiring Department 5,000

Raw Materials 33,000

b. To record direct labor costs incurred:Work in ProcessMolding Department 18,000Work in ProcessFiring Department 5,000

Wages Payable 23,000

c. To record applying manufacturing overhead:Work in ProcessMolding Department 24,000Work in ProcessFiring Department 37,000

Manufacturing Overhead 61,000

d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department:Work in ProcessFiring Department 67,000

Work in ProcessMolding Department 67,000

e. To record transfer of finished bricks from the Firing Department to the finished goods warehouse:Finished Goods 108,000

Work in ProcessFiring Department 108,000

f. To record Cost of Goods Sold:Cost of Goods Sold 106,000

Finished Goods 106,000

4-3


Exercise 4-2 (10 minutes)

Weighted-Average MethodEquivalent Units

Materials ConversionUnits transferred out ........................................ 410,000 410,000Work in process, ending:

30,000 units 70%........................................ 21,00030,000 units 50%........................................ 15,000

Equivalent units of production.......................... 431,000 425,000

4-4


Exercise 4-3 (10 minutes)Weighted-Average Method

1.Materials Labor Overhead

Cost of beginning work in process inventory...................................... $ 14,550 $ 23,620 $118,100

Cost added during the period......... 88,350 14,330 71,650 Total cost (a)................................... $102,900 $37,950 $189,750Equivalent units of production (b). . . 1,200 1,100 1,100Cost per equivalent unit (a) (b).... $85.75 $34.50 $172.50

2.Cost per equivalent unit for materials...... $ 85.75Cost per equivalent unit for labor............. 34.50Cost per equivalent unit for overhead...... 172.50 Total cost per equivalent unit................... $292.75

4-5



Weighted-Average Method

Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production.................... 300 100Cost per equivalent unit............................. $31.56 $9.32Cost of ending work in process inventory. .

$9,468 $932$10,40

0

Units completed and transferred out:Units transferred to the next department. . . 1,300 1,300Cost per equivalent unit............................. $31.56 $9.32Cost of units transferred out......................

$41,028 $12,116$53,14

4

4-6



Baking DepartmentCost Reconciliation

Costs to be accounted for:Cost of beginning work in process inventory. . $ 4,830Costs added to production during the period. . 25,650 Total cost to be accounted for......................... $30,480

Costs accounted for as follows:Cost of ending work in process inventory....... $ 1,120Cost of units completed and transferred out... 29,360 *Total cost accounted for.................................. $30,480

*The cost of units completed and transferred out can be deduced as follows:Cost of beginning Costs added Cost of ending Cost of unitswork in process + to production = work in process+ completed and

inventory during the period inventory transferred out

Cost of $4,830 + $25,650 = $1,120 +

unitscompleted andtransferred out

Cost of unitscompleted and = $4,830 + $25,650 - $1,120transferred out

Cost of unitscompleted and = $29,360transferred out

4-7




1. Materials Labor OverheadUnits transferred to the next

department......................................... 790,000 790,000 790,000Work in process, ending:

Materials: 50,000 units 60% complete.......... 30,000

Labor and overhead:50,000 units 20% complete.......... 10,000 10,000

Equivalent units of production............... 820,000 800,000 800,000

2. Materials Labor OverheadCost of beginning work in process.... $ 68,600 $ 30,000 $ 48,000Cost added during the period............ 907,200 370,000 592,000 Total cost (a)..................................... $975,800 $400,000 $640,000Equivalent units of production (b)...... 820,000 800,000 800,000Cost per equivalent unit (a) (b)....... $1.19 $0.50 $0.80

4-8




1. Equivalent units of productionPulping Conversio

nTransferred to next department.......................... 146,000 146,000Ending work in process:

Pulping: 6,000 units x 100% complete............. 6,000 Conversion: 6,000 units x 75% complete......... 4,500

