chapter 3
DESCRIPTION
CHAPTER #. Instruction manual.. For accountancy, Student,TRANSCRIPT
3-1
CHAPTER 3
Process Costing
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives QuestionsBrief
Exercises ExercisesA
ProblemsB
Problems
1. Understand who usesprocess cost systems.
1, 2 1
2. Explain the similaritiesand differences betweenjob order cost andprocess cost systems.
2, 3, 4, 5 1
3. Explain the flow of costsin a process cost system.
6 3 3A 3B
4. Make the journal entriesto assign manufacturingcosts in a processcost system.
6, 7 1, 2, 3 2, 4 3A 3B
5. Compute equivalentunits.
10, 11, 12,13
5, 10 3, 5, 6, 7, 8,9, 10, 11, 13,14, 15, 16,
1A, 2A, 4A,5A, 6A
1B, 2B, 4B,5B, 6B
6. Explain the four stepsnecessary to preparea production cost report.
8, 9, 14, 15,18
4, 6, 7, 8,9
3, 5, 6, 7, 8,9, 10, 11, 13,14, 15, 16,17, 18, 19
1A, 2A, 4A,5A
1B, 2B, 4B,5B
7. Prepare a productioncost report.
16, 17, 19,20
7, 12, 13 1A, 2A, 4A,5A, 6A
1B, 2B, 4B,5B, 6B
*8. Compute equivalent unitsusing the FIFO method.
21, 22 11, 12, 13 16, 17, 18,19, 20
7A 7B
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix*tothe chapter.
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ASSIGNMENT CHARACTERISTICS TABLE
ProblemNumber Description
DifficultyLevel
TimeAllotted (min.)
1A Complete four steps necessary to prepare a productioncost report.
Simple 30–40
2A Complete four steps necessary to prepare a productioncost report.
Simple 30–40
3A Journalize transactions. Moderate 20–30
4A Assign costs and prepare production cost report. Moderate 20–30
5A Determine equivalent units and unit costs andassign costs.
Moderate 20–30
6A Compute equivalent units and complete productioncost report.
Moderate 15–25
*7A* Determine equivalent units and unit costs and assigncosts for processes; prepare production cost report.
Moderate 30–40
1B Complete four steps necessary to prepare a productioncost report.
Simple 30–40
2B Complete four steps necessary to prepare a productioncost report.
Simple 30–40
3B Journalize transactions. Moderate 20–30
4B Assign costs and prepare production cost report. Moderate 20–30
5B Determine equivalent units and unit costs andassign costs.
Moderate 20–30
6B Compute equivalent units and complete productioncost report.
Moderate 15–25
*7B Determine equivalent units and unit costs and assigncosts for processes; prepare production cost report.
Moderate 30–40
BLOOM’S TAXONOMY TABLE
3-3
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3-4
STUDY OBJECTIVES
1. UNDERSTAND WHO USES PROCESS COST SYSTEMS.
2. EXPLAIN THE SIMILARITIES AND DIFFERENCESBETWEEN JOB ORDER COST AND PROCESS COSTSYSTEMS.
3. EXPLAIN THE FLOW OF COSTS IN A PROCESSCOST SYSTEM.
4. MAKE THE JOURNAL ENTRIES TO ASSIGN MANU-FACTURING COSTS IN A PROCESS COST SYSTEM.
5. COMPUTE EQUIVALENT UNITS.
6. EXPLAIN THE FOUR STEPS NECESSARY TO PRE-PARE A PRODUCTION COST REPORT.
7. PREPARE A PRODUCTION COST REPORT.
*8. COMPUTE EQUIVALENT UNITS USING THE FIFOMETHOD.
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CHAPTER REVIEW
Process Manufacturing and Accounting
1. (S.O. 1) Process cost systems are used to apply costs to similar products that are massproduced in a continuous fashion, such as the production of ice cream, steel or soft drinks. Incomparison, costs in a job order cost system are assigned to a specific job, such as theconstruction of a customized home, the making of a motion picture, or the manufacturing of aspecialized machine.
