handout 7 - process costing

5/28/2018 Handout 7 - Process Costing

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ACCT 102 Managerial Accounting

Cheng Nam Sang

Objectives

To understand what is process costingTo understand what is process costing

To understand the physical flow and basicTo understand the physical flow and basicentries in a process costing systementries in a process costing system

To beTo be able to calculateable to calculate the production costthe production cost

1

in a process costing system by usingin a process costing system by using

the Weighted Average methodthe Weighted Average method

Oil Refinery: A

for the use of

The oil refining process star

JobJob--order costinorder costin Process costinProcess costin

Comparison of Job-Order Costing

and Process Costing

Costs accumulated byCosts accumulated bythethejobjob..

Work in process has aWork in process has ajobjob--cost sheet for eachcost sheet for eachjobjob..

Costs accumulated byCosts accumulated bydepartment ordepartment or processprocess..

Work in process has aWork in process has aproduction report forproduction report foreach batch ofeach batch of productsproducts..

3

any un que,any un que, g cosg cosjobs.jobs.

Jobs built toJobs built to customercustomerorder.order.

ew en ca ,ew en ca , ow cosow cosproducts.products.

UnitsUnits continuouslycontinuouslyproduced for inventoryproduced for inventoryin automated process.in automated process.

ProcessCostingProcessCosting

Typical Applicat

Typical process cost ap

Chocolate Making

http://www.hersheys.com/discohttp://www.youtube.com/watch

http://www.youtube.com/watch

Paint manufacturerhttp://painting.about.com/od/ar

Paper mil lhttp://www.youtube.com/watch


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Cheng Nam Sang

Types of Processes

Process 1 Process 3 Finished

Goods

Process 2

Sequential:

Process 1

Process 4 Finished

Product X

Process 2

Process 5 Finished

Product Y

Process 3

Parallel:

5

Process 3Process 1

Process 4Process 2

Process 5 Finished

Goods

Job-order and

Appl

1.1. Evian (Evian (www.evian.cowww.evian.co2.2. Paramount PicturesParamount Pictures3.3. Nestle S.A. (Nestle S.A. (www.newww.ne4.4. SAP (SAP (www.sap.comwww.sap.com))5.5. Toyota Motor (Toyota Motor (www.www.6.6. Zurich Financial ServZurich Financial Serv

and justify the reasoand justify the reasobetween jobbetween job--order aorder aused by them.used by them.

Process Costing:

Note for Calculation

Direct Direct-labor costsMaterial

are usually smallin comparison to

other productcosts in process

cost systems.(high level ofa

rAm

ount

Direct

ManufacturingOverhead

7

automation)

Type of Product Cost

Doll Labor

Proces

Note forDirect

Material

C

ollar

Amount

So, direct labor and macombined into one pro

Type of Product C

D


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Cheng Nam Sang

The work-in-process

Differences Between Job-Order

and Process Costing

Direct Material

FinishedGoods

Direct Labor Jobs

individualjobs in ajob-order cost system.

9

Cost ofGoodsSold

ManufacturingOverhead

Differences B

and Pro

Direct Material

Direct Labor& Overhead

onvers on

When direct l abor is a relaticompared to material and o

combined wi th ov

Process Costing

Accumulate the total costs for a periodAccumulate the total costs for a period

Measure the output of the processMeasure the output of the process

Calculate the average unit cost of the outputCalculate the average unit cost of the output

Can be used in nonCan be used in non--manufacturingmanufacturing

organizationsorganizations

11

. .

Example of the transaction flow: see ExhibitExample of the transaction flow: see Exhibit1414--1 in the next slide1 in the next slide


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Cheng Nam Sang

Process Cost Flows

without WIP

Mixing /

Brewing

department

Bottling

department

Packaging

department

$'000 $'000 $'000

http://www.youtube.com/watch?v=ztNW2rzP6HM

13

rect ater a s 5,300 3,000 2,500

Direct Labour 2,700 950 1,050

App li ed overhead 1,500 2,500 2,200

9,500 6,450 5,750

Cost transferred i n 0 9,500 15,950

Cost transferred out 9,500 15,950 21,700

Equiva

A Key Co

for products in wofor products in woProducts in workProducts in work--

the beginning andthe beginning andonlyonly partially compartially com

qu va en un squ va en un s ssthese partially comthese partially comsmaller number osmaller number oproducts.products.

Equivalent Units Example

Two one-half comp leted products are

+ =

equ va en o one comp e e pro uc .

