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Chapter 4Systems Design: Process Costing
Solutions to Questions
4-1 A process costing system is appropriate when a homogeneous product is produced on a continuous basis.
4-2 Process costing and job-order costing are similar in the following ways:1. Both systems have the same basic
purposes, which are to assign materials, labor, and overhead cost to products and to provide a mechanism for computing unit costs.
2. Both systems use the same basic accounts.
3. Cost flows through the accounts in basically the same way in both systems.
4-3 Costs are accumulated by department in a process costing system.
4-4 Cost accumulation is simpler under process costing because costs only need to be identified by department—not by separate job. Usually a company has only a few departments, whereas there can be hundreds or even thousands of jobs in a job-order costing system.
4-5 A Work in Process account is maintained for each separate processing department in a process costing system.
4-6 The journal entry to transfer the costs of partially completed goods from the Mixing Department to the Firing Department would be:
Work in Process, Firing.........XXXX
Work in Process, Mixing.. XXXX
4-7 The costs that might be added to the Firing Department’s Work in Process account would include: (1) cost transferred in from the Mixing Department, (2) materials cost, (3) labor cost, and (4) overhead cost.
4-8 Under the weighted-average method, the 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.
4-9 A quantity schedule shows the physical flow of units through a department during a period. It serves several purposes. First, it provides the manager with information about activity in his or her department and also shows the manager the stage of completion of any in-process units. Second, it provides data for computing the equivalent units and for preparing the other parts of the production report.
4-10 A unit of product accumulates cost in each department that it passes through, with the costs of one department added to the costs of the preceding department in a snowballing fashion.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 137
Brief Exercise 4-1 (30 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
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.138 Introduction to Managerial Accounting, 2nd Edition
Brief Exercise 4-2 (10 minutes)Weighted-Average Method
Equivalent Units
MaterialsConversio
nUnits transferred to the next
department 410,000 410,000Work in process, October 31:
30,000 units × 70% 21,00030,000 units × 50% 15,000
Equivalent units 431,000 425,000
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 139
Brief Exercise 4-3 (15 minutes)Weighted-Average Method
1. Work in process, May 1................................................ 80,000Started into production during May............................. 300,000Total kilograms in process........................................... 380,000Deduct work in process, May 31.................................. 50,000 Completed and transferred out during May................. 330,000
2. Kilograms to be accounted for:Work in process, May 1 (materials 80% complete;
conversion 20% complete)..................................... 80,000Started into production during the month................. 300,000
Total kilograms to be accounted for............................ 380,000Kilograms accounted for as follows:
Transferred out during the month............................. 330,000Work in process, May 31 (materials 40% complete;
conversion 10% complete)..................................... 50,000 Total kilograms accounted for..................................... 380,000
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.140 Introduction to Managerial Accounting, 2nd Edition
Brief Exercise 4-4 (15 minutes)1.
Materials Labor OverheadWork in process, May 1 $ 14,550 $23,620 $118,100Cost added during May 88,350 14,330 71,650 Total cost (a) $102,900 $37,950 $189,750Equivalent 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 EU for materials $ 85.75Cost per EU for labor 34.50Cost per EU for overhead 172.50
Total cost per EU$292.7
5
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 141
Brief Exercise 4-5 (30 minutes)1. Computation of the total cost per EU:
Cost per EU for materials $24.00Cost per EU for labor 7.00Cost per EU for overhead 14.00 Total cost per EU $45.00
2. Computation of equivalent units in ending inventory:
Materials LaborOverhea
dUnits in ending inventory 1,500 1,500 1,500Percentage completed 90% 40% 40%Equivalent units of
production1,350 600 600
3. Cost ReconciliationTotal Cost
Materials Labor
Over-head
Cost accounted for as follows:
Transferred to the next department: 18,000 units at $45.00 per unit
$810,000 18,000 18,000 18,000
Work in process, ending:Materials, at $24.00 per
EU 32,400 1,350Labor, at $7.00 per EU 4,200 600Overhead, at $14.00 per
EU 8,400 600Total work in process 45,000
Total cost$855,00
0
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.142 Introduction to Managerial Accounting, 2nd Edition
Exercise 4-6 (15 minutes)Work in Process—Mixing..........................................330,000
Raw Materials Inventory..................................... 330,000Work in Process—Mixing..........................................260,000Work in Process—Baking.........................................120,000
Wages Payable.................................................... 380,000Work in Process—Mixing..........................................190,000Work in Process—Baking.........................................90,000
Manufacturing Overhead.................................... 280,000Work in Process—Baking.........................................760,000
Work in Process—Mixing..................................... 760,000Finished Goods........................................................980,000
Work in Process—Baking..................................... 980,000
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 143
Exercise 4-7 (20 minutes)Weighted-Average Method
Quantity
Schedule
Pounds to be accounted for:Work in process, May 1
(materials 100% complete, labor and overhead 55% complete) 30,000
Started into production during May 480,000
Total pounds to be accounted for510,000
Equivalent Units
MaterialsLabor &
OverheadPounds accounted for as follows:
Transferred to Packing Department during May* 490,000 490,000 490,000
Work in process, May 31 (materials 100% complete, labor and overhead 90% complete) 20,000 20,000 18,000
Total pounds accounted for 510,000 510,000 508,000 *30,000 + 480,000 – 20,000 = 490,000.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.144 Introduction to Managerial Accounting, 2nd Edition
Exercise 4-8 (30 minutes)Weighted-Average Method
1. For the sake of brevity, only the portion of the quantity schedule from which the equivalent units are computed is shown below.