2. (S.O. 2) Job order cost and process cost systems are similar in that (a) both use the same threemanufacturing cost elements of direct materials, direct labor, and manufacturing overhead; (b)both accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor bydebiting Factory Labor, and manufacturing overhead costs by debiting Manufacturing Overhead;and (c) both flow costs to the same accounts of Work in Process, Finished Goods Inventory, andCost of Goods Sold.
3. The major differences between a job order cost system and a process cost system are as follows:
Job Order ProcessFeature Cost System Cost System Work in process One for each job One for each processaccounts
Documents used Job cost sheets Production cost reports
Determination of Each job Each periodtotal manufacturingcosts
Unit-cost Cost of each job Total manufacturing costscomputations ÷ Units produced ÷ Equivalent Units produced
for the job during the period
Process Cost Flow
4. (S.O. 3) In the Tyler Company example in the text book, manufacturing consists of twoprocesses: machining and assembly. In the Machining Department, the raw materials are shaped,honed, and drilled. In the Assembly Department, the parts are assembled and packaged.
5. Materials, labor, and manufacturing overhead can be added in both the Machining and AssemblyDepartments. When the Machining Department finishes its work, the partially completed units aretransferred to the Assembly Department. In the Assembly Department, the goods are finished andare then transferred to the finished goods inventory. Upon sale, the goods are removed from thefinished goods inventory.
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Assignment of Manufacturing Costs
6. (S.O. 4) All raw materials issued for production are a materials cost to the producing department.Materials requisition slips may be used in a process cost system, but fewer requisitions aregenerally required than in a job order cost system, because the materials are used for processesrather than for specific jobs. The entry to record the materials used is:
Work in Process—Machining .................................................. XXXXWork in Process—Assembly ................................................... XXXX
Raw Materials Inventory................................................. XXXX
7. Time tickets may be used in determining the cost of labor assignable to the productiondepartments. The labor cost chargeable to a process can be obtained from the payroll register ordepartmental payroll summaries. All labor costs incurred within a producing department are a costof processing the raw materials. The entry to assign the labor costs is:
Work in Process—Machining .................................................. XXXXWork in Process—Assembly ................................................... XXXX
Factory Labor.................................................................... XXXX
8. The basis for allocating the overhead costs to the production departments in an objective andequitable manner is the activity that “drives” or causes the costs. A primary driver of overheadcosts in continuous manufacturing operations is machine time used, not direct labor. Thus,machine hours are widely used in allocating manufacturing overhead costs. The entry to allocateoverhead is:
Work in Process—Machining .................................................. XXXXWork in Process—Assembly ................................................... XXXX
Manufacturing Overhead................................................ XXXX
9. At the end of the period, the following transfer entries are needed:
Work in Process—Assembly ................................................... XXXXWork in Process—Machining ........................................ XXXX
Finished Goods Inventory ........................................................ XXXXWork in Process—Assembly ......................................... XXXX
Cost of Goods Sold.................................................................... XXXXFinished Goods Inventory .............................................. XXXX
Equivalent Units
10. (S.O. 5) A major step in process cost accounting is the calculation of equivalent units. Equivalentunits of production measure the work done during the period, expressed in fully completedunits. This concept is used to determine the cost per unit of completed product.
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11. The formula to compute equivalent units of production under the weighted average method is asfollows:
Units Completed and Transferred Out +
Equivalent Units ofEnding Work in
Process= Equivalent Units of
Production
12. The method of computing equivalent units here is referred to as the weighted-average method. Itconsiders the degree of completion (weighting) of the units completed and transferred out and theending work in process. A lesser used method, called the FIFO method, is discussed in theappendix to this chapter.
