Solutions for Problems in Chapter 1 - DOC by w3OacgU

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									                                    Chapter 6
                                  Process Costing

LEARNING OBJECTIVES
Chapter 6 addresses the following questions:

   Q1   How are costs assigned to mass-produced products?
   Q2   What are equivalent units, and how do they relate to the production process?
   Q3   How is the weighted average method used in process costing?
   Q4   How is the FIFO method used in process costing?
   Q5   What alternative methods are used for mass production?
   Q6   How is process costing performed for multiple production departments?
   Q7   How are spoilage costs handled in process costing?
   Q8   What are the uses and limitations of process cost information?

These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual
exercises and problems.


COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.

Questions Having a Single Correct Answer:
     No Symbol    This question requires students to recall or apply knowledge as shown in the
                  textbook.
          e       This question requires students to extend knowledge beyond the applications
                  shown in the textbook.


Open-ended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):
               Step 1 skills (Identifying)
               Step 2 skills (Exploring)
               Step 3 skills (Prioritizing)
               Step 4 skills (Envisioning)
6-2   Cost Management


                                        QUESTIONS

6.1    Weighted average and FIFO process costing produce similar equivalent unit costs
       whenever the unit cost of production does not change or whenever there are no beginning
       or ending work-in-process inventories. In addition, the equivalent unit costs will be
       similar if the number of equivalent units produced during the period is large relative to
       inventories.

6.2    A process would complete more units during the period than it started when there are
       more units in beginning inventory than in ending inventory.

6.3    This approach would overstate the cost of spoiled units because partially complete units
       would be treated as if they had received 100% of direct materials and conversion costs,
       regardless of the amount actually allocated to those units.

6.4    If the beginning and ending inventories are the same from one period to the next, the
       number of units started is equal to the number of units completed and transferred out.
       This means that WIP inventory can be ignored when calculating equivalent units.
       However, if costs change from one period to the next, then the cost allocated to ending
       WIP will not be the same as the cost allocated to beginning WIP.

6.5    Judgment is needed to determine the percentage complete that is used in process costing
       calculations. Each unit or batch of units is complete to a different degree than other units
       or batches because the process is continuous. The percent complete is an average
       completion percentage that is estimated using judgment.

6.6    If the percent completion in year 1 is overestimated, then the equivalent units for those
       units will be too high in year 1. In turn, this will cause the cost per equivalent unit in year
       1 to be understated. In year 2, this misstatement will cause the equivalent units for
       completion of beginning WIP to be too low. The understatement of equivalent units will
       cause the cost per equivalent unit to be overstated in year 2.

6.7    The weighted average method ignores the period in which product is started. In addition,
       costs from beginning inventories are added to costs of this period. All products
       completed are then given an average cost, regardless of when they were started. The
       FIFO method, on the other hand, tracks work completed and costs from the prior period
       separately from work completed and costs incurred during the current period. Under
       FIFO, beginning WIP consists of last period’s costs and work valued separately. At the
       end of the accounting period, this period’s costs to complete these units are added. Then
       the total costs for beginning WIP from last period and this period are summed and
       attached to the beginning inventory units that were completed this period. Then the units
       started and completed this period are valued using this period’s costs. If an
       organization’s costs fluctuate regularly, the FIFO method will reflect the most current
       costs so that managers can investigate changes in cost more quickly.

6.8    Goods that are mass-produced have uniform specifications and are made in large batches
       or on a continuous assembly line. Services that are mass-produced are performed using
                                                                 Chapter 6: Process Costing        6-3


       the same skills and time and each task is very similar. Goods that are custom produced
       come in many variations and are made to specifications that vary with each order. Many
       services are custom, such as accounting, health care, and law services because each
       customer requires different inputs to match their needs. While it is relatively easy to
       track costs for custom made goods by attaching tags or using individual records to log
       costs of materials and labor, it is impossible to trace costs to mass-produced units. Job
       order costing is used for custom products. Direct material and labor costs are traced to
       each product and overhead costs are allocated using some allocation base that is labor or
       machine related. For mass-production, process costing is used. Equivalent units are
       calculated to account for units that are partially complete. Direct materials costs are
       allocated separately. Direct labor and overhead are combined and called conversion
       costs. These are allocated to complete and partially completed units.

6.9    They should be counted as ending WIP inventory in the department. Completed units
       imply that the units have been transferred to the next department or to finished goods,
       which is not the case with these units.

6.10   This is what is referred to as "continuous processing." Units just entering the process
       have had little done to them, while units just about to leave the process have had all or
       most of the conversion done. On average, the units in process are 50% complete as to
       conversion.

6.11   The cost of spoiled units is added to the total cost of goods transferred and increases the
       cost per unit.

6.12   Job costing is often used when products are manufactured in batches. In this firm, a
       single batch would have a specific sized wire and specific length of nail. The cost of
       each type of nail will depend primarily on the cost of the type of wire used and the time
       required for each type. Therefore job costing is the most appropriate method. This
       information would be lost if process cost techniques were employed.

6.13   Here are three factors. 1. If inspection costs are high and the cost to produce a single
       unit is very low, managers may decide to reduce the number of time units are inspected.
       In this case, inspection might occur only when units are completed. 2. If production
       costs are high and units go through several different departments, inspection may take
       place earlier in the manufacturing process so that spoiled units are caught when they are
       relatively incomplete. 3. If a firm is developing a strategy of high quality products,
       inspection may take place more often to insure that products are free of defects.

6.14   Advantages of reducing spoilage include saving the cost of the spoiled units and being
       able to sell those units and increasing the contribution margin. In addition, in some
       industries all firms need to compete on quality, and increased spoilage may lead to
       increased defects in units sold, harming the reputation of the company resulting in a loss
       of market share. Disadvantages might be that the costs incurred do not guarantee that
       spoilage will be significantly reduced, or that the benefits in improved quality will be
       worth the costs.
6-4     Cost Management


                                             EXERCISES

6.15 Francisco’s

      A and B
         Assumptions:
             Work performed in May:
             Beginning WIP                                 9,000
             % complete direct materials                     100%
             % complete conversion costs                      40%
             Units started                                50,000
             Units completed and transferred out          47,000
             Ending WIP                                   12,000
             % complete direct materials                     100%
             % complete conversion costs                      30%

Summarize Physical and Equivalent Units
                                                    Work This Period
                                        Complete      Start          Start   Total Work       Total
                       Beginning        Beginning     and           Ending   Performed      Units to
                         WIP              WIP       Complete         WIP     This Period   Account for
Physical Units           9,000                0      38,000         12,000     50,000        59,000

Equivalent Units:                                                                          Total Work
  Direct Materials        9,000                0     38,000         12,000     50,000        59,000
  Conversion Costs        3,600            5,400     38,000          3,600     47,000        50,600

      A. Weighted average equivalent units for direct materials is 59,000 (total work this period)
         because the ending units get 100% credit for direct materials, since direct materials are
         added at the beginning of processing. Equivalent units for conversion costs are 50,600
         (total work this period) because ending inventory units are only 30% complete and,
         hence, have only 30% of the conversion costs (since conversion costs are incurred evenly
         during production).

      B. FIFO equivalent units are found under Total Work Performed This Period. Therefore
         direct materials equivalent units are 50,000 (excludes beginning inventory because direct
         materials were added last period and includes ending inventory because materials were
         added this period), and equivalent units for conversion costs are 47,000 (excluding work
         done on beginning WIP but including this period’s work to complete those units and
         including the portion of work completed on ending WIP.
                                                                             Chapter 6: Process Costing           6-5


6.16 Fine Fans

    A and B
       Assumptions for October:

Work performed:                                                Costs:
                                                                 Beginning WIP (FIFO and Weighted
                                                                 Average)
Beginning WIP                                            9,000
    % complete direct materials                          100%       Direct materials             $   18,000
    % complete conversion costs                           20%      Conversion costs                  36,000
Units started                                          100,000   Total beginning WIP costs           54,000
Units completed and transferred out                     94,000   Costs added this month
Ending WIP                                              15,000   Direct materials                 100,000
    % complete direct materials                          100%    Conversion costs                 200,000
    % complete conversion costs                           60%    Total costs added                300,000
                                                                 Total costs to account for      $354,000

Summarize Physical and Equivalent Units
                                                         Work This Period
                                          Complete         Start          Start  Total Work              Total
                       Beginning          Beginning        and           Ending  Performed              Units to
                       WIP (20%)          WIP (80%)      Complete      WIP (60%) This Period          Account for
Physical Units           9,000                  0         85,000         15,000   100,000              109,000

Equivalent Units:                                                                                     Total Work
  Direct Materials          9,000                0         85,000          15,000      100,000         109,000
  Conversion Costs          1,800            7,200         85,000           9,000      101,200         103,000

Calculate Actual Cost Per Equivalent Unit

    Weighted Average:
        Direct materials:             Beginning WIP + Direct materials cost =         $118,000         = $ 1.08
                                         Equivalent units for total work               109,000

        Conversion costs:             Beginning WIP + Direct materials cost =         $236,000         =       2.29
                                         Equivalent units for total work               103,000

        Total cost per equivalent unit:                                                                       $3.37

    First-in, First-out:
        Direct materials:     _____________Direct materials cost_____________          = $100,000      = $ 1.00
                              Equivalent units for total work performed this period       100,000

        Conversion costs:     ______________Conversion costs______________             = $200,000      =       1.98
                              Equivalent units for total work performed this period       101,200

        Total cost per equivalent unit:                                                                       $2.98
6-6     Cost Management


6.17 Journal Entry for Abnormal Spoilage

[Note: This problem requires students to extend concepts about journal entries for spoilage from
Chapter 5 to Chapter 6.]

         When spoiled units are sold, the net realizable value offsets the cost. In this case the total
         cost of spoiled units is $16,000 (80*$200). However, $2,000 is recovered by selling the
         spoiled units for their net realizable value. The journal entry follows.