Quantity Equivalent Units (EU)
Schedule Materials
Conversion
Units accounted for as follows:Transferred to the next process 300,000 300,000 300,000Work in process, June 30
(materials 50% complete, conversion 25% complete) 40,000 20,000 10,000
Total units accounted for 340,000 320,000 310,000
2. Total Cost
Materials
Conversion
Whole Unit
Cost to be accounted for:
Work in process, June 1$ 71,50
0$ 56,60
0 $ 14,900Cost added by the department 599,500 385,000 214,500
Total cost to be accounted for (a)$671,00
0$441,60
0 $229,400Equivalent units (b) 320,000 310,000Cost per equivalent unit (a) ÷ (b) $1.38 + $0.74 = $2.12
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 145
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.146 Introduction to Managerial Accounting, 2nd Edition
Exercise 4-9 (20 minutes)Weighted-Average Method
TotalEquivalent Units
(EU)
CostMaterial
sConversio
nCost accounted for as follows:
Transferred to the next process:300,000 units at $2.12 each $636,00
0 300,000 300,000Work in process, June 30:
Materials, at $1.38 per EU 27,600 20,000Conversion, at $0.74 per EU
7,400 10,000Total work in process 35,000
Total cost accounted for$671,00
0
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 147
Exercise 4-10 (30 minutes)Weighted-Average Method
1. Quantity
Schedule
Gallons to be accounted for:Work in process, May
1 (materials 80% complete, labor and overhead 75% complete) 80,000
Started into production 760,000
Total gallons accounted for 840,000
Equivalent Units Material
s LaborOverhea
dGallons accounted for as
follows:Transferred to the
next department 790,000 790,000 790,000 790,000Work in process, May
31 (materials 60% complete, labor and overhead 20% complete) 50,000 30,000 10,000 10,000
Total gallons accounted for 840,000 820,000 800,000 800,000
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.148 Introduction to Managerial Accounting, 2nd Edition
Exercise 4-10 (continued)2. Total
CostsMaterial
s LaborOverhea
dWhole Unit
Cost to be accounted for:Work in process, May
1$ 146,60
0 $ 68,600$
30,000 $ 48,000Cost added during the
month 1,869,20
0 907,200 370,000 592,000 Total cost to be
accounted for (a)$2,015,80
0$975,80
0$400,00
0 $640,000Equivalent units (b) — 820,000 800,000 800,000Cost per equivalent unit
(a) ÷ (b) $1.19 + $0.50 + $0.80 = $2.49
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 149
Problem 4-11 (30 minutes)Weighted-Average Method
1. The computation of equivalent units would be:Quantit
y Equivalent Units (EU)Schedul
eMaterial
s LaborOverhea
dUnits accounted for as
follows:Transferred to the next
department 35,600 35,600 35,600 35,600Work in process, April 30
(materials 80% complete, labor and overhead 60% complete) 7,400 5,920 4,440 4,440
Total units and equivalent units of production 43,000 41,520 40,040 40,040
2. The cost reconciliation follows:Total Equivalent Units (EU)
CostMaterial
s Labor OverheadCost accounted for as
follows:Transferred to the next
department: 35,600 units × $2.90 per unit
$103,240 35,600 35,600 35,600
Work in process, April 30:Materials, at $0.50 per
EU 2,960 5,920Labor, at $1.10 per EU 4,884 4,440Overhead, at $1.30 per
EU 5,772 4,440Total work in process 13,616
Total cost$116,85
6
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.150 Introduction to Managerial Accounting, 2nd Edition
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 151
Problem 4-12 (45 minutes)Weighted-Average Method1. The equivalent units for the month would be:
QuantityEquivalent Units
(EU)Schedul
eMaterial
sConversio
nUnits accounted for as follows:
Transferred to next department 92,000 92,000 92,000
Work in process, May 30 (materials 75% complete; conversion 50% complete) 14,000 10,500 7,000
Total units and equivalent units of production 106,000 102,500 99,000
2. Total Cost
Materials
Conversion
Whole Unit
Work in process, May 1
$ 16,400 $ 5,900 $ 10,500
Cost added during the month 431,200
194,20 0 237,000
Total cost (a)$447,60
0$200,10
0 $247,500Equivalent units of
production (b) 102,500 99,000Cost per EU (a) ÷ (b) $1.95 + $2.50 = $4.45
3. Total units transferred.............................................92,000Less units in the beginning inventory...................... 6,000 Units started and completed during
May.......................................................................86,000
