ch04

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 purposes—to 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 departments—not 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 department’s 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, process costing is ideally suited for the company’s needs.

© The McGraw-Hill Companies, Inc., 2013. All rights reserved.

Solutions Manual, Chapter 4 1

The Foundational 15

1. The journal entries would be recorded as follows:

Work in Process—Mixing..........................................120,000Raw Materials Inventory..................................... 120,000

Work in Process—Mixing..........................................79,500Wages Payable.................................................... 79,500

2. The journal entry would be recorded as follows:

Work in Process—Mixing..........................................97,000Manufacturing Overhead.................................... 97,000

3. The “units completed and transferred to finished goods” is computed as follows:

PoundsWork in process, June 1..................................... 5,000Started into production during the month......... 37,500Total pounds in process..................................... 42,500Deduct work in process, June 30....................... 8,000 Completed and transferred out during the

month............................................................. 34,500

4. and 5.

The equivalent units of production for materials and conversion are computed as follows:

Equivalent Units

MaterialsConversio

nUnits transferred out .............................. 34,500 34,500Work in process, ending:

8,000 units × 100%.............................. 8,0008,000 units × 40%................................ 3,200

Equivalent units of production................. 42,500 37,700

The Foundational 15 (continued)

6. and 7.

Materials

Conversion

Cost of beginning work in process.......... $ 16,000

$ 12,000

Cost added during the period................. 120,00 0

176,500*

Total cost................................................ $136,00 0

$188,500

* $79,500 + $97,000 = $176,500

8. and 9.

The cost per equivalent unit for materials and conversion is computed as follows:

Total cost (a).....................................$136,00

0 $188,500Equivalent units of production (b)..... 42,500 37,700Cost per equivalent unit (a) ÷ (b)...... $3.20 $5.00

10. and 11.

The cost of ending work in process inventory for materials and conversion is computed as follows:

Materials

Conversion Total

Equivalent units of production (a)......................................... 8,000 3,200

Cost per equivalent unit (b)...... $3.20 $5.00Cost of ending work in process

inventory (a) × (b)................$25,60

0 $16,000$41,60

0*

* $41,600 is the June 30 balance in the Work in Process—Mixing Department T-account.

12. and 13.

The cost of materials and conversion transferred to finished goods is computed as follows:

Materials

Conversion Total

Units transferred out (a)..................34,500 34,500Cost per equivalent unit (b).............$3.20 $5.00Cost of units transferred to

finishedgoods (a) × (b)............................

$110,400 $172,500

$282,900

The Foundational 15 (continued)

14. The journal entry to record the transfer of costs from Work in Process to Finished Goods would be recorded as follows:

Finished Goods...................................... 282,900Work in Process—Mixing.................. 282,900

15. The total cost to be accounted for and the total cost accounted for is:

Costs to be accounted for:Cost of beginning work in process inventory...................................................

$ 28,000

Costs added to production during the period........................................................

296,50 0

Total cost to be accounted for..................... $324,50 0

Costs accounted for:Cost of ending work in process inventory.... $ 41,60

0Cost of units completed and transferred out.............................................................

282,90 0

Total cost accounted for.............................. $324,50 0

Exercise 4-1 (20 minutes)

a. To record issuing raw materials for use in production:Work in Process—Molding Department.. 28,000Work in Process—Firing Department..... 5,000

Raw Materials.................................. 33,000

b. To record direct labor costs incurred:Work in Process—Molding Department.. 18,000Work in Process—Firing Department..... 5,000

Wages Payable................................ 23,000

c. To record applying manufacturing overhead:Work in Process—Molding Department.. 24,000Work in Process—Firing 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 Process—Firing Department..... 67,000Work in Process—Molding Department

67,000

e. To record transfer of finished bricks from the Firing Department to the finished goods warehouse:

Finished Goods...................................... 108,000Work in Process—Firing Department

108,000

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

Finished Goods................................ 106,000


Weighted-Average Method

Equivalent Units

MaterialsConversio


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




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 $189,750

Equivalent units of production (b).......................................... 1,200 1,100 1,100

Cost per equivalent unit (a) ÷ (b).......................................... $85.75 $34.50 $172.50

2.Cost per equivalent unit for

materials........................................$ 85.7

5Cost per equivalent unit for labor..... 34.50Cost per equivalent unit for

overhead........................................ 172.50

Total cost per equivalent unit.......... $292.75



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.............. $41,02

8 $12,116$53,14

4


Baking DepartmentCost Reconciliation

Costs to be accounted for:Cost of beginning work in process inventory..............................................