13. To illustrate the computation of equivalent units using the weighted-average method, assume thatmaterials are entered at the beginning of the process and the following information is provided forthe Processing Department of the Silva Company:
Percentage Complete Physical Units Materials Conversion Costs
Work in process, Beg. 2,500 100% 80%Started into production 4,500Total units 7,000Units transferred out 6,000Work in process, End. 1,000 100% 60%Total units 7,000
14. The two equivalent unit computations are as follows:
Equivalent Units Conversion
Materials Costs Units transferred out 6,000 6,000Work in process, End 1,000 X 100% 1,000 1,000 X 60% 600Total equivalent units 7,000 6,600
Production Cost Report
15. (S.O. 6) A production cost report is the key document used by management to understand theactivities in a department because it shows the production quantity and cost data related to thatdepartment. In order to be ready to complete a production cost report, the company must performfour steps:a. Compute the physical unit flow.b. Compute the equivalent units of production.c. Compute unit production costs.d. Prepare a cost reconciliation schedule.
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16. The computation of physical units involves:a. adding the units started (or transferred) into production during the period to the units in
process at the beginning of the period to determine the total units to be accounted for; andb. accounting for these units by determining the output for the periodwhich consists of units
transferred out during the period and units in process at the end of the period.
In the example above, the total units to be accounted for and the units accounted for are bothequal to 7,000 units for the Silva Company.
17. In computing unit costs, production costs are expressed in terms of equivalent units of production.When equivalent units are different for materials and conversion costs, the formulas for computingunit costs are as follows:
Total MaterialsCost ÷ Equivalent Units
of Materials = Unit MaterialsCost
Total ConversionCosts ÷ Equivalent Units
of Conversion Costs = Unit ConversionCost
Unit MaterialsCost ÷ Unit Conversion
Cost = Total ManufacturingCost per Unit
18. The cost reconciliation schedule shows that the total costs accounted for equal the total coststo be accounted for as follows:
Costs to be accounted forTransferred out .................................................. $XXXXWork in process, End
Materials......................................................... $XXXXConversion costs.......................................... XXXX XXXX
Total costs.............................................................. $XXXX
19. (S.O. 7) Assume the Processing Department of the Silva Company has the following additionalcost information:
Work in process, Beg.Direct materials: 100% complete............................. $ 24,000Conversion costs: 80% complete............................ 19,620
Cost of work in process, Beg............................................ $ 43,620
Costs incurred during productionDirect materials ........................................................... $200,000Conversion costs ........................................................ 150,000
Costs incurred...................................................................... $350,000
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20. The Silva Company’s Processing Department Production Cost Report at the end of the period isas follows:
Processing DepartmentProduction Cost Report
For the Period Ended
Equivalent Units Physical Conversion Units Materials Costs
QUANTITIESUnits to be accounted for
Work in process, Beg. 2,500Started into production 4,500
Total units 7,000Units accounted for
Transferred out 6,000 6,000 6,000Work in process, End. 1,000 1,000 600 (1,000 X 60%)
Total units 7,000 7,000 6,600
ConversionMaterials Costs Total
COSTSUnit costs
Costs during the period (a) $224,000 $169,620 $393,620Equivalent units (b) 7,000 6,600Unit costs [(a) ÷ (b)] $32.00 $25.70 $57.70
Costs to be accounted forWork in process, Beg. $ 43,620Started into production 350,000
Total costs $393,620
Cost Reconciliation ScheduleCosts accounted for
Transferred out (6,000 X $57.70) $346,200Work in process, End.
Materials (1,000 X $32.00) $32,000Conversion costs (600 X $25.70) 15,420 47,420
Total costs $393,620
Operations Costing
21. Companies often use a combination of a process cost and a job order cost system, calledoperations costing. Operations costing is similar to process costing in that standardizedmethods are used to manufacture the product. At the same time, the product may have somecustomized, individual features that require the use of a job order cost system.