15

Equivalent

Two one-half coequ va en o o

+So, 10,000 unit

are equivalent t


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Cheng Nam Sang

For the current period, Jones started 15,000

Equivalent Units Question 1

, ,

5,000 uni ts in process 30 percent complete.How many equivalent units of product ion

did Jones have for the period?

a. 10,000

17

b. 11,500

c. 13,500

d. 15,000

Equivalent U

Calculating and Using Equivalent

Units of Production

equivalent unit for the period:equivalent unit for the period:

Cost pere u ivalent =

Costs for the period

19

unit

qu va ent un ts or t e per o

If Jones inroduction

Equivalent U

equivalent units.per equivalen

a. $1.84. .

c. $2.76

d. $2.90


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Cheng Nam Sang

Equivalent Units Question 2

21

Overall Concept

1. Analysis of

Pr

p ys ca ow

of units.

3. Computationof total cost and

unit costs.

Production Cost: Process Costing

TheThe weightedweighted--averageaverage method . . .method . . .

Makes no distinction between work done in theMakes no distinction between work done in the. .

Blends together units and costs from the priorBlends together units and costs from the priorperiod and the current period.period and the current period.

FIFOFIFO methodmethod (NOT EXAMINABLE)(NOT EXAMINABLE)

Equivalent units are based on the work done inEquivalent units are based on the work done in

23

e curren per o on y.e curren per o on y.

See AttachmentSee Attachment -- Process costing example with rearrangement.pdfProcess costing example with rearrangement.pdf

The FIFO method is a morecomplex method.

Calculation in

Process Costing

can be very

complicated and

confusing.


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Cheng Nam Sang

Process Costing: Key Steps

Key steps to help resolve some of theKey steps to help resolve some of theissuesissues

1.1. Summarize the physical flow of unitsSummarize the physical flow of units2.2. Compute equivalent units of productionsCompute equivalent units of productions

3.3. Summarize the total cost incurred for theSummarize the total cost incurred for theperiodperiod

3.1Com ute the cost er e uivalent unit3.1Com ute the cost er e uivalent unit

25

4.4. Calculate the cost of completed units andCalculate the cost of completed units andthe value of closing WIPthe value of closing WIP

5.5. Cost reconciliationCost reconciliation a control processa control process

Check you

Can a firm adCan a firm ademploying botemploying botcosting? Whycosting? Why

Operation Costing

Operation cost ing employs some aspects- .

Job-order Operation Costing ProcessCosting (Products produced in batches) Costing

27

Conversion costsassigned to batches

as in process costing.

Material Costs Chargedto batches as in

job-order costing.

Con

--

A simple costing mA simple costing mproductsproducts

Process costingProcess costing

A more complicatA more complicatmass produced itemass produced ite

Other related issuOther related issujoint products andjoint products and


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Cheng Nam Sang

Challenging Questions

Process Costing MCQ File 1 + File 2Process Costing MCQ File 1 + File 2 Process CostingProcess Costing-- challenging questionschallenging questions

29


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Managerial Accounting

Cheng Nam Sang 1

1 PROCESS COSTING - STOCK AND WORK IN PROGRESS VALUATIONS

1.1 IntroductionIn many processes production is continuous, so that at any time there will be partly processedmaterials within the process. Thus part of the costs incurred in the period will relate to completed

production, and part to the uncompleted work-in-progress.

1.2 Equivalent units of production

Consider the following situation:Total costs incurred in the period $18,000Finished units completed - 6,000Work-in-progress at the end of the period - 3,000 units.

A naive approach to obtain the cost per unit is to simply divide $18,000 by 9,000 units (ie, the total

number of completed and uncompleted units) to give a unit cost of $2.

This makes the assumption that all units, regardless of whether they are finished or are in work-in-progress at the period end, should be valued at the same cost per actual unit.

Surely this would be very misleading if the work-in-progress had only just been started at the periodend, and so accounted for very little of the total costs incurred.

What we require, then, is a method of identifying how much of the resources used in the period areto be apportioned to finished goods and to work-in-progress respectively.

We will use the technique of equivalent units of production, which simply says that 2 units 50%complete are equivalent to 1 unit 100% complete in terms of resources used.

(Note that equivalent units may also be called effective units, or effective finished units.)

Let us now assume that, in our example, the work in progress is 50% complete.

$Total Costs 18,000Equivalent units of production:

Finished units 6,000 WIP (3,000 x 50%) 1,500 7,500

Therefore cost per equivalent unit =$18,000

$2.407,500

=

Finally, to apportion our total costs for the period:

Finished production 6,000 x $2.40 = 14,400Work-in-progress 1,500 x $2.40 = 3,600 18,000

You will see that this gives a different valuation (and obviously a more sensible one!) than our naivetreatment of valuing all units at $2 each.


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Cheng Nam Sang 2

1.3 Several cost items

Now consider a more practical development of the above example, in which different types of costare incurred at different times during the process.

Total costs incurred in the period: $Materials input 16,200

Conversion 1,800 18,000Finished units produced 6,000Work-in-progress (100% material, 50% conversion) 3,000

In relation to the work-in-progress, the whole amount of material necessary for their completion hasbeen input ('100% complete' with respect to materials), but only half the necessary work has beendone ('50% complete' with respect to Conversion), ie the material is all added at the beginning butonly half the 'stirring' has been performed.