4. No, the manager should not be rewarded for good cost control. The reason for the Mixing Department’s low unit cost for May is traceable to the fact that costs of the prior month have been averaged in with May’s costs in computing the lower, $1.95 per unit figure. This is a major criticism of the weighted-average
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.152 Introduction to Managerial Accounting, 2nd Edition
method in that the figures computed for product costing purposes can’t be used to evaluate cost control or measure performance for the current period.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 153
Problem 4-13 (60 minutes)Weighted-Average Method
Quantity Schedule and Equivalent Units
Quantity Schedul
eUnits to be accounted for:
Work in process, April 1 (materials 85% complete; conversion 60% complete) 7,000
Started into production 88,000Total units 95,000
Equivalent Units (EU)
Materials
Conversion
Units accounted for as follows:Transferred to bottling: 82,000 82,000 82,000Work in process, April 30
(materials 60% complete, conversion 20% complete) 13,000 7,800 2,600
Total units and equivalent units of production 5 95,000 89,800 84,600
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.154 Introduction to Managerial Accounting, 2nd Edition
Problem 4-13 (continued)Costs per Equivalent Unit
TotalCost Materials
Conversion
Whole Unit
Cost to be accounted for:Work in process, April 1 $ 14,800 $ 6,800 $ 8,000Cost added during April 249,730 105,450 144,280 Total cost (a) $264,530 $112,250 $152,280
Equivalent units of production (b) 89,800 84,600Cost per EU (a) ÷ (b) $1.25 + $1.80 = $3.05
Cost ReconciliationTotal Equivalent Units (EU)
Cost MaterialsConversio
nCost accounted for as follows:
Transferred to bottling:82,000 units × $3.05 per unit $250,100 82,000 82,000
Work in process, April 30:Materials, at $1.25 per EU 9,750 7,800Conversion, at $1.80 per EU 4,680 2,600
Total work in process 14,430 Total cost $264,530
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 155
Problem 4-14 (60 minutes)Weighted-Average Method
1. 2., and 3.
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:Work in process, July 1
(materials 100% complete; labor and overhead 90% complete) 15,000
Started into production 160,000Total units 175,000
Equivalent Units (EU)Material
s LaborOverhea
dUnits accounted for as follows:
Transferred out 155,000 155,000 155,000 155,000Work in process, July 31
(materials 40% complete; labor and overhead 10% complete) 20,000 8,000 2,000 2,000
Total units and equivalent units of production 175,000 163,000 157,000 157,000
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.156 Introduction to Managerial Accounting, 2nd Edition
Problem 4-14 (continued)Cost per Equivalent Unit
Total Cost Materials Labor Overhead
Whole Unit
Cost to be accounted for:
Work in process, July 1$
53,120 $ 14,100 $ 22,680 $ 16,340Cost added during the
month 558,660 142,380 237,940 178,340
Total cost (a)$611,78
0 $156,480 $260,620 $194,680Equivalent units of production
(b) 163,000 157,000 157,000Cost per EU (a) ÷ (b) $0.96 + $1.66 + $1.24 = $3.86
Cost ReconciliationEquivalent Units (EU)
Total Cost Materials Labor
Overhead
Cost accounted for as follows:Transferred out:
155,000 units × $3.86 per unit
$598,300 155,000 155,000 155,000
Work in process, July 31:Materials, at $0.96 per EU
7,680 8,000Labor, at $1.66 per EU 3,320 2,000
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 157
Overhead, at $1.24 per EU 2,480 2,000
Total work in process 13,480
Total cost$611,78
0
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.158 Introduction to Managerial Accounting, 2nd Edition
Problem 4-15 (75 minutes)Weighted-Average Method
1. A completed production report follows:
Quantity Schedule and Equivalent Units
Quantity Schedul
eUnits to be accounted for:
Work in process, March 1 (materials 100% complete; labor and overhead 60% complete) 4,500
Started into production 56,800Total Units 61,300
Equivalent Units (EU)
Materials
Labor & Overhead
Units accounted for as follows:Transferred to mixing 58,400 58,400 58,400Work in process, March 31
(materials 100% complete; labor and overhead 70% complete) 2,900 2,900 2,030
Total Units and equivalent units of production 61,300 61,300 60,430