                 Loss from Abnormal Spoilage                           $14,000
                 Cash                                                    2,000
                        Work-in-Process inventory                                      $16,000

6.18 Journal Entry for Normal and Abnormal Spoilage

      A. Number of spoiled units = 10,000 – 8,000 = 2,000

         Cost of spoiled units = 2,000*$5 = $10,000

      B. When all spoilage is normal, the total cost of units (good and spoiled) is transferred into
         finished goods. That cost is $50,000 (10,000*$5). The journal entries follow.

                 Finished Goods Inventory                              $50,000
                        Work-in-Process Inventory                                      $50,000

      C. For abnormal spoilage, only the cost of good units is transferred to finished goods. The
         cost of spoiled units is recorded as a separate loss. The cost of good units is $40,000
         (8,000*$5).

                 Finished Goods Inventory                              $40,000
                 Loss from Abnormal Spoilage                            10,000
                        Work-in-Process Inventory                                      $50,000
                                                                              Chapter 6: Process Costing            6-7


6.19 through 6.22 Felix and Sons

Assumptions for December:

Work performed:                                                 Costs:
                                                                  Beginning WIP (FIFO and Weighted
                                                                  Average)
Beginning WIP                                             8,000
    % complete direct materials                           100%       Direct materials             $    19,200
    % complete conversion costs                            75%      Conversion costs                    7,200
Units started (12,000 – 8,000 + 6,000)                   10,000   Total beginning WIP costs            26,400
Units completed and transferred out                      12,000   Costs added this month
Ending WIP                                                6,000   Direct materials                     31,200
    % complete direct materials                           100%    Conversion costs                     21,600
    % complete conversion costs                            50%    Total costs added                    52,800
                                                                  Total costs to account for          $79,200

Summarize Physical and Equivalent Units
                                                          Work This Period
                                           Complete         Start          Start  Total Work               Total
                        Beginning          Beginning        and           Ending  Performed              Units to
                        WIP (30%)          WIP (75%)      Complete      WIP (50%) This Period           Account for
Physical Units            8,000                  0          4,000          6,000    10,000                18,000

Equivalent Units:                                                                                       Total Work
  Direct Materials           8,000                0           4,000          6,000       10,000           18,000
  Conversion Costs           6,000            2,000           4,000          3,000        9,000           15,000

Calculate Actual Cost Per Equivalent Unit

    Weighted Average:
         Direct materials:            Beginning WIP + Direct materials cost =          $50,400           = $ 2.80
                                         Equivalent units for total work                18,000

         Conversion costs:            Beginning WIP + Direct materials cost =          $28,800           =       1.92
                                         Equivalent units for total work                15,000

         Total cost per equivalent unit:                                                                        $4.72

    First-in, First-out:
        Direct materials:      _____________Direct materials cost_____________         = $31,200         = $ 3.12
                               Equivalent units for total work performed this period      10,000

         Conversion costs:     ______________Conversion costs______________            = $21,600         =       2.40
                               Equivalent units for total work performed this period      9,000

         Total cost per equivalent unit:                                                                        $5.52
6-8     Cost Management


Process Cost Reports for December 31
                                          First-in, First-Out                       Weighted Average
                                Computation          Units      Costs         Computation     Units          Costs
                              From November
Beginning WIP                 cost report            8,000      $26,400
Costs to complete
beginning WIP:
  Direct materials            0x$3.12                                  0
  Conversion costs            2,000x$2.40                          4,800
    Total costs added this
    period                                          _____          4,800

Total cost of beginning
WIP transferred out                                 8,000         31,200

New units started,
completed, and transferred
out                           4,000x$5.52           4,000         22,080

Total units completed and
transferred out                                    12,000         53,280   (8,000+4,000)x$4.72   12,000      $56,640

Ending WIP:                                         6,000                                         6,000
  Direct materials            6,000x$3.12                         18,720   6,000x$2.80                        16,800
  Conversion costs            3,000x2.40                           7,200   3,000x$1.92                         5,760
    Total ending WIP cost                           _____         25,920                         _____        22,560

Total Accounted For                                18,000       $79,200                          18,000      $79,200




6.23 Humphrey Manufacturing

      A and B
         Assumptions for April:

Work performed:                                                 Costs:
                                                                   Beginning WIP (FIFO and Weighted
                                                                   Average)
Beginning WIP                                             6,000
    % complete direct materials                           100%        Direct materials           $   7,500
    % complete conversion costs                            40%       Conversion costs                2,125
Units started (8,000+40,000-6,000)                       42,000    Total beginning WIP costs         9,625
Units completed and transferred out                      40,000    Costs added this month
Ending WIP                                                8,000    Direct materials                70,000
    % complete direct materials                           100%     Conversion costs                42,500
    % complete conversion costs                            25%     Total costs added              112,500
                                                                   Total costs to account for    $122,125
                                                                             Chapter 6: Process Costing     6-9


Summarize Physical and Equivalent Units
                                                         Work This Period
                                          Complete         Start          Start  Total Work          Total
                       Beginning          Beginning        and           Ending  Performed         Units to
                       WIP (40%)          WIP (60%)      Complete      WIP (25%) This Period      Account for
Physical Units           6,000                  0         34,000          8,000    42,000           48,000

Equivalent Units:                                                                                 Total Work
  Direct Materials          6,000                0         34,000           8,000       42,000      48,000
  Conversion Costs          2,400            3,600         34,000           2,000       39,600      42,000

Calculate Actual Cost Per Equivalent Unit

    Weighted Average:
        Direct materials:            Beginning WIP + Direct materials cost =          $77,500     = $ 1.6146
                                        Equivalent units for total work                48,000

        Conversion costs:            Beginning WIP + Direct materials cost =          $44,625     =     1.0625
                                        Equivalent units for total work                42,000

        Total cost per equivalent unit:                                                                $2.6771

    First-in, First-out:
        Direct materials:     _____________Direct materials cost_____________         = $70,000   =    $1.6667
                              Equivalent units for total work performed this period      42,000

        Conversion costs:     ______________Conversion costs______________            = $42,500   =     1.0732
                              Equivalent units for total work performed this period      39,600

        Total cost per equivalent unit:                                                                $2.7399
6-10 Cost Management


Process Cost Reports for April
                                          First-in, First-Out                     Weighted Average
                               Computation          Units      Costs     Computation    Units      Costs
                              From March
Beginning WIP                 cost report            6,000    $ 9,625
Costs to complete beginning
WIP:
  Direct materials            0x$1.6667                            0
  Conversion costs            3,600x$1.0732                    3,864
    Total costs added this
    period                                       _____         3,864

Total cost of beginning WIP
transferred out                                   6,000       13,489

New units started,
completed, and transferred
out                           34,000x$2.7399    34,000        93,157

Total units completed and
transferred out                                 40,000       106,646    40,000x$2.6771   40,000    $107,084

Ending WIP:                                       8,000                                   8,000
  Direct materials            8,000x$1.667                    13,336    8,000x$1.6146                12,917
  Conversion costs            2,000x1.073                      2,146    2,000x$1.0625                 2,125
    Total ending WIP cost                        _____        15,482                     _____       15,042

Total Accounted For                             48,000     $122,128                      48,000    $122,126



Differences in total costs are due to rounding errors. If a spreadsheet is used to make these
calculations, the totals will have fewer rounding errors.

    C. Journal entries for weighted average method for April:

                 Work in process inventory                           $70,000
                        Raw materials inventory                                     $70,000
                 To record the cost of raw materials used in production during April.

                 Work in process inventory                           $42,500
                        Wages and accounts payable                                 $42,500
                 To record the conversion costs incurred in production during April.

                 Finished goods                                       $107,084
                        Work in process inventory                                   $107,084
                 To record the cost of 40,000 units transferred to finished goods during April
                 (includes the cost of normal spoilage).
                                                                  Chapter 6: Process Costing 6-11


      Journal entries for FIFO method for April:

              Work in process inventory                           $70,000
                     Raw materials inventory                                     $70,000
              To record the cost of raw materials used in production during April.

              Work in process inventory                           $42,500
                     Wages and accounts payable                                 $42,500
              To record the conversion costs incurred in production during April.

              Finished goods                                       $106,646
                     Work in process inventory                                   $106,646
              To record the cost of 40,000 units transferred to finished goods during April
              (includes the cost of normal spoilage).


6.24 For Seniors Only

   A. Process costing is appropriate in this situation because the returns are very similar in the
      amount of time and therefore cost to complete each one. If the returns were more
      complex or extra research was needed on certain ones, process costing would no longer
      be appropriate because there would be too much variation between different returns.

   B. To determine the costs for April, last year’s cost data is needed as well as data from
      previous months. Additional information required is the approximate number of returns
      will be done, the salary paid to the employees, overhead costs, the number of employees
      that will be hired for the month, the amount of time each will work, and the amount of
      time it takes for each return. Also, an estimate is needed for the number of returns that
      are likely to be in progress at the beginning of April.