Because the number of equivalent units will be different for each of the two types of cost, thecalculation is more complex:

PhysicalUnits

%done

Material Conversion Total

Work in progress:Closing units 3,000

A 100% 3,000B 50% 1,500

Completed Units 6,000C 100% 6,000 6,000

Equivalent unit D 9,000 7,500

Costs E $16,200 $1,800 $18,000

Cost per EquivalentUnit

EF=

D $1.80 $0.24

The total cost will thus be divided as follows:

Work in progressAxF $5,400BxF $360

$5,400 $360 $5,760Completed

CxF $10,800 $1,440 $12,240 $18,000

Note carefully the following:

(1) The number of equivalent units for each individual cost is the product of units that willeventually be produced, and % completion to date.

(2) There is no limit to the number of different cost items in such a problem. For example,overheads may be segregated from conversion cost, and may have a different percentage ofcompletion.

(3) Obviously, a clear and logical presentation of cost per unit calculations is needed -tabulation is to be preferred.


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Cheng Nam Sang 3

(4) Where we are dealing with successive processes, a process will take in completed outputfrom the previous process in the production cycle.

This injection can be called transferred-in cost and will be treated just like any othermaterial costs but should be kept separate from direct materials added in the current process.

1.4 Opening and closing work-in-progress - Example

Since we are usually dealing with continuous processes, then it is likely that there will be openingwork-in-progress, as well as closing work-in-progress.

There are two accepted ways of dealing with Beginning Work-In-Progress, depending upon theassumptions which can be made concerning the work being done in the period. The two methodsare Weighted Average and FIFO. The following worked example will be used to illustrate theirdifferences.

Work-in-progress on 1 March: 2,000 units (i.e. Beginning WIP)

50% complete with respect to materials, value $1,375 [d]25% complete with respect to Conversion, value $89 [d]

Cost incurred during March: Materials $10,500Conversion $1,680

6,000 units were completed during March.

Work-in-progress on 31 March: 1,000 units (i.e. Ending WIP)25% complete with respect to materials10% complete with respect to Conversion

1.5 Solution - Weighted Average flow of costs

Under this method, our assumptions are that:

(a) All units are equally likely to be completed in the period; and

(b) Because of this, it is possible that some of the opening work-in-progress is carried forward asclosing work-in-progress.

In this type of process the opening work-in-progress becomes mixed with the work done in theperiod.

This means that it is not possible to identify, strictly, the work done in the period. We thereforecompute a weighted average cost per unit, by aggregating costs bought forward and costs incurred inthe period, and spreading the resulting total cost over the corresponding production. This productioncan now be identified as:

(a) completed units (whenever started); and

(b) closing work-in-progress (whenever started).

Finally note that, in order to use the weighted average method, it is necessary to know the break-down of the opening work-in-progress into the different categories of costs.


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Cheng Nam Sang 4

The steps in the solution are:

(a) Physical flow of units

This should be the first step in the solution whether the FIFO or the weighted averagemethod is used. It is simply an equation to identify the items to be worked on, as shown

below.Beginning WIP 2,000Units started 5,000 (balancing figure)

7,000

Units completed 6,000Ending WIP 1,000

7,000

(b) Compute equivalent units of production in the currentperiod.

Note that we do not need to know how many of the completed units were in the Beginning

WIP, and how many were started in the period. The crucial point isthat it doesn't matter!(The major different from the FIFO method below)

(c) Compute the Weighted Average Cost per equivalent unit.

Material Conversion Total

Costs b/f (BWIP) d $1,375 $89 $1,464Costs in the period $10,500 $1,680 $12,180

b $11,875 $1,769 $13,644

Cost per Equivalent Unitb

c=a

$1.90 $0.29 $2.19

(d) We can now calculate the cost of completed units and the value of closing work-in-progress.

Valuation of Inventories Material Conversion TotalCompleted units f x c $13,140WIP e x c 475 29 $ 504

Total Ending Inventory $13,644

(e) Cost reconciliation:Costs brought forward + incurred in the period = completed units + Ending WIP

$1,464 + $12,180 = $13,140 + $504

Material Conversion

Work in progress:Completed Units f 6000 6,000 6,000Ending Equiv. units e 1000 25%

10%250

100

Equiv. Unit of Production a 6,250 6,100

costsfromp

reviousw

orkdone

+

costsincurredinthisperiod


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Cheng Nam Sang 5

SUMMARY OF THE CALCULATION IN THE TABULATED FORMAT

WEIGHTED AVERAGE

BWIP 2,000

STARTED 5,000 Bal

Fig7,000

EQUIVALENT UNIT

MATERIAL CONVERSION TOTAL

COMPLETED 6,000 6,000 6,000

EWIP 1,000 25%

10%

250

100

7,000 6,250 6,100

COSTS

BWIP $1,375 $89 $1,464

INCURRED DURING THE

PERIOD$10,500 $1,680 $12,180

$11,875 $1,769 $13,644EQUIVALENT COST PERUNIT

$1.90 $0.29 $2.19

COST OF GOODS TFROUT (i.e. completed)