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 159
Problem 4-15 (continued)Cost per Equivalent Unit
Total Cost
Materials
Labor & Overhea
dWhole Unit
Cost to be accounted for:Work in process, March 1 $ 12,365 $ 9,125 $ 3,240Cost added during March 188,794 113,475 75,319
Total cost (a)$201,15
9$122,60
0 $78,559Equivalent units of production (b) 61,300 60,430Cost per EU (a) ÷ (b) $2.00 + $1.30 = $3.30
Cost ReconciliationEquivalent Units (EU)
Total Cost
Materials
Labor & Overhea
dCost accounted for as follows:
Transferred to mixing: 58,400 units × $3.30 per unit
$192,720 58,400 58,400
Work in process, March 31:Materials, at $2.00 per EU 5,800 2,900Labor and overhead, at $1.30 per
EU 2,639 2,030Total work in process 8,439
Total cost $201,15
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.160 Introduction to Managerial Accounting, 2nd Edition
9
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 161
Problem 4-15 (continued)2. In computing unit costs, the weighted-average method mixes
costs of the prior period in with current period costs. Thus, under the weighted-average method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant when attempting to measure performance in the current period. Good cost control in the current period might be concealed to some degree by the unit costs that have been brought forward in the beginning inventory. The reverse could also be true in that poor cost control during a period might be concealed somewhat (or entirely) by the costs of the prior period that have been brought forward and added in with current period costs.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.162 Introduction to Managerial Accounting, 2nd Edition
Problem 4-16 (90 minutes)Weighted-Average Method
1. The equivalent units would be:Materials Labor Overhead
Units completed during the year 635,000 635,000 635,000
Work in process, December 31: 30,000 units
× 100% 30,00030,000 units
× 80% 24,000 24,000 Total
equivalent units (a) 665,000 659,000 659,000
The costs per equivalent unit would be:
Materials Labor OverheadWhole Unit
Work in process, January 1 $ 18,000 $ 9,555 $ 7,644 *
Cost added during the year 979,500 616,495 493,196 **
Total costs (b) $997,500 $626,050 $500,840Cost per EU
(b) ÷ (a) $1.50 + $0.95 + $0.76 = $3.21 * $9,555 × 80% = $7,644** $616,495 × 80% = $493,196
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 163
Problem 4-16 (continued)2. The amount of cost that should be assigned to the ending
inventories is:Work in Process
Finished Goods Total
Work in process:Materials:
30,000 units × $1.50 per unit $45,000 $ 45,000
Labor: 24,000 EU × $0.95 per EU 22,800 22,800
Overhead: 24,000 EU × $0.76 per EU 18,240 18,240
Finished goods: 12,000 units × $3.21 per unit $38,520 38,520
Total cost that should be assigned to inventories $86,040 $38,520 $124,560
3. The necessary adjustments would be:Work in Process
Finished Goods Total
Cost that should be assigned to inventories (above) $86,040 $ 38,520 $ 124,560
Year-end balances in the accounts 85,000 60,000 145,000
Difference $ 1,040 $(21,480) $(20,440)
Debit CreditWork in Process Inventory 1,040Cost of Goods Sold 20,440
Finished Goods 21,480
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.164 Introduction to Managerial Accounting, 2nd Edition
Problem 4-16 (continued)4. The simplest computation of the cost of goods sold would be:
Beginning finished goods inventory......................... 0Units completed during the year............................. 635,000 Units available for sale............................................635,000Less units in ending finished goods
inventory............................................................... 12,000 Units sold during the year........................................623,000Cost per equivalent unit (from part 1)..................... × $3.21
Cost of goods sold...................................................$1,999,83
0
Alternative computation:Total manufacturing cost incurred:
Materials (part 1)...................................................$ 997,50
0Labor (part 1)........................................................626,050Overhead (part 1).................................................. 500,840
Total manufacturing cost.........................................2,124,390Less cost assigned to inventories (part 2)............... 124,560