$ 4,830

Costs added to production during the period...................................................

25,65 0

Total cost to be accounted for................ $30,48 0

Costs accounted for as follows:Cost of ending work in process inventory..............................................

$ 1,120

Cost of units completed and transferred out........................................................

29,36 0

*

Total cost accounted for......................... $30,48 0

*The cost of units completed and transferred out can be deduced as follows:



1. Materials Labor Overhead

Units transferred to the next department................................. 790,000 790,000 790,000

Work in process, ending:Materials:

50,000 units × 60% complete. . 30,000Labor and overhead:

50,000 units × 20% complete. . 10,000 10,000 Equivalent units of production....... 820,000 800,000 800,000

2.Materials Labor

Overhead

Cost of beginning work in process....................................

$ 68,600

$ 30,000

$ 48,000

Cost added during the period..... 907,200 370,00

0 592,00

0

Total cost (a)..............................$975,80

0$400,00

0$640,00

0

Equivalent units of production (b)............................................ 820,000 800,000 800,000

Cost per equivalent unit (a) ÷ (b)............................................ $1.19 $0.50 $0.80



1.

Equivalent units of production

Pulping Conversion

Transferred to next department................ 146,000

146,000

Ending 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.................. 152,00 0

150,500

2.

Cost per equivalent unit

Pulping Conversion

Cost 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 out

Pulping Conversion

Total

Ending work in process inventory:

Equivalent units of production......................... 6,000 4,500

Cost per equivalent unit...... $0.40 $0.1495Cost of ending work in process inventory.............. $2,400 $673 $3,073

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

Exercise 4-7 (continued)

4.

Cost reconciliation

Costs 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.............................................. $ 3,073

Cost of units completed and transferred out........................................................ 80,227

Total cost accounted for......................... $83,300


Work in Process—Mixing..........................................330,000Raw Materials Inventory..................................... 330,000

Work in Process—Mixing..........................................260,000Work in Process—Baking.........................................120,000

Wages Payable.................................................... 380,000

Work in Process—Mixing..........................................190,000Work in Process—Baking.........................................90,000

Manufacturing Overhead.................................... 280,000

Work in Process—Baking.........................................760,000Work in Process—Mixing..................................... 760,000

Finished Goods........................................................980,000Work in Process—Baking..................................... 980,000



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 Overhead

Total

Ending work in process inventory:Equivalent units of production............... 1,350 600 600

Cost per equivalent unit.......................... $24.00 $7.00 $14.00

Cost of ending work in process inventory $32,400 $4,200 $8,400 $45,000

Units completed and transferred out:

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


Cost of units completed and transferred out........

$432,000

$126,000

$252,000

$810,000

3. Cost reconciliation:

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




1.Kilograms of Cement

Work 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)Material

sConversio

nUnits 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



1.Materia

lsConversi

onUnits 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...........$ 56,60

0 $ 14,900

Cost added during the period.................. 385,00

0 214,500

Total cost (a)...........................................$441,60

0 $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

Units completed and transferred out:Units transferred to the

next process................... 300,000 300,000Cost per equivalent unit $1.38 $0.74

(see previous exercise)...Cost of units completed

and transferred out.........$414,00

0 $222,000$636,00

0



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.........................510,00

0 508,000

* 30,000 + 480,000 – 20,000 = 490,000

Problem 4-13A (45 minutes)


1.

Equivalent Units of Production

Materials

Conversion

Transferred to next department*............... 380,000

380,000

Ending work in process:Materials: 40,000 units x 75% complete. 30,000 Conversion: 40,000 units x 25% complete...............................................

10,000


390,000

*Units transferred to the next department = Units in beginning work in process + Units started into production − Units in ending work in process = 70,000 + 350,000 − 40,000 = 380,000

2.

Cost per Equivalent Unit

Materials

Conversion


$ 36,000


198,000

Total cost (a)........................................... $533,000

$234,000

Equivalent 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

Materials

Conversion

Total


Equivalent units of production (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 $45,000

Units 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

Problem 4-13A (continued)

4.