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Equivalent Units Using the FIFO Method
*22. (S.O. 8) To illustrate the computation of equivalent units using the FIFO method, assume thatmaterials are entered at the beginning of the process and the following information is provided forthe Processing Department of the Silva Company:
Percentage Complete Physical Units Materials Conversion Costs
Work in process, Beg. 2,500 100% 80%Started into production 4,500Total units 7,000Units transferred out 6,000Work in process, End. 1,000 100% 60%Total units 7,000
*23. The equivalent units for material costs of the Processing Department under the FIFO method arecomputed as follows:
Processing DepartmentWork Added Equivalent
Production Data Physical Units This Period Units Work in process, Beg. 2,500 0Started and finished 3,500 100% 3,500Work in process, End. 1,000 100% 1,000Total 7,000 4,500
*24. The equivalent units for conversion costs of the Processing Department under the FIFO methodare computed as follows:
Processing DepartmentWork Added Equivalent
Production Data Physical Units This Period Units Work in process, Beg. 2,500 20% 500Started and completed 3,500 100% 3,500Work in process, End. 1,000 60% 600Total 7,000 4,600
Production Cost Report Using the FIFO Method
*25. Assume the Processing Department of the Silva Company has the following additional costinformation:
Work in process, Beg. Direct materials: 100% complete................................................ $ 24,000 Conversion costs: 80% complete ............................................... 19,620Cost of work in process, Beg......................................................... $ 43,620
Costs incurred during the production Direct materials .............................................................................. $200,000 Conversion costs ........................................................................... 150,000Costs incurred................................................................................... $350,000
3-11
*26. The Silva Company’s Processing Department Production Cost Report at the end of the periodusing the FIFO method is as follows:
Processing DepartmentProduction Cost Report
For the Period Ended
Equivalent Units Physical Conversion
Units Materials Costs QUANTITIESUnits to be accounted for
Work in process, Beg. 2,500Started into production 4,500
Total units 7,000Units accounted for
Completed and transferred out Work in process, Beg. 2,500 0 500 Started and completed 3,500 3,500 3,500Work in process, End. 1,000 1,000 600
Total units 7,000 4,500 4,600
ConversionMaterials Costs Total
COSTSUnit costs
Costs during the period (a) $200,000 $150,000 $350,000Equivalent units (b) 4,500 4,600Unit costs [(a)/(b)] $44.444 $ 32.609 $77.053
Costs to be accounted forWork in process, Beg. $ 43,620Started into production 350,000
Total costs $393,620
Cost Reconciliation ScheduleCosts accounted forTransferred out
Work in process, $ 43,620Costs to complete beg. work in process
Conversion costs (500 X $32.609) 16,305 Total costs 59,925
Units started and completed (3,500 X $77.053) 269,686Total costs transferred out 329,611Work in process, End
Materials (1,000 X $44.444) $44,444Conversion costs (600 X $32.609) 19,565 64,009
Total costs $393,620
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LECTURE OUTLINE
A. Uses of Process Cost Systems.
1. Process cost systems are used to apply costs to similar products thatare mass-produced in a continuous fashion.
2. Once production begins, it continues until the finished product emerges,and each unit of finished product is like every other unit.
B. Similarities and Differences Between Job Order Cost and Process CostSystems.
1. In a process cost system, costs are tracked through a series of connectedmanufacturing processes or departments, rather than by individual jobsas in a job order cost system.
2. Companies use process cost systems when they produce a large volumeof relatively homogeneous products.
3. Job order cost and process cost systems are similar in three ways:
a. Both systems track the same manufacturing cost elements—directmaterials, direct labor, and manufacturing overhead.
b. Costs are accumulated in the same accounts—Raw Materials Inven-tory, Factory Labor, and Manufacturing Overhead.
c. Accumulated costs are assigned to the same accounts—Work inProcess, Finished Goods Inventory, and Cost of Goods Sold.
4. There are four main differences between the two cost systems:
a. In a job order cost system, only one work in process account is usedwhile separate accounts are maintained for each department ormanufacturing process in a process cost system.