Cost of goods sold...................................................$1,999,83
0
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 165
Problem 4-17 (120 minutes)Weighted-Average Method
1. a. Work in Process—Bending Department...................394,210Work in Process—Drilling Department.....................100,800
Raw Materials..................................................... 495,010
b. Work in Process—Bending Department...................638,144Work in Process—Drilling Department.....................250,600
Salaries and Wages Payable............................... 888,744
c. Manufacturing Overhead.........................................685,000Accounts Payable................................................ 685,000
d. Work in Process—Bending Department...................493,584Manufacturing Overhead.................................... 493,584
Work in Process—Drilling Department.....................189,000Manufacturing Overhead.................................... 189,000
e. Work in Process—Drilling Department.....................1,536,99
0Work in Process—Bending
Department......................................................1,536,99
0
f. Finished Goods........................................................1,650,00
0Work in Process—Drilling
Department......................................................1,650,00
0
g. Accounts Receivable................................................2,700,00
0
Sales...................................................................2,700,00
0
Cost of Goods Sold...................................................1,600,00
0
Finished Goods....................................................1,600,00
0
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.166 Introduction to Managerial Accounting, 2nd Edition
Problem 4-17 (continued)2.
Accounts Receivable Raw Materials(g) 2,700,00
0Bal. 500,00
0495,010 (a)
Bal. 4,990
Work in ProcessBending Department
Work in ProcessDrilling Department
Bal.
45,369 1,536,990
(e) Bal.
10,000 1,650,000
(f)
(a) 394,210 (a) 100,800(b) 638,144 (b) 250,600(d) 493,584 (d) 189,000Bal.
34,317 (e) 1,536,990
Bal.
437,390
Finished Goods Manufacturing OverheadBal.
110,000 1,600,000
(g) (c) 685,000
682,584 (d)
(f) 1,650,000
Bal. 2,416
Bal.
160,000
Accounts Payable Salaries and Wages Payable685,000 (c) 888,744 (b)
Sales Cost of Goods Sold2,700,00
0(g) (g) 1,600,0
00
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 167
Problem 4-17 (continued)3. The production report for the Bending Department follows:
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:Work in process, May 1 (materials 80%
complete, labor and overhead 60% complete)............................................................12,000
Started into production.........................................270,000Total units.............................................................282,000
Equivalent Units (EU)Material
s LaborOverhea
dUnits accounted for as follows:
Transferred to Drilling: 273,000 * 273,000 273,000 273,000Work in process, May 31 (materials 90%
complete, labor and overhead 60% complete)............................................................ 9,000 8,100 5,400 5,400
Total units and equivalent units of production...........................................................282,000 281,100 278,400 278,400
* 282,000 units – 9,000 units = 273,000 units
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.168 Introduction to Managerial Accounting, 2nd Edition
Problem 4-17 (continued)Costs per Equivalent Unit
Total Cost Materials LaborOverhea
dWhole Unit
Cost to be accounted for:
Work in process, May 1 $ 45,369 $ 13,385 $ 18,880$
13,104
Cost added during May 1,525,938 394,210 638,144 493,58
4
Total cost (a) $1,571,307 $407,595 $657,024$506,68
8Equivalent units of production
(b) 281,100 278,400 278,400Cost per EU (a) ÷ (b) $1.45 + $2.36 + $1.82 = $5.63
Cost ReconciliationTotal Equivalent Units (EU)
Cost Materials LaborOverhea
dCost accounted for as follows:
Transferred to Drilling: 273,000; × $5.63 per unit $1,536,990 273,000 273,000 273,000
Work in process, May 31:Materials, at $1.45 per EU 11,745 8,100Labor, at $2.36 per EU 12,744 5,400Overhead, at $1.82 per EU 9,828 5,400
Total work in process 34,317 © The McGraw-Hill Companies, Inc., 2005. All rights reserved.
