ch4 manual of managerial accounting 14e- garrison, noreen, brewer
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The solution manual is for Managerial Accounting 14E- Garrison, Noreen, Brewer chapter 4 in order to help studentsTRANSCRIPT
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 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.
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Chapter 4 Process Costing
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 company’s needs.
Exercise 4-1 (20 minutes)
a. To record issuing raw materials for use in production:
4-3
Chapter 4 Process Costing
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
4-4
Chapter 4 Process Costing
Exercise 4-2 (10 minutes)
Weighted-Average Method
Equivalent Units
MaterialsConversio
nUnits 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
4-5
Chapter 4 Process Costing
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 $189,750
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........................................ $ 85.75
Cost per equivalent unit for labor..... 34.50Cost per equivalent unit for
overhead........................................ 172.50
Total cost per equivalent unit.......... $292.75
4-6
Chapter 4 Process Costing
Exercise 4-4 (10 minutes)
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.............. $41,02
8 $12,116$53,14
4
4-7
Chapter 4 Process Costing
Exercise 4-5 (10 minutes)
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:
4-8
Chapter 4 Process Costing
4-9
Chapter 4 Process Costing
Exercise 4-6 (15 minutes)
Weighted-Average Method
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
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Chapter 4 Process Costing
Exercise 4-7 (30 minutes)
Weighted-Average Method
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 Conversi Total
4-11
Chapter 4 Process Costing
onEnding 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
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Chapter 4 Process Costing
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
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Chapter 4 Process Costing
Exercise 4-8 (10 minutes)
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
4-14
Chapter 4 Process Costing
Exercise 4-9 (20 minutes)
Weighted-Average Method
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 per equivalent $24.00 $7.00 $14.00
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Chapter 4 Process Costing
unit..........................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:
Cost of ending work in process inventory.............................................. $ 45,000
Cost of units completed and transferred out........................................................ 810,000
Total cost accounted for......................... $855,000
4-16
Chapter 4 Process Costing
Exercise 4-10 (10 minutes)
Weighted-Average Method
1.Kilograms of Cement
Work in process, May 1..................................... 80,000Started into production during the month......... 300,000Total kilograms in process................................. 380,000Deduct work in process, May 31........................ 50,000 Completed and transferred out during the
month............................................................. 330,000
2.Equivalent Units
(EU)Material
sConversio
nUnits transferred out........................... 330,000 330,000Work in process, ending:
Materials: 50,000 kilograms × 40%.. 20,000Conversion: 50,000 kilograms ×
10%................................................ 5,000
Equivalent units of production............ 350,000 335,000
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Chapter 4 Process Costing
Exercise 4-11 (30 minutes)
Weighted-Average Method
1.Materia
lsConversi
onUnits transferred to the next process....... 300,000 300,000Ending work in process:
Materials: 40,000 units × 50% complete.............................................. 20,000
Conversion: 40,000 units × 25% complete.............................................. 10,000
Equivalent units of production.................. 320,000 310,000
2. Materials
Conversion
Cost of beginning work in process...........$ 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:
4-18
Chapter 4 Process Costing
Equivalent units of production (see above)... 20,000 10,000
Cost per equivalent unit (see above)..................... $1.38 $0.74
Cost 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
(see previous exercise)... $1.38 $0.74Cost of units completed
and transferred out.........$414,00
0 $222,000$636,00
0
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Chapter 4 Process Costing
Exercise 4-12 (10 minutes)
Weighted-Average Method
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 4-13 (45 minutes)
Weighted-Average Method
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
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Chapter 4 Process Costing
Conversion: 40,000 units x 25% complete...............................................