6,000*$1.9 6,000*0.29 6,000*$2.19 =$13,140

Value of EWIP 250*$1.9 = $475 100*$0.29 = $29 $504

TOTAL INVENTORY $13,644


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Cheng Nam Sang 6

Summary of Weighted Average Process Costing

Weighted Average

1 Physical flow calculation Calculate physical flow (in units):BWIP + Units started = Units completed + EWIP

2 Equivalent Unit calculation Calaculate the equivalent units based oncompleted units

andEWIP

3 Brought Forward Costs Add to the current period to calculate the average costper equivalent unit

4 Cost incurred in the period Differentiate Material and Conversion costs

5 Cost per Equiv. Unit(CEU)

Cost b/f + Cost in the periodEquivalent unit produced

6 Cost of completed Units Completed unitsx

CEU

7 Final Checking Cost reconciliation:Costs brought forward + incurred in the period

=

completed units + Ending WIP

Note:For calculations involving multiple materials (e.g Material 1, . and Material N) and multipleconversion processes (e.g. Conversion 1 and Conversion N), the tabel format for calculation in theearlier example helps even more. Simply, include additional columns for individual material andprocess. If some materials are partially or fully completed in the previous process, then it can alsohave another column(s) for Transfer In Material(s) (TIM 1 TIM N) e.g. seeMCQ Exercises File 2Q12-Q14.

PhysicalUnits

%done

TIM1

TIMN

Mat1

MatN

Con1

ConN

Total

Work in progress:Closing units

Completed Units


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Cheng Nam Sang 7

Example: Budo Pte Ltd

The following information is available for Budo Pte Ltd for the month of December:Physical Units Cost

Work in process, 1 December (75% completed) 4,000

Direct Material (100% at the beginning) $8,000Conversion $17,000

Total work in process, 1 December $25,000

Started during December 17,000

Cost added:

Direct Material $35,000Conversion $60,000

Total cost added in December $95,000

Work in progress, 31 December (40% completed) 5,000

Materials are added at the beginning of the process.

1. Budo Pte Ltds conversion cost per equivalent unitof production using the weighted average methodwouldbe:(A) $3.50(B) $3.67(C) $4.28(D) $4.81(E) None of the above

2. Budo Pte Ltds cost of goods transferred out using the weighted average method would be:(ROUND UP YOUR ANSWER TO THE NEAREST THOUSAND)(A) $ 68,000

(B) $101,000(C) $108,000(D) $133,000(E) None of the above

Working:

WEIGHTED AVERAGE

BWIP

STARTED

EQUIVALENT UNIT

MATERIAL CONVERSION TOTAL

COMPLETED

EWIP

COSTS

BWIP

INCURRED DURING

THE PERIOD

EQUIVALENT COST

PER UNIT

COST OF GOODS TFROUT (i.e. completed)

Value of EWIP


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ACCT 102 Management Accounting

Cheng Nam Sang 1

Exercise 9-8

Weighted-Average Method

1. Materials Labor Overhead

Units transferred to the next department ...... 42,000 42,000 42,000

Work in process, ending:

Materials:

8,000 units 75% complete ................. 6,000

Labor and overhead:

8,000 units 50% complete ................. 4,000 4,000

Equivalent units of production ...................... 48,000 46,000 46,000

2.Materials Labor Overhead

Cost of beginning work in process ............ $ 4,320 $ 1,040 $ 1,790

Cost added during the period ................... 52,800 21,500 32,250

Total cost (a) .......................................... $57,120 $22,540 $34,040

Equivalent units of production (b)............. 48,000 46,000 46,000

Cost per equivalent unit (a) (b) ............. $1.19 $0.49 $0.74


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Cheng Nam Sang 1

Process Costing MCQ File 1

E1. Which of the following best describes sequential processing?a. Several sequences of production are applied to a product in the department.

b. Units must pass through one process before they can be worked on in later processes,c. Only one process can be applied to a product in each department.d. sub components can be worked on simultaneously in different processes and then brought

together in a final process for completion.

E2. Which of the following best describes parallel processing?a. A large number of similar products pass through an identical set of processes.

b. Units typically pass through a series of manufacturing or producing departments.c. Partially completed units can be worked on simultaneously in different processes and then

brought together in a final process for completion.d. Units must pass through one process before they can be worked on in later processes.

E3. Which statement best describes the concept of equivalent units of production?a. Equivalent units are the measure of a period's output

b. Equivalent units are the units completed in a department.c. Equivalent units are the total of the units produced by all departmentsd. Equivalent units are the number of units completed at the end of the last process.

