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					Chapter 08 - Process Costing



8
Process Costing


Solutions to Review Questions

8-1.
Process costing is most likely to be used in industries that produce relatively
homogeneous products using continuous processes.

8-2.
Using the basic cost flow equation, rearrange the terms to solve for the unknown
beginning inventory. From BB + TI – TO = EB, we have:
Beginning Inventory + Current Work – Transferred Out = Ending Inventory.
Rearranging yields:
Beginning Inventory = Transferred Out + Ending Inventory – Current Work

8-3.
With FIFO costing, the units in the beginning inventory are transferred out first. These
beginning inventory units carry with them the costs incurred in a previous period plus the
costs incurred this period to complete the beginning inventory. The costs transferred-out
will tend to be lower versus weighted-average costing during periods of rising costs. The
ending work-in-process inventory will be carried at a cost that is more current, hence
higher.

8-4.
Under FIFO costing, the equivalent units represent only the work done in the current
period. Under weighted average, the equivalent units represent the work associated with
all of the costs charged to work in process regardless of the period in which those costs
were incurred (i.e., including costs from prior periods that are in beginning inventory).




                                             8-1
Chapter 08 - Process Costing


8-5.
Prior department costs behave the same as direct materials, which are typically added at
the start of production. They are treated separately because they represent the
accumulation of costs from previous departments rather than the receipt of materials from
the stores area. It is helpful to separate prior department costs from other costs because
the manager of the department receiving the transferred units has no control over the
costs incurred in prior departments. Thus, the prior department costs are not useful for
evaluating the performance of the manager of the department receiving the units.

8-6.
Disagree. The more important individual unit costs are for decisions, the more likely it is
that a company will want to use a costing system that separates costs by units. With job
costing, the company can treat every unit as a separate job.

8-7.
From the inventory equation:
        BB + TI – TO = EB; Therefore, TO = BB + TI – EB.




                                             8-2
Chapter 08 - Process Costing
Solutions to Critical Analysis and Discussion Questions

8-8.
To assign costs to specific barrels of liquid cleaning products or similarly mass–produced
items requires a considerable amount of record keeping. Assuming products are all the
same, a process costing system provides sufficient information for control purposes.
Record keeping is simplified since all costs in a given month are accumulated in one
account and assigned at the end of the period.

8-9.
This is a fairly common problem. LIFO is usually beneficial for tax purposes when prices
are rising and inventory levels are steady or rising. However, maintaining internal records
on a LIFO basis is often quite burdensome. To avoid the problem, companies usually
maintain their internal accounting records on a FIFO or weighted-average basis and then
make an estimate of the LIFO cost of inventories. The LIFO estimate is usually done on a
highly aggregated basis and employs some form of ―dollar value‖ LIFO estimation.
A company may use LIFO for tax purposes and some other method for internal
accounting purposes. This is an example of the idea of ―different costs for different
purposes,‖ which was discussed in earlier chapters.

8-10.
The results will be the same using either costing system. The important point is that job
costing and process costing are both methods to assign costs incurred to services
completed. When there is only one service, the method of accumulation and assignment
does not affect the final cost.

8-11.
The correct answer is (b). The difference between the weighted-average and FIFO
methods of process costing is how they handle beginning WIP. When there is no
beginning WIP there is no difference between the two costing methods.
Answer (a) is incorrect because both methods assume units are homogeneous. Answer
(c) is incorrect because amounts in beginning inventory will differ between FIFO and
weighted-average. If there are no ending inventories, then the cost of goods
manufactured is the sum of the current costs, which will be the same under both methods,
and the costs in beginning work in process, which can differ. Answer (d) is incorrect
because the cost per equivalent unit can differ and so the costs assigned to the
equivalent units in ending inventory can differ.




                                             8-3
Chapter 08 - Process Costing


8-12.
If the percentage completion is overstated, (a) the total equivalent units for the period will
be overstated, because the work-in-process ending inventory will be assumed to have
more equivalent units than it actually does. (b) The costs per equivalent unit will be
understated, as the cost is divided by equivalent units that are overstated. (c) Because the
equivalent units in ending work-in-process are overstated, the costs transferred-out will be
understated (and the ending work-in-process costs overstated).

8-13.
The correct answer is (b). The weighted-average method of process costing combines the
costs of work done in the previous period and the current period.

8-14.
(e). None of these answers are correct.
Answers (a) and (b) are incorrect because (a) ignores stages of completion and (b)
double counts units started that are still in ending inventory. Answer (c) is incorrect
because the ending inventory should be multiplied by the amount of work done this
period, not work necessary to complete the items. Answer (d) is incorrect because for the
same reason as answer (c): the ending inventory should be multiplied by the amount of
work done this period, not work necessary to complete the items.




                                             8-4
Chapter 08 - Process Costing



Solutions to Exercises

8-15. (20 min.) Compute Equivalent Units—Weighted-Average Method: Clean
      Corporation.


                                                                       a.              b.
                                                                    Materials   Conversion Costs
Units transferred out ..........................................   42,000        42,000
Equivalent units in ending inventory:
 Materials: 10% x 14,000a units ........................            1,400 EU
 Conversion costs: 20% x 14,000 units .............                               2,800 EU
Total equivalent units for all work done to date ..                43,400 EU     44,800 EU
a14,000   units in ending inventory
        = 8,000 units in beginning inventory + 48,000 units started this period
        – 42,000 units transferred out.




                                                          8-5
Chapter 08 - Process Costing


8-16. (20 min.)      Compute Equivalent Units—FIFO method: Clean Corporation.
                                                             a.             b.
Compute Equivalent Units—FIFO                            Materials   Conversion Costs
To complete beginning inventory:
 Materials: 50%a x 8,000 units .......................... 4,000 EU
 Conversion costs: 70%b x 8,000 units .............                    5,600    EU
Started and completed during the period ...........     34,000 EU  c  34,000    EU
Units still in ending inventory:
 Materials: 10% x 14,000d units ........................ 1,400 EU
 Conversion costs: 20% x 14,000 units.............                     2,800    EU
                                                        39,400 EU     42,400    EU


a50%   = 100% – 50% already done at the beginning of the period.
b70%   = 100% – 30% already done at the beginning of the period.
c34,000 units started and completed = 42,000 units transferred out less 8,000 units from
beginning inventory.
d 14,000  units in ending inventory = 8,000 units in beginning inventory + 48,000 units
started this period – 42,000 units transferred out.
Alternative Method:
                      Equivalent        Units                   EU               EU
                     units of work = transferred +             ending    –    beginning
                       done this         out                 inventory        inventory
                        period
a. Materials:         39,400 EU = 42,000 units +             1,400 EU    –    4,000 EU
b. Conversion Costs: 42,400 EU = 42,000 units +              2,800 EU    –    2,400 EU




                                             8-6
Chapter 08 - Process Costing


8-17. (15 min.) Compute Equivalent Units—Weighted Average Method: Missouri
      Corporation.

                                                                                     b.
                                                                          a.     Conversion
                                                                       Materials   Costs
Units transferred out ..............................................    150,000    150,000
Equivalent units in ending inventory:
 Materials: 100% x 100,000 units ..........................             100,000
 Conversion costs: 15% x 100,000 units ...............                               15,000
Total equivalent units for all work done to date ......                 250,000     165,000


8-18. (20 min.)          Compute Equivalent Units—FIFO method: Missouri Corporation.

                                                                                             b.
                                                                           a.            Conversion
                                                                        Materials          Costs
To complete beginning inventory:
 Materials: 0%b x 70,000a units................................       0        EU
 Conversion costs: 40%     c x 70,000 units ..................                           28,000   EU
Started and completed during the period .................. 80,000              EU   d    80,000   EU
Units still in ending inventory:
 Materials: 100% x 100,000 units ............................. 100,000         EU
 Conversion costs: 15% x 100,000 units ..................                                15,000   EU
                                                                180,000        EU       123,000   EU

a 70,000  units in beginning inventory
       = 150,000 units transferred out + 100,000 units in ending inventory
         – 180,000 units started this period.
b 0%   = 100% – 100% already done at the beginning of the period.
c 40%   = 100% – 60% already done at the beginning of the period.
d 80,000 units started and completed = 150,000 units transferred out less 70,000 units
    from beginning inventory.
Alternative Method
                                  Equivalent        Units           EU          EU
                                 units of work = transferred +     ending  – beginning
                                done this period     out         inventory   inventory
a. Materials:                      180,000 EU = 150,000 units + 100,000 EU – 70,000 EU
b. Conversion Costs:               123,000 EU = 150,000 units + 15,000 EU – 42,000 EU




                                                           8-7
Chapter 08 - Process Costing


8-19. (30 min.)          Compute Equivalent Units: Bears, Inc.
a. Weighted-average method:


                                                                                              Conversion
                                                                                Materials       Costs
Units transferred out .......................................................    180,000        180,000
Equivalent units in ending inventory:
 Materials: 100% x 27,000 units ....................................                 27,000
 Conversion costs: 60% x 27,000 units..........................                                  16,200
Total equivalent units for all work done to date ..............                     207,000     196,200
b. First-in, First-out (FIFO) method:


                                                                                               Conversion
                                                                            Materials            Costs
To complete beginning inventory:
  Materials: 0%a x 27,000 units ........................                        0    EU
  Conversion costs: 25%b x 27,000 units .........                                               6,750 EU
Started and completed during the periodc .........                     153,000       EU       153,000 EU
Units still in ending inventory:
  Materials: 100% x 27,000 units ......................                  27,000      EU
  Conversion costs: 60% x 27,000 units ...........                                             16,200 EU
                                                                       180,000       EU       175,950 EU

a 0%   = 100% – 100% already done at the beginning of the period.
b 25%    = 100% – 75% already done at the beginning of the period.
c 153,000     units started and completed
    = 180,000 units transferred out less 27,000 units from beginning inventory.