Cost Reconciliation

Costs 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







1.


Materials

Conversion

Transferred to next department................ 450,000 450,000

Ending 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.................. 510,00 0 470,000

2.


Materials

Conversion


$ 13,500


287,300

Total cost (a)........................................... $428,40 0

$300,800


3.

Applying Costs to Units

Materials

Conversion

Total


Equivalent units of production ..................... 60,000 20,000

Cost per equivalent unit... $0.84 $0.64Cost of ending work in $50,400 $12,800 $63,200

process 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.

Cost Reconciliation

Costs 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 production

Materials

Conversion

Transferred to next department*............... 270,000

270,000

Ending work in process:Materials: 45,000 units x 100% complete...............................................

45,000

Conversion: 45,000 units x 60% complete...............................................

27,000


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

2.

Cost per equivalent unit

Materials

Conversion


$ 20,300


187,600

Total cost (a)........................................... $441,000

$207,900


3.

Cost of ending work in process inventory and units transferred out

Materials

Conversion

Total

Ending work in process

inventory:Equivalent units of production......................... 45,000 27,000

Cost per equivalent unit...... $1.40 $0.70Cost of ending work in process inventory.............. $63,000 $18,900 $81,900

Units 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



1. a. Work in Process—Blending......................................147,600Work in Process—Bottling........................................45,000

Raw Materials.....................................................192,600

b. Work in Process—Blending......................................73,200Work in Process—Bottling........................................17,000

Salaries and Wages Payable...............................90,200

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

d. Work in Process—Blending......................................481,000Manufacturing Overhead....................................481,000

Work in Process—Bottling........................................108,000Manufacturing Overhead....................................108,000

e. Work in Process—Bottling........................................722,000Work in Process—Blending.................................722,000

f. Finished Goods........................................................920,000Work in Process—Bottling...................................920,000

g. Accounts Receivable................................................1,400,00

0Sales...................................................................1,400,000

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


2.

Accounts Receivable Raw Materials(g) 1,400,00

0Bal. 198,60

0(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) 1,400,00

0(g) 890,000




Mixing Materials

Conversion

Units 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

Conversion

Cost of beginning work in process inventory................................................

$ 1,640 $ 26

$ 105

Cost added during the period.................. 94,74

0 8,402 61,197

Total cost.................................................$96,38

0 $8,428$61,30

2Equivalent units of production................. 61.0 60.2 60.1Cost per equivalent unit.......................... $1,580 $140 $1,020


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

Mixing Materials Conversion

Total

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 60.0

Cost per equivalent unit...................... $1,580 $140 $1,020Cost of units transferred out...............

$94,800 $8,400 $61,200$164,40

0


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 units transferred out.................. 164,400 Total cost accounted for......................... $166,110



1.

Total units transferred to the next department.............................................. 30,000

Less units in the May 1 inventory............... 5,000 Units started and completed in May........... 25,000

2.

The equivalent units were:

Materials

Conversion

Transferred 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

Conversion

Cost 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:

Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production (see above)............................. 3,000 2,000

Cost per equivalent unit............ £2.00 £1.10Cost of ending work in process £6,000 £2,200 £8,20

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

Analytical Thinking (45 minutes)


1. The revised computations follow:

Equivalent Units of Production:Transferre

d In MaterialsConversi

onTransferred 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 Materials

Conversion

Cost of beginning work in process............ $ 8,820$ 3,400

$ 10,200

Cost added during the period................... 81,480 27,600 96,900 Total cost (a)............................................. $90,300

$31,000$107,10

0Equivalent units of production (b)............ 105,000 100,000 102,000Cost per equivalent unit, (a) ÷ (b)........... $0.86 $0.31 $1.05

Analytical Thinking (continued)

Transferred In Costs Materials

Conversion Total

Ending work in process inventory:Equivalent units of production (see above)........................................... 5,000 0 2,000

Cost 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

100,000 100,000

Cost 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.

Ethics Challenge (90 minutes)

This case is difficult—particularly 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 Conversion

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 25% complete....... 5,000

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


Cost of beginning work in process. . . $ 0 $ 0

Cost added during the period........... 49,221,000 16,320,00 0

Total cost (a).................................... $49,221,000

$16,320,000

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

Ethics Challenge (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 +

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:

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.