Equivalent units of production............................ 152,000 150,500

2. Cost per equivalent unitPulping Conversio

nCost of beginning work in process.................. $ 1,500 $ 400Cost added during the period......................... 59,300 22,100Total cost (a)................................................... $60,800 $22,500Equivalent units of production (b)................... 152,000 150,500Cost per equivalent unit, (a) (b)................... $0.40 $0.1495

3. Cost of ending work in process inventory and units transferred outPulping Conversio

nTotal

Ending work in process inventory:Equivalent units of production... 6,000 4,500Cost per equivalent unit............ $0.40 $0.1495Cost of ending work in process $2,400 $673 $3,073

4-9


inventory.................................Units completed and transferred out:

Units transferred to the next department.............................. 146,000 146,000

Cost per equivalent unit............ $0.40 $0.1495Cost of units completed and

transferred out......................... $58,400 $21,827 $80,227

4-10


Exercise 4-7 (continued)

4. Cost reconciliationCosts to be accounted for:

Cost of beginning work in process inventory($1,500 + $400)............................................ $ 1,900

Costs added to production during the period($59,300 + $22,100)..................................... 81,400

Total cost to be accounted for......................... $83,300 Costs accounted for as follows:

Cost of ending work in process inventory....... $ 3,073Cost of units completed and transferred out... 80,227 Total cost accounted for.................................. $83,300

4-11



Work in ProcessMixing 330,000Raw Materials Inventory 330,000

Work in ProcessMixing 260,000Work in ProcessBaking 120,000

Wages Payable 380,000Work in ProcessMixing 190,000Work in ProcessBaking 90,000

Manufacturing Overhead 280,000Work in ProcessBaking 760,000

Work in ProcessMixing 760,000Finished Goods 980,000

Work in ProcessBaking 980,000

4-12




1. Computation of equivalent units in ending inventory:Materials Labor Overhead

Units in ending inventory........... 1,500 1,500 1,500Percent completed.................... 90% 40% 40%Equivalent units of production. . . 1,350 600 600

2. Cost of ending work in process inventory and units transferred out:Materials Labor Overhea

dTotal

Ending work in process inventory:Equivalent units of

production.................... 1,350 600 600Cost per equivalent unit. $24.00 $7.00 $14.00Cost of ending work in

process inventory........ $32,400 $4,200 $8,400 $45,000Units completed and transferred out:

Units transferred to the next department.......... 18,000 18,000 18,000

Cost per equivalent unit. $24.00 $7.00 $14.00Cost of units completed

and transferred out...... $432,000 $126,000 $252,000 $810,000

3. Cost reconciliation:

4-13


Total cost to be accounted for............................. $855,000 Costs accounted for as follows:


4-14




1.Kilograms of

CementWork in process, May 1............................................... 80,000Started into production during the month.................... 300,000Total kilograms in process........................................... 380,000Deduct work in process, May 31................................. 50,000 Completed and transferred out during the month........ 330,000

2. Equivalent Units (EU)Materials Conversion

Units transferred out.................................... 330,000 330,000Work in process, ending:

Materials: 50,000 kilograms 40%.......... 20,000Conversion: 50,000 kilograms 10%....... 5,000

Equivalent units of production..................... 350,000 335,000

4-15




1.Material

sConversio

nUnits transferred to the next process................ 300,000 300,000Ending work in process:

Materials: 40,000 units 50% complete........ 20,000 Conversion: 40,000 units 25% complete.... 10,000

Equivalent units of production.......................... 320,000 310,000

2. Materials

Conversion

Cost of beginning work in process................... $ 56,600 $ 14,900Cost added during the period........................... 385,000 214,500 Total cost (a).................................................... $441,600 $229,400Equivalent units of production (b)..................... 320,000 310,000Cost per equivalent unit (a) (b)...................... $1.38 $0.74