Solutions Manual, Chapter 4 169
Total cost $1,571,307
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.170 Introduction to Managerial Accounting, 2nd Edition
Problem 4-18 (120 minutes)Weighted-Average Method
1. a. Work in Process—Drying Department......................540,460Work in Process—Salting Department.....................295,000
Raw Materials..................................................... 835,460
b. Work in Process—Drying Department......................397,970Work in Process—Salting Department.....................201,000
Salaries and Wages Payable............................... 598,970
c. Manufacturing Overhead.........................................542,000Accounts Payable................................................ 542,000
d. Work in Process—Drying Department......................208,170Work in Process—Salting Department.....................340,000
Manufacturing Overhead.................................... 548,170
e. Work in Process—Salting Department.....................1,200,00
0Work in Process—Drying
Department......................................................1,200,00
0
f. Finished Goods........................................................1,980,00
0Work in Process—Salting
Department......................................................1,980,00
0
g. Accounts Receivable................................................2,500,00
0
Sales...................................................................2,500,00
0
Cost of Goods Sold...................................................1,930,00
0
Finished Goods....................................................1,930,00
0
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 171
Problem 4-18 (continued)2.
Accounts Receivable Raw Materials(g) 2,500,00
0Bal. 850,00
0835,460 (a)
Bal. 14,540
Work in ProcessDrying Department
Work in ProcessSalting Department
Bal.
97,400 1,200,000
(e) Bal.
33,000 1,980,000
(f)
(a) 540,460 (a) 295,000(b) 397,970 (b) 201,000(d) 208,170 (d) 340,000Bal.
44,000 (e) 1,200,000
Bal.
89,000
Finished Goods Manufacturing OverheadBal.
57,000 1,930,000
(g) (c) 542,000
548,170 (d)
(f) 1,980,000
6,170 Bal.
Bal.
107,000
Accounts Payable Salaries and Wages Payable542,000 (c) 598,970 (b)
Sales Cost of Goods Sold2,500,00
0(g) (g) 1,930,0
00
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.172 Introduction to Managerial Accounting, 2nd Edition
Problem 4-18 (continued)3. The production report for the Drying Department follows:
Quantity Schedule and Equivalent Units
Quantity
Schedule
Pounds to be accounted for:Work in process, December 1 (materials
90% complete, labor and overhead 80% complete)............................................................19,000
Started into production.........................................191,000 *Total pounds..........................................................210,000
Equivalent Units (EU)Materials Labor Overhead
Pounds accounted for as follows:Transferred to Salting:...........................................200,000 200,000 200,000 200,000Work in process, December 31 (materials
100% complete, labor and overhead 50% complete)............................................................ 10,000 10,000 5,000 5,000
Total pounds and equivalent units of production...........................................................210,000 210,000 205,000 205,000
* (200,000 pounds + 10,000 pounds) – 19,000 pounds = 191,000 pounds started
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 173
Problem 4-18 (continued)Cost per Equivalent Unit
Total CostMaterial
s LaborOverhea
dWhole Unit
Cost to be accounted for:Work in process, December
1 $ 97,400 $ 47,540 $ 32,530 $ 17,330
Cost added during December 1,146,60
0 540,460 397,970 208,170
Total cost (a)$1,244,00
0$588,00
0$430,50
0 $225,500Equivalent units of production
(b) 210,000 205,000 205,000Cost per EU (a) ÷ (b) $2.80 + $2.10 + $1.10 = $6.00
Cost Reconciliation
Total Cost
Equivalent Units (EU)Material
s LaborOverhea
dCost accounted for as follows:
Transferred to Salting: 200,000 pounds at $6.00 per pound
$1,200,000 200,000 200,000 200,000
Work in process, December 31:Materials, at $2.80 per EU 28,000 10,000Labor, at $2.10 per EU 10,500 5,000
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.174 Introduction to Managerial Accounting, 2nd Edition
Overhead, at $1.10 per EU 5,500 5,000Total work in process 44,000
Total cost$1,244,00
0
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 175
Analytical Thinking (90 minutes)Weighted-Average Method
1. The revised production report follows:Quantity Schedule and Equivalent Units
Quantity Schedul
eUnits to be accounted
for:Work in process,
October 1 (material 100% complete, conversion 7/8 complete) 8,000
Received from the preceding department* 97,000
Total units to be accounted for 105,000
Equivalent Units (EU)Transferre
d InMaterial
sConver-
sionUnits accounted for as
follows:Transferred to
Stamping100,00
0 100,000 100,000 100,000Work in process,
October 31 (material 0% complete, conversion 2/5 complete) month 5,000 5,000 — 2,000
Total units accounted for
105,000 105,000 100,000 102,000
*100,000 + 5,000 – 8,000 = 97,000.