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 $ 0

Cost added during the period........... 49,221,000 16,320,00 0

Total cost (a).................................... $49,221,000

$16,320,000

Equivalent 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 Kostowski’s 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.


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 manager’s compensation rather than thousands of dollars. Therefore, the incentives to misstate the net operating income are reduced. Why tempt people unnecessarily?

Chapter 4Take Two Solutions



Equivalent Units

MaterialsConversio


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


Note to Instructors: Use the Take Two data to emphasize the point that the percentage completion of the units in beginning work in process does not affect the equivalent units of production when using the 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 16,530 71,650 Total cost (a)............................ $102,900 $40,150 $189,750

Equivalent units of production (b).......................................... 1,200 1,100 1,100

Cost per equivalent unit (a) ÷ (b).......................................... $85.75 $36.50 $172.50

2.Cost per equivalent unit for

materials........................................$ 85.7

5Cost per equivalent unit for labor..... 36.50Cost per equivalent unit for

overhead........................................ 172.50

Total cost per equivalent unit.......... $294.75



Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production........... 300 100Cost per equivalent unit.................... $31.56 $10.00Cost of ending work in process

inventory....................................... $9,468 $1,000$10,46

8

Units completed and transferred out:Units transferred to the next

department.................................... 1,300 1,300Cost per equivalent unit.................... $31.56 $10.00Cost of units transferred out.............. $41,02

8 $13,000$54,02

8

Note to Instructors: Use the Take Two data to emphasize that the cost per equivalent unit is used to determine the ending work in process inventories and the cost of the units transferred out.



Costs to be accounted for:Cost of beginning work in process inventory..............................................

$ 4,830

Costs added to production during the period...................................................

25,65 0

Total cost to be accounted for................ $30,48 0

Costs accounted for as follows:Cost of ending work in process inventory..............................................

$ 1,300

Cost of units completed and transferred out........................................................

29,18 0

*

Total cost accounted for......................... $30,48 0


Note to Instructors: Without allowing students to perform any calculations, ask them if the cost of units completed and transferred out will be higher or lower than the original scenario. Since the total cost to be accounted for remains the same, the

total cost accounted for has to also remain unchanged. If the cost of the ending work in process inventory increases, then the cost of units completed and transferred out must decrease.



1. Materials Labor Overhead

Units transferred to the next department................................. 780,000 780,000 780,000

Work in process, ending:Materials:

50,000 units × 60% complete. . 30,000Labor and overhead:

50,000 units × 20% complete. . 10,000 10,000 Equivalent units of production....... 810,000 790,000 790,000

2.Materials Labor

Overhead

Cost of beginning work in process....................................

$ 68,600

$ 30,000

$ 48,000

Cost added during the period..... 907,200 370,00

0 592,00

0

Total cost (a)..............................$975,80

0$400,00

0$640,00

0

Equivalent units of production (b)............................................ 810,000 790,000 790,000

Cost per equivalent unit (a) ÷ (b)............................................ $1.20 $0.51 $0.81




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 Overhead

Total

Ending work in process inventory:Equivalent units of production............... 1,350 600 600


Cost of ending work in process inventory $31,050 $4,200 $8,400 $43,650

Units completed and transferred out:

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


Cost of units completed and transferred out........

$414,000

$126,000

$252,000

$792,000


Total cost to be accounted for.................... $835,650 Costs accounted for as follows:






month............................................................. 300,000

2.Equivalent Units

(EU)Material

sConversio

nUnits transferred out........................... 300,000 300,000Work in process, ending:

Materials: 50,000 kilograms × 40%.. 20,000Conversion: 50,000 kilograms ×

10%................................................ 5,000


Note to Instructors: Without allowing students to perform any calculations, ask them if the equivalent units of production will be greater than or less than the original scenario. Because the inventory levels remain the same and fewer units are started into production, it means the equivalent units of production have to be less than the original scenario.



Materials

Labor & Overhead

Pounds transferred to the Packing Department during May*...............................