                                                            8-8
Chapter 08 - Process Costing


8-20. (30 min.)         Compute Equivalent Units—Ethical Issues: Aaron Company.
a. Weighted-average method:


                                                                                     Conversion
                                                                         Materials     Costs
Units transferred out ..............................................     630,000      630,000
Equivalent units in ending inventory:
  Materials: 0% x 120,000 units ............................                     0
  Conversion costs: 40% x 120,000 units .............                                  48,000
Total equivalent units for all work done to date ......                   630,000     678,000
b. First-in, First-out (FIFO) method:

                                                                                            b.
                                                                            a.          Conversion
                                                                         Materials        Costs
To complete beginning inventory:
  Materials: 0%a x 150,000 units .......................                     0 EU
  Conversion costs: 40%b x 150,000 units ........                                      60,000 EU
Started and completed during the periodc .........                     480,000 EU     480,000 EU
Units still in ending inventory:
  Materials: 0% x 120,000 units ........................                     0 EU
  Conversion costs: 40% x 120,000 units .........                                      48,000 EU
                                                                       480,000 EU     588,000 EU

a 0%   = 100% – 100% already done at the beginning of the period (conversion was 60%
       complete).
b 40%   = 100% – 60% already done at the beginning of the period.
c 480,000   units started and completed
       = 630,000 units transferred out less 150,000 units from beginning inventory.
c.
1. The change will reduce the unit cost for the units transferred to finished goods.
2. It is not ethical; there is no reason to believe the change reflects anything other than a
   desire for reporting better results.
3. It is unlikely to be successful for long. An accounting system keeps track of actual
   costs. If a manager postpones reporting them this period, they will be reported next
   period or shortly thereafter.




                                                           8-9
Chapter 08 - Process Costing


8-21. (20 min.) Compute Cost per Equivalent Unit—Weighted Average Method:
      Davenport Plant.



                                                                     Physical        Materials
                                                                      Units          Eq. Units
Flow of units:
  Units to be accounted for:
  Beginning WIP inventory ................................            270,000
  Units started this period .................................         720,000
    Total units to account for ............................           990,000
   Units accounted for:
   Completed and transferred out
     Materials (765,000 x 100%) ........................              765,000        765,000
   Units in ending inventory:
     Materials (225,000 x 100%) ........................              225,000        225,000
       Total units accounted for.........................             990,000        990,000



                                                                               Direct Materials
Flow of costs:
Costs to be accounted for:
  Costs in beginning WIP inventory ................................                  $99,000
  Current period costs .....................................................         316,800
    Total costs to be accounted for ................................                $415,800
Cost per equivalent unit
  Materials ($415,800 ÷ 990,000 units) ..........................                       $0.42




                                                          8-10
Chapter 08 - Process Costing


8-22. (20 min.)           Compute Cost per Equivalent Unit—FIFO method: Davenport
      Plant.



                                                                                 Physical   Materials Eq.
                                                                                  Units        Units
Flow of units:
  Units to be accounted for:
  Beginning WIP inventory ........................................               270,000
  Units started this period ..........................................           720,000
    Total units to account for ....................................              990,000
  Units accounted for:
  Completed and transferred out
     From beginning WIP inventory (270,000 x 0%)                                 270,000                0
    Started and completed currently (495,000a x                                  495,000          495,000
100%).........................................................................
  Units in ending inventory:
    Materials (225,000 x 100%) ................................                  225,000          225,000
      Total units accounted for .................................                990,000          720,000
a495,000 units started and completed = 765,000 units transferred-out – 270,000
beginning WIP units.



                                                                                              Direct
                                                                                             Materials
Flow of costs:
Costs to be accounted for:
    Total costs to be accounted for (current period costs only) ..........                  $316,800
Cost per equivalent unit
  Materials ($316,800 ÷ 720,000 units) ..............................................         $     0.44




                                                                8-11
Chapter 08 - Process Costing


8-23. (20 min.)         Compute Equivalent Units—FIFO method: Santiago Company.

                                                                              Physical    Conversion
                                                                              Units       Eq. Units
Flow of units:
  Units to be accounted for:
  Beginning WIP inventory ..............................................         45,000
  Units started this period ...............................................     510,000
    Total units to account for ..........................................       555,000
    Units accounted for:
    Completed and transferred out
       From beginning WIP inventory [45,000 x (1 – 40%)]                         45,000       27,000
      Started and completed currently (435,000a x 100%)                         435,000      435,000
    Units in ending inventory:
      Conversion (75,000 x 70%) ......................................           75,000       52,500
        Total units accounted for.......................................        555,000      514,500
a   435,000 units started and completed = 480,000 units transferred-out – 45,000 beginning
       WIP units.




                                                         8-12
Chapter 08 - Process Costing


8-24. (20 min.) Compute Cost per Equivalent Unit—Weighted-Average method:
      Santiago Company.


a.                                                        Physical
                                                           Units                        Equivalent Units
                                                                                 Materials         Conversion
                                                                                 Eq. units      Costs Eq. units
Flow of units:
  Units to be accounted for:
                                                    45,000
  Beginning WIP inventory ................................
                                                  510,000
  Units started this period ..................................
                                                  555,000
    Total units to account for ............................
     Units accounted for:
                                                   480,000
     Completed and transferred out .......................                       480,000              480,000
                                                     75,000
     Units in ending inventory ................................
       Materials (75,000 x 100%) ..........................                       75,000
       Conversion costs (75,000 x 70%) ...............                                                 52,500
                                                   555,000
       Total units accounted for ............................                    555,000              532,500




b.                                                                                     Direct     Conversion
                                                                         Total        Materials     Costs
Flow of costs:
Costs to be accounted for:
                                                             $
 Costs in beginning WIP inventory .......................... 63,000                   $24,300        $38,700
                                                               1,360,500
 Current period costs...............................................                  280,950      1,079,550
                                                             $1,423,500
   Total costs to be accounted for............................                       $305,250     $1,118,250
Cost per equivalent unit
 Materials ($305,250 ÷ 555,000 units) ....................                              $ 0.55
 Conversion costs ($1,118,250 ÷ 532,500
   units) .................................................................                           $ 2.10




                                                               8-13
Chapter 08 - Process Costing


8-25. (35 min.) Compute Costs per Equivalent Unit—Weighted-Average Method:
      Matsui Lubricants.

                                                     Physical
                                                      Units                  Equivalent Units
                                                                      Materials         Conversion
                                                                      Eq. units      Costs Eq. units
Flow of units:
  Units to be accounted for:
                                                         600
  Beginning WIP inventory ................................
                                                      4,000
  Units started this period .................................
                                                      4,600
    Total units to account for ............................
    Units accounted for:
    Completed and transferred outa .....................
                                                       3,400              3,400                 3,400
                                                       1,200
    Units in ending inventory ................................
      Materials (1,200 x 40%) ..............................               480
      Conversion costs (1,200 x 20%) .................                                            240
                                                       4,600
      Total units accounted for ............................              3,880                 3,640
a 3,400 units transferred out = 4,600 units to account for – 1,200 units in ending WIP
inventory.



                                                                               Direct      Conversion
                                                                  Total       Materials      Costs
Flow of costs:
Costs to be accounted for:
 Costs in beginning WIP inventory ...........                    $ 1,248       $ 976         $ 272
 Current period costs ...............................             18,084       11,440         6,644
   Total costs to be accounted for ............                  $19,332      $12,416        $6,916
Cost per equivalent unit
 Materials ($12,416 ÷ 3,880 units) ...........                                    $ 3.20
    Conversion costs ($6,916 ÷ 3,640 units)                                                  $ 1.90




                                                        8-14
Chapter 08 - Process Costing


8-26. (20 min.) Assign Costs to Goods Transferred Out and Ending Inventory—
      Weighted-Average Method: Matsui Lubricants.

                                                                         Direct     Conversion
                                                            Total       Materials     Costs
Flow of costs:
Costs to be accounted for:
 Costs in beginning WIP inventory ....................$ 1,248            $ 976       $ 272
 Current period costs......................................... 18,084    11,440       6,644
   Total costs to be accounted for...................... $19,332        $12,416      $6,916
Cost per equivalent unit
 Materials ($12,416 ÷ 3,880 units) ....................                  $ 3.20
 Conversion costs ($6,916 ÷ 3,640) ..................                                $ 1.90
Costs accounted for:
 Costs assigned to units transferred out                   $17,340      $10,880 a    $6,460 b
 Cost of ending WIP inventory .......................... 1,992            1,536 c       456 d
  Total costs accounted for............................... $19,332      $12,416      $6,916
Costs transferred out total $17,340, and costs in ending inventory total $1,992.

a $10,880 = 3,400 EU x $3.20 per EU.
b $6,460 = 3,400 EU x $1.90 per EU.
c $1,536 = 480 EU x $3.20 per EU.
d $456 = 240 EU x $1.90 per EU.




                                                     8-15
Chapter 08 - Process Costing


8-27. (35 min.) Compute Costs per Equivalent Unit—FIFO Method: Matsui
      Lubricants.

                                                                        Physical
                                                                         Units         Equivalent Units
                                                                                   Materials Conversion
                                                                                   Eq. units Costs Eq. units
Flow of units:
  Units to be accounted for:
  Beginning WIP inventory ......................................           600
  Units started this period .......................................      4,000
    Total units to account for ..................................        4,600
     Units accounted for:
     Completed and transferred outa ...........................          3,400
        From beginning WIP inventory
              Materials (600 x (1 – 60%))                                              240
              Conversion (600 x (1 – 53%))                                                         282
       Started and completed currently (2,800 x 100%)                                2,800       2,800
     Units in ending inventory ......................................    1,200
       Materials (1,200 x 40%) ....................................                    480
       Conversion costs (1,200 x 20%) .......................                                      240
       Total units accounted for ..................................      4,600       3,520       3,322
a   3,400 units transferred out
      = 4,600 units to account for – 1,200 units in ending WIP inventory.