© The McGraw-Hill Companies, Inc., 2003. All rights reserved.176 Managerial Accounting, 10th Edition
Analytical Thinking (continued)Costs per Equivalent Unit Total
CostTransferre
d In MaterialsConversio
nWhole Unit
Cost to be accounted for:
Work in process, October 1$
22,420 $ 8,820 $ 3,400 $ 10,200Cost transferred in or added
during the month 205,980 81,480 27,600 96,900 Total cost to be accounted for
(a)$228,40
0 $ 90,300$
31,000 $107,100Equivalent units (b) 105,000 100,000 102,000Cost per equivalent unit (a) ÷
(b) $0.86 + $0.31 + $1.05 = $2.22
Cost Reconciliation Total Equivalent Units (EU)
CostTransferred
In MaterialsConversio
nCost accounted for as follows:
Transferred to Stamping:
100,000 units × $2.22 per unit...........................$222,00
0 100,000 100,000 100,000Work in process, October 31:
Transferred in cost, at $0.86 per EU.....................................................................4,300 5,000
Conversion, at $1.05 per EU............................... 2,100 2,000Total work in process............................................ 6,400
Total cost accounted for..........................................$228,40
0© The McGraw-Hill Companies, Inc., 2003. All rights reserved.
Solutions Manual, Chapter 4 177
2. The unit cost figure 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.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.178 Introduction to Managerial Accounting, 2nd Edition
Ethics Case (120 minutes) This case is difficult—particularly part 3, which requires
analytical skills. Since 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 assign the problem specifying that the FIFO method be used rather than the weighted-average method.
1. The computation of the cost of goods sold follows:Transferred
In ConversionEstimated completion 100% 25%
Computation of equivalent units:Completed and transferred
out 250,000 250,000Work in process, ending:
Transferred in, 20,000 units × 100% 20,000
Conversion, 20,000 units × 25% 5,000
Total equivalent units 270,000 255,000
Transferred In Conversion
Whole Unit
Cost to be accounted for:Work in process 0 0
Cost added during the month$49,221,00
0$16,320,00
0Total cost to be accounted for
(a)$49,221,00
0$16,320,00
0
Equivalent units (above) (b) 270,000 255,000Cost per equivalent unit (a) ÷
(b) $182.30 + $64.00=
$246.30Cost of goods sold = 250,000 units × $246.30 per unit =
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 179
$61,575,000
© The McGraw-Hill Companies, Inc., 2003. All rights reserved.180 Managerial Accounting, 10th Edition
Ethics Case (continued)2. The estimate of the percentage completion of ending work in
process inventories affects the unit costs of finished goods and therefore of the cost of goods sold. Thad Kostowski would like the estimated percentage completion figures to be increased for the ending work in process. 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.
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
Since 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:
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 181
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.182 Introduction to Managerial Accounting, 2nd Edition
Ethics Case (continued)
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.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 183
Ethics Case (continued)3. (continued)
Transferred In ConversionEstimated completion 100% 30%
Computation of equivalent units:Completed and transferred out 250,000 250,000Work in process, ending:
Transferred in, 20,000 units × 100% 20,000
Conversion, 20,000 units × 30% 6,000 Total equivalent units 270,000 256,000
Transferred In ConversionWhole Unit
Cost to be accounted for:Work in process 0 0
Cost added during the month $49,221,000$16,320,00
0
Total cost to be accounted for (a) $49,221,000$16,320,00
0Equivalent units (above) (b) 270,000 256,000
Cost per equivalent unit (a) ÷ (b) $182.30 + $63.75=$246.0
5
Cost of goods sold = 250,000 units × $246.05 per unit = $61,512,500
© The McGraw-Hill Companies, Inc., 2003. All rights reserved.184 Managerial Accounting, 10th Edition
Ethics Case (continued)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. However, 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?
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 185
Communicating in Practice (30 minutes)Date: Current DateTo: Minesh PatelFrom: Student’s NameSubject: Production Report
Referring to the Production Report for the Shaping and Milling Department, please perform the following steps:
1. Ensure that the current balance in the Shaping and Milling Department Work in Process account is currently $734,675, which is the total cost to be accounted for in the Cost Reconciliation section of the Production Report.
2. Prepare the following journal entry for the 4,800 units that were transferred during the month from the Shaping and Milling Department to the Graphics Application Department:
Work in Process, Graphics Application.....................715,200Work in Process, Shaping and Milling.................. 715,200
3. After this entry is posted to the ledger, the Shaping and Milling Department account should have an ending account balance of $19,475, which is the total Work in Process, May 31 amount reflected in the Cost Reconciliation section of the Production Report.
If you have any questions, please do not hesitate to contact me.