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b. In a job order cost system, costs are charged to individual jobs andsummarized in a job cost sheet; in a process cost system, costs aresummarized in a production cost report for each department.
c. Costs are totaled at the completion of a job in a job cost system butat the end of a time period (i.e. a month or year) in a process costsystem.
d. In a job cost system, the unit cost is the total cost per job ÷ by the unitsproduced. In a process cost system, the unit cost is total manufac-turing costs for the period ÷ by the units produced during theperiod.
ILLUSTRATION 3-1 contrasts the differences between a job order cost and aprocess cost system.
C. Process Cost Flow.
1. The company can add materials, labor, and manufacturing overhead ineach production department.
2. The costs of units completed are transferred from one department toanother as those units move through the manufacturing process.
3. The costs of completed work are transferred to Finished Goods Inventory.
4. When inventory is sold, costs are transferred to Cost of Goods Sold.
TEACHING TIP
3-14
ILLUSTRATION 3-2 provides an overview of the flow of costs in a process costsystem. Point out that a work in process account is maintained for each departmentor process in a process cost system.
D. Assignment of manufacturing costs.
1. The accumulation of the costs of materials, labor, and manufacturingoverhead is the same in a process cost system as in a job order costsystem.
2. Entries to assign the costs of raw materials, factory labor, and overheadconsist of a debit to Work in Process for each department and a credit toRaw Materials Inventory, Factory Labor, and Manufacturing Overhead.
3. The assignment of the three manufacturing cost elements to Work inProcess in a process cost system is different from a job order cost system.
a. All raw materials issued for production are a materials cost to theproducing department. A process cost system may use materialsrequisition slips, but fewer requisitions are generally required thanin a job order system, because the materials are used for processesrather than specific jobs.
b. Companies may use time tickets to determine the cost of factorylabor assignable to production departments. Since labor costs areassigned to a process rather than a job, the labor cost chargeableto a process can be obtained from the payroll register or departmentalpayroll summaries.
c. The objective in assigning overhead in a process cost system is toallocate the overhead costs to the production departments on anobjective and equitable basis. A primary driver of overhead costsin continuous manufacturing operations is machine time used, notdirect labor. Companies widely use machine hours in allocatingmanufacturing overhead costs.
TEACHING TIP
3-15
4. The entry to record units completed and transferred to the warehouse isa debit to Finished Goods Inventory and a credit to Work in Process.
5. The entry to record the sale of goods is a debit to Cost of Goods Soldand a credit to Finished Goods Inventory.
E. Equivalent Units.
1. Equivalent units of production measure the work done during the period,expressed in fully completed units.
2. This amount is used to determine the cost per unit of completed product.
3. Equivalent units of production are the sum of:
a. Units completed and transferred out.
b. Equivalent units of ending work in process.
4. The weighted-average method is used to compute equivalent units ofproduction.
5. This method considers the degree of completion (weighting) of the unitscompleted and transferred out and the ending work in process.
6. In computing equivalent units, the beginning work in process is not partof the equivalent units of production formula.
7. Companies need to make two equivalent unit computations: one formaterials, and the other for conversion costs. This is necessary becauseending work in process is fully complete as to materials, but only partiallycomplete as to conversion costs.
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F. Production Cost Report.
Use ILLUSTRATION 3-3 to identify the four-step procedure to be followed at theend of a period for each department or process. Illustrations 3-4 through 3-8provide an integrated example of each of the four required steps, culminating inthe preparation of a production cost report.
1. In order to complete a production cost report, the company must performfour steps:
a. Compute the physical unit flow.
b. Compute the equivalent units of production.
c. Compute unit production costs.
d. Prepare a cost reconciliation schedule.
2. The first step in completing a production cost report requires computingphysical unit flow.
ILLUSTRATION 3-4 provides an example of computing the physical units withina department. Point out that it is necessary to know how many units were workedon during the period and to know what happened to the units.
a. The physical units are computed by adding the units started (ortransferred) into production during the period to the units in processat the beginning of the period. This amount is called the total unitsto be accounted for.