500,000 500,000

Work in process, May 31:Materials: 20,000 pounds × 100%

complete..................................................... 20,000 Labor and overhead: 20,000 pounds ×

90% complete............................................. 18,000


0 518,000

* 40,000 + 480,000 – 20,000 = 500,000

Supplement: Process Costing Using the FIFO Method

Exercise 4S-1 (10 minutes)

FIFO Method

Materials

Conversion

To complete beginning work in process:Materials: 50,000 units × (100% − 90%)..............5,000Conversion: 50,000 units × (100% −

60%)................................................................... 20,000

Units started and completed during October*................................................................360,000 360,000

Ending work in process:Materials: 30,000 units × 70% complete..............21,000Conversion: 30,000 units × 50%

complete............................................................. 15,000

Equivalent units of production.................................386,000 395,000

* 390,000 units started into production – 30,000 units in ending work in process = 360,000 units started and completed


FIFO method

Materials Labor

Overhead

Cost added during May (a).......... $82,560 $52,920 $132,300Equivalent units of production

(b)................................... 16,000 14,000 14,000Cost per equivalent unit (a) ÷ (b) $5.16 $3.78 $9.45

Cost per equivalent unit for materials................................... $ 5.16

Cost per equivalent unit for labor 3.78Cost per equivalent unit for

overhead................................... 9.45

Total cost per equivalent unit..... $18.39


Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production......... 800 200Cost per equivalent unit.................. $4.40 $1.30Cost of ending work in process

inventory..................................... $3,520 $260 $3,780

Units transferred out:Cost in beginning inventory............ $2,700 $380 $3,080

Cost to complete the units in beginning work in process inventory:

Equivalent units of production required to complete the beginning inventory................... 400 700

Cost per equivalent unit................ $4.40 $1.30Cost to complete the units in

beginning inventory................... $1,760 $910 $2,670Cost of units started and completed this period:

Units started and completed this period (8,000 units completed and transferred to the next department – 1,000 units in beginning work in process inventory).................................. 7,000 7,000

Cost per equivalent unit................ $4.40 $1.30Cost of units started and

completed this period................$30,80

0 $9,100$39,90

0Total cost of units transferred out. . . $45,65

0


Solutions Manual, Supplement 61



Costs to be accounted for:Cost of beginning work in process inventory.............................................. $ 4,230

Costs added to production during the period................................................... 46,320

Total cost to be accounted for................ $50,550

Costs accounted for as follows:Cost of ending work in process inventory.............................................. $ 3,870


*




FIFO Method

Materials

Labor & Overhead

To complete the beginning work in process:Materials: 30,000 pounds × (100% −

100%)......................................................... 0Labor and overhead:

30,000 pounds × (100% − 55%)................ 13,500

Pounds started and completed during May*....460,00

0 460,000Ending work in process:

Materials: 20,000 pounds × 100% complete..................................................... 20,000

Labor and overhead: 20,000 pounds × 90% complete............................................. 18,000


0 491,500

* 480,000 pounds started – 20,000 pounds in ending work in process inventory = 460,000 pounds started and completed this month.




FIFO Method



month............................................................. 330,000

2. Equivalent Units

MaterialsConversio

nTo complete beginning work in

process:Materials:

80,000 kilograms × (100% − 80%) 16,000Conversion:

80,000 kilograms × (100% − 20%) 64,000Units started and completed during

the month*....................................... 250,000 250,000Ending work in process:

Materials: 50,000 kilograms × 40% complete 20,000

Conversion: 50,000 kilograms × 10% complete 5,000


* 300,000 kilograms started into production – 50,000 kilograms in ending work in process = 250,000 tons started and completed


FIFO Method

1 Materials Labor

Overhead

To complete beginning work in process:Materials:

80,000 gallons × (100% − 80%). 16,000Labor:

80,000 gallons × (100% − 75%). 20,000Overhead:

80,000 gallons × (100% − 75%). 20,000Units started and completed

during the period................... 710,000 710,000 710,000Ending work in process:

Materials: 50,000 gallons × 60%. . . 30,000 Labor: 50,000 gallons × 20%......... 10,000 Overhead: 50,000 gallons × 20%. . 10,000

Equivalent units of production.......... 756,000 740,000 740,000

Materials Labor

Overhead

Cost added during the period (a)......$907,20

0$370,00

0$592,00

0Equivalent units of production (b).... 756,000 740,000 740,000Cost per equivalent unit (a) ÷ (b)..... $1.20 $0.50 $0.80




Materials

Conversion

To complete beginning work in process:Materials: 400 units x (100% – 75%)........... 100Conversion: 400 units x (100% – 25%)........ 300