   C. The first step in determining the cost for April returns is to find the total units in progress
      and their percent completion. In addition, the number of returns to be completed in April
      needs to be estimated. Last year’s data will be useful in estimating this year’s volume.
      Using data mentioned in part B, costs are categorized as direct materials or conversion
      costs. An equivalent cost per unit for the tax returns can then be estimated. Once the
      number of returns for the month of April has been predicted, the equivalent costs can be
      estimated and a total cost for that month can be predicted. It is likely that there will be no
      ending WIP inventory, because tax returns are due April 15 and this organization’s
      clients are likely to file by the due date rather than request extensions.
6-12 Cost Management


                                                 PROBLEMS

6.25 Benton Industries

1. Summarize Total Costs to Account For
      FIFO:
                                                       Transferred-in   Direct Materials Conversion Costs   Total Cost
             Beginning WIP                               $ 40,470           $     0         $ 14,322         $ 54,792
             Current period costs                         224,130           166,840          315,228          706,198
                 Total costs to account for              $264,600          $166,840         $329,550         $760,990

2. Summarize Physical and Equivalent Units
                                                            Work This Period
                                          Complete            Start          Start  Total Work
                       Beginning          Beginning           and           Ending  Performed            Total to
                       WIP (33%)          WIP (67%)         Complete      WIP (40%) This Period        Account for
Physical Units          15,000                  0            82,000         11,000    93,000            108,000

Equivalent Units:
  Transferred-in                0                  0          82,000          11,000       93,000
  Direct Materials              0             15,000          82,000               0       97,000
  Conversion Costs          5,000             10,000          82,000           4,400       96,400

3. Calculate First-in, First-out Cost Per Equivalent Unit

        Transferred-in:       _____________Transferred-in costs_____________             = $224,130     = $ 2.41
                              Equivalent units for total work performed this period         93,000

        Direct materials:     _____________Direct materials cost_____________            = $166,840     =     1.72
                              Equivalent units for total work performed this period         97,000

        Conversion costs:     ______________Conversion costs______________               = $315,228     =     3.27
                              Equivalent units for total work performed this period         96,400

        Total cost per equivalent unit:                                                                      $7.40
                                                                            Chapter 6: Process Costing 6-13


4. Process cost report for the year
                                                                                  First-in, First-Out
                                                             Computation         Units             Costs
       Beginning WIP                                         From last year     15,000           $ 54,792
       Costs to complete beginning WIP:
       Direct materials                                      15,00 x $1.72                        25,800
       Conversion costs                                      10,000 x $3.27                       32,700
       Total costs added this period                                             _____            58,500

       Total cost of beginning WIP transferred out                              15,000          113,292

       New units started, completed, and transferred out     82,000*$7.40       82,000          606,800

       Total units completed and transferred out                                97,000          720,092

       Ending WIP:                                                              11,000
       Transferred-in                                        11,000 x $2.41                       26,510
       Direct materials                                      0 x $1.72                                 0
       Conversion costs                                      4,400 x $3.27                        14,388
       Total ending WIP cost                                                     _____            40,898

       Total Accounted For                                                     108,000         $760,990

Notice that the total costs summarized above ($760,990) are equal to the costs accounted for in
the cost report.


6.26 Victoria’s Closet-A

   A. Preparation of process cost report using the weighted average method.

       Summary of unit information given in the problem:

                             WIP Units                                              Summary of Spoilage
    Beginning (25% complete) 11,000
    Started                  74,000    61,000 Good completed                    Normal spoilage        6,600
                                        8,000 Spoiled                           Abnormal spoilage        ???
    Ending (75% complete)    16,000                                             Total                  8,000

       When computing equivalent units, notice that the ending WIP inventory units are
       considered 100% complete with respect to direct materials, since direct materials are
       added at the beginning of processing. However, the ending WIP inventory units are only
       75% complete and, hence, have only 75% of the conversion costs (incurred evenly
       throughout production). Both normal and abnormal spoilage are assigned 100% of all
       costs because spoilage occurs just before inspection, which is at the 100% stage of
       completion.

1. Summarize Total Costs to Account For
                                                     Direct Materials     Conversion Costs          Total Cost
           Beginning WIP                                $220,000              $30,000              $ 250,000
           Current period costs                        1,480,000              942,000               2,422,000
               Total costs to account for             $1,700,000             $972,000             $2,672,000
6-14 Cost Management



2. Summarize Physical and Equivalent Units
                                            Work Performed This Period
                           Complete           Start       Start      Total Work            Total         Spoiled
                 Beginning Beginning           and       Ending       Performed           Units to        Units
                 WIP (25%) WIP (75%)        Complete WIP (75%) This Period               Account for      (100%)
Physical Units     11,000         0          58,000      16,000         74,000              85,000       (8,000)

Equivalent Units:                                                                        Total Work
  Direct Materials 11,000               0     58,000       16,000         74,000            85,000       (8,000)
  Conversion Costs 2,750            8,250     58,000       12,000         78,250            81,000       (8,000)

Total Spoilage                                                                                               8,000
   Less Normal Spoilage                                                                                      6,600
       Abnormal Spoilage                                                                                     1,400

3. Calculate Cost per Equivalent Unit: Weighted Average

        Direct materials:           Beginning WIP + Direct materials cost =        $1,700,000      = $20
                                       Equivalent units for total work               85,000

        Conversion costs:           Beginning WIP + Direct materials cost =        $972,000        =    12
                                       Equivalent units for total work              81,000

        Total cost per equivalent unit:                                                                $32

4. Weighted Average Process Cost Report for January
                                                     Computation                          Units           Costs
        Total units completed and transferred out:
            Good units                               (11,000 + 58,000 – 8,000) x$32       61,000       $1,952,000
            Normal spoilage                          6,600 x $32                         ______           211,200
                 Total transferred out                                                    61,000        2,163,200

        Abnormal spoilage                            1,400*$32                                            44,800

        Ending WIP:                                                                      16,000
            Direct materials                         16,000 x $20                                        320,000
            Conversion costs                         12,000 x $12                                        144,000
                Total ending WIP cost                                                                    464,000

        Total Good Units Accounted For               85,000 – 8,000                      77,000
        Total Accounted For                                                                            $2,672,000

    B. Journal entries:

                 Work in process inventory                        $1,480,000
                        Raw materials inventory                                  $1,480,000
                 To record the cost of raw materials used in production during January.

                 Work in process inventory                         $942,000
                        Wages and accounts payable                                $942,000
                 To record the conversion costs incurred in production during January.
                                                                            Chapter 6: Process Costing 6-15


               Finished goods                                    $2,163,200
                      Work in process inventory                                 $2,163,200
               To record the cost of 61,000 units transferred to finished goods during January
               (includes the cost of normal spoilage).

               Abnormal spoilage loss                             $44,800
                      Work in process inventory                                                $44,800
               To record the cost of abnormal spoilage during January.


6.27 Victoria’s Closet-B

   A. This problem is identical to problem 6.26, except that the FIFO method is used instead of
      the weighted average method. The first two parts of the process cost report are identical
      under the two methods. Therefore, the following solution shows only the last two parts
      of the process cost report.

3. Calculate Cost per Equivalent Unit: FIFO

      Direct materials:    _____________Direct materials cost_____________         = $1,480,000   = $20.0000
                           Equivalent units for total work performed this period       74,000

      Conversion costs:    ______________Conversion costs______________            = $942,000     =    12.0383
                           Equivalent units for total work performed this period      78,250

      Total cost per equivalent unit:                                                                 $32.0383

4. FIFO Process Cost Report for Victoria’s Closet
                                                             Computation               Units             Costs
      Beginning WIP                                                                   11,000          $ 250,000
      Costs to complete beginning WIP:
          Direct materials                                   0x$20                                             0
          Conversion costs                                   8,250*$12.0383                               99,316
               Total costs added this period                                           _____              99,316

               Total cost of beginning WIP transferred out                            11,000             349,316

      New units started, completed, and transferred out      50,000*$32.0383          50,000           1,601,915

      Normal spoilage                                        6,600*$32.0383           ______             211,453

               Units completed and transferred out                                    61,000           2,162,684

      Abnormal spoilage                                      1,400*$32.0383                               44,854

      Ending WIP:                                                                     16,000
          Direct materials                                   16,000 x $20                                320,000
          Conversion costs                                   12,000 x $12.0383                           144,460
              Total ending WIP cost                                                    _____             464,460

      Total Good Units Accounted For                         85,000-8,000             77,000
      Total Costs Accounted For                                                                       $2,671,998
6-16 Cost Management


   B. A standard cost report would be the same as the FIFO cost report from a format
      standpoint. However, the standard costs would be used instead of equivalent unit costs.
      That is the only difference.

   C. If Victoria’s Closet wants to set a benchmark for productivity, standard costs are
      appropriate. A standard cost is an estimate of cost under efficient operations and
      therefore acts as a benchmark or budget with which actual costs can be compared. The
      standards need to be updated regularly, though.


6.28 Kim Mills-A

   Summary of information given in the problem:

                             WIP Units                                   Summary of Spoilage
    Beginning                20,000
    Started                   ????     90,000 Good completed         Normal spoilage       3,600
                                        7,000 Spoiled                Abnormal spoilage      ????
    Ending                   17,000                                  Total                 7,000

   A. Abnormal spoilage = 7,000 – 3,600 = 3,400 units

   B. Spoilage costs = 7,000 x $1,000 = $7,000,000

   C. The opportunity costs of spoilage can be measured in several ways. First, in addition to
      the cost of the spoiled units, there is also the contribution margin foregone because the
      products could not be sold. In addition, there are the opportunity costs of bad units that
      are sold because they pass through inspection without having been detected as spoiled.
      Through word of mouth or services such as Consumer Reports or Good Housekeeping, a
      company’s reputation may suffer and the organization loses market share. These costs
      can be considerable, especially if competitors have reputations for high quality with
      similar prices.


6.29 Kim Mills-B

   A. If inspection occurs when units are 40% complete, direct materials have already been
      added, but conversion costs will only be 40% added.

                Equivalent units for direct materials = 100% x 7,000 units = 7,000 units
                Equivalent units for conversion costs = 40% x 7,000 units = 2,800 units

   B. Abnormal spoilage for conversion costs = 2,800 (total spoilage per Part A) – 1,800
      (normal spoilage) = 1,000 units.

   C. Here are several advantages of inspecting units earlier in their manufacturing process:
          Kim saves the rest of the conversion cost that would be added.
                                                                              Chapter 6: Process Costing 6-17


                Units are removed from further handling (storage and control), except to dispose
                 of them.
                If the manufacturing process further down the line would tend to hide the defects,
                 a larger number of defective units are identified, and Kim avoids selling defective
                 units to customers.