TEACHING TIP
TEACHING TIP
3-17
b. These units then are accounted for by the output of the period, whichconsists of units transferred out during the period and any units inprocess at the end of the period.
3. The second step in completing a production cost report requires computingequivalent units of production.
a. Each processing department adds materials at the beginning of theprocess, and incurs conversion costs uniformly during the process.
b. Two computations of equivalent units are required—one for materialsand one for conversion costs.
ILLUSTRATION 3-5 provides an example of the computation of equivalent unitsof production for materials and conversion costs. Emphasize that when manu-facturing cost elements are not incurred at the same time, there must be a separateequivalent unit computation for each cost element.
4. The third step in completing a production cost report requires computingunit production costs.
ILLUSTRATION 3-6 provides an example of calculating unit production costs.Individual calculations of unit cost for materials and conversion costs are made.Emphasize that both beginning inventory costs and the current period’s materialand conversion costs are used in the unit cost calculations.
a. Unit production costs are costs expressed in terms of equivalent unitsof production.
b. When equivalent units of production are different for materials andconversion costs, companies compute three unit costs: (1) materials,(2) conversion, and (3) total manufacturing.
TEACHING TIP
TEACHING TIP
3-18
c. Total manufacturing cost per unit is computed as the sum of unitmaterials cost + unit conversion cost.
5. The fourth step in completing a production cost report requires preparinga cost reconciliation schedule.
a. The company then prepares a cost reconciliation schedule to assigntotal costs to (1) units transferred out to the next department and(2) ending work in process.
b. The total manufacturing cost per unit is used in costing the unitscompleted and transferred out.
c. The cost reconciliation schedule shows that the total costs ac-counted for equal the total costs to be accounted for.
ILLUSTRATION 3-7 provides an example of the preparation of a cost recon-ciliation schedule. Point out that the cost reconciliation schedule shows that thetotal costs accounted for equal the total costs to be accounted for.
G. Preparing the Production Cost Report.
1. The production cost report contains both quantity and cost data for aproduction department.
a. This report is an internal document for management that showsproduction quantity and cost data for a production department.
TEACHING TIP
3-19
ILLUSTRATION 3-8 provides an example of a production cost report. Thecalculations made in the examples used in Illustrations 3-4 through 3-7 are usedto complete the production cost report.
b. There are four steps in preparing a production cost report:
(1) Prepare a physical unit schedule.
(2) Compute equivalent units.
(3) Compute unit costs.
(4) Prepare a cost reconciliation schedule.
c. Production cost reports provide a basis for evaluating the productivityof a department. Managers can use the cost data to assess whetherunit costs and total costs are reasonable.
*H. Equivalent Units Under FIFO.
1. Under the FIFO method, companies compute equivalent units on a first-in, first-out basis.
2. Companies assume that the beginning work in process is completedbefore new work is started under the FIFO method.
3. Equivalent units are the sum of the work performed to:
a. Finish the units of beginning work in process inventory.
b. Complete the units started into production during the period (unitsstarted and completed).
c. Start, but only partially complete, the units in ending work inprocess inventory.
TEACHING TIP
3-20
4. The units started and completed during the current period are the unitstransferred out minus the units in beginning work in process.
5. Companies often expand the physical units schedule to ensure reportingof the beginning work in process and the units started and completed.
6. As with the weighted average method, once companies determine thephysical flow of units, they need to compute the equivalent units ofproduction.
a. Since companies add materials at the beginning of the process, noadditional materials costs are required to complete the beginningwork in process.
b. Equivalent units for materials are the sum of:
(1) Units started and finished.
(2) Equivalent units of ending work in process.
c. Equivalent units for conversion costs are the sum of:
(1) Equivalent units of beginning work in process.
(2) Units started and finished.
(3) Equivalent units of ending work in process.
7. The unit production costs are based entirely on the production costsincurred during the month. The costs in the beginning work in processare ignored because they were incurred on work done in the precedingmonth.