3. Materials Conversion

Total

Ending work in process inventory:Equivalent units of production

(see above).......................... 20,000 10,000Cost per equivalent unit (see

above).................................. $1.38 $0.74Cost of ending work in process

inventory............................... $27,600 $7,400 $35,000

4-16


Units completed and transferred out:Units transferred to the next

process................................. 300,000 300,000Cost per equivalent unit

(see previous exercise)........ $1.38 $0.74Cost of units completed and

transferred out...................... $414,000 $222,000 $636,000

4-17




Materials

Labor & Overhead

Pounds transferred to the Packing Department during May*........................................................... 490,000 490,000

Work in process, May 31:Materials: 20,000 pounds 100% complete......... 20,000 Labor and overhead: 20,000 pounds 90%

complete............................................................ 18,000 Equivalent units of production................................. 510,000 508,000

* 30,000 + 480,000 20,000 = 490,000

Problem 4-13 (45 minutes)


1. Equivalent Units of ProductionMaterial

sConversio

nTransferred to next department*........................ 380,000 380,000Ending work in process:

Materials: 40,000 units x 75% complete.......... 30,000 Conversion: 40,000 units x 25% complete....... 10,000

Equivalent units of production............................ 410,000 390,000*Units transferred to the next department = Units in beginning work in process + Units started into

4-18


production Units in ending work in process = 70,000 + 350,000 40,000 = 380,000

2. Cost per Equivalent UnitMaterials Conversio

nCost of beginning work in process.................. $ 86,000 $ 36,000Cost added during the period......................... 447,000 198,000 Total cost (a)................................................... $533,000 $234,000Equivalent units of production (b)................... 410,000 390,000Cost per equivalent unit, (a) (b)................... $1.30 $0.60

3. Cost of Ending Work in Process Inventory and Units Transferred Out

4-19


Materials Conversion

Total


(materials: 40,000 units x 75% complete; conversion: 40,000 units x 25% complete)......... 30,000 10,000

Cost per equivalent unit......... $1.30 $0.60Cost of ending work in process

inventory.............................. $39,000 $6,000 $45,000Units completed and transferred out:

Units transferred to the next department.......................... 380,000 380,000

Cost per equivalent unit......... $1.30 $0.60Cost of units completed and

transferred out..................... $494,000 $228,000 $722,000

4-20


Problem 4-13 (continued)

4. Cost ReconciliationCosts to be accounted for:

Cost of beginning work in process inventory($86,000 + $36,000)..................................... $122,000

Costs added to production during the period($447,000 + $198,000)................................. 645,000



4-21




1. Equivalent Units of ProductionMaterial

sConversio

nTransferred to next department.......................... 450,000 450,000Ending work in process:

Materials: 80,000 units x 75% complete.......... 60,000 Conversion: 80,000 units x 25% complete....... 20,00 0

Equivalent units of production............................ 510,000 470,000

2. Cost per Equivalent UnitMaterials Conversio


3. Applying Costs to UnitsMaterials Conversio

nTotal

Ending work in process inventory:Equivalent units of production 60,000 20,000Cost per equivalent unit......... $0.84 $0.64Cost of ending work in process $50,400 $12,800 $63,200

4-22


inventory..............................Units completed and transferred out:

Units transferred to the next department.......................... 450,000 450,000

Cost per equivalent unit......... $0.84 $0.64Cost of units completed and

transferred out..................... $378,000 $288,000 $666,000

4-23



4. Cost ReconciliationCosts to be accounted for:

Cost of beginning work in process inventory($36,550 + $13,500)..................................... $ 50,050

Costs added to production during the period($391,850 + $287,300)................................. 679,150





1. Equivalent units of productionMaterial

sConversio

nTransferred to next department*........................ 270,000 270,000Ending work in process:

Materials: 45,000 units x 100% complete........ 45,000 Conversion: 45,000 units x 60% complete....... 27,000

Equivalent units of production............................ 315,000 297,000*Units transferred to the next department = Units in beginning work in process + Units started into production Units in ending work in process = 35,000 + 280,000 45,000 = 270,000