                                                                              Direct         Conversion
                                                                Total        Materials         Costs
Flow of costs:
Costs to be accounted for:
 Costs in beginning WIP inventory .................... 1,248 $                    $ 976       $ 272
 Current period costs ........................................ 18,084             11,440       6,644
   Total costs to be accounted for .....................     $19,332             $12,416      $6,916
Cost per equivalent unit
 Materials ($11,440 ÷ 3,520 units) ....................                           $ 3.25
    Conversion costs ($6,644 ÷ 3,322) ..................                                      $ 2.00




                                                         8-16
Chapter 08 - Process Costing


8-28. (20 min.) Assign Costs to Goods Transferred Out and Ending Inventory—
      FIFO Method: Matsui Lubricants.

                                                          Physical
                                                           Units             Equivalent Units
                                                                      Materials      Conversion Costs
                                                                      Eq. units          Eq. units
Flow of units:
  Units to be accounted for:
                                                         600
  Beginning WIP inventory ................................
                                                      4,000
  Units started this period ..................................
                                                      4,600
    Total units to account for ............................
  Units accounted for:
  Completed and transferred outa .....................     3,400
     From beginning WIP inventory
           Materials (600 x (1 – 60%))                                  240
           Conversion (600 x (1 – 53%))                                                    282
    Started and completed currently
(2,800                                                                2,800              2,800
    x 100%) .......................................................
                                                           1,200
  Units in ending inventory ................................
    Materials (1,200 x 40%) ..............................              480
    Conversion costs (1,200 x 20%) .................                                       240
    Total units accounted for ............................ 4,600      3,520              3,322
a 3,400 units transferred out = 4,600 units to account for – 1,200 units in ending WIP
inventory.




                                                           8-17
Chapter 08 - Process Costing
8-28. (continued)
                                                                    Direct     Conversion
                                                      Total        Materials     Costs
Flow of costs:
Costs to be accounted for:
                                                $ 1,248
 Costs in beginning WIP inventory ....................                    $     $ 544
                                                                        976
                                                          18,084
 Current period costs ........................................       11,440      6,644
  Total costs to be accounted for ..................... $19,332     $12,416     $6,916
Cost per equivalent unit
 Materials ($22,880 ÷ 3,520 units) ....................              $ 3.25
 Conversion costs ($13,288 ÷ 3,322) ................                            $ 2.00

Costs accounted for:
 Costs assigned to units transferred out:
  Costs from beginning WIP inventory .............    $ 1,248         $ 976      $ 272
  Current costs added to complete
                                                           1,344
beginning WIP inventory ....................................
      Materials ($3.25 x 240) ............................              780
      Conversion costs ($2.00 x 282) ...............                               564
 Current costs of units started and                      14,700
completed:
    Materials ($3.25 x 2,800) ............................            9,100
    Conversion costs ($2.00 x 2,800) ...............                             5,600
                                                     $ 17,292
Total costs transferred out .................................       $10,856     $6,436
Cost of ending WIP inventory ............................  2,040
    Materials ($3.25 x 480) ...............................           1,560
    Conversion costs ($2.00 x 240) ..................                              480
                                                       $19,332
  Total costs accounted for ..............................          $12,416     $6,916


Ending inventory is slightly higher under the FIFO method because the unit costs are
  higher under FIFO.




                                                     8-18
Chapter 08 - Process Costing


8-29. (35 min.) Compute Costs per Equivalent Unit—Weighted-Average Method:
      Pacific Ink.

                                                         Physical
                                                          Units               Equivalent Units
                                                                       Materials     Conversion Costs
                                                                       Eq. units         Eq. units
Flow of units:
 Units to be accounted for:
 Beginning WIP inventory.................................. 48,000
 Units started this period a                               84,000
                                                         132,000
   Total units to account for ...............................
    Units accounted for:
    Completed and transferred out (given) ............      102,000    102,000         102,000
                                                              30,000
    Units in ending inventory ..................................
     Materials (30,000 x 80%) ...............................           24,000
     Conversion costs (30,000 x 40%) ..................                                 12,000
                                                            132,000
     Total units accounted for ...............................         126,000         114,000
a84,000 units started this period = 132,000 units to account for – 48,000 units in
beginning work-in-process inventory.



                                                                          Direct       Conversion
                                                              Total      Materials       Costs
Flow of costs:
Costs to be accounted for:
                                                          $
 Costs in beginning WIP inventory .................... 372,480           $ 152,460     $ 220,020
                                                           2,685,720
 Current period costs.........................................            1,171,800     1,513,920
   Total costs to be accounted for...................... $3,058,200      $1,324,260    $1,733,940
Cost per equivalent unit
 Materials ($1,324,260 ÷ 126,000 units) ...........                         $ 10.51
    Conversion costs ($1,733,940 ÷ 114,000) .......                                       $ 15.21




                                                       8-19
Chapter 08 - Process Costing


8-30. (20 min.) Assign Costs to Goods Transferred Out and Ending Inventory—
      Weighted-Average Method: Pacific Ink.

                                                                    Direct       Conversion
                                                       Total       Materials       Costs
Flow of costs:
Costs to be accounted for:
                                                          $
 Costs in beginning WIP inventory .................... 372,480 $ 152,460         $ 220,020
                                                           2,685,720
 Current period costs ........................................       1,171,800    1,513,920
   Total costs to be accounted for ..................... $3,058,200 $1,324,260   $1,733,940
Cost per equivalent unit
 Materials ($1,324,260 ÷ 126,000 units) ...........                 $ 10.51
    Conversion costs ($1,733,940 ÷ 114,000) .......                                $ 15.21
Costs accounted for:
 Costs assigned to units transferred out             $2,623,440 $1,072,020 a     $1,551,420 b
 Cost of ending WIP inventory .......................... 434,760   252,240 c        182,520 d
                                                     $3,058,200 $1,324,260
  Total costs accounted for ..............................                       $1,733,940


Costs transferred out total $2,623,440 and costs in ending inventory total $434,760.
a   $1,072,020 = 102,000 EU x $10.51 per EU.
b   $1,551,420 = 102,000 EU x $15.21 per EU.
c   $252,240 = 24,000 EU x $10.51 per EU.
d   $182,520 = 12,000 EU x $15.21 per EU.




                                                8-20
Chapter 08 - Process Costing


8-31. (35 min.)           Compute Costs per Equivalent Unit—FIFO Method: Pacific Ink.

                                                                Physical
                                                                 Units           Equivalent Units
                                                                             Materials      Conversion
                                                                             Eq. units      Costs Eq.
                                                                                              units
Flow of units:
 Units to be accounted for:
 Beginning WIP inventory.............................            48,000
 Units started this perioda                                      84,000
   Total units to account for ..........................        132,000
    Units accounted for:
    Completed and transferred out                               102,000
        From beginning WIP inventory
             Materials (48,000 x (1 – 30%)) ......                              33,600
             Conversion (48,000 x (1 – 30%)) ..                                             33,600
        Started and completed .........................                         54,000      54,000
    Units in ending inventory .............................      30,000
     Materials (30,000 x 80%) ..........................                        24,000
     Conversion costs (30,000 x 40%) .............                                          12,000
     Total units accounted for ..........................       132,000       111,600       99,600
a   84,000 units started this period = 132,000 units to account for – 48,000 units in
       beginning work-in-process inventory.

                                                                             Direct      Conversion
                                                                Total       Materials      Costs
Flow of costs:
Costs to be accounted for:
                                                          $
 Costs in beginning WIP inventory .................... 372,480             $ 152,460     $ 220,020
                                                           2,685,720
 Current period costs.........................................              1,171,800     1,513,920
   Total costs to be accounted for...................... $3,058,200        $1,324,260    $1,733,940
Cost per equivalent unit
 Materials ($1,171,800 ÷ 111,600 units) ...........                          $ 10.50
    Conversion costs ($1,513,920 ÷ 99,600) .........                                       $ 15.20




                                                         8-21
Chapter 08 - Process Costing


8-32. (20 min.) Assign Costs to Goods Transferred Out and Ending Inventory—
      FIFO Method: Pacific Ink.

                                                            Physical
                                                             Units           Equivalent Units
                                                                        Materials      Conversion
                                                                        Eq. units    Costs Eq. units
Flow of units:
  Units to be accounted for:
  Beginning WIP inventory ................................ 48,000
  Units started this perioda                                 84,000
    Total units to account for ............................ 132,000
    Units accounted for:
    Completed and transferred out                             102,000
       To complete beginning WIP inventory
             Materials (48,000 x (1 – 30%)) ..........                   33,600
             Conversion (48,000 x (1 – 30%)) .......                                       33,600
      Started and completed .............................                54,000            54,000
    Units in ending inventory ................................ 30,000
      Materials (30,000 x 80%) ............................              24,000
      Conversion costs (30,000 x 40%) ...............                                      12,000
      Total units accounted for ............................ 132,000    111,600            99,600
a84,000 units started this period = 132,000 units to account for – 48,000 units in
beginning work-in-process inventory.