8. In preparing a cost reconciliation schedule under the FIFO method:
a. The cost of the beginning work in process is always assigned to thegoods transferred to the next department (or finished goods, ifprocessing is complete).
b. The ending work in process also will be assigned only the produc-tion costs incurred in the current period.
3-21
9. The weighted-average method of computing equivalent units is simple tounderstand and apply. It will be very similar to the FIFO method whenprices do not fluctuate significantly from period to period.
10. Conceptually, the FIFO method is superior to the weighted-averagemethod because it measures current performance is using only costsincurred in the current period. It provides current cost information, whichthe company can use to establish more accurate pricing strategies forgoods manufactured and sold in the current period.
3-22
20 MINUTE QUIZ
Circle the correct answer.True/False
1. Costs are assigned to each specific job in a process cost system.
True False
2. In a process cost system, total costs are determined at the end of a period of time, suchas a month.
True False
3. In a process cost system, the unit cost is total manufacturing costs divided by the unitsproduced during the period.
True False
4. The accumulation of the costs of materials, labor, and manufacturing overhead is thesame in a process cost system as in a job order cost system.
True False
5. More materials requisitions are generally required in a process cost system than in a joborder cost system.
True False
6. Equivalent units of production equals units completed and transferred out + units inbeginning work in process.
True False
7. Two equivalent unit computations are necessary—one for materials and the other forconversion costs.
True False
8. The first step in preparing a production cost report is to compute the equivalent units ofproduction.
True False
9. The cost reconciliation schedule shows that the total costs accounted for equal the totalcosts to be accounted for.
True False
*10. Units in work in process at the beginning of the period are included in units “started andcompleted” under the FIFO method.
True False
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Multiple Choice
1. Which of the following is not a step in preparing a production cost report?a. Prepare a cost reconciliation schedule.b. Compute equivalent units of production.c. Compute the physical unit flow.d. Assign costs to particular jobs.
2. A department has no beginning work in process, has started 80,000 units and completed50,000 units. Its ending work in process is 30,000 units, 60% complete as to conversioncosts and fully complete as to materials. Its equivalent units for conversion costs area. 50,000.b. 80,000.c. 68,000.d. 44,000.
3. In process costing, the computation of unit production costs requiresa. the accumulation of material and conversion costs in work in process for each
department or process.b. the computation of equivalent units for material and conversion costs.c. both a and b.d. neither a nor b.
4. Which of the following is not included in a production cost report?a. Costs accounted for.b. Entries to assign cost.c. Units accounted for.d. Units to be accounted for.
5. Unit costs for materials and conversion costs amount to $4 and $5 respectively. Theending work in process costs for 8,000 units (100% complete as to material and 70%complete as to conversion costs) amount toa. $60,000.b. $72,000.c. $44,000.d. $40,000.
3-24
ANSWERS TO QUIZ
True/False
1. False 6. False2. True 7. True3. True 8. False4. True 9. True5. False *10. False
Multiple Choice
1. d.2. c.3. c.4. b.5. a.
3-25
ILLUSTRATION 3-1DIFFERENCES BETWEEN JOB ORDER COST ANDPROCESS COST SYSTEM
Work in processaccounts
Job Order CostSystemFeatures
Process CostSystem
One for each job One for each process
Documentsused
Job cost sheets Production costreports
Determination oftotal manufacturingcosts
Each job Each period
Unit-costcomparison
Cost of each job ÷Units produced forthe job
Total manufacturingcosts ÷ Units producedduring the period
3-26
ILLUSTRATION 3-2FLOW OF COSTS IN PROCESS COST SYSTEM
Man
ufac
turi
ng C
ost
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Raw
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bor
Man
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ld
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So
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Wo
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n P
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Dep
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ent A
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Wo
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Dep
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ork
3-27
ILLUSTRATION 3-3PRODUCTION COST REPORT (STEPS)
Step 4. Prepare a cost reconciliation schedule.