E4. The Fox Company uses the weighted average method. The beginning work in process consists of20,000 units (100% completed as to materials and 50% complete as to conversion costs). Thenumber of units completed was 80,000. The ending work in process consists of 10,000 units(100% complete as to materials and 20% complete as to conversion costs). The equivalent unitsof production for conversion costs was:

a. 80,000b. 90,000c. 110,000d. 92,000e. 82,000

E5. Garcia Company uses the weighted average method in its costing system. For the month of Mayin the Assembly Department, the equivalent units for conversion costs amounted to 35,000. Therewere 5,000 units in beginning work-in-process that were 50% complete. During the month,33,000 units were started and 31,400 were completed and transferred. The ending work in processconsists of:

a. 5,000 unitsb. 7,000 unitsc. 6,600 unitsd. 3,600 units


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Cheng Nam Sang 2

Figure 1 (for E6 & E7)

The following information is available for Department X for August:

Work in process, August 1:Materials $8,000

Conversion costs $15,000Costs added during August:

Materials $28,000 Conversion costs $25,000Equivalent units of production (weighted average):

Materials 4,000 Conversion 5,000

E6. Refer to Figure 1. Department X's cost per equivalent unit for materials using the weighted

average method would bea. $2.00

b. $7.00c. $8.00d. $9.00

E7. Refer to Figure 1. Department X's cost per equivalent unit for conversion using the weightedaverage method would bea. $8.00

b. $5.00c. $3.00

d. $9.00

E8. Burgundy Manufacturing uses a process cost system and computes cost using the weightedaverage method. During the current period, the beginning work-in-process inventory cost was$13,525. Manufacturing cost added was $57,000. If Burgundy's ending work-in-processinventory was valued at $15,100, then cost of goods transferred must have beena. $70,525

b. $55,425c. $84,625d. $58,575

E9. The following information is provided:Units

Work in process, June 1 (20% complete) 4,000Started in June 32,000Work in process, June 30 (30% complete) 12,000Materials are added at the beginning of the process.

Equivalent units of production for conversion costs using the weighted average method would bea. 35,600

b. 34,800c. 36,000d. 27,600


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Cheng Nam Sang 3

Suggested Answers:

E1. B

E2. C

E3. AE4. E

Units completed 80,000Ending work in process (10,000 x 20%) 2,000 82,000

E5. C

Ending inventory = (5,000 + 33,000) - 31,400 = 6,600 units

E6. D

Beginning work in process, materials $ 8,000Material costs incurred during period 28,000 Total costs to account for $36,000Cost per equivalent unit for materials

($36,000/4,000) $9.00

E7. A

Beginning work in process, conversion $15,000Conversion costs incurred during period 25,000 Total costs to account for $40,000Cost per equivalent unit for conversion

($40,000/5,000) $8.00

E8. B

Cost to be accounted for = $13,525 + $57,000 = $70,525

Cost to be accounted for - Ending inventory = Cost transferred$70,525 - $15,100 = $55,425

E9. D

Units completed (4,000 + 32,000 - 12,000) 24,000Units in ending work in process (12,000 x 30%) 3,600 Total equivalent units--conversion 27,600


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ACCT 102 Management Accounting - Process Costing File 2

Cheng Nam Sang Page 1

1. The weighted average method in process-costing system typically measuresoverall production costs for the period and then averages the costs based on totalunits produced during the period. The resulting average cost per unit is then usedto determine the __________ cost and the __________.

A. equivalent unit; equivalent unitsB. inventory, cost of goods sold.C.product, product price.D. overhead, finished goods cost.E. total, variance from budget.F. none of the above.

2. Deleted

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 3 5The following information is available for Gandalf Pte Ltd for the month ofDecember:

Physical Units CostWork in process, 1 December (75% completed) 4,000Direct Material $8,000Conversion $17,000

Total work in process, 1 December $25,000

Started during December 17,000

Cost added:Direct Material $35,000Conversion $60,000

Total cost added in December $95,000

Work in progress, 31 December (40% completed) 5,000

Materials are added at the beginning of the process.


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FOR QUESTIONS 3 AND 4, ROUND UP YOUR ANSWER TO 2 DECIMAL

PLACES

3. Gandalf Pte Ltds conversion cost per equivalent unit of production using the weighted average methodwould be:

(A) $3.50(B) $3.67(C) $4.28(D) $4.81(E) None of the above

4. Deleted

5. Gandalf Pte Ltds cost of goods transferred out using the weighted average

method would be: (ROUND UP YOUR ANSWER TO THE NEARESTTHOUSAND)

(A) $ 68,000(B) $101,000(C) $108,000(D) $133,000(E) None of the above

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 6 11

ABC Company is a manufacturing organization. 70% of direct materials are addedat the beginning of the process and the remaining 30% of the direct materials areadded when the units are 75% converted. All conversion costs are addeduniformly in the production process. Information for September are as follows:

Work-in-Process, September 1:8000 units (80 % converted)Direct materials (DM) $48,000Conversion costs (CC) $73,600

During September, 60,000 units were completed and transferred to the FinishedGoods Department. The following costs were incurred by the ManufacturingDepartment during September:

DM $333,000CC $673,200

Also, 5,000 units that were 50 % converted remained in the ManufacturingDepartment at the end of the day on September 30.