                                                     8-22
Chapter 08 - Process Costing
8-32. (continued)
                                                                        Direct       Conversion
                                                           Total       Materials       Costs
Flow of costs:
Costs to be accounted for:
 Costs in beginning WIP inventory ....................   $ 372,480    $ 152,460      $ 220,020
                                                          2,685,720
 Current period costs.........................................         1,171,800      1,513,920
   Total costs to be accounted for......................$3,058,200    $1,324,260     $1,733,940
Cost per equivalent unit
 Materials ($1,171,800 ÷ 111,600 units) ...........                     $ 10.50
 Conversion costs ($1,513,920 ÷ 99,600) .........                                      $ 15.20

Costs accounted for:
 Costs assigned to units transferred out:
  Costs from beginning WIP inventory .............         $ 372,480 $ 152,460      $ 220,020
  Current costs added to complete
         beginning WIP inventory .......................       863,520
  Materials ($10.50 x 33,600) ..........................                352,800
  Conversion costs ($15.20 x 33,600) .............                                   510,720
 Current costs of units started and
                                                            1,387,800
        completed: .............................................
  Materials ($10.50 x 54,000) ..........................                567,000
  Conversion costs ($15.20 x 54,000) .............                                    820,800
                                                        $ 2,623,800 $1,072,260
Total costs transferred out .................................                      $1,551,540
Cost of ending WIP inventory ............................      434,400
  Materials ($10.50 x 24,000) ..........................                252,000
  Conversion costs ($15.20 x 12,000) .............                                    182,400
                                                          $3,058,200 $1,324,260
 Total costs accounted for .................................                       $1,733,940

Ending inventory is slightly lower under the FIFO method because the unit costs are lower
under FIFO. This means that current costs are slightly lower than last period’s costs.
Because ending WIP inventory is carried at current costs under FIFO, the ending WIP
costs are lower under FIFO.




                                                    8-23
Chapter 08 - Process Costing


8-33. (50 min.)         Production Cost Report—FIFO method: El Paso Corporation.


                                                           Physical Units        Equivalent Units
                                                                                 Prior   Department
                                                                              Department   No. B
Flow of units:
 Units to be accounted for:
 Beginning WIP inventory .................................        7,500
 Units started this period ...................................   17,500
   Total units to account for ...............................    25,000
 Units accounted for:
 Completed and transferred out
  From beginning WIP inventory ......................             7,500
    Prior department .........................................                       0
    Dept. B [7,500 units x (1–20%)] ..................                                        6,000
                                                                          a
  Started and completed currently ...................            15,000         15,000       15,000
Units in ending WIP inventory............................         2,500
  Prior department............................................                   2,500
  Department B (2,500 units x 50%) ................                                           1,250
    Total units accounted for .............................      25,000         17,500       22,250

a. 15,000 = 17,500 units started – 2,500 units in ending WIP inventory.




                                                        8-24
Chapter 08 - Process Costing
8-33. (continued)
                                                                                Prior      Department
                                                                Total        Department      No. B
Flow of costs:
Costs to be accounted for:
 Costs in beginning WIP inventory .................... $ 36,675               $29,000         $ 7,675
 Current period costs......................................... 219,075         70,000         149,075
   Total costs to be accounted for...................... $255,750             $99,000        $156,750
Cost per equivalent unit
 Prior department ($70,000 ÷ 17,500 units) .....                              $     4.00
 Department. B ($149,075 ÷ 22,250 units) .......                                              $     6.70

Costs accounted for:
 Costs assigned to units transferred out:
  Costs from beginning WIP inventory ............. $ 36,675                   $29,000         $ 7,675
  Current costs added to complete beginning
WIP inventory.....................................................  40,200
    Prior department ..........................................                       0
    Department B ($6.70 x 6,000 units) ............                                               40,200
 Current costs of units started and completed:                     160,500
    Prior department ($4.00 x 15,000) ...............                             60,000
    Department B ($6.70 x 15,000) .................                                           100,500
Total costs transferred out ................................. $237,375        $89,000        $148,375
Cost of ending WIP inventory ............................           18,375
    Prior department ($4.00 x 2,500) ................                             10,000
    Department B ($6.70 x 1,250) ....................                                           8,375
  Total costs accounted for............................... $255,750           $99,000        $156,750




                                                      8-25
Chapter 08 - Process Costing


8-34. (50 min.) Production Cost Report—Weighted-Average Method: El Paso
      Corporation.

a.                                                           Physical
                                                              Units            Equivalent Units
                                                                              Prior     Department
                                                                           Department      No. B
Flow of units:
 Units to be accounted for:
 Beginning WIP inventory ................................. 7,500
 Units started this period ................................... 17,500
   Total units to account for ............................... 25,000
 Units accounted for:
 Completed and transferred out ........................ 22,500                22,500         22,500
 Units in ending inventory ................................. 2,500
  Prior department (2,500 units x 100%) ..........                             2,500
  Department No. B (2,500 units x 50%) ..........                                             1,250
   Total units accounted for ............................. 25,000             25,000         23,750

                                                               Total      Direct       Conversion
                                                                         Materials       Costs
Flow of costs:
Costs to be accounted for:
 Costs in beginning WIP inventory ....................$ 36,675            $29,000        $ 7,675
 Current period costs ........................................ 219,075     70,000        149,075
   Total costs to be accounted for .....................$255,750          $99,000        156,750
Cost per equivalent unit
 Prior department ($99,000 ÷ 25,000 units) ......                         $   3.96
 Department No. B ($156,750 ÷ 23,750) ..........                                         $   6.60
Costs accounted for:
 Costs assigned to units transferred out ...........$237,600              $89,100       $148,500
 Costs of ending WIP inventory ........................ 18,150              9,900          8,250
  Total costs accounted for ..............................$255,750        $99,000       $156,750
b. The ending inventory is lower under the weighted-average method than under the
   FIFO method. Under weighted-average, the ending inventory is $18,150. This is $225
   less than FIFO, which is $18,375. The difference is due to the differences in costs per
   equivalent unit between FIFO and weighted-average.




                                                      8-26
Chapter 08 - Process Costing


8-34. (continued)
c. The decision depends on the decisions that will be made using the data. If the most
   current cost information is desired, FIFO might be the better method. If there are
   random fluctuations that the company wants to smooth, weighted average might be
   best.




                                          8-27
Chapter 08 - Process Costing


8-35. (50 min.) Operations Costing: Brokia Electronics.
a.

                                                            Basic     Photo         UrLife
                                                           (40,000   (30,000       (10,000
                                              Total         units)    units)        units)
        Materials ......................   $2,240,000      $480,000 $1,200,000     $560,000

        Conversion
           Assemblya ...............       $ 1,400,000      700,000 525,000   175,000
           Special Packaging ..                400,000          –0–     –0–   400,000
             Total conversion...           $ 1,800,000     $700,000$525,000 $ 575,000
        Total Product Cost                                       $1,725,000 $1,135,00
                                           $4,040,000 $1,180,000                    0
        Number of Units                                   40,000     30,000    10,000
        Cost per unit                                     $29.50     $57.50   $113.50
        a   Unit cost is $17.50 (= $1,400,000 ÷ 80,000 units)
b.

(1)

                                                          Basic         Photo       UrLife
                                                         (40,000       (30,000     (10,000
                                             Total        units)        units)      units)
        Materials                          $2,240,000    $480,000     $1,200,000   $560,000

        Conversion
            Assemblya           $ 1,400,000        300,000      750,000     350,000
            Special Packaging        400,000           –0–          –0–     400,000
         Total conversion cost $ 1,800,000 $300,000           $750,000 $ 750,000
        Total Product Cost        $4,040,000 $780,000 $1,950,000 $1,310,000
        Number of Units                             40,000       30,000      10,000
        Cost per unit                               $19.50       $65.00     $131.00
        a Unit cost is 62.5% of material dollars (= $1,400,000 ÷ $2,240,000 material
           dollars)




                                                    8-28
Chapter 08 - Process Costing

(2) If there is a reason that conversion costs are related to material dollars (for example,
    because of the difficulty of working with different materials), this change might be
    justified. If it is done simply to shift cost to the cost-plus customer, this is not ethical.


8-36. Operation Costing: Ferdon Watches.
a.




                                               8-29
Chapter 08 - Process Costing
8-36. (continued)
b.
                                                   Gag-Gift Commuter    Sport Retirement
                                                    (5,000   (10,000   (13,000  (2,000
                                           Total     units)   units)    units)   units)
        Materials ....................   $ 321,000 $15,000    $90,000 $156,000  $60,000

        Conversion
          Assemblya ..............       $120,000    $20,000    $40,000 $52,000    $ 8,000
          Polishingb ...............       69,000        –0–     30,000   39,000        –0–
         Special Finishingc ...            20,000        –0–        –0–      –0–     20,000
         Packagingd..............          90,000     15,000     30,000   39,000      6,000
           Total conversion...           $299,000    $35,000   $100,000 $130,000   $ 34,000
        Total Product Cost .....         $620,000    $50,000   $190,000 $286,000    $94,000
        Number of Units .........                      5,000     10,000   13,000      2,000
        Cost per unit...............                  $10.00     $19.00   $22.00     $47.00

        a   Unit cost is $4.00 (= $120,000 ÷ 30,000 units)
        b   Unit cost is $3.00 (= $69,000 ÷ 23,000 units)
        c   Unit cost is $10.00 (= $20,000 ÷ 2,000 units)
        d   Unit cost is $3.00 (= $90,000 ÷ 30,000 units)




                                                    8-30
Chapter 08 - Process Costing
Solutions to Problems

8-37. (45 min.) Compute Equivalent Units: Multiple Choice.
a. The answer is (2).
                                                                             Conversion
                                                                 Materials      Costs
                                                             790,000
Units transferred out ..........................................          a 790,000 a
EU in ending inventory:
   Materials 100% x 80,000 units ....................... EU    80,000
   Conversion costs 30% x 80,000                                             24,000 EU
units ...................................................................
                                                             870,000
EU produced this period .................................... EU             814,000 EU

aUnits  transferred out = units started + beg. inventory – ending inventory
                                = 720,000 + 150,000 – 80,000
                                = 790,000
b. The answer is (2).
                                                                     Prior                 Conversion
                                                               Department       Materials     Costs
                                                                    Costs
Units transferred out .......................................... a
                                                            330,000           330,000 a   330,000 a
EU in ending inventory:
   Prior department costs ................................... 40,000       EU
   Materialsb .......................................................             –0– EU
   Conversion costs 65% x 40,000                                                           26,000 EU
units ...................................................................
EU produced this period ....................................370,000        EU 330,000 EU  356,000 EU
a320,000     started + 50,000 in beg. inv. – 40,000 in ending inv. = 330,000 transferred out.
bMaterials     are added at the end of the process.

c. The answer is (1).
    EU to complete beginning inventory 70%a x 20,000                             14,000 EU
    units ...................................................................
    Started and completedb .....................................                300,000 EU
    EU in ending inventory 70% x 40,000 units .......                            28,000 EU
    EU done this period ...........................................             342,000 EU
a70%    = 100% – 30% already done at the beginning of the period.
b 300,000     units = 320,000 transferred out – 20,000 from beginning inventory.