6.30 Red Dog Products

    A and B. Weighted average and FIFO process costing reports:

Summarize Physical and Equivalent Units
                                                          Work This Period
                                          Complete          Start          Start  Total Work            Total
                       Beginning          Beginning         and           Ending  Performed            Units to
                       WIP (30%)          WIP (70%)       Complete      WIP (50%) This Period        Account for
Physical Units          20,000                  0          68,000         12,000    80,000            100,000

Equivalent Units:                                                                                    Total Work
  Direct Materials          20,000                0         68,000          12,000       80,000       100,000
  Conversion Costs           6,000           14,000         68,000           6,000       88,000        94,000

Calculate Actual Cost Per Equivalent Unit
   First-in, First-out:
        Direct materials:      _____________Direct materials cost_____________          = $220,000   = $ 2.75
                               Equivalent units for total work performed this period       80,000

        Conversion costs:      ______________Conversion costs______________             = $74,000    =     0.84
                               Equivalent units for total work performed this period       88,000

        Total cost per equivalent unit:                                                                   $3.59

    Weighted Average:
        Direct materials:             Beginning WIP + Direct materials cost =          $245,000      = $ 2.45
                                         Equivalent units for total work                100,000

        Conversion costs:             Beginning WIP + Direct materials cost =          $77,000       =     0.82
                                         Equivalent units for total work                94,000

        Total cost per equivalent unit:                                                                   $3.27
6-18 Cost Management


Process Cost Reports for Molding Department: May
                                                  First-in, First-Out                   Weighted Average
                                       Computation         Units      Costs       Computation   Units    Costs
                                      From April
Beginning WIP                         cost report          20,000     $ 28,000
Costs to complete beginning
WIP:
  Direct materials                    0x$2.75                               0
  Conversion costs                    14,000x$0.84                     11,760
    Total costs added this period                        _____         11,760

Total cost of beginning WIP
transferred out                                         20,000         39,760

New units started, completed, and
transferred out                       68,000x$3.59      68,000        244,120

Total units completed and
transferred out                                         88,000        283,880    (88,000)x$3.27    88,000   $287,760

Ending WIP:                                             12,000                                     12,000
  Direct materials                    12,000x$2.75                     33,000    12,000x$2.45                 29,400
  Conversion costs                    6,000x$0.84                       5,040    6,000x$0.82                   4,920
    Total ending WIP cost                                _____         38,040                      _____      34,320

Total Accounted For                                    100,000      $321,920                      100,000   $322,080



The total costs to account for disagree with the total calculated in part 1 because of differences
due to rounding the cost per equivalent unit. If students used a spreadsheet for these calculations
they would have no error.

    C. Factors that would affect the choice of accounting method include:
           The stability of input prices
           The need for current price information
           Whether managers want to compare a standard cost to actual costs
           Whether beginning and ending inventory levels are large or small


6.31 Empire Forging

Summary of information given in the problem:
                                    WIP Units                                         Summary of Spoilage
     Beginning                      60,000
     Started                          ???? 420,000 Good completed                 Normal spoilage      12,600
                                              36,000 Spoiled                      Abnormal spoilage        ??
     Ending                         68,000                                        Total                36,000

    A. Abnormal spoilage = Total spoilage – Normal spoilage
          = 36,000 – 12,600 = 23,400 units
                                                             Chapter 6: Process Costing 6-19


B. Units started in May: Refer to the above T-Account, and solve for the unknown number
   of units started

           60,000 + Started – 420,000 – 36,000 = 68,000
           Started = 464,000

C. Percentage of good units allowed for spoilage is 3% (12,600/420,000). Total spoiled
   units as a percentage of good units is 8.6% (36,000/420,000). When spoilage rates
   increase dramatically, it is likely that more spoiled units are sold as good units because
   they have been overlooked in the inspection process. This leads to more returns and
   potential loss of market share. In addition, the cost of good units increases, and so the
   contribution margin on those units decreases. It is also possible that more units have
   been reworked, and these could be lower quality than first run units, and rework also
   increases the cost of good units.

D. Below are examples of arguments that could be made; students may think of additional
   arguments.

   The costs of undetected spoiled units can be quite high. Customers are unhappy with
   defective units and may not purchase the goods again, so market share could be lost. In
   addition, if the defect causes any type of harm, the company could be subject to legal
   action and may have to pay a settlement or high legal fees. These costs are difficult to
   value. It is much easier to determine the cost of quality improvements, such as more
   frequent inspections, quality circles with employees to elicit suggestions for
   improvements, or redesigning the product or manufacturing process to reduce defects.

   Because of the uncertainty of the costs of spoiled units, the company should analyze costs
   for returned units and warranty work, develop better tracking systems so that all spoiled
   units are counted (whether they are reworked or not), and hire a marketing company to
   identify customers who have quit using its products to determine if quality was a factor in
   this decision. Once the managers have more information, they will better understand the
   costs and benefits of quality problems and quality initiatives.
6-20 Cost Management


6.32 The Rally Company

A sample spreadsheet showing the solution for this problem is available on the Instructor’s web
site for the textbook (available at www.wiley.com/college/eldenburg).

      A. Weighted average: Following are excerpts from the sample spreadsheet for this problem.

         A           B           C            D             E           F          G            H              I             J
 1
  2 Input Area for Assumptions
  3 Work Performed:
  4           Work in Process:                           Beg. WIP End. WIP
  5             Units                                        2,000          Ending WIP Units were not given,
  6             % complete direct materials                  100%     100%   so they must be calculated:
  7             % complete conversion costs                   80%      25%            Beginning WIP                            2,000
  8           Units started                                         18,000            Units started                           18,000
  9           Units completed and transferred out                   14,800               Total to account for                 20,000
 10           Spoiled Units:                                                          Transferred out*                       -14,800
 11             Normal                                                1,000           Normal spoilage                         -1,000
 12             Abnormal                                              1,000           Abnormal spoilage                       -1,000
 13                                                                                      Ending WIP                            3,200
 14 Costs:
 15           Beginning Work in Process:                                                     * Note: Only good units
 16             Direct materials                           $4,000                           are transferred out
 17             Conversion costs                           $3,200
 18           Costs Added This Month:
 19             Direct materials                                      $36,000
 20             Conversion costs                                      $32,000
 21

         A           B           C            D             E           F          G            H              I             J
 23   1. Summarize Total Costs to Account For
 24                                                                   Direct   Conversion      Total
 25                                                                  Materials   Costs        Costs
 26             Beginning WIP                                          $4,000     $3,200       $7,200
 27             Current period costs                                  $36,000    $32,000      $68,000
 28                         Total costs to account for                $40,000    $35,200      $75,200
 29

         A           B           C           D             E           F          G            H           I             J
30    2. Summarize Physical and Equivalent Units
31                                                Work Performed This Period
32                                       Beginning Complete       Start       Start  Total Work          Total         Spoiled
33                                         WIP      Beg. WIP      and       End. WIP Performed          Units to        Units
34                                         80%        20%      Complete       25%    This Period        Acct for        100%
35              Physical Units               2,000          0     14,800       3,200    18,000           20,000           (2,000)
36
37              Equivalent Units:
38                Direct Materials           2,000               0    14,800      3,200       18,000      20,000          (2,000)
39                Conversion Costs           1,600             400    14,800        800       16,000      17,600          (2,000)
40
41              Total Spoilage                                                                                             2,000
42              Less Normal Spoilage                                                                                       1,000
43                Abnormal Spoilage                                                                                        1,000
44
                                                                                        Chapter 6: Process Costing 6-21

        A          B              C         D              E          F            G           H         I          J
45   3. Calculate Cost Per Equivalent Unit
46
47            Weighted Average:                                                               Total    Total
48                                                                                            Cost     Units
49            Direct Materials:                                                              $40,000   20,000      $2.0000
50
51            Conversion Costs:                                                              $35,200   17,600      $2.0000
52
53            Total Cost Per Equivalent Unit                                                                       $4.0000
54


        A          B              C         D              E          F            G           H         I          J
55   4. Weighted Average Process Cost Report for January
56                                                                Cost Per    Equivalent     Spoiled   Good
57                                                                 Unit         Units         Units    Units      Total
58            Total units completed and transferred out:
59              Good units                                         $4.0000                             14,800      $59,200
60              Normal spoilage                                    $4.0000                     1,000                $4,000
61                         Total transferred out                                                                   $63,200
62
63            Abnormal spoilage                                    $4.0000                     1,000                $4,000
64
65            Ending WIP:                                                                               3,200
66              Direct materials                                   $2.0000         3,200                            $6,400
67              Conversion costs                                   $2.0000           800                            $1,600
68                       Total ending WIP cost                                                         _____        $8,000
69
70            Total Good Units Accounted For        (Total to account for - Total spoiled)             18,000
71            Total Accounted For                                                                                  $75,200
72


     B. Journal entries for weighted average method:

                 Work in process inventory                           $36,000
                        Raw materials inventory                                      $36,000
                 To record the cost of raw materials used in production during July.

                 Work in process inventory                           $32,000
                        Wages and accounts payable                                  $32,000
                 To record the conversion costs incurred in production during July.

                 Finished goods                                        $63,200
                        Work in process inventory                                    $63,200
                 To record the cost of 14,800 units transferred to finished goods during July
                 (includes the cost of normal spoilage).

                 Abnormal spoilage loss                               $4,000
                        Work in process inventory                                                               $4,000
                 To record the cost of abnormal spoilage during July.
6-22 Cost Management


   C. FIFO: Following are excerpts from the sample spreadsheet for this problem.

       The input section and the sections for steps 1 and 2 are identical to the spreadsheet shown
       in Part A above. Therefore, only the sections for steps 3 and 4 are shown below.

3. Calculate Cost Per Equivalent Unit

         FIFO:                                                                          Current   Current
                                                                                         Cost      Units
         Direct Materials:                                                              $36,000    18,000   $2.0000

         Conversion Costs:                                                              $32,000    16,000   $2.0000

         Total Cost Per Equivalent Unit                                                                     $4.0000


4. FIFO Process Cost Report for January
                                                             Cost Per    Equivalent     Spoiled   Good
                                                              Unit         Units         Units    Units     Total
         Beginning WIP                                                                             2,000     $7,200
         Costs to complete beginning WIP:
           Direct materials                                   $2.0000             0                              $0
           Conversion costs                                   $2.0000           400                            $800
                     Total costs added this period                                                 _____       $800

         Total cost of beginning WIP transferred out                                                2,000    $8,000

         Good units started, completed, and trans. out        $4.0000                              12,800   $51,200

         Normal spoilage                                      $4.0000                     1,000    _____     $4,000

                     Total units completed and transferred out                                     14,800   $63,200

         Abnormal spoilage                                    $4.0000                     1,000              $4,000

         Ending WIP:                                                                                3,200
           Direct materials                                   $2.0000         3,200                          $6,400
           Conversion costs                                   $2.0000           800                          $1,600
                    Total ending WIP cost                                                          _____     $8,000

         Total Good Units Accounted For        (Total to account for - Total spoiled)              18,000
         Total Accounted For                                                                                $75,200



   D. Several factors affect accountants’ choices of costing systems. For process costing, the
      two main factors are ease of calculations (although with spreadsheets and software
      programs that currently of little concern) and the usefulness of more current cost
      information. If costs do not change rapidly and there is no need for the most current cost
      information, then weighted average is easier to calculate and understand. However, if
      managers want to monitor current period costs more closely, then FIFO is a better
      method because it better reflects the most current costs.