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Teamwork In Action
Reports similar to the following should be prepared by the Expert Teams and shared with the Learning Teams:
a. Quantity Schedule and Equivalent UnitsThe Quantity Schedule and Equivalent Units section of the production report: (1) accounts for all of the units that were in production during the period, and (2) computes the equivalent units of production. Imagine that you are the manager of a department in a factory. You are responsible for the units that pass through your department during the month. This section of the report summarizes that activity. In addition, it converts the information to equivalent units.The “work in process, beginning of the period” represents the number of units that are sitting in your department when you arrive at work on the first day of the month. These units were started last month. During the month, the department just before yours in the production process will transfer units into your department (or, if you are the first department in the process, raw materials will be transferred into your department during the month). These units are “started into production.” Also, during the month, your department will work on (or process) units. The units that have been completely processed are “transferred to the next department.” It is important to note that the units on hand at the beginning of the month plus the units that were transferred in must equal the units that were transferred out plus the units that were still on hand at the end of the period.To determine the department’s output for the period, the equivalent units of production are computed for both materials and conversion (labor and overhead). The equivalent units of production are determined by adding the number of completed units that were transferred to the next department and the equivalent units that are in the ending work in process inventory. The number of equivalent units in the ending work in process inventory is computed by multiplying the number of units on hand times the percent complete.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 187
Teamwork In Action, continuedb. Costs per Equivalent UnitThe Costs per Equivalent Unit section of the production report: (1) summarizes the total costs that must be accounted for, and (2) documents the cost per equivalent unit. The “costs to be accounted for” section represents the costs added to the department’s Work in Process account during the period. The “work in process, beginning of period” is the beginning balance in the inventory account for this department. Note that this balance is broken out into its two components: materials and conversion. The “costs added” represent the materials and conversion costs that were debited to the work in process account during the period. Materials requisitions generate the amount used in the entry to record the material costs. The conversion costs are comprised of: (1) the direct labor wages paid to the employees who worked in the department during the period and (2) the overhead that was applied (using the department’s predetermined overhead rate) to the units that passed through the department during the period.The “materials cost per equivalent unit” is determined by dividing the total materials costs (the total of materials in the beginning inventory and the costs that were added during the period) by the number of equivalent units of production for materials (which is calculated in the Quantity Schedule and Equivalent Units section of the report). The “conversion cost per equivalent unit” is determined by dividing the total conversion costs (the total of conversion costs in the beginning inventory and the labor and overhead that were added during the period) by the number of equivalent units of production for conversion (which is calculated in the Quantity Schedule and Equivalent Units section of the report). The “whole unit cost per equivalent unit” is the total of the “material cost per equivalent unit” and the “conversion cost per equivalent unit.”
c. Cost ReconciliationThe Cost Reconciliation section of the production report summarizes the total costs that have been accounted for. This © The McGraw-Hill Companies, Inc., 2005. All rights reserved.188 Introduction to Managerial Accounting, 2nd Edition
section determines the amount that will be used in the entry to transfer units from this department’s work in process account to the next. This is referred to as
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 189
Teamwork In Action, continued“transferred to the next department” in this section of the report. Also, in addition to showing the components (materials and conversion) of the ending balance in this department’s work in process account (for use in preparing next month’s Production Report), this section proves that ending balance.The amount that is “transferred to the next department” is determined by multiplying the number of units transferred to the next department (which appears in the Quantity Schedule and Equivalent Units section of the report) by the whole unit cost per equivalent unit (which is calculated in the Costs per Equivalent Unit section of the report).The amount of “materials” in the ending work in process inventory for this department is determined by multiplying the number of equivalent units (for materials) that are in the ending work in process (which appears in the Quantity Schedule and Equivalent Units section of the report) by the materials cost per equivalent unit (which is calculated in the Costs per Equivalent Unit section of the report).The amount of “conversion” in the ending work in process inventory for this department is determined by multiplying the number of equivalent units (for conversion) that are in the ending work in process (which appears in the Quantity Schedule and Equivalent Units section of the report) by the conversion cost per equivalent unit (which is calculated in the Costs per Equivalent Unit section of the report).The “total work in process” is the sum of the amounts just calculated for “materials” and “conversion.” After all journal entries are made, this amount should appear as the ending balance in this department’s Work in Process account.Finally, the “total cost” is the sum of the costs transferred to the next department and the ending Work in Process inventory for this department. Note that this total must equal the total of the “costs to be accounted for” that appears in the Costs per Equivalent Unit section of the report.
© The McGraw-Hill Companies, Inc., 2005. All rights reserved.190 Introduction to Managerial Accounting, 2nd Edition