4-24


2. Cost per equivalent unitMaterials Conversio


3. Cost of ending work in process inventory and units transferred outMaterials Conversio

nTotal

4-25


Ending work in process inventory:Equivalent units of production... 45,000 27,000Cost per equivalent unit............ $1.40 $0.70Cost of ending work in process

inventory................................. $63,000 $18,900 $81,900Units completed and transferred out:

Units transferred to the next department.............................. 270,000 270,000

Cost per equivalent unit............ $1.40 $0.70Cost of units completed and

transferred out......................... $378,000 $189,000 $567,000

4-26




1.a. Work in ProcessBlending 147,600Work in ProcessBottling 45,000

Raw Materials 192,600b. Work in ProcessBlending 73,200

Work in ProcessBottling 17,000Salaries and Wages Payable 90,200

c. Manufacturing Overhead 596,000Accounts Payable 596,000

d. Work in ProcessBlending 481,000Manufacturing Overhead 481,000

Work in ProcessBottling 108,000Manufacturing Overhead 108,000

e. Work in ProcessBottling 722,000Work in ProcessBlending 722,000

Finished Goods 920,000Work in ProcessBottling 920,000

g. Accounts Receivable 1,400,000Sales 1,400,000

Cost of Goods Sold 890,000Finished Goods 890,000

4-27



2.

Accounts Receivable Raw Materials(g) 1,400,000 Bal. 198,600 (a) 192,600

Bal. 6,000

Work in ProcessBlending Department

Work in ProcessBottling Department

Bal. 32,800 (e) 722,000 Bal. 49,000 (f) 920,000(a) 147,600 (a) 45,000(b) 73,200 (b) 17,000(d) 481,000 (d) 108,000Bal. 12,600 (e) 722,000

Bal. 21,000

Finished Goods Manufacturing OverheadBal. 20,000 (g) 890,000 (c) 596,000 (d) 589,000(f) 920,000 Bal. 7,000Bal. 50,000

Accounts Payable Salaries and Wages Payable(c) 596,000 (b) 90,200

Sales Cost of Goods Sold(g) 1,400,000 (g) 890,000


4-28



1. Computation of equivalent units in ending inventory:Mixing Materials Conversio

nUnits transferred to the next department.......... 60.0 60.0 60.0Ending work in process:

Mixing: 1 unit 100% complete.................. 1.0 Materials: 1 unit 20% complete................ 0.2 Conversion: 1 unit 10% complete............. 0.1

Equivalent units of production.......................... 61.0 60.2 60.1

2. Costs per equivalent unit:Mixing Materials Conversio

nCost of beginning work in process inventory.... $ 1,640 $ 26 $ 105Cost added during the period........................... 94,740 8,402 61,197 Total cost.......................................................... $96,380 $8,428 $61,302Equivalent units of production.......................... 61.0 60.2 60.1Cost per equivalent unit.................................... $1,580 $140 $1,020

4-29



3. Costs of ending work in process inventory and units transferred out:Mixing Materials Conversio

nTotal

Ending work in process inventory:Equivalent units of production..................... 1.0 0.2 0.1Cost per equivalent unit............................... $1,580 $140 $1,020Cost of ending work in process inventory.... $1,580 $28 $102 $1,710

Units completed and transferred out:Units transferred to the next department..... 60.0 60.0 60.0Cost per equivalent unit............................... $1,580 $140 $1,020Cost of units transferred out........................ $94,800 $8,400 $61,200 $164,400

4. Cost reconciliation:Cost to be accounted for:

Cost of beginning work in process inventory($1,640 + $26 + $105).................................. $ 1,771

Cost added to production during the period($94,740 + $8,402 + $61,197)...................... 164,339


Cost of ending work in process inventory....... $ 1,710Cost of units transferred out........................... 164,400 Total cost accounted for.................................. $166,110

4-30




1. Total units transferred to the next department.. . . 30,000Less units in the May 1 inventory........................ 5,000 Units started and completed in May.................... 25,000

2. The equivalent units were:Material

sConversio

nTransferred to next department.................... 30,000 30,000Ending work in process:

Materials: 4,000 units x 75% complete...... 3,000 Conversion: 4,000 units x 50% complete... 2,000

Equivalent units of production...................... 33,000 32,000

3. The costs per equivalent unit were:Materials Conversio

nCost of beginning work in process.................. 9,000 4,400Cost added during the period......................... 57,000 30,800 Total cost (a)................................................... 66,000 35,200Equivalent units of production (b)................... 33,000 32,000Cost per equivalent unit, (a) (b)................... 2.00 1.10

4. The ending work in process figure is verified as follows:Material

sConversio

nTotal


(see above).................................... 3,000 2,000Cost per equivalent unit................... 2.00 1.10Cost of ending work in process

inventory........................................ 6,000 2,2008,20

0

5. Multiplying the unit cost figure of 3.10 per unit by 1,000 units does not provide a valid estimate of the incremental cost of processing an additional 1,000 units through the department. If there is sufficient idle capacity to process an additional 1,000 units, the incremental cost per

4-31


unit is almost certainly less than 3.10 per unit because the conversion costs are likely to include fixed costs.

4-32


Case 4-19 (90 minutes)

This case is difficultparticularly part 3, which requires analytical skills. Because there are no beginning inventories, it makes no difference

whether the weighted-average or FIFO method is used by the company. You may choose to specify that the FIFO method be used rather than the weighted-average method.

1. Computation of the Cost of Goods Sold:Transferred

In ConversionUnits completed and sold........................ 250,000 250,000Ending work in process:

Transferred in: 20,000 units x 100% complete............ 20,000

Conversion: 20,000 units x 25% complete.............. 5,000

Equivalent units of production.................. 270,000 255,000

Transferred In Conversion

Cost of beginning work in process........... $ 0 $ 0Cost added during the period.................. 49,221,000 16,320,000 Total cost (a)............................................ $49,221,000 $16,320,000Equivalent units of production (b)............ 270,000 255,000Cost per equivalent unit, (a) (b)............ $182.30 $64.00

Cost of goods sold = 250,000 units ($182.30 + $64.00) per unit = $61,575,000.

2. The estimate of the percentage completion of ending work in process inventories affects the unit costs of finished goods and therefore the cost of goods sold. Thad Kostowski would like the estimated percentage completion of the ending work in process to be increased. The higher the percentage of completion of ending work in process, the higher the equivalent units for the period and the lower the unit costs.

3. Increasing the percentage of completion can increase net operating income by reducing the cost of goods sold. To increase net operating income by $62,500, the cost of goods sold would have to be decreased

4-33


by $62,500 from $61,575,000 down to $61,512,500. See the next page for the necessary calculations.

4-34


Case 4-19 (continued)

The percentage of completion, X, affects the cost of goods sold by its effect on the unit cost, which can be determined as follows:

Unit cost = $182.30 + $16,320,000

250,000 + 20,000X

And the cost of goods sold can be computed as follows:Cost of goods sold = 250,000 Unit cost

Because the cost of goods sold must be reduced down to $61,512,500, the unit cost must be $246.05 ($61,512,500 250,000 units). Thus, the required percentage completion, X, to obtain the $62,500 reduction in cost of goods sold can be found by solving the following equation:

$16,320,000$182.30 + = $246.05250,000 + 20,000X

$16,320,000 = $246.05 - $182.30250,000 + 20,000X

$16,320,000 = $63.75250,000 + 20,000X

250,000 + 20,000X 1 = $16,320,000 $63.75

$16,320,000250,000 + 20,000X = $63.75

250,000 + 20,000X = 256,000

20,000X = 256,000 - 250,000

20,000X = 6,0006,000X = = 30%

20,000

Thus, changing the percentage completion to 30% will decrease cost of goods sold and increase net operating income by $62,500 as verified on the next page.