       It appears that Rally’s costs did not change from last period to this period. If costs
       change slowly, the weighted average method would be the easiest report to prepare.
                                                                           Chapter 6: Process Costing 6-23


6.33 Toddler Toys

Solutions below are provided first for the weighted average method. Then solutions for the FIFO
method are presented.

WEIGHTED AVERAGE SOLUTION
  A. If a student chose the weighted average method, its main advantage is that it is a little less
     complex to calculate. The disadvantage is that the cost information is not as current as
     FIFO information.

    B. Here is a cost report using the weighted average method.

1. Summarize Total Costs to Account For
                                                 Transferred-in   Direct Materials   Conversion Costs Total Cost
             Beginning WIP                           $ 4,000            $ 2,000          $ 1,600       $ 7,600
             Current period costs                      36,000            18,000           16,000        70,000
                 Total costs to account for          $40,000            $20,000          $17,600       $77,600

2. Summarize Physical and Equivalent Units
                                              Work Performed This Period
                           Complete             Start       Start      Total Work           Total        Spoiled
                 Beginning Beginning             and       Ending       Performed          Units to       Units
                 WIP (80%) WIP (20%)          Complete WIP (25%) This Period              Account for     (100%)
Physical Units      2,000         0            14,800       3,200         18,000             20,000      (2,000)

Equivalent Units:                                                                         Total Work
  Transferred in   2,000               0       14,800       3,200           18,000           20,000
  Direct Materials 2,000               0       14,800           0           14,800           16,800      (2,000)
  Conversion Costs 1,600             400       14,800         800           16,000           17,600      (2,000)

  Normal spoilage                                                                                         1,000
  Abnormal Spoilage                                                                                       1,000
       Total spoilage                                                                                     2,000

3. Calculate Cost Per Equivalent Unit (Weighted Average)

        Transferred-in:         Beginning WIP + Transferred-in costs                 =   $40,000 = $ 2.0000
                                   Equivalent units for total work                        20,000

        Direct materials:       Beginning WIP + Direct materials cost                =   $20,000 =       1.1905
                                   Equivalent units for total work                        16,800

        Conversion costs: Beginning WIP + Direct materials cost                      =   $17,600 =       1.0000
                             Equivalent units for total work                              17,600        ______

        Total cost per equivalent unit:                                                                 $4.1905
6-24 Cost Management


4. Process Cost Reports for Assembly Department in August (Weighted Average)
                                              Computation          Units      Costs
      Units completed and transferred out     14,800*$4.1905      14,800     $62,020
      Normal spoilage                         1,000 x $4.1905                  4,190
             Total cost transferred out                                       66,210

      Abnormal spoilage                            1,000 x $4.1905                          4,190

      Ending work in process:                                              3,200
         Transferred-in                            3,200 x $2.0                             6,400
         Direct materials                          0 x $1.1905                                  0
         Conversion costs                          800 x $1.00                                800
            Total ending WIP cost                                          _____            7,200

      Total Accounted For                                                 18,000        $77,600

   C. Journal entries:

              Work in process inventory-Assembly Dept.             $36,000
                     Work in process inventory-Plastics Dept.                     $36,000
              To record the cost of units transferred from the plastics department during
              August.

              Work in process inventory-Assembly Dept.            $18,000
                     Raw materials inventory                                    $18,000
              To record the cost of raw materials used in production during August.

              Work in process inventory-Assembly Dept.            $16,000
                     Wages and accounts payable                                $16,000
              To record the conversion costs incurred in production during August.

              Finished goods inventory                              $66,210
                     Work in process inventory-Assembly Dept.                     $66,210
              To record the cost of 14,800 units transferred to finished goods during August
              (includes the cost of normal spoilage).

              Abnormal spoilage loss                             $4,190
                     Work in process inventory-Assembly Dept.                      $4,190
              To record the cost of abnormal spoilage during August.
                                                                           Chapter 6: Process Costing 6-25


FIFO SOLUTION
   A. If a student chose FIFO, its main advantage is that the costs are more current, the
      disadvantage is that it is a bit more complex to calculate.

    B. Here is a cost report using the FIFO method. Notice that the first two parts are identical
       to the report under the weighted average method.

1. Summarize Total Costs to Account For
                                                 Transferred-in   Direct Materials   Conversion Costs Total Cost
             Beginning WIP                           $ 4,000            $ 2,000          $ 1,600       $ 7,600
             Current period costs                      36,000            18,000           16,000        70,000
                 Total costs to account for          $40,000            $20,000          $17,600       $77,600

2. Summarize Physical and Equivalent Units
                                              Work Performed This Period
                           Complete             Start       Start      Total Work           Total        Spoiled
                 Beginning Beginning             and       Ending       Performed          Units to       Units
                 WIP (80%) WIP (20%)          Complete WIP (25%) This Period              Account for     (100%)
Physical Units      2,000         0            14,800       3,200         18,000             20,000      (2,000)

Equivalent Units:                                                                         Total Work
  Transferred in   2,000               0       14,800       3,200           18,000           20,000
  Direct Materials 2,000               0       14,800           0           14,800           16,800      (2,000)
  Conversion Costs 1,600             400       14,800         800           16,000           17,600      (2,000)

  Normal spoilage                                                                                         1,000
  Abnormal Spoilage                                                                                       1,000
       Total spoilage                                                                                     2,000

3. Calculate Cost Per Equivalent Unit (FIFO)

        Transferred-in: _________Transferred-in costs__________ =                       $36,000     = $2.0000
                        Equiv. units for work performed this period                      18,000

        Direct materials: __________Direct materials cost_________ =                    $18,000     =    1.2162
                          Equiv. units for work performed this period                    14,800

        Conversion costs:___________Conversion costs__________ =                        $16,000     =    1.0000
                         Equiv. units for work performed this period                     16,000         ______

        Total cost per equivalent unit:                                                                 $4.2162
6-26 Cost Management


4. Process Cost Reports for Assembly Department: June
                                                                   First-in, First-Out
                                                          Computation      Units          Costs
      Beginning WIP from May cost report                                    2,000        $ 7,600
      Costs to complete beginning WIP:
         Transferred in                               0 x $2                                     0
         Direct materials                             0 x $1.2162                                0
         Conversion costs                             400*$1                                   400
      Total costs added this period                                         _____              400

              Total cost of beginning WIP transferred out                   2,000            8,000

      New units started, completed, and trans. out    12,800*$4.2162       12,800           53,968

      Normal spoilage                                 1,000 x $4.2162                        4,216

              Total units completed and transferred out                    14,800           66,184

      Abnormal spoilage                               1,000 x $4.2162                        4,216

      Ending WIP:                                                           3,200
         Transferred-in                               3,200 x $2.00                          6,400
         Direct materials                             0 x $1.2162                                0
         Conversion costs                             800 x $1                                 800
            Total ending WIP cost                                           _____            7,200

      Total Accounted For                                                  18,000        $77,600

   C. Journal entries:

              Work in process inventory-Assembly Dept.             $36,000
                     Work in process inventory-Plastics Dept.                     $36,000
              To record the cost of units transferred from the plastics department during
              August.

              Work in process inventory-Assembly Dept.            $18,000
                     Raw materials inventory                                   $18,000
              To record the cost of raw materials used in production during August.

              Work in process inventory-Assembly Dept.            $16,000
                     Wages and accounts payable                                $16,000
              To record the conversion costs incurred in production during August.

              Finished goods inventory                              $66,184
                     Work in process inventory-Assembly Dept.                     $66,184
              To record the cost of 14,800 units transferred to finished goods during August
              (includes the cost of normal spoilage).
                                                              Chapter 6: Process Costing 6-27


              Abnormal spoilage loss                             $4,216
                     Work in process inventory-Assembly Dept.                    $4,216
              To record the cost of abnormal spoilage during August.


6.34 Britain’s Health and Safety Commission

   A. Accounting for each cost in a process costing system would be as follows:
          Lost worker time would be part of conversion costs.
          Employer-paid medical costs would be conversion costs.
          Training to replace workers would require two separate ways to recognize the
            cost. Costs of training such as classrooms, materials, and instructors, would not
            be assigned to manufacturing; they would be assigned to a support department.
            However, the employee time for training is probably part of conversion costs.
          Record-keeping would not be part of manufacturing costs, but instead would be
            part of the accounting department costs.

   B. Examples of the responsibilities for each group are discussed below. Students might
      have identified additional responsibilities.
          Governments set up agencies such as Britain’s Health and Safety Commission and
             the U.S. Occupational Safety and Health Administration (OSHA; part of the U.S.
             Department of Labor) to establish and regulate safety standards for workers.
          Employers are responsible for keeping their employees safe by monitoring
             accident rates, identifying problem areas, improving the physical environment to
             prevent accidents, training workers to improve their safety habits, and monitoring
             compliance with company standards. Employers are also responsible for
             complying with governmental regulations.
          Managers oversee employees and are therefore responsible for the safety of
             employees directly under their supervision. Managers set the tone by determining
             the priority of safety within a company. They also need to track health and safety
             problems and make improvements in their physical environment and also give
             workers training in safety habits. In addition, managers are responsible for
             ensuring that their companies comply with governmental regulations.
          Workers are responsible for their own safety and any team members’ safety. This
             responsibility includes meeting or exceeding employer standards, as well as
             adopting a proactive approach toward their own and others’ safety.
          Customers are not typically held responsible for safety. However, customers can
             choose to investigate the safety records and practices of companies with which
             they do business. They can establish policies of doing business only with
             companies having acceptable safety performance. This type of policy can be
             most important for goods and services produced in less-developed countries. In
             addition, each customer should work at improving their own safety habits and
             alert the organizations that they frequent when any safety concerns arise.
6-28 Cost Management


   C. There are many possible answers to this question. Here are some issues that students
      might have considered as they developed their own answers. (These issues are organized
      using Steps for Better Thinking.)