Step 3. Compute unit production costs.
Step 2. Compute the equivalent units of production.
Step 1. Compute the physical unit flow.
COMPLETE THE STEPS FOR EACH DEPARTMENT
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ILLUSTRATION 3-4STEP 1: COMPUTE THE PHYSICAL UNIT FLOW
Units completed and transferred outAdd: Units in ending work in processTotal units
Units in beginning work in processAdd: Units started into production
Analyze Physical Units Without Regard toPercentages of Completion
Total units
9,0001,000
10,000
2,0008,000
10,000
Units to be accounted for
Units accounted for
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ILLUSTRATION 3-5STEP 2: COMPUTE EQUIVALENT UNITS OF PRODUCTION
Equivalent Units Calculation Given the Physical Units andPercentage(s) of Completion
Beginning work in processUnits started into production Total units to be accounted forUnits transferred outEnding work in process Total units accounted for
2,0008,000
10,0009,0001,000
10,000
(75%)
(80%)
COMPUTATION OF EQUIVALENT UNITS
Materials* Conversion Costs**
Units transferred outEnding work in process 1,000 × 100% 1,000 × 80%
9,000
1,000
9,000
800
Total equivalent units 10,000 9,800
Materials are added at the beginning of the process.Conversion costs are incurred uniformly throughout the process.
***
3-30
ILLUSTRATION 3-6STEP 3: COMPUTE UNIT PRODUCTION COST
1.TOTAL
MATERIALSCOST
$80,000
EQUIVALENTUNITS OF
MATERIALS
10,000
UNITMATERIALS
COST
$8
÷ =
2.TOTAL
CONVERSIONCOSTS
$49,000
EQUIVALENTUNITS OF
CONVERSIONCOSTS9,800
UNITCONVERSION
COST
$5
÷ =
3.UNIT
MATERIALSCOST
$8
UNITCONVERSION
COST
$5
TOTALMANUFACTURING
COST PER UNIT
$13
+ =
COMPUTATION OF UNIT COSTS
COST INFORMATION
Materials Conversion Costs
Beginning work in processCosts added to production during period
$16,000
64,000
$9,000
40,000
Total $80,000 $49,000
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ILLUSTRATION 3-7STEP 4: PREPARE A COST RECONCILIATION SCHEDULE
COST INFORMATION
Costs Accounted For
Costs to be accounted for Beginning work in process ($16,000 + $9,000) Started into production ($64,000 + $40,000)
EquivalentUnits
UnitCost
Total CostsAssigned
Transferred out
Ending work in process Materials Conversion costs
9,000
1,000800
$13
$8$5
$8,0004,000
$117,000
12,000
$129,000
Cost Reconciliation Schedule
$ 25,000104,000
$129,000
×
××
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ILLUSTRATION 3-8PREPARING THE PRODUCTION COST REPORT
Production Cost Report
QUANTITIES
Equivalent Units
Units to be accounted for
Total units
Total units
Work in process, beginningStarted into production
Units accounted forTransferred outWork in process, ending
PhysicalUnits
(Step 1)
Materials Conversion Costs
(Step 2)
2,0008,000
10,000
9,0001,000
10,000
9,0001,000
10,000
9,000800
9,800(1,000 × 80%)
COSTS
Unit costs (Step 3)
Total costs
Costs in current periodEquivalent unitsUnit costs (a) (b)
(a) $80,000(b) 10,000
$8
$49,0009,800
$ 5
$129,000
$13
MaterialsConversion
Costs Total
Work in process, beginning ($16,000 + $9,000)Started into production ($64,000 + $40,000)
$ 25,000104,000
$129,000
Costs to be accounted for
Cost Reconciliation Schedule (Step 4)Costs accounted for Transferred out $117,000(9,000 × $13)Work in process, ending Materials Conversion costs
(1,000 × $8)(800 × $5)
$ 8,0004,000 12,000
Total costs $129,000