4-35



3. (continued)Computation of the Cost of Goods Sold:


Units completed and sold........................ 250,000 250,000Ending work in process:

Transferred in: 20,000 units x 100% complete............ 20,000

Conversion: 20,000 units x 30% complete.............. 6,000

Equivalent units of production.................. 270,000 256,000


Cost of beginning work in process........... $ 0 $ 0Cost added during the period.................. 49,221,000 16,320,000 Total cost (a)............................................ $49,221,000 $16,320,000Equivalent units of production (b)............ 270,000 256,000Cost per equivalent unit, (a) (b)............ $182.30 $63.75

Cost of goods sold = 250,000 units ($182.30 per unit + $63.75 per unit) = $61,512,500.

4. Carol is in a very difficult position. Collaborating with Thad Kostowski in subverting the integrity of the accounting system is unethical by almost any standard. To put the situation in its starkest light, Kostowski is suggesting that the production managers lie in order to get their bonus. Having said that, the peer pressure to go along in this situation may be intense. It is difficult on a personal level to ignore such peer pressure. Moreover, Carol probably prefers not to risk alienating people she might need to rely on in the future. On the other hand, Carol should be careful not to accept at face value Kostowskis assertion that all of the other managers are doing as much as they can to pull this bonus out of the hat. Those who engage in unethical or illegal acts often rationalize their own behavior by exaggerating the extent to which others engage in the same kind of behavior. Other managers may actually be very uncomfortable pulling strings to make the target profit for the year.

4-36



From a broader perspective, if the net profit figures reported by the managers in a division cannot be trusted, then the company would be foolish to base bonuses on the net profit figures. A bonus system based on divisional net profits presupposes the integrity of the accounting system. The company should perhaps reconsider how it determines the bonus. It is quite common for companies to pay an all or nothing bonus contingent on making a particular target. This inevitably creates powerful incentives to bend the rules when the target has not quite been attained. It might be better to have a bonus without this all or nothing feature. For example, managers could be paid a bonus of x% of profits above target profits rather than a bonus that is a preset percentage of their base salary. Under such a policy, the effect of adding that last dollar of profits that just pushes the divisional net profits over the target profit will add a few pennies to the managers compensation rather than thousands of dollars. Therefore, the incentives to misstate the net operating income are reduced. Why tempt people unnecessarily?

4-37


Case 4-20 (45 minutes)


1. The revised computations follow:

Equivalent Units of Production:Transferred

In MaterialsConversio

nTransferred to next department.......................... 100,000 100,000 100,000Ending work in process:

Transferred in: 5,000 units x 100% complete... 5,000 Materials: 5,000 units x 0% complete.............. 0 Conversion: 5,000 units x 40% complete......... 2,000

Equivalent units of production............................ 105,000 100,000 102,000

Cost per Equivalent Unit:Transferred

In Costs MaterialsConversio

nCost of beginning work in process.................... $8,820 $3,400 $10,200Cost added during the period............................ 81,480 27,600 96,900 Total cost (a)..................................................... $90,300 $31,000 $107,100Equivalent units of production (b)...................... 105,000 100,000 102,000Cost per equivalent unit, (a) (b)...................... $0.86 $0.31 $1.05

4-38



Transferred In Costs Materials

Conversion Total

Ending work in process inventory:Equivalent units of production (see above). . 5,000 0 2,000Cost per equivalent unit................................ $0.86 $0.31 $1.05Cost of ending work in process inventory..... $4,300 $0 $2,100 $6,400

Units completed and transferred out:Units transferred to the next department 100,000 100,000 100,000Cost per equivalent unit................................ $0.86 $0.31 $1.05Cost of units completed and transferred out. $86,000 $31,000 $105,000 $222,000

2. The unit cost computed above is $2.22 (= $0.86 + $0.31 + $1.05) versus $2.284 on the original report. The unit cost on the report prepared by the accountant is high because none of the cost incurred during the month was assigned to the units in the ending work in process inventory.

4-39

199687936 ch4 manual of managerial accounting 14e garrison noreen brewer

Documents

processfiring department

processmolding department

mixing department

process costingexercise

transfer of work

process costingsolutions

process costingchapter

process account