Units started and completed during the period (42,600 units started – 500 units in ending inventory)........................................ 42,100 42,100

Ending work in processMaterials: 500 units x 80% complete.......... 400 Conversion: 500 units x 30% complete....... 150

Equivalent units of production......................... 42,600 42,550


FIFO method

1. Computation of the total cost per equivalent unit of production:

Cost per equivalent unit of production for material... $18.20Cost per equivalent unit of production for

conversion............................................................... 23.25

Total cost per equivalent unit of production.............. $41.45


Materials ConversionUnits in ending inventory.... 300 300 Percentage completed........ 80% 40%Equivalent units of

production........................ 240 120

3. Computation of equivalent units required to complete the beginning inventory:

Materials ConversionUnits in beginning

inventory.......................... 400 400Percentage uncompleted.... 30% 70%Equivalent units of

production........................ 120 280

4. Units transferred to the next department.... 4,400Less units from the beginning inventory...... 400 Units started and completed during the

period......................................................... 4,000



Exercise 4S-9 (continued)

5.

Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production.......................................... 240 120Cost per equivalent unit.................................................... $18.20 $23.25Cost of ending work in process inventory......................... $4,368 $2,790 $7,158

Units transferred out:Cost from the beginning work in process inventory.......... $4,897 $2,989 $7,886Cost to complete the units in beginning work in process inventory:

Equivalent units of production required to complete the units in beginning inventory................................ 120 280

Cost per equivalent unit............................................... $18.20 $23.25Cost to complete the units in beginning inventory....... $2,184 $6,510 $8,694

Cost of units started and completed this period:Units started and completed this period....................... 4,000 4,000Cost per equivalent unit............................................... $18.20 $23.25Cost of units started and completed this period........... $72,80

0 $93,000$165,8

00Total cost of units transferred out.................................... $182,3

80


68 Introduction to Managerial Accounting, 6th Edition

Problem 4S-10 (45 minutes)

FIFO Method

1.


Materials

Conversion

To complete beginning work in process:Materials: 60,000 units x (100% − 60%) 24,000Conversion: 60,000 units x (100% −

30%).................................................... 42,000Units started and completed during the

period (510,000 units started − 70,000 units in ending inventory).......................

440,000 440,000

Ending work in process:Materials: 70,000 units x 80% complete 56,000 Conversion: 70,000 units x 40%

complete............................................. 28,000 Equivalent units of production.................... 520,00

0 510,000

2.


Materials

Conversion

Cost added during the period (a)........ $468,000 $357,000

Equivalent units of production (b)...... 520,000 510,000Cost per equivalent unit (a) ÷ (b)....... $0.90 $0.70

3. See the next page.

4.

Cost Reconciliation

Costs to be accounted for:Cost of beginning work in process inventory

($27,000 + $13,000)....................................$ 40,00

0Costs added to production during the period

($468,000 + $357,000)................................ 825,00

0



Total cost to be accounted for......................... $865,000

Costs accounted for as follows:Cost of ending work in process inventory........ $ 70,00

0Costs of units transferred out.......................... 795,00

0Total cost accounted for.................................. $865,00

0



Problem 4S-10 (continued)

3.

Costs of Ending Work in Process Inventory and Units Transferred Out

Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production........................................ 56,000 28,000Cost per equivalent unit................................................. $0.90 $0.70Cost of ending work in process inventory....................... $50,40

0 $19,600$70,00

0

Units transferred out:Cost in beginning work in process inventory.................. $27,00

0 $13,000$40,00

0Cost to complete the units in beginning work in process

inventory:Equivalent units of production required to complete

the beginning inventory........................................... 24,000 42,000Cost per equivalent unit............................................. $0.90 $0.70Cost to complete the units in beginning inventory..... $21,60

0 $29,400$51,00

0Cost of units started and completed this period:

Units started and completed this period..................... 440,000 440,000

Cost per equivalent unit............................................. $0.90 $0.70Cost of units started and completed this period......... $396,0

00 $308,000$704,0

00Cost of units transferred out........................................... $795,0

00



Problem 4S-11 (45 minutes)

FIFO method

1.