Work to two (2) significant decimal place


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6. The prime cost incurred by the Manufacturing Department for the month ofSeptember (only) is:

A. $ 333,000B. $ 481,000C. $1,006,200D. $1,154,200E. $1,230,800F. none of the above

7. The total equivalent unit (EU) of production for direct materials using theWeighted Average (WA) method for the month of September is:

A. 55,500 EUB. 58,500 EUC. 63,500 EUD. 65,000 EUE. 68,000 EUF. none of the above

8. Deleted9. Deleted10.Deleted11.The cost of the ending inventory (WIP) as at 30 th September using the WA

method is:

A. $48,390B. $48,555C. $50,875D. $51,000E. $52,375F. none of the above

Answer Question 12 17 using the following information

The Johnson Chemical Company produces a special kind of body oil that is widely used byprofessional sportsmen. The oil is produced in three processes: Blending, Mixing andPackaging. Raw oil materials are introduced at the beginning of the blending process.

In the mixing process, coloring material is totally added to the transferred-in inventory at thestart of the process. Half-way through the process, a Secret ingredient is totally added to givethe oil a sporty fragrance. Conversion costs incur uniformly in Mixing Department. Theoutput from the Mixing process is then sent for packaging.

The following information is available for the Mixing Dept for January 2006.


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Litres Costs

Beginning Work-in-process (WIP) 10,000Transferred in Costs (TIC) from Blending Dept $ 8,400Coloring Material $ 13,000Conversion costs (40% complete) $ 16,000Total WIP Jan 1st2006 $ 37,400

TIC during January 2006 150,000 $150,000

Cost incurred in Mixing Dept during January 2006Coloring Material $ 75,000Secret Ingredient $ 80,000Conversion costs $308,000Total Current Costs $463,000

During January 120,000 litres of body oil was sent for packaging. At the end of January, theclosing WIP was 60% complete with respect to conversion.

12.Using the weighted average approach, what is the cost per equivalent unit forconversion cost?

A $2.00

B $2.25

C $3.01

D $4.00

E $2.01

F none of the above

13.Using the weighted average approach, the equivalent units (EU) of production for thespecial ingredient would be:

A 160,000

B 145,000

C 150,000

D 135,000

E 140,000

F none of the above

14.Using the weighted average approach, what is the cost of the closing WIP?A $136,000

B $129,850

C $137,450

D $135,600

E $140,000

F none of the above

15.Deleted16.Deleted


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17. Deleted18. Which one of the following methods of allocating joint costs uses a measure such as

pounds or units to allocate joint costs to joint products?A) net realizable value method.B) physical measure method.C) product measure method.D) cost measure method.E) sales value at split-off method.

19. Which one of the following methods of allocating joint costs allocates joint costs tojoint products on the basis of estimated sales values at the split-off point?A) net realizable value method.B) physical measure method.C) average cost method.D) net sales value method.

E) sales value at split-off method.

20. Which of the following statements best describes a by-product?A) A product that is produced from material that would otherwise be scrap.B) A product that has a similar unit selling price than the main product.C) A product created along with the main product whose sales value does not cover

its cost of production.D) A product that usually produces a small amount of revenue when compared to the

main product's revenue.E) A product that has a lower unit selling price that the main unit.


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Suggested Answers:

1.B 2. 3.C 4. 5.B6.F 7.C 8. 9. 10.11.C 12.B 13.A 14.D 15.16. 17. 18.B 19.A 20.D

Working Q3

DM CCBWIP 4,000 4,000Started & Completed 12,000 12,000

EWIP 5,000 2,00021,000 18,000

Cost to account for: $43,000 $77,000Cost per EU: $2.05 $4.28

Working Q4 (Deleted)

Working Q5

Cost per unit transferred out = $2.05 +$4.28 (see answer for Q.4)