                                                             8-31
Chapter 08 - Process Costing
8-37. (continued)

d. The answer is (4).
                                                                              Conversion
                                                             Materials          Costs
     To complete beginning inventory:
       Materials: 0%a x 40,000 units .........................        0
       Conversion costs: 30%b x 40,000 units ..........                       12,000 EU
     Started and completed during the period ...........140,000 c EU         140,000 EU
     Units still in ending inventory:
       Materials: 100% x 32,000 units ....................... 32,000 EU
       Conversion costs: 50% x 32,000 units ............                      16,000 EU
     Work done in current period ...............................172,000 EU   168,000 EU
a 0%   = 100% – 100% already done at the beginning of the period.
b   30% = 100% – 70% already done at the beginning of the period.
c   140,000 = 180,000 transferred out – 40,000 from beginning inventory.




                                                 8-32
Chapter 08 - Process Costing


8-38. (30 min) FIFO Method: McKenzie Corporation.
a.                                                             Equivalent Units
                                                     Physical    Conversion
                                                        Units       Costs
Flow of units
 Units to be accounted for:
                                                       300,000
 Beginning WIP inventory..................................
                                                    1,620,000
 Units started this period ...................................
                                                    1,920,000
    Total units to account for .............................
 Units accounted for:
 Completed and transferred out
  From beginning WIP inventory ...................... 300,000
   (300,000 x 20%) ..........................................                    60,000
  Started and completed currently ....................900,000                   900,000
                                                      720,000
 Units in ending WIP inventory ..........................
   (720,000 x 50%) ..........................................                  360,000
                                                    1,920,000
     Total units accounted for ...........................                   1,320,000

                                                                    Conversion Costs
Flow of costs:
Costs to be accounted for:
  Costs in beginning WIP inventory.............................             $ 387,000
  Current period costs .................................................     2,178,000
    Total costs to be accounted for .............................          $2,565,000


Cost per equivalent unit ($2,178,000 ÷ 1,320,000) .....                     $     1.65
Costs accounted for:
  Costs assigned to units transferred out:
    Costs from beginning WIP inventory.....................                $ 387,000
    Current costs added to complete
      beginning WIP inventory:
      Conversion costs ($1.65 x 60,000) ...................                     99,000
  Current costs of units started and completed:
    Conversion costs ($1.65 x 900,000) ....................                 1,485,000
  Total costs transferred out ........................................     $1,971,000
Cost of ending WIP inventory:
      Conversion costs ($1.65 x 360,000) .................                    594,000 (Answer)
    Total costs accounted for ......................................       $2,565,000




                                                         8-33
Chapter 08 - Process Costing
8-38. (continued)
b.

Cost per unit for the previous period is $1.6125 [= $387,000 ÷ (300,000 equiv. units x
80%)]
Cost per unit for the current period is $1.65 as calculated in (a) above.




                                           8-34
Chapter 08 - Process Costing




8-39. (50 min.) Prepare A Production Cost Report—Weighted Average Method: Douglas Toys.

        a.
                                                              Douglas Toys
                                                         Assembling Department
                                                Production Cost Report—Weighted Average
                                                     FLOW OF PRODUCTION UNITS
                                                (Section 1)
                                                Physical
                                                units
Units to be accounted for:
                                                      100,000
  Beginning WIP inventory ................................
                                                      500,000
  Units started this period ..................................
                                                      600,000
Total units to be accounted for ...........................
                                                                 (Section 2)
                                                                 COMPUTE EQUIVALENT UNITS
                                                                 Prior                                      Manufacturing
                                                                 department Materials  Labor                overhead
                                                                 costs
Units accounted for:
 Units completed and transferred out:
                                                      100,000
  From beginning inventory ..............................
  Started and completed currently ....................300,000
                                                      400,000
  Total transferred out ......................................    400,000   400,000         400,000          400,000
                                                      200,000
 Units in ending WIP inventory ..........................         200,000   180,000   (90%) 140,000 (70%)     70,000 (35%)
                                                      600,000
Total units accounted for ....................................    600,000   580,000         540,000          470,000




                                                                     8-35
Chapter 08 - Process Costing


8-39. (continued)
                                                                                 DETAILS
                                                                                     Prior                            Manufacturing
                                                                 Total costs      department   Materials    Labor      overhead
                                                                                    costs
Costs to be accounted for: (Section 3)
 Costs in beginning WIP inventory ....................            $ 255,200        $128,000    $ 80,000           $      $18,400
                                                                                                             28,800
 Current period costs.........................................    1,243,600         640,000     384,000     144,000       75,600
Total costs to be accounted for ..........................       $1,498,800        $768,000    $464,000    $172,800      $94,000
Cost per equivalent unit: (Section 4)
 Prior department costs ($768,000  600,000) .                                        $1.28
 Materials ($464,000  580,000) .......................                                            $0.80
 Labor ($172,800  540,000) ............................                                                      $0.32
 Manufacturing overhead ($94,000  470,000) .                                                                               $0.20
Costs accounted for: (Section 5)
 Costs assigned to units transferred out:
  Prior department costs ($1.28 x 400,000)......                   $512,000        $512,000
  Materials ($0.80 x 400,000) ...........................           320,000                    $ 320,000
  Labor ($0.32 x 400,000) ................................          128,000                                $128,000
  Manufacturing overhead ($0.20 x 400,000) ...                       80,000                                              $80,000
 Total costs of units transferred out...................         $1,040,000
Costs assigned to ending WIP inventory:
  Prior department costs ($1.28 x 200,000)......                   $256,000         256,000
  Materials ($0.80 x 180,000) ...........................           144,000                     144,000
  Labor ($0.32 x 140,000) ................................           44,800                                  44,800
  Manufacturing overhead ($0.20 x 70,000) .....                      14,000                                               14,000
 Total ending WIP inventory ..............................         $458,800
Total costs accounted for ...................................    $1,498,800        $768,000    $464,000    $172,800      $94,000

                                                                          8-36
Chapter 08 - Process Costing


8-39. (continued)

b. The report to management should include the following items:
   Materials: The $0.80 per unit goal set by management is currently being achieved by the Assembling Dept.
   Labor: Equivalent unit labor costs per unit ($.32) is below management’s goal of $0.40.
   Manufacturing overhead: overhead costs per unit ($0.20) is slightly higher than management’s goal of $0.18.




                                                           8-37
Chapter 08 - Process Costing




8-40. (50 min.)         Prepare a Production Cost Report—FIFO Method: Douglas Toys.

a.
                                                                Douglas Toys
                                                           Assembling Department
                                                        Production Cost Report—FIFO
FLOW OF PRODUCTION UNITS                                                                 (Section 2)
                                                 (Section 1)                      COMPUTE EQUIVALENT UNITS
                                                                    Prior
                                                 Physical        department                                        Manufacturing
                                                 units             costs         Materials        Labor             overhead
Units to be accounted for:
                                                      100,000
 Beginning WIP inventory..................................
                                                      500,000
 Units started this period ...................................
                                                      600,000
Total units to be accounted for ...........................
Units accounted for:
 Units completed and transferred out:
  From beginning inventory ..............................
                                                      100,000          –0–        –0–          40,000   (40%) a    50,000 (50%) b
  Started and completed currently ....................300,000      300,000    300,000         300,000             300,000
                                                      200,000
 Units in ending WIP inventory ..........................          200,000    180,000   (90%) 140,000   (70%)      70,000 (35%)
                                                      600,000
Total units accounted for ....................................     500,000    480,000         480,000             420,000


a40%   = 100% – 60% already done at the beginning of the period.
b50%   = 100% – 50% already done at the beginning of the period.




                                                                       8-38
Chapter 08 - Process Costing


8-40. (continued)

COSTS                                                                                                DETAILS
                                                                                 Prior
                                                                  Total Costs    department                           Manufacturing
                                                                                 costs        Materials   Labor       overhead
Costs to be accounted for: (Section 3)
  Costs in beginning WIP inventory...................              $ 255,200       $128,000   $ 80,000    $ 28,800       $18,400
   Current period costs .......................................    1,243,600        640,000     384,000    144,000        75,600
Total costs to be accounted for ..........................        $1,498,800       $768,000   $464,000    $172,800       $94,000

Cost per equivalent unit: (Section 4)
   Prior department costs ($640,000  500,000)                                        $1.28

   Materials ($384,000  480,000)....................                                             $0.80

   Labor ($144,000  480,000) ...........................                                                     $0.30

   Manufacturing overhead ($75,600  420,000)                                                                              $0.18




                                                                          8-39
Chapter 08 - Process Costing


8-40. (continued)
                                                                                                           Details
                                                                                     Prior                             Manufacturing
                                                                 Total Costs      department   Materials      Labor     overhead
                                                                                    costs
Costs accounted for: (Section 5)
 Costs assigned to units transferred out:
  Costs from beginning WIP inventory .............                $ 255,200       $128,000     $ 80,000            $      $18,400
                                                                                                              28,800
    Current costs added to complete beginning WIP inventory:
    Prior department costs ................................                 –0–         –0–
    Materials ......................................................        –0–                     –0–
    Labor ($0.30 x 40,000) ................................              12,000                               12,000
    Manufacturing overhead ($0.18 x 50,000) ...                           9,000                                              9,000
  Total costs from beginning inventory .............                   $276,200
Current costs of units started and completed:
  Prior department costs ($1.28 x 300,000)......                        384,000     384,000
  Materials ($0.80 x 300,000) ...........................               240,000                 240,000
  Labor ($0.30 x 300,000) ................................               90,000                               90,000
  Manufacturing overhead ($0.18 x 300,000) ...                           54,000                                            54,000
 Total costs of units started and completed ......                     $768,000
Total costs of units transferred out .....................           $1,044,200
Costs assigned to ending WIP inventory:
 Prior department costs ($1.28 x 200,000) ........                     $256,000     256,000
 Materials ($0.80 x 180,000) .............................              144,000                 144,000
 Labor ($0.30 x 140,000)...................................              42,000                               42,000
 Manufacturing overhead ($0.18 x 70,000) .......                         12,600                                            12,600
Total ending WIP inventory ................................            $454,600
Total costs accounted for ...................................        $1,498,800    $768,000    $464,000 $172,800          $94,000


                                                                        8-40
Chapter 08 - Process Costing


8-40. (continued)
b. The report to management should include the following items:
     Materials: The equivalent unit materials cost per unit ($0.80) is the same as management’s goal of $0.80.
     Labor: Equivalent unit labor costs per unit ($0.30) is below management’s goal of $0.40.
     Manufacturing overhead: Overhead costs per unit ($0.18) is equal to management’s goal of $0.18.