Materials

Conversion

To complete beginning work in process:Materials: 70,000 units x (100% − 70%) 21,000Conversion: 70,000 units x (100% −

40%).................................................... 42,000Units started and completed during the

period (460,000 units started − 80,000 units in ending inventory).......................

380,000 380,000

Ending work in process:Materials: 80,000 units x 75% complete 60,000 Conversion: 80,000 units x 25%

complete............................................. 20,000 Equivalent units of production.................... 461,00

0 442,000

2.


Materials

Conversion

Cost added during the period (a)........ $391,850 $287,300

Equivalent units of production (b)...... 461,000 442,000Cost per equivalent unit (a) ÷ (b)....... $0.85 $0.65

3. See the next page.

4.

Cost Reconciliation

Costs to be accounted for:Cost of beginning work in process inventory

($36,550 + $13,500)....................................$ 50,05

0Costs added to production during the period

($391,850 + $287,300)................................ 679,15

0



Total cost to be accounted for......................... $729,200

Costs accounted for as follows:Cost of ending work in process inventory........ $ 64,00

0Costs of units transferred out.......................... 665,20

0Total cost accounted for.................................. $729,20

0



Problem 4S-11 (continued)

3.

Costs of Ending Work in Process Inventory and Units Transferred Out

Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production........................................ 60,000 20,000Cost per equivalent unit................................................. $0.85 $0.65Cost of ending work in process inventory....................... $51,00

0 $13,000$64,00

0

Units transferred out:Cost in beginning work in process inventory.................. $36,55

0 $13,500$50,05

0Cost to complete the units in beginning work in process

inventory:Equivalent units of production required to complete

the beginning inventory........................................... 21,000 42,000Cost per equivalent unit............................................. $0.85 $0.65Cost to complete the units in beginning inventory..... $17,85

0 $27,300$45,15

0Cost of units started and completed this period:

Units started and completed this period..................... 380,000 380,000

Cost per equivalent unit............................................. $0.85 $0.65Cost of units started and completed this period......... $323,0

00 $247,000$570,0

00Cost of units transferred out........................................... $665,2

00



Analytical Thinking (60 minutes)

FIFO Method

1.

Transferred In

Materials

Conversion

To complete beginning work in process:Transferred in: 8,000 units x 0%............................ 0Materials: 8,000 units x 0%................................... 0Conversion: 8,000 units x (1 − 7/8)....................... 1,000

Units started and completed during the period (97,000 units started − 5,000 units in ending inventory)............................................................... 92,000 92,000 92,000

Ending 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 2/5 complete................ 2,000

Equivalent units of production................................... 97,000 92,000 95,000

Transferred In

Materials

Conversion

Cost added during the period (a)...............................$81,480 $27,600

$96,900

Equivalent units of production (b)............................. 97,000 92,000 95,000Cost per equivalent unit (a) ÷ (b).............................. $0.84 $0.30 $1.02



Analytical Thinking (continued)

Transferred In

Materials

Conversion Total

Ending work in process inventory:Equivalent units of production................... 5,000 0 2,000Cost per equivalent unit............................ $0.84 $0.30 $1.02Cost of ending work in process inventory.. $4,200 $0 $2,040 $6,240

Units transferred out:Cost in beginning work in process

inventory................................................ $8,820 $3,400 $10,200$22,42

0Cost to complete units in beginning work

in process inventory:Equivalent units of production required to

complete the beginning inventory (see above) ................................................... 0 0 1,000Cost per equivalent unit........................ $0.84 $0.30 $1.02Cost to complete units in beginning

inventory............................................ $0 $0 $1,020 $1,020Cost of units started and completed this

period:Units started and completed this period 92,000 92,000 92,000Cost per equivalent unit........................ $0.84 $0.30 $1.02Cost of units started and completed this

period................................................. $77,280$27,60

0 $93,840$198,7

20Cost of units transferred out...................... $222,1

60

2. The effects of the cost-cutting will tend to show up more under the FIFO method. The



reason is that the FIFO method keeps the costs of the current period separate from the costs of prior periods. Thus, under the FIFO method, management will be able to see the effect of price increases on unit costs without any distorting influence from what has happened in the past. Under the weighted-average method, however, costs carried over from the prior period are averaged in with costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort.



ch04

Documents

process inventory

process account

process costingsolutions

materials costs

firing department

pounds work

firing xxxx work

transfer of work