      Uncertainties: Ideally, the goal for companies should be to achieve perfect health and
      safety. However, this goal might not be attainable because it is not possible to identify all
      possible health and safety problems or to perfectly control worker actions. For example,
      researchers continue to investigate the association between various types of work and
      ergonomic problems such as discomfort, fatigue, and musculoskeletal disorders. It is not
      always easy to identify the types of actions or work arrangements that cause specific
      problems. A chemical believed to be safe may be found to cause previously-unforeseen
      medical problems. To complicate matters, workers may be unwilling to comply with
      health and safety practices. For example, employees may object to ergonomic seating or
      to an ergonomic computer keyboard. Or, they may fail to use safety equipment such as
      helmets or masks.

      Exploring Perspectives: Who are the major stakeholders in this issue? Worker health
      and safety obviously affects the well-being of individual workers and their families. It
      also has social implications. Injured or ill workers are less productive and may require
      greater social services than other people. From the company’s point of view, economic
      concerns exist. It might be very expensive to make a small improvement in worker
      health and safety. In addition, a company with high health and safety standards may be
      unprofitable if it sells goods and services in an industry where competitors adopt lower
      standards.

      Prioritizing: There are many questions to ask when choosing values and making trade-
      offs for deciding on a company goal. Is it appropriate to weigh only the company’s cost
      and benefit? What are the company’s obligations to shareholders, workers, and society?
      How can the company attempt to meet all of its obligations in a morally acceptable way?

      Envisioning: It is always possible to improve worker health and safety. New practices
      can be adopted as research provides new information about the causes of problems and
      ways to prevent them. Thus, an important aspect of a company’s goal should be to
      continuously improve. How can the company’s goal be worded to encourage continuous
      improvement?
                                                                          Chapter 6: Process Costing 6-29


6.35 Cellular Advantage

A sample spreadsheet for this problem is available on the Instructor’s web site for the textbook
(available at www.wiley.com/college/eldenburg).

    A. Weighted Average Method

1. Summarize Total Costs to Account For
                                                      Direct Materials   Conversion Costs             Total Cost
             Beginning WIP                             $ 440,000          $ 60,000                   $ 500,000
             Current period costs                       2,960,000          1,884,000                  4,844,000
                 Total costs to account for            $3,400,000         $1,944,000                 $5,344,000

2. Summarize Physical and Equivalent Units
                                              Work Performed This Period
                            Complete            Start       Start      Total Work             Total          Spoiled
                  Beginning Beginning            and       Ending       Performed           Units to           Units
                  WIP (30%) WIP (70%)         Complete WIP (60%) This Period               Account for        (75%)
Physical Units      22,000         0          116,000      32,000        148,000             170,000        (16,000)

Equivalent Units:                                                                          Total Work
  Direct Materials 22,000                0    116,000      32,000        148,000            170,000         (16,000)
  Conversion Costs 6,600            15,400    112,000*     19,200        146,600            153,200         (12,000)

                                                                   Equivalent Units
                                                                Direct        Conversion
                                               Physical        Materials        Costs
                                                Units          (100%)           (75%)
Total Spoilage                                 16,000
   Less Normal Spoilage                        13,200           13,200             9,900
       Abnormal Spoilage                        2,800            2,800             2,100

     *   Because inspection takes place when units are 75% complete, spoiled units are removed
         when units are 100% complete with respect to direct materials and 75% complete with
         respect to conversion costs. This also means that 25% of the conversion cost work is
         never performed on spoiled units. Therefore, the number of equivalent units started and
         completed for conversion costs is calculated as:

                  Total physical units started and completed                                               116,000
                  Less spoiled units not completed [16,000 x (1-75%)]                                       (4,000)
                         Equivalent units started and completed for conversion costs                       112,000

3. Calculate Cost per Equivalent Unit: Weighted Average

         Direct materials:           Beginning WIP + Direct materials cost =       $3,400,000    =       $20.0000
                                        Equivalent units for total work             170,000

         Conversion costs:           Beginning WIP + Direct materials cost =       $1,944,000    =        12.6893
                                        Equivalent units for total work             153,200

         Total cost per equivalent unit:                                                                 $32.6893
6-30 Cost Management


4. Weighted Average Process Cost Report
                                                 Computation                         Units             Costs
      Total units completed and transferred out:
          Good units                             (22,000+116,000–16,000)x$32.6893 122,000           $3,988,094
          Normal spoilage:
               Direct materials                  13,200 x $20                                          264,000
               Conversion costs                  9,900 x $12.6893                 _______              125,624
                    Total transferred out                                          122,000           4,377,718

      Abnormal spoilage
         Direct materials                     2,800 x $20                                              56,000
         Conversion costs                     2,100 x $12.6893                                         26,648
             Total abnormal spoilage                                                                   82,648

      Ending WIP:                                                                    32,000
          Direct materials                    32,000 x $20                                            640,000
          Conversion costs                    19,200 x $12.6893                                       243,634
              Total ending WIP cost                                                 _______           883,634

      Total Good Units Accounted For          170,000 – 16,000                      154,000
      Total Accounted For                                                                           $5,344,000

   B: FIFO Method
      The summary of physical and equivalent units and the summary of costs to account for
      are the same as those shown above for the weighted average method. Thus, the solution
      below shows only steps 3 and 4.

3. Calculate Cost per Equivalent Unit: FIFO

      Direct materials:    _____________Direct materials cost_____________ =       $2,960,000   = $20.0000
                           Equivalent units for total work performed this period    148,000

      Conversion costs:    ______________Conversion costs______________ =          $1,884,000   =    12.8513
                           Equivalent units for total work performed this period    146,600

      Total cost per equivalent unit:                                                               $32.8513
                                                                           Chapter 6: Process Costing 6-31


4. FIFO Process Cost Report
                                                             Computation              Units         Costs
      Beginning WIP                                                                  22,000      $ 500,000
      Costs to complete beginning WIP:
          Direct materials                                   0x$20                                       0
          Conversion costs                                   15,400 x $12.8513                     197,910
               Total costs added this period                                         ______        197,910

               Total cost of beginning WIP transferred out                           22,000        697,910

      New units started, completed, and transferred out      100,000 x $32.8513     100,000       3,285,130

      Normal spoilage
         Direct materials                                    13,200 x $20                          264,000
         Conversion costs                                    9,900 x $12.8513        ______        127,228

               Units completed and transferred out                                  122,000       4,374,267

      Abnormal spoilage
         Direct materials                                    2,800 x $20                            56,000
         Conversion costs                                    2,100 x $12.8513                       26,988
             Total abnormal spoilage                                                                82,988

      Ending WIP:                                                                    32,000
          Direct materials                                   32,000 x $20                          640,000
          Conversion costs                                   19,200 x $12.8513                     246,745
              Total ending WIP cost                                                  ______        886,745

      Total Good Units Accounted For                         170,000-16,000         154,000
      Total Costs Accounted For                                                                  $5,344,000

   C. Because spoilage increases the cost of good units, most organizations want to minimize
      the number of units spoiled. By setting limits on normal spoilage, incentive is provided
      for managers and operations employees to keep spoilage under the limit. The accounting
      system combines the cost of normal spoilage with good units, so the amount of cost
      incurred for normal spoilage is not obvious. Many organizations view spoilage as part of
      the cost of producing good units. However, when spoilage amounts become large,
      abnormal spoilage is recorded and these amounts are more obvious to managers, so that
      quality problems can be investigated.

   D. Rework costs are hidden in the accounting system because units reworked go through the
      manufacturing process twice, but are counted only once. Therefore, it is difficult to track
      rework costs, and the financial affects of rework.
6-32 Cost Management


6.36 Rausher Industries

    A. FIFO process costing report and calculations for the current year and the budget for next
       year:

        FIFO CURRENT YEAR

        Physical Flow of Units: Current Period
                                                         Department 1            Department 2
            WIP beginning                                        0                       0
            Started                                         12,000                       0
            Transferred in                                       0                   9,000
                Total to account for                        12,000                   9,000
            Ending WIP                                       3,000                   2,000
                Completed and transferred out                9,000                   7,000

1. Summarize Total Costs to Account For (Current Year)
                                               Transferred-in     Direct Materials   Conversion Costs Total Cost
        Department 1:
           Beginning WIP                       not applicable          $     0           $     0        $     0
           Current period costs                not applicable           36,000            14,040         50,040
               Total costs to account for      not applicable          $36,000           $14,040        $50,040

        Department 2:
           Beginning WIP                            $     0        not applicable        $     0        $     0
           Current period costs                      38,700        not applicable         32,760         71,460
               Total costs to account for           $38,700        not applicable        $32,760        $71,460

2. Summarize Physical and Equivalent Units (Current Year)
                                                        Work This Period
                                        Complete          Start           Start      Total Work      Total
                       Beginning        Beginning         and            Ending      Performed      Units to
                         WIP              WIP           Complete          WIP        This Period   Account for
Department 1:            (0%)             (0%)                           (60%)
  Physical Units            0                0            9,000          3,000         12,000        15,000

  Equivalent Units:                                                                                Total Work
    Direct Materials         0                 0          9,000            3,000       12,000        12,000
    Conversion Costs         0                 0          9,000            1,800       10,800        10,800

Department 2:            (0%)               (0%)                           (40%)
  Physical Units            0                  0          7,000            2,000       12,000        15,000