                                                             8-41
Chapter 08 - Process Costing




8-41. (60 min.) Prepare a Production Cost Report and Adjust Inventory Balances—Weighted Average Method:
      Elmhurst Parts.
a.
                                                                Elmhurst Parts
                                                   Production Cost Report—Weighted Average
Flow Of Production Units
                                                         (Section 1)
                                                         Physical units
Units to be accounted for:
 Beginning WIP inventory.................................. 80,000
 Units started this period ................................... 400,000
Total units to be accounted for ........................... 480,000
                                                                                           (Section 2)
                                                                                    COMPUTE EQUIVALENT UNITS
                                                                           Materials      Labor         Overhead
Units accounted for:
 Units completed and transferred out:
  From beginning inventory ..............................         80,000
  Started and completed currently ....................           280,000
  Total transferred out ......................................   360,000     360,000   360,000           360,000
 Units in ending WIP inventory ..........................        120,000     120,000    48,000   (40%)    48,000 (40%)
Total units accounted for ....................................   480,000     480,000   408,000           408,000




                                                                           8-42
Chapter 08 - Process Costing


8-41. (continued)


Costs                                                                                           Details
                                                                 Total costs    Materials      Labor      Overhead
Costs to be accounted for: (Section 3)
 Costs in beginning WIP inventory ....................           $ 1,222,800    $ 240,000 $ 546,000       $ 436,800
 Current period costs.........................................     5,534,400     1,560,000  2,208,000      1,766,400
Total costs to be accounted for ..........................        $6,757,200    $1,800,000 $2,754,000     $2,203,200
Cost per equivalent unit: (Section 4)
 Materials ($1,800,000  480,000) ..................                                 $3.75
 Labor ($2,754,000  408,000) .......................                                             $6.75
 Overhead ($2,203,200  408,000) .................                                                             $5.40
Costs accounted for: (Section 5)
 Costs assigned to units transferred out:
  Materials ($3.75 x 360,000) ...........................         $1,350,000    $1,350,000
  Labor ($6.75 x 360,000) ................................         2,430,000                 $2,430,000
  Overhead ($5.40 x 360,000) ..........................            1,944,000                              $1,944,000
 Total costs of units transferred out...................           5,724,000
Costs assigned to ending WIP inventory:
  Materials ($3.75 x 120,000) ...........................            450,000      450,000
  Labor ($6.75 x 48,000) ..................................          324,000                   324,000
  Overhead ($5.40 x 48,000) ............................             259,200                                259,200
 Total ending WIP inventory ..............................         1,033,200
Total costs accounted for ...................................     $6,757,200    $1,800,000 $2,754,000     $2,203,200




                                                                         8-43
Chapter 08 - Process Costing
8-41. (continued)

b. Adjustment required:
                                                 Work in                   Finished
                                                Process                     Goods
                                                  $793,152
Per problem statement ......................................              $337,560
Correct ...............................................................
                                                 1,033,200                 318,000 a
                                               ($240,048)
Difference ..........................................................     $ 19,560
Journal entry:

                                             240,048
  Work in Process ..............................................
   Finished Goods .............................................19,560
   Cost of Goods Sold ....................................... 220,488
Additional computations:
a20,000     units of finished-goods inventory ($3.75 + 6.75 + 5.40) = $318,000




c. Income would have been understated.
   Work in process would have been understated.
   Finished goods would have been overstated.




                                                                8-44
Chapter 08 - Process Costing


8-42. (40 min.) Prepare a Production Cost Report and Show Cost Flows Through
       Accounts—FIFO method: Recyclers, Inc.
                                              Recyclers, Inc.
                                 Production Cost Report—FIFO
a.
FLOW OF PRODUCTION UNITS                                                        (Section 2)
                                                                             Compute Equivalent
                                                                                   Units
                                                               (Section 1)     Conversion
                                                              Physical units      costs
Units to be accounted for:
 Beginning WIP inventory..................................           300
 Units started this period ...................................     2,700
Total units to be accounted for ...........................        3,000
Units accounted for:
 Units completed and transferred out:
  From beginning inventory ..............................          300     120 (40%)a
  Started and completed currently ....................           2,550   2,550
 Units in ending WIP inventory ..........................          150      30 (20%)
Total units accounted for ....................................   3,000   2,700
a40%   = 100% – 60% already done at the beginning of the period.




                                                        8-45
Chapter 08 - Process Costing
8-42. (continued)
COSTS                                                                Total costs   Conversion
                                                                                     costs
Costs to be accounted for: (Section 3)
 Costs in beginning WIP inventory........................              $   168      $    168
 Current period costs ............................................      10,800        10,800
Total costs to be accounted for .............................          $10,968       $10,968
Cost per equivalent unit: (Section 4)
 Conversion costs ($10,800  2,700) ....................                                 $4.00
Costs accounted for: (Section 5)
 Costs assigned to units transferred out:
  Costs from beginning inventory .........................             $     168    $     168
  Current costs added to complete beginning
           WIP inventory:
    Conversion costs ($4.00 x 120).......................                    480          480
 Total costs from beginning inventory ...................                  $ 648
 Current costs of units started and completed:
  Conversion costs ($4.00 x 2,550) ......................               10,200          10,200
 Total costs of units started and completed ..........                 $10,200
 Total costs of units transferred out ......................           $10,848
 Costs assigned to ending WIP inventory:
  Conversion costs ($4.00 x 30) ...........................                120            120
 Total ending WIP inventory .................................          $ 120
Total costs accounted for ......................................       $10,968       $10,968

b.                                          Work in Process
     Beginning inventory:
       Conversion costs                      168
     This period's costs:
       Conversion costs                  10,800       10,848a         To Finished Goods Inventory
     Ending inventory                       120
All costs have been accounted for.
            Various Payables                                 Finished Goods Inventory
                     10,800                                      10,848
a$10,848    = $648 + $10,200


c. The company’s target has been achieved. Production costs total $4.00 per unit, less
   than management’s target of $4.25.




                                                         8-46
Chapter 08 - Process Costing



8-43. (60 min.) FIFO Process Costing: Pantanal, Inc.

                                                                 Pantanal, Inc.
                                                            Assembling Department
                                                         Production Cost Report—FIFO
FLOW OF PRODUCTION UNITS                                                              (Section 2)
                                                       (Section 1)             COMPUTE EQUIVALENT UNITS
                                                                       Prior
                                                     Physical units department
                                                                      costs            Materials          Conversion
Units to be accounted for:
 Beginning WIP inventory .................................. 10,000
 Units started this period ...................................102,000
Total units to be accounted for ...........................112,000
Units accounted for:
 Units completed and transferred out:
  From beginning inventory .............................. 10,000             –0–     4,000   (40)% a     6,000   (60%) b
  Started and completed currently .................... 86,000             86,000    86,000              86,000
 Units in ending WIP inventory .......................... 16,000          16,000    14,400   (90%)       8,000   (50%)
Total units accounted for ....................................112,000    102,000   104,400             100,000


a40%   = 100% – 60% already done at the beginning of the period.
b60%   = 100% – 40% already done at the beginning of the period.