= $6.33Cost transferred out = $6.33 x 16,000 = $101,280


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Workings Q6 Q9

WEIGHTED

AVERAGE

BWIP 8000

STARTED Bal57000

65000

EQUIVALENT UNIT

MATERIAL CONVERSION

COMPLETED 60000 60000 60000

EWIP 5000 5000*70%=3500 5000*50%=2500

65000 63500 62500

COSTS

BWIP 48000 73600

INCURREDDURING THEPERIOD

333000 673200

381000 746800

EQUIVALENTCOST PERUNIT

381000/63500=6 746800/62500=11.95

EWIP 3500*6+2500*11.95=50875

Working for Q 12 Q14

WA

1. PU

BWIP 40% 10,000

Started 150,000

Units to A/C 160,000

2. EU

TIC CM SI CC

Completed 120,000 120,000 120,000 120,000 120,000

EWIP 60% ??? 40,000 40,000 40,000 40,000 24,000

Units to A/C 160,000 160,000 160,000 160,000 144,000

3. COSTS

BWIP 8,400 13,000 0 16,000

INCURRED DURINGTHE PERIOD

150,000 75,000 80,000 308,000

Total costs 158,400 88,000 80,000 324,000

Costs per EU 0.99 0.55 0.5 2.25

Cost of EWIP EU*Cost per EU = (40,000*(0.99+0.55+0.5))+(24000*2.25)=135,600


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ACCT 102 Management Accounting Process Costing Challenging Questions

Cheng Nam Sang 1

Use the following information to answer questions 1-3 regarding information for the currentperiod:

Yummy Pizza Corporation produces frozen pizzas for selling to supermarkets all over Singapore.The pizzas pass through three departments: (1) Assembly, (2) Freezing, and (3) Packaging. In the

Assembly Department, 70% of direct materials are added at the beginning of the process and theother 30% are added at the end of the process. Conversion costs are added evenly throughout theassembly process. Data for the current period for the Assembly Department are as follows:

Beginning work in process inventory (30% completed) 6,000 unitsUnits started in current period 30,000 unitsEnding work in process inventory (80% completed) 4,000 units

Costs in beginning work in process inventory Direct Materials $3,978

Conversion Costs $1,800

Total $5,778

Costs added during the current period: Direct Materials ? Conversion Costs ?Total $47,170

Cost per equivalent unit from weighted average method:Direct Materials $0.51Conversion Costs $1.00

1. Using the weighted average method, compute the physical units (PU) completed.

2. Using the weighted average method (WA), compute the equivalent units (EU) for conversioncosts.

3. Using the weighted average method (WA), compute the total value of ending WIP inventory.


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Cheng Nam Sang 2

Suggested Answers:

Q1.

6,000 + 30,000 4,000 = 32,000 units

Q2.Physical

Units DM CC

BWIP 6,000 70% 30%

Started 30,000

Completed 32,000

EWIP 4,000 70% 80%

EU (CC) = 32,000 + 4000*0.8 = 35,200 units

Q3.2,800*0.51 + 3,200*1.00 = $4,628


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Cheng Nam Sang 3

Example: Sure Marks Up (SMU)

Sensing strong potential demand from stressed out students coping with examinations and project work, agroup of enterprising SMU students bunch together to concoct a tonic soup that would regenerate brain cells,improve attention span, and enable students to understand concepts and not just memorise textbooks blindly.

Given the huge untapped customer group ranging from primary school students to university undergraduates,these entrepreneurs eschewed traditional methods in favor of the latest advanced techniques to make a good

bowl of potent soup. With a grant from the government, they set up the Tonic Soup factory, an advanced,computerized-integrated manufacturing (CIM) production facility located on Jurong Island to produce theirunique, patented Sure Marks Up (SMU) tonic soup.

The manufacturing process of The Tonic Soup factory is premised on the need to churn out as much soup aspossible within the shortest period of time in order to meet the insatiable demands of its customers. As such,the Tonic Soup factory would manufacture this product continuously, 24 hours a day, 7 days a week.

The operation process of churning out the tasty SMU tonic soup is as follows. The factory basically consists

of a gigantic manufacturing silo, a huge, cylindrical steel container that is capable of making up to 50,000 pre-packaged bowls of hot, tasty SMU tonic soup. To brew this delicious soup, the raw materials, consisting ofginseng, lingzhi, ginko nuts and a variety of Chinese herbs including bulbus lilli (Bai He), euryale ferox (QianShi), polyconattum(Yu Zhu) and semin nelumbinis (Lian Zi) are first poured inside the silo. Thereafter, 100%

pure, clean and totally distilled Newater is added in. Once all the ingredients are in, the processing processwill commence. In converting it into the final product, the solution is double-boiled over a slow fire and agiant stirrer within the silo will stir and mix the soup to ensure that all the ingredients are evenly mixed andwell-blended. The process would take 5 days, after which the soup is cooked to perfection.

The SMU tonic soup is a huge commercial success, as mothers stocked up the product in the dozens, since itspre-packaged bowl ensures the freshness of the soup for up to two months. In accounting for the productioncost of the tonic soup, the group of entrepreneurs used process costing, which they remembered from their

Management Accounting lessons. In the month of October, the accountant was hospitalized as a result of anoverdose of the SMU soup (despite health warning precautions), and the Chief Financial Officer (CFO)requested your help in doing the accounting.

He provided you with the following data and stated that the company is using a weighted average method.