  Equivalent Units:                                                                                Total Work
    Transferred-In           0                 0          7,000            2,000        9,000         9,000
    Conversion Costs         0                 0          7,000              800        7,800         7,800
                                                                                Chapter 6: Process Costing 6-33


3. FIFO Cost Per Equivalent Unit (Current Year)
    Department 1:

        Direct materials:         _____Current Period Direct materials cost_____        = $36,000     =   $3.00
                                Equivalent units for total work performed this period      12,000

        Conversion costs:         ______Current Period Conversion costs______           = $14,040     =    1.30
                                Equivalent units for total work performed this period      10,800

        Total cost per equivalent unit:                                                                   $4.30

    Department 2:

        Transferred-in costs:     _____Current Period Transferred-in cost_____          = $38,700     =   $4.30
                                Equivalent units for total work performed this period      9,000

        Conversion costs:         ______Current Period Conversion costs______           = $32,760     =    4.20
                                Equivalent units for total work performed this period      7,800

        Total cost per equivalent unit:                                                                   $8.50

4. FIFO Process Cost Report (Current Year)
                                                Department 1                              Department 2
                                       Computation    Units         Costs       Computation Units      Costs
Beginning WIP                                             0         $     0                      0      $          0
Costs to complete beginning
WIP:
  Transferred-in                                                         n/a                                        0
  Direct materials                                                         0                                      n/a
  Conversion costs                                                         0                                        0
    Total costs added this
    period                                               _____             0                  _____                0

Total cost of beginning WIP
transferred out                                               0            0                     0                 0

New units started, completed,
and transferred out                  9,000x$4.30          9,000       38,700    7,000x$8.50   7,000         59,500

Total units completed and
transferred out                                           9,000       38,700                  7,000         56,640

Ending WIP:                                               3,000                               2,000
  Transferred in                                                          n/a   2,000x$4.30                  8,600
  Direct materials                   3,000x$3                          9,000                                    n/a
  Conversion costs                   1,800x$1.30                       2,340    800x$4.20                    3,360
    Total ending WIP cost                                _____        11,340                  _____         11,960

Total Accounted For                                      12,000     $50,040                   9,000        $71,460
6-34 Cost Management


        FIFO BUDGET FOR NEXT YEAR

        Physical Flow of Units: Next Period
                                                                 Department 1          Department 2
            WIP beginning                                            3,000                 2,000
            Started                                                 15,000                     0
            Transferred in                                               0                13,000
                Total to account for                                18,000                15,000
            Ending WIP                                               5,000                 1,000
                Completed and transferred out                       13,000                14,000

1. Summarize Total Costs to Account For (Next Year)
                                                  Transferred-in    Direct Materials   Conversion Costs Total Cost
        Department 1:
           Beginning WIP                          not applicable         $ 9,000           $ 2,340         $11,340
           Current period costs                   not applicable          48,600            14,545          63,145
               Total costs to account for         not applicable         $57,600           $16,885         $74,485

        Department 2:
           Beginning WIP                               $ 8,600       not applicable        $ 3,360        $ 11,960
           Current period costs                         55,631       not applicable         59,075         114,706
               Total costs to account for              $64,231       not applicable        $62,435        $126,666

2. Summarize Physical and Equivalent Units (Next Year)
                                                         Work This Period
                                           Complete        Start           Start       Total Work      Total
                        Beginning          Beginning       and            Ending       Performed      Units to
                          WIP                WIP         Complete          WIP         This Period   Account for
Department 1:            (60%)              (40%)                         (50%)
  Physical Units         3,000                  0         10,000          5,000          15,000          18,000

  Equivalent Units:                                                                                  Total Work
    Direct Materials        3,000                0         10,000            5,000       15,000        18,000
    Conversion Costs        3,000            1,200         10,000            2,500       13,700        15,500

Department 2:               (40%)            (60%)                           (70%)
  Physical Units            2,000                0         12,000            1,000       13,000          15,000

  Equivalent Units:                                                                                  Total Work
    Transferred-In          2,000                0         12,000            1,000       13,000        15,000
    Conversion Costs          800            1,200         12,000              700       13,900        14,700

3. FIFO Cost Per Equivalent Unit (Next Year)
    Department 1:

        Direct materials:       _____Current Period Direct materials cost_____          = $48,600    =   $3.2400
                              Equivalent units for total work performed this period        15,000

        Conversion costs:       ______Current Period Conversion costs______             = $14,545    =    1.0617
                              Equivalent units for total work performed this period        13,700

        Total cost per equivalent unit:                                                                  $4.3017
                                                                               Chapter 6: Process Costing 6-35

    Department 2:

        Transferred-in costs:     _____Current Period Transferred-in cost_____             = $55,631   =    $4.28
                                Equivalent units for total work performed this period         13,000

        Conversion costs:         ______Current Period Conversion costs______              = $59,075   =     4.25
                                Equivalent units for total work performed this period         13,900

        Total cost per equivalent unit:                                                                     $8.53

4. FIFO Process Cost Report (Next Year)
                                             Department 1                                   Department 2
                                   Computation     Units         Costs       Computation      Units        Costs
                                 Current year                                Current year
Beginning WIP                    cost report        3,000        $11,340     cost report      2,000         $ 11,960
Costs to complete beginning
WIP:
  Transferred-in                                                       n/a   0x$4.28                                    0
  Direct materials               0x$3.24                                 0                                            n/a
  Conversion costs               1,200x$1,0617                      1,274    1,200x$4.25                           5,100
    Total costs added this
    period                                            _____         1,274                     _____                5,100

Total cost of beginning WIP
transferred out                                        3,000      12,614                      2,000           17,060

New units started,
completed, and transferred
out                              10,000x$4.3017      10,000       43,017     12,000x$8.53    12,000          102,352

Total units completed and
transferred out                                      13,000       55,631                     14,000          119,412

Ending WIP:                                            5,000                                  1,000
  Transferred in                                                      n/a    1,000x$4.28                           4,279
  Direct materials               5,000x$3.24                      16,200                                              n/a
  Conversion costs               2,500x$1.0617                     2,654     700x$4.25                             2,975
    Total ending WIP cost                             _____       18,854                      _____                7,254

Total Accounted For                                  18,000      $74,485                     15,000         $126,666




    B. Weighted average process costing report and calculations for the current year and the
       budget for next year

        WEIGHTED AVERAGE CURRENT YEAR

        Because there are no beginning inventories in period one, the cost reports for FIFO and
        weighted-average are the same. See the preceding FIFO report.
6-36 Cost Management


        WEIGHTED AVERAGE BUDGET FOR NEXT YEAR

1. Summarize Total Costs to Account For (Next Year—Weighted Average)
                                                  Transferred-in    Direct Materials   Conversion Costs Total Cost
        Department 1:
           Beginning WIP                          not applicable         $ 9,000           $ 2,340         $11,340
           Current period costs                   not applicable          48,600            14,545          63,145
               Total costs to account for         not applicable         $57,600           $16,885         $74,485

        Department 2:
           Beginning WIP                               $ 8,600       not applicable        $ 3,360        $ 11,960
           Current period costs                         55,762       not applicable         59,075         114,837
               Total costs to account for              $64,362       not applicable        $62,435        $126,797

2. Summarize Physical and Equivalent Units (Next Year)
                                                         Work This Period
                                           Complete        Start           Start       Total Work      Total
                        Beginning          Beginning       and            Ending       Performed      Units to
                          WIP                WIP         Complete          WIP         This Period   Account for
Department 1:            (60%)              (40%)                         (50%)
  Physical Units         3,000                  0         10,000          5,000          15,000          18,000

  Equivalent Units:                                                                                  Total Work
    Direct Materials        3,000                0         10,000            5,000       15,000        18,000
    Conversion Costs        3,000            1,200         10,000            2,500       13,700        15,500

Department 2:               (40%)            (60%)                           (70%)
  Physical Units            2,000                0         12,000            1,000       13,000          15,000

  Equivalent Units:                                                                                  Total Work
    Transferred-In          2,000                0         12,000            1,000       13,000        15,000
    Conversion Costs          800            1,200         12,000              700       13,900        14,700

3. Weighted Average Cost Per Equivalent Unit (Next Year)
    Department 1:

        Direct materials:    Beginning WIP + Current Period Direct materials cost       = $57,600    =   $3.2000
                             Equivalent units for total work performed this period         18,000

        Conversion costs:      Beginning WIP + Current Period Conversion costs          = $16,885    =    1.0894
                              Equivalent units for total work performed this period        15,500

        Total cost per equivalent unit:                                                                  $4.2894

    Department 2:

        Transferred-in costs: Beginning WIP + Current Period Transferred-in cost        = $64,362    =   $4.2908
                             Equivalent units for total work performed this period         15,000

        Conversion costs:      Beginning WIP + Current Period Conversion costs          = $62,435    =    4.2473
                              Equivalent units for total work performed this period        14,700

        Total cost per equivalent unit:                                                                  $8.5381
                                                                    Chapter 6: Process Costing 6-37


4. Weighted Average Process Cost Report (Next Year)
                                      Department 1                                Department 2
                             Computation    Units     Costs      Computation        Units        Costs
Total units completed and
transferred out             13,000x$4.2894   13,000    55,762    14,000x$8.5381     14,000         119,533

Ending WIP:                                   5,000                                  1,000
  Transferred in                                           n/a   1,000x$4.2908                           4,291
  Direct materials          5,000x$3.20                16,000                                               n/a
  Conversion costs          2,500x$1.0894               2,723    700x$4.2473                             2,973
    Total ending WIP cost                    _____     18,723                       _____                7,264

Total Accounted For                          18,000   $74,485                       15,000        $126,797



    C.
         1. If she better understands the flow of resources, she can more accurately determine
            percentage completed. This seems like a way to improve accuracy.

         2. More accurately estimating percentage completed would mean that cost per unit
            would better reflect the use of resources. In addition, the costs for each period would
            be more accurately identified with the units of that period. If it takes a lot of time to
            develop a more accurate estimate and if ending work in process inventory is relatively
            immaterial, the cost could be greater than the benefit.