10,000
Equivalent units of production.................. 410,00 0
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
Cost of beginning work in process.......... $ 86,000
$ 36,000
Cost added during the period................. 447,00 0
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
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Chapter 4 Process Costing
Materials
Conversion
Total
Ending work in process inventory:
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
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Chapter 4 Process Costing
Problem 4-13 (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
Total cost to be accounted for................ $767,000 Costs accounted for as follows:
Cost of ending work in process inventory.............................................. $ 45,000
Cost of units completed and transferred out........................................................ 722,000
Total cost accounted for......................... $767,000
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Chapter 4 Process Costing
Problem 4-14 (45 minutes)
Weighted-Average Method
1.
Equivalent Units of Production
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.
Cost per Equivalent Unit
Materials
Conversion
Cost of beginning work in process.......... $ 36,550
$ 13,500
Cost added during the period................. 391,85 0
287,300
Total cost (a)........................................... $428,40 0
$300,800
Equivalent units of production (b).......... 510,000 470,000Cost per equivalent unit, (a) ÷ (b)......... $0.84 $0.64
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Chapter 4 Process Costing
3.
Applying Costs to Units
Materials
Conversion
Total
Ending work in process inventory:
Equivalent units of production ..................... 60,000 20,000
Cost per equivalent unit... $0.84 $0.64Cost of ending work in process inventory........... $50,400 $12,800 $63,200
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
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Chapter 4 Process Costing
Problem 4-14 (continued)
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
Total cost to be accounted for................ $729,200 Costs accounted for as follows:
Cost of ending work in process inventory.............................................. $ 63,200
Cost of units completed and transferred out........................................................ 666,000
Total cost accounted for......................... $729,200
Problem 4-15 (45 minutes)
Weighted-Average Method
1.
Equivalent units of production
Materials
Conversion
Transferred to next department*............... 270,00 270,000
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Chapter 4 Process Costing
0Ending 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.................. 315,00 0
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
Cost of beginning work in process.......... $ 43,400
$ 20,300
Cost added during the period................. 397,60 0
187,600
Total cost (a)........................................... $441,000
$207,900
Equivalent units of production (b).......... 315,000 297,000Cost per equivalent unit, (a) ÷ (b)......... $1.40 $0.70
3.
Cost of ending work in process inventory and units transferred out
Material Conversi Total
4-27
Chapter 4 Process Costing
s on
4-28
Chapter 4 Process Costing
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
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Chapter 4 Process Costing
Problem 4-16 (45 minutes)
Weighted-Average Method
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 Payable90,200
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 Receivable1,400,00
0Sales 1,400,000
Cost of Goods Sold 890,000Finished Goods 890,000
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Chapter 4 Process Costing
Problem 4-16 (continued)
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
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Chapter 4 Process Costing
(c) 596,000 (b)
90,200
Sales Cost of Goods Sold(g) 1,400,00
0(g) 890,000
Problem 4-17 (60 minutes)
Weighted-Average Method
1. Computation of equivalent units in ending inventory:
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
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Chapter 4 Process Costing
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
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Chapter 4 Process Costing
Problem 4-17 (continued)
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
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
Total cost to be accounted for................ $166,110 Costs accounted for as follows:
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Chapter 4 Process Costing
Cost of ending work in process inventory.............................................. $ 1,710
Cost of units transferred out.................. 164,400 Total cost accounted for......................... $166,110
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Chapter 4 Process Costing
Problem 4-18 (30 minutes)
Weighted-Average Method
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
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Chapter 4 Process Costing
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.
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Chapter 4 Process Costing
Case 4-19 (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
Transferred In Conversion
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
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Chapter 4 Process Costing
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.
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Chapter 4 Process Costing
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 +
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.
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Chapter 4 Process Costing
Case 4-19 (continued)
3. (continued)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 30% complete....... 6,000
Equivalent units of production......... 270,000 256,000
Transferred In Conversion
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
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Chapter 4 Process Costing
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.
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Chapter 4 Process Costing
Case 4-19 (continued)
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?
4-43
Chapter 4 Process Costing
Case 4-20 (45 minutes)
Weighted-Average Method
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
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Chapter 4 Process Costing
Case 4-20 (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.
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