                                                                        8-47
Chapter 08 - Process Costing

8-43. (continued)

COSTS                                                                                         DETAILS
                                                                                   Prior
                                                                                department
                                                                  Total Costs     costs       Materials    Conversion
Costs to be accounted for: (Section 3)
 Costs in beginning WIP inventory ....................              $323,400      $ 98,000    $ 164,400     $ 61,000
 Current period costs .........................................    3,306,600      2,142,000      939,600     225,000
Total costs to be accounted for ..........................        $3,630,000     $2,240,000   $1,104,000    $286,000
Cost per equivalent unit: (Section 4)
 Prior department costs ($2,142,000  102,000)                                       $21.00
 Materials ($939,600  104,400) .......................                                            $9.00
 Conversion ($225,000  100,000)....................                                                            $2.25




                                                                        8-48
Chapter 08 - Process Costing

8-43. (continued)


                                                                                                                  Details

                                                                                                        Prior
                                                                                                     department
                                                                                       Total Costs     costs          Materials      Conversion
Costs accounted for: (Section 5)
 Costs assigned to units transferred out:
  Costs from beginning WIP inventory.....................................              $ 323,400      $ 98,000       $ 164,400              $
                                                                                                                                       61,000
    Current costs added to complete beginning WIP inventory:
    Prior department costs ........................................................          –0–           –0–
    Materials ($9.00 x 4,000) ...................................................         36,000                            36,000
    Conversion ($2.25 x 6,000) ...............................................            13,500                                       13,500
  Total costs from beginning inventory ....................................            $ 372,900
Current costs of units started and completed:
  Prior department costs ($21.00 x 86,000) .............................               $1,806,000     1,806,000
  Materials ($9.00 x 86,000) ....................................................         774,000                      774,000
  Conversion ($2.25 x 86,000) .................................................           193,500                                     193,500
 Total costs of units started and completed .............................              $2,773,500
Total costs of units transferred out ............................................      $3,146,400
Costs assigned to ending WIP inventory:
 Prior department costs ($21.00 x 16,000) ...............................              $ 336,000       336,000
 Materials ($9.00 x 14,400) ......................................................        129,600                      129,600
 Conversion ($2.25 x 8,000) .....................................................          18,000                                      18,000
Total ending WIP inventory .......................................................     $ 483,600
Total costs accounted for ..........................................................   $3,630,000    $2,240,000     $1,104,000       $286,000




                                                                                8-49
Chapter 08 - Process Costing



8-44. (40 min.)        Solving For Unknowns—FIFO Method.

a. The cost per equivalent unit is obtained by dividing the ending inventory costs by the
equivalent units in ending inventory;

                               $87,000 ÷ 10,000      = $8.70 per EU

Equivalent units worked this period are the sum of the equivalent units to:
     (a)    complete the beginning inventory
     (b)    start and complete some units, and
     (c)    to start the ending inventory

             which, for the problem are: 42,000 + 60,000 + 10,000 = 112,000


     The total costs incurred are the cost per equivalent unit times the equivalent units
     worked this period, that is 112,000  $8.70 = $974,400.

b.
     Units started and completed equals the units transferred out (units completed this
     period) less the units started in a previous period (beginning inventory):


                                 40,000   units transferred out
                                 –5,000   units in beginning inventory
                                 35,000   units started and completed.
c.


     Current units started equals units transferred out minus beginning inventory plus
     ending inventory or, in equation form:


                       Current units started   = TO – BB + EB
                                               = 9,500 – 4,000 + 3,000
                                               = 8,500 units




                                                  8-50
Chapter 08 - Process Costing
8-44. (continued)
d.   Equivalent units = Beginning inventory
                        x (1 – percentage of completion of beginning inventory)
                        + 100% of units started and completed
                        + ending inventory times its percentage of completion
                      = 5,600 equivalent units
Let X be the unknown percentage of completion. Then,
                 5,600 = 1,000 (1 – X) + 4,500 + (3,000 x 30%)
                 5,600 = 1,000 – 1,000X + 5,400
collecting terms:
                                      5,600 – 5,400 – 1,000 = –1,000X
                                                        800 = 1,000X
                                                          X = 80%



      Also, using BB =         TO + EB – TI
                     =         (4,500 + 1,000) + 900 – 5,600
                     =         800 units
                 800 =         1,000X
                   X =         80%




                                                 8-51
Chapter 08 - Process Costing


8-45. (50 min.)         Solving For Unknowns—Weighted-Average Method.
a. First, we compute the cost of ending inventory:


                               BB + TI (current work) = TO + EB
                                $11,400 + $108,600 = $115,200 + EB
                                                  EB = $120,000 – $115,200
                                                      = $4,800
    Equivalent units in ending inventory equals $4,800 divided by the cost per
    equivalent unit.
    Costs per equivalent unit is the $115,200 transferred out costs divided by the units
    transferred out:
                         $115,200 ÷ 28,800 units        = $4 per E.U


Cost assigned to ending inventory is based on the relationship:
$4,800 = Equivalent units in EB times $4.00 and solving for EU in EB

                                   EU in EB         = $4,800 ÷ $4
                                                    = 1,200 EU


b. The materials cost per equivalent unit is:
              $26,880 ÷ 12,800 units transferred out           = $2.10 per EU
    Since ending inventory contains direct materials cost of $5,040, it must contain
       2,400 ( = $5,040 ÷ $2.10) equivalent units.
    If the inventory is 25% complete with respect to direct materials costs, then these
    2,400 equivalent units represent 25% of the physical count of units in the ending
    inventory. Therefore, since 2,400 EU = .25 (units in EB)
    Then
                                      units in EB = 2,400 ÷ .25
                                                  = 9,600




                                                 8-52
Chapter 08 - Process Costing
8-45. (continued)


c. The inventory equation yields:
                                      BB + TI = TO + EB
    Given the information in the problem, we can compute the right hand side. There are
    4,800 (24,000 x 20%) equivalent units in ending inventory at a cost of $18,000. The
    cost per equivalent unit is $3.75 (or $18,000  4,800 EU).
    The right hand side of the equation is the total equivalent units represented by
    all costs in the account (72,000 EU) times the cost per equivalent unit ($3.75).
    The resulting $270,000 and the beginning inventory cost of $56,800 are entered in
    the equation:


                                 $56,800 + TI = $270,000
                      and solving for TI:
                                           TI = $270,000 – $56,800
                                              = $213,200
d. Units transferred out equals beginning inventory plus current work minus ending
   inventory. In equation form:
                           TO = BB + TI (current work) – EB
                              = 12,300 + 10,500 – 10,000
                              = 12,800
    Of the 12,800 units transferred out, 12,300 were from the beginning inventory.
    Therefore, 500 units were started and completed. That is, 12,800 completed this
    period less 12,300 started in a prior period equals the 500 started and completed this
    period.




                                             8-53
Chapter 08 - Process Costing


8-46. (50 min.)         Operation Costing—Work-in-Process Inventory: Washington, Inc.


      The solution to this problem is to apply process costing methods for the conversion
      costs and then add the cost of materials for each product. Because there is no
      beginning work-in-process inventory, FIFO and weighted-average process costing
      gives the same results.


a.
The material costs per unit are:

                               Material         Number of              Unit Material
               Product          Cost              Units                    Cost

            X-10 ..........    $75,000    ÷         500           =      $ 150
            X-20 ..........    135,000    ÷         300           =         450
            X-40 ..........    240,000    ÷         200           =       1,200


The conversion costs per equivalent unit are:
Department A:

                                                    Physical     Conversion Costs
                                                     Units       Equivalent Units
Flow of units:
  Units to be accounted for:
                                                         –0–
  Beginning WIP inventory ................................
  Units started this perioda                          1,000
                                                      1,000
    Total units to account for ............................
     Units accounted for:
     Completed and transferred outb                        840          840
     Units in ending inventoryc                            160
       Conversion costs (160 x 25%) ....................                 40
                                                        1,000
       Total units accounted for ............................           880


a   1,000 units = 500 X-10 + 300 X-20 + 200 X-40
b   840 units = 400 X-10 + 260 X-20 + 180 X-40
c   160 units = 1,000 units started – 840 units transferred out.




                                                     8-54
Chapter 08 - Process Costing
8-46. (continued)

                                                                 Conversion
                                                    Total          Costs
Flow of costs:
Costs to be accounted for:
                                                  $
 Costs in beginning WIP inventory ....................     –0–      $ –0–
                                                    264,000
 Current period costs.........................................      264,000
                                                 $ 264,000
   Total costs to be accounted for......................          $ 264,000
Cost per equivalent unit
 Conversion costs ($264,000 ÷ 880) .................                   $ 300


Department B:

                                                   Physical      Conversion Costs
                                                    Units        Equivalent Units
Flow of units:
  Units to be accounted for:
                                                       –0–
  Beginning WIP inventory ................................
  Units started this perioda                           440
                                                       440
    Total units to account for ............................
    Units accounted for:
    Completed and transferred outb                      390              390
    Units in ending inventoryc                            50
      Conversion costs (50 x 60%) ......................                  30
                                                        440
      Total units accounted for ............................             420
a   440 units = 260 X-20 + 180 X-40
b   390 units = 225 X-20 + 165 X-40
c   50 units = 440 units started – 390 units transferred out.

                                                                 Conversion
                                                    Total          Costs
Flow of costs:
Costs to be accounted for:
                                                  $
 Costs in beginning WIP inventory ....................     –0–     $    –0–
                                                      42,000
 Current period costs.........................................       42,000
                                                   $ 42,000
   Total costs to be accounted for......................           $ 42,000
Cost per equivalent unit
 Conversion costs ($42,000 ÷ 420) ...................                  $ 100



                                                      8-55
Chapter 08 - Process Costing
8-46. (continued)


Cost of units transferred to finished goods:


                              Unit               Unit                   Unit
           Product           Material         Department             Department         Unit Cost
                              Cost              A Cost                 B Cost

        X-10 ..........          $150 +         $ 300          +       $ –0–        =   $ 450
        X-20 ..........           450 +           300          +        100         =     850
        X-40 ..........         1,200 +           300          +        100         =   1,600
b.
Work-in-Process Ending Inventory Balances are:
Department A:

        Material cost                       Number           Unit
                                            of Units         Cost      Total Cost
          X-10 ........................       100          $150       $ 15,000
          X-20 ........................        40           450         18,000
          X-30 ........................        20         1,200         24,000
        Total material cost .....                                      $ 57,000

        Conversion costs .......              40              300        12,000
        Total ...........................                               $ 69,000
Department B:

        Material cost                       Number           Unit
                                            of Units         Cost      Total Cost
          X-20 ........................        35          $450         15,750
          X-30 ........................        15         1,200         18,000
        Total material cost .....                                      $ 33,750

        Conversion costs .......
         From Dept. A ..........              50              300        15,000
         From Dept. B ..........              30              100         3,000
        Total ...........................                               $ 51,750




                                                        8-56
Chapter 08 - Process Costing


8-47. (50 min.) Operation Costing—Work-in-Process Inventory: Miller Outdoor
      Equipment.
      The solution to this problem is to apply process costing methods for the conversion
      costs and then add the cost of materials for each product. Because there is no
      beginning work-in-process inventory, FIFO and weighted-average process costing
      gives the same results.
a.
The material costs per unit are:

                               Material         Number of              Unit Material
               Product          Cost              Units                    Cost

            Rookie ......      $12,000    ÷         600           =       $ 20
            Novice.......       11,520    ÷         480           =         24
            Hiker .........      8,700    ÷         290           =         30
            Expert .......       7,500    ÷         150           =         50
The conversion costs per equivalent unit are:
Stitching Department:

                                                    Physical     Conversion Costs
                                                     Units       Equivalent Units
Flow of units:
  Units to be accounted for:
                                                         –0–
  Beginning WIP inventory ................................
  Units started this perioda                          1,520
                                                      1,520
    Total units to account for ............................
     Units accounted for:
     Completed and transferred outb                     1,380         1,380
     Units in ending inventoryc                            140
       Conversion costs (140 x 40%) ....................                 56
                                                        1,520
       Total units accounted for ............................         1,436


a   1,520 units = 600 Rookie + 480 Novice + 290 Hiker + 150 Expert
b   1,380 units = 540 Rookie + 450 Novice + 270 Hiker + 120 Expert
c   140 units = 1,520 units started – 1,380 units transferred out.