6.37 Computer Components

    A. Here are several possible answers to this question; students may think of others. Actual
       costs can differ from standards because of changes in prices, as described in the problem.
       Differences can also result from deviations from standards in the efficiency with which
       raw materials or labor hours are used. For example, an equipment malfunction might
       slow production or spoil some units. Employees can work faster or slower than expected.
       The quality of materials can be better or worse than expected, causing deviations from
       the expected amount of spoilage or scrap. A new labor contract could be negotiated,
       increasing direct labor costs. Overhead costs can also be higher or lower than expected.
       There could be an increase in electricity rates or insurance costs. Equipment maintenance
       could be higher or lower than expected.

    B. Kevin might or might not make the same argument if the supplier’s price had decreased.
       However, it appears that he might have been making his argument to avoid responsibility.
       From the information presented, Kevin has at least some control over the purchase price.
       He stated that he does not want to consider changing suppliers at this time, and a division
       manager often has control over the purchasing function for the division. If he was
       making his argument primarily to avoid responsibility, then he would probably make a
       different argument if the price had decreased. In that case, he would probably want to be
       rewarded for good performance.
6-38 Cost Management


   C. Changing vendors could have many benefits, such as reducing costs, enhancing quality,
      improving delivery timeliness, etc. Changing vendors could also do the opposite—
      increase costs, decrease quality, and result in delivery delays. The relationship with the
      vendor may also be important. It may not be in the company’s best interests to drop a
      long-term and beneficial relationship. At the same time, it might be in the company’s
      interests to develop a relationship with a new supplier.

   D. The practice of giving managers bonuses based on comparisons of actual to standard
      costs can motivate managers to achieve or exceed standards. In turn, achieving the
      standards can help the company meet profitability and other goals.

   E. As discussed more completely in Chapter 10, employees are most likely to be motivated
      by a standard that is achievable. Vendor price increases or decreases should be reflected
      in the standard if they are not in the manager’s control. This improves the fairness and
      achievability of the standard. However, the standard should not be adjusted for vendor
      price changes that the manager can influence. In this case, the adjustment would reduce
      the manager’s motivation to control costs.

   F. There is no one answer to this part. Sample solutions and a discussion of typical student
      responses will be included in assessment guidance on the Instructor’s web site for the
      textbook (available at www.wiley.com/college/eldenburg).
                                                                Chapter 6: Process Costing 6-39


          BUILD YOUR PROFESSIONAL COMPETENCIES

6.38 Focus on Professional Competency: Reporting

   A. Information used in process costing reports:
           Departments in the production process for which process accounting is performed
           Cost flow assumption (e.g., FIFO, weighted average) or standard costs
           Beginning WIP: units, percent complete, costs (direct materials, conversion costs,
             transferred-in costs)
           Costs incurred during the period (direct materials used, conversion costs incurred)
           Ending WIP: units, percent complete
           Spoilage: units, normal amount of spoilage
           Number of units started and transferred out

      Information required to perform calculations needed for a process costing report:
           Flow of costs in the production process
                 o Point at which direct materials are added
                 o Pattern in which conversion costs are incurred
                 o Point(s) at which inspection occurs
           Assignment of costs in the accounting system for direct materials and conversion
             (this could include computation of depreciation, allocation of physical space
             costs, estimates for costs incurred but not yet paid, and so on)

   B. Chapter 6 introduced three methods for preparing a process costing report: FIFO,
      weighted average, and standard costs. Each method has pros and cons and results in
      different information for users.

   C. Objectivity is needed to avoid bias in the measurement of costs and other factors such as
      percent completion. Conciseness and clarity are needed to enhance communication.
      Managers are more likely to use the information in a process cost report if the report
      contains only important information that is easy to understand.

   D. There is no one answer to this question. The explanation of the cost report should be
      adapted to the characteristics and needs of the audience—in this case, non-accountant
      managers. It should not include technical accounting terms unless there is reason to
      believe that the managers know the terms. Also, most non-accountant managers are
      probably are more interested in the results of the report than in details about how it was
      prepared. They should be given details only for items involving judgment that would
      significantly affect the results. For example, it might be appropriate to point out that
      spoiled units were assumed to be removed at the end of production rather than at a mid-
      point—but only if the point of inspection for spoilage would be likely to affect the results
      sufficiently to affect the managers’ decisions.

   E. In the Premier Plastics illustrations, the accountant is not serving as a spokesperson to
      people outside the organization. Instead, she is serving as a spokesperson within the
6-40 Cost Management


        organization; she was choosing a report to communicate the costs of producing products.
        Specific things she did as a spokesperson included:

              Focusing on the managers’ needs—such as their need to monitor costs for new
               equipment
              Choosing a cost flow assumption to provide managers with the most current cost
               information
              Gaining consensus by discussing her choice with the managers who will use the
               information
              Remaining alert for deviations from expectations—such as the large spoilage
               identified for July, leading to a revision in the content of the process report to
               include normal and abnormal spoilage
              Alerting managers to potential competitor strengths and production problem
               areas—such as the discoloration quality problem in the plastics department.

   F.
        1. The methods used to create process cost reports might require monitoring and
           updating because of changes in production processes or accounting systems. In
           addition, changes may be needed because the information that managers want
           changes. For example, successful competition in recent years has increasingly
           focused on the ability to control costs. Managers are likely to need more precise and
           timely information to effectively monitor costs.

        2. Process cost reports can be used to monitor operating performance by allowing
           managers to observe trends in per-unit costs over time. Actual costs can also be
           compared with standard costs to evaluate whether operations are in control—i.e., are
           meeting expectations or targeted levels of performance.


6.39 Integrating Across the Curriculum: Production Management

[Note: This problem assumes knowledge of Chapter 5 (job costing). The problem does NOT
assume knowledge of JIT or backflush accounting, but Part B.2 encourages students to think
about how process costing might be less complex in the absence of significant work in process
inventories.]
    A.
       1. Work in process inventories should greatly decrease. Currently, whole jobs are
           waiting to be processed at each department. With continuous processing, these will
           disappear. The only in-process inventory will be jobs in process within a cell, most
           of which will be completed the next day. Because individual units are produced one
           by one, there will be very few individual units in process at any point in time.

           Raw material inventory should almost disappear. The company currently carries a
           parts inventory. Under the new system, it would carry parts only for jobs in process.
                                                         Chapter 6: Process Costing 6-41


2. Materials handling costs may decrease depending on the trade-off in increased time of
   delivering parts more frequently to cells and elimination of transfers between
   departments. Finished goods still need to be transported to shipping.

   Machine set ups should all but disappear. Since each cell will be dedicated to one
   product line, machines can be permanently set for the product. Nonetheless, some
   adjustments will likely need to be made for different models, but the adjustments are
   probably minor.

3. There should be a substantial decrease in the number of defects. Instead of testing
   units after an entire batch has been completed, the units will be tested continuously.
   A faulty assembly or soldering operation should be caught (and corrective action
   taken) after only one or two units have been affected, not the entire order. In
   addition, fewer setting changes will be made to the equipment in assembly and
   soldering, which should reduce the likelihood that defects are caused by erroneous
   settings.

4. The ratio of units produced to units ordered should decrease. Under the current
   system the firm must estimate the number of units that will fail to pass inspection.
   They must produce enough units so that units produced minus defective units still
   yield enough units to satisfy the customer's order. To be highly confident that enough
   units will be produced to fill an order, an excess number of units is probably
   produced, on average. Under the new system a cell keeps on producing for an order
   until enough good units are achieved. Thus, only the minimum number of units
   needed will be produced.

5. The firm should experience a decrease in the workload for production scheduling.
   Instead of scheduling jobs through several departments, jobs need only be assigned to
   a single cell. Also, the need to expedite replacements for spoiled jobs should
   disappear as entire jobs should no longer be spoiled.

   Machine utilization rates are likely to fall. If there are no orders for a particular
   product for a period of time, the cells dedicated to that product would be idle. In fact,
   this is the major tradeoff for adopting a job versus process orientation. If a firm
   makes many different products (requiring different kinds of processing on a variety of
   machines) but none of them in any significant quantity, then it cannot afford to
   dedicate equipment to each product line. However, as the breadth of the product line
   decreases or manufacturing processes become more similar, management should
   consider the benefits of switching to a process orientation.

6. This depends on the tradeoff between the various costs saved and the additional costs
   incurred to obtain separate equipment for each cell (if necessary) and the cost of idle
   equipment. However, total costs will probably decrease. Presumably, management
   will not make the change unless they study existing and expected future production
   patterns and expect the cost savings to be larger than the additional costs.
6-42 Cost Management


        7. The change in system will probably make it more difficult to fill a customer’s rush
           order. No parts inventories are maintained, and it will take approximately one week
           to receive new parts.

   B.
        1. With a change from a job orientation to a process orientation, there does not appear to
           be a need to know the cost for any particular order. The company could use process
           costing to compute the average materials and conversion cost for each type of
           product. For pricing or profitability analysis, the firm could add the cost of materials
           required for each model to the average conversion cost. This manufacturing situation
           is similar to a fast-food restaurant where managers may wish to track the relative
           profitability of food versus drinks, but there is no need to capture the cost of
           hamburgers versus cheeseburgers, nor is there a need to know the profitability of a
           particular customer's order. Under process costing, costs could be measured and
           monitored to ensure that costs of each process are in control. This accounting system
           would cost less than the current job costing system because detailed data for each job
           would no longer be tracked.

        2. First, there would be no need to keep track of raw material inventory. The cost of
           raw material purchases could be added directly to production. Second, the absence of
           significant work in process inventory reduces the need to calculate and track
           equivalent units. Units started would be roughly equal to units completed, so the
           company could adopt an actual cost system for each product line and simply record
           all production costs directly in cost of goods sold. This would also eliminate the need
           to choose between the FIFO and weighted average methods. The average materials
           and conversion cost for each type of product could be periodically measured and
           monitored to ensure that costs are in control. But it does not appear necessary to
           capture this information for units on a continuous basis. If desired, the small amount
           of jobs in process at the end of an accounting period could be handled through end of
           period adjustments rather than through a system that continuously tracks work in
           process inventory.

								
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