Table 1 - Operational Data for the Month of October

Units CostsBeginning WIP, 1 October 2002 30,000 bowlsDirect Materials (herbs): 50,000 kg $270,000Conversion (stirred and boiled for 3 days): $352,000Total WIP costs $622,000

Costs incurred in the month of October 2002Direct Materials added: 300,000 kg $1,755,000Conversion costs $2,321,000

Closing WIP, 31 October 2002 50,000 bowls(stirred and boiled for 2 days)

200,000 completed bowls of soup were sent from the factory to the warehouse in October 2002.

(a) Prepare a cost of production reportfor the month of October based on the weighted average method.Your answers should state clearly the cost of goods manufactured, the value of the ending WIP andthe unit cost per bowl of soup.


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Cheng Nam Sang 4

In reviewing the manufacturing process and your report, the Chief Executive Officer (CEO) commented thatthe conversion process of stirring and boiling should not be assumed to be uniform. He has learned that whilethe soup is boiled continuously for five days, most of the stirring is done in the initial days, and very littlestirring is done at the later stage. Hence, the CEO felt that the accounting system should distinguish separatelythe boiling and stirring processes so as to be more accurate.

Hurriedly, the CFO instructed the operational manager to split the conversion process into two distinctprocesses, boiling and stirring. The revised operational data for the month of October is then handed to you.

Table 2 Revised Operational Data for the Month of October

Units CostsBeginning WIP, 1 October 2002 30,000 bowlsDirect Materials (herbs): 50,000 kg $270,000Conversion:Boiling process (60% completed) $ 36,000

Stirring process (90% completed) $ 316,000Total WIP costs $ 622,000

Costs incurred in the month of October 2002:Direct Materials added: 300,000 kg $1,755,000Conversion:Boiling $ 404,000Stirring $1,917,000

Closing WIP, 31 October 2002 50,000 bowlsConversion:Boiling process (40% completed)

Stirring process (80% completed)

Note: 200,000 completed bowls of soup were sent from the factory to the warehouse in October 2002.

(b) Prepare a revised cost of production reportfor the month of October based on the weighted averagemethod. Your answers should state clearly the cost of goods manufactured, the value of the endingWIP and the unit cost per bowl of soup.

The CEO was bemused to see different sets of unit cost of the SMU tonic soup even through the total costfigures are intact. He asked you to prepare a short explanation to reconcile and justify the reasons why the costfigures keep changing.

(c) Prepare a short note to the CEO explaining the reasons why the cost of goods manufactured and theunit cost of one bowl of SMU tonic soup differ based on your two production cost reports.Substantiate your reasons with computations if necessary.


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Cheng Nam Sang 5

Suggested Answers to SMU

Req (a)Units/Bowls to be accounted for:

BWIP 30,000Added ??? 220,000

250,000

Materials Conversions Completed 200,000 200,000 200,000EWIP 50,000 50,000 20,000

Equivalent Units 250,000 250,000 220,000

Costs (Weighted Average) TotalBWIP $270,000 $352,000 $622,000

Incurred during the period $1,755,000 $2,321,000 $4,076,000Total Costs $2,025,000 $2,673,000 $4,698,000

Cost per Equiv. Unit $8.10 $12.15 $20.25Cost of goods manufactured (i.e. completed) $1,620,000 $2,430,000 $4,050,000Value of EWIP $405,000 $243,000 $648,000

Req (b)Weighted Average

Materials Boiling StirringCompleted 200,000 200,000 200,000 200,000

EWIP 50,000 50,000 20,000 40,000Equivalent Units 250,000 250,000 220,000 240,000

Costs TotalBWIP $270,000 $36,000 $316,000 $622,000Incurred during the period $1,755,000 $404,000 $1,917,000 $4,076,000

Total Costs $2,025,000 $440,000 $2,233,000 $4,698,000

Cost per Equivalent Unit $8.10 $2.00 $9.30 $19.40Cost of goods manufactured (i.e. completed) $1,620,000 $400,000 $1,860,833 $3,880,833

Value of EWIP $405,000 $40,000 $372,167 $817,167

As can be seen from the above table, the main difference is the split between the value of EWIP andCost of goods manufactured for the two methods.

Req (c)1. For the two calculations the total of goods manufactured and EWIP are the same.2. The change from a to b is the conversion element is split into stirring and boiling. For EWIP,

instead of 40% (2 out of 5 days) completed for conversion under a, we have 40% completefor boiling and 80% complete for stirring.

3.

It should be noted that stirring is more expensive than boiling. Since we have a higher % ofstirring under WIP for method b, we should expect the EWIP for method b to be higher.


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Cheng Nam Sang 6

Overall, the differences are caused by not having the processes defined correctly and accurately,assuming method b is the correct method, then method b will give us the correct figure. However,one must weight the costs and benefits of these detailed analyses. If the differences are not big wemay not want to alter our calculation.

handout 7 - process costing

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