                                                     8-57
Chapter 08 - Process Costing
8-47. (continued)

                                                                 Conversion
                                                     Total         Costs
Flow of costs:
Costs to be accounted for:
                                                  $
 Costs in beginning WIP inventory....................      –0–         $ –0–
                                                      50,260
 Current period costs ........................................        50,260
                                                   $ 50,260
   Total costs to be accounted for .....................            $ 50,260
Cost per equivalent unit
 Conversion costs ($50,260 ÷ 1,436)................                        $ 35


Customizing Department:

                                                   Physical      Conversion Costs
                                                    Units        Equivalent Units
Flow of units:
  Units to be accounted for:
                                                        –0–
  Beginning WIP inventory ................................
  Units started this perioda                            840
                                                        840
    Total units to account for ............................
    Units accounted for:
    Completed and transferred outb                       790                790
    Units in ending inventoryc                             50
      Conversion costs (50 x 20%) ......................                     10
                                                         840
      Total units accounted for ............................                800
a   840 units = 450 Novice + 270 Hiker + 120 Expert
b   790 units = 440 Novice + 250 Hiker + 100 Expert
c   50 units = 840 units started – 790 units transferred out.

                                                                 Conversion
                                                    Total          Costs
Flow of costs:
Costs to be accounted for:
                                                  $
 Costs in beginning WIP inventory....................      –0–     $    –0–
                                                      24,000
 Current period costs ........................................       24,000
                                                   $ 24,000
   Total costs to be accounted for .....................           $ 24,000
Cost per equivalent unit
 Conversion costs ($24,000 ÷ 800)...................                       $ 30



                                                      8-58
Chapter 08 - Process Costing
8-47. (continued)


Cost of units transferred to finished goods:


                             Unit               Stitching            Customizing
           Product          Material           Department            Department          Unit Cost
                             Cost               Unit Cost             Unit Cost

        Rookie ......             $20      +     $ 35           +      $ –0–         =    $ 55
        Novice ......              24      +       35           +        30          =      89
        Hiker .........            30      +       35           +        30          =      95
        Expert .......             50      +       35           +        30          =    115
b.
Work-in-Process Ending Inventory Balances are:
Stitching Department:

        Material cost                      Number              Unit
                                           of Units            Cost     Total Cost
          Rookie .....................        60              $20       $ 1,200
          Novice .....................        30               24            720
          Hiker........................       20               30            600
          Expert......................        30               50         1,500
        Total material cost ......                                       $ 4,020

        Conversion costs ........              56*             35         1,960
        Total...........................                                 $ 5,980
      * 140 units, 40% complete.




                                                        8-59
Chapter 08 - Process Costing
8-47. (continued)
Customizing Department:

        Material cost                               Number           Unit
                                                    of Units         Cost   Total Cost
          Novice.................................      10            $24         240
          Hiker ...................................    20             30         600
          Expert .................................     20             50      1,000
        Total material cost .................                                $ 1,840

        Conversion costs ...................
         From Stitching.....................            50           35       1,750
         From Customizing ...............               10*          30         300
           Total conversion costs .....                                       $2,050
        Total .......................................                        $ 3,890

        * 50 units, 20% complete.




                                                          8-60
Chapter 08 - Process Costing


8-48. (50 min.) Process Costing and Ethics – Increasing Production to Boost
      Profits: Pacific Siding, Inc.


a. The CEO and CFO expect to produce profits by reducing the unit cost of each sold.
   This will occur because of the fixed overhead costs. (Recall ―most of the overhead
   costs are fixed.‖) Because each unit transferred out in March will have a lower unit
   costs, reported costs of goods sold will be lower. Therefore, profit will be higher.




                                           8-61
Chapter 08 - Process Costing

8-48. (continued)
b. See the revised data entry section and production cost report below:

                                                 Data Entry Section
Unit Information                                                                              Percent Complete
                                                                       Units
                                                                      (board       Direct         Direct
                                                                       feet)      materials       labor          Overhead
Units in beginning WIP inventory (all completed this period)            250,000     n/a            n/a             n/a
Units started and completed during the period                           140,000        100%            100%           100%
Units started and partially completed during the period                 225,000         80%              85%           90%

                                                                                   Direct         Direct
Cost Information                                                                  materials       labor          Overhead
Costs in beginning WIP inventory                                                    $76,000          $90,000       $150,000
Costs incurred during the period                                                    $95,000         $102,000       $150,000




                                                               8-62
Chapter 08 - Process Costing

8-48. (continued)
                                    Revised Production Cost Report
                                         Month Ending March 31


Step 1: Summary of Physical Units and Equivalent Unit Calculations
                                                          Physical
Units to be accounted for                                   Units
 Units in beginning WIP inventory                               250,000
 Units started during the period                                365,000
Total units to be accounted for                                 615,000


                                                                                    Equivalent Units
                                                                               Direct      Direct
Units accounted for                                                           materials    labor     Overhead
 Units completed and transferred out                            390,000        390,000     390,000    390,000
 Units in ending WIP inventory                                  225,000        180,000     191,250    202,500
Total units accounted for                                       615,000        570,000     581,250    592,500



Step 2: Summary of Costs to be Accounted for
                                                           Direct              Direct
Costs to be accounted for                                 materials             labor     Overhead    Total
 Costs in beginning WIP inventory                               $76,000        $90,000 $150,000 $316,000
 Costs incurred during the period                                    95,000    102,000     150,000    347,000
Total costs to be accounted for                                $171,000 $192,000 $300,000 $663,000



Step 3: Calculation of Cost per Equivalent Unit




                                                              8-63
Chapter 08 - Process Costing

                                                            Direct            Direct
                                                          materials           labor     Overhead   Total
 Total costs to be accounted for (a)                           $171,000 $192,000 $300,000
 Total equivalent units accounted for                            570,000      581,250    592,500
Cost per equivalent unit (a) / (b)                               $0.3000      $0.3303    $0.5063   $1.1367


Step 4: Assign Costs to Units Transferred Out and Units in Ending WIP Inventory
                                                            Direct            Direct
                                                          materials           labor     Overhead   Total
 Costs assigned to units transferred out                       $117,000 $128,826 $197,468 $443,294
 Costs assigned to ending WIP inventory                              54,000    63,174    102,532   219,706
Total costs accounted for                                      $171,000 $192,000 $300,000 $663,000




                                                              8-64
Chapter 08 - Process Costing
8-48. (continued)
c. The costs assigned to units transferred out has decreased from $541,621 to
   $443,294, or $98,327. Because all the units transferred out will be sold before the end
   of March, profits will be $98,327 higher than originally planned.
d. This is not ethical. The reason for the production increase was solely to manipulate
   income and distort results for the year. There is no indication that the increase in
   production was to meet much larger demand.




                                           8-65
Chapter 08 - Process Costing


Solutions to Integrative Cases

8-49. (70 min.)         Show Cost Flows—FIFO Method: Vermont Co.

                                     Work in Process
Beginning Balance                 716,000               Transferred out:
Current work:                                 716,000 a  From beginning inventory
  materials (given)               300,400                From current work
  conversion (given)            1,287,000     240,320 a    materials
                                              833,976b     conversion costs
Ending Balance                    513,104


Additional computations:
a $240,320= 40,000 EU transferred x ($300,400 ÷ 50,000 EU for materials)
(40,000 EU = 50,000 – 10,000 in ending inventory)
b $833,976  = 40,500 EU transferred out x ($1,287,000 ÷ 62,500 EU for conversion costs;
     40,500 EU = 62,500 – 22,000 in ending inventory)

                                      Finished Goods
     Transferred in              1,790,296 a 1,432,237 To Cost of Goods Sold     (80%)
     Balance                       358,059
aFrom   total credits in Work in Process.

                                   Cost of Goods Sold
From Finished Goods              1,432,237 Overapplied overhead      55,000
                                             (See explanation below)
    Overhead applied in beginning WIP inventory is 125% of direct labor costs (i.e.,
    $325,000 ÷ $260,000). Since the application rate has not changed, the ratio of applied
    overhead to total conversion costs found in the beginning inventory should also hold
    for conversion costs this period.


     For this period, 1.25 D.L. + D.L. = $1,287,000
                            2.25 D.L. = $1,287,000
                                  D.L. = $572,000
     So, total conversion costs – direct labor = overhead applied
              $1,287,000 – $572,000 = $715,000
    Based on the balance in the manufacturing overhead account, actual overhead is
    $660,000. Therefore, overhead is overapplied by $55,000 (i.e., $715,000 – $660,000).



                                            8-66
Chapter 08 - Process Costing
8-49. (continued)
The journal entry to assign the overapplied overhead to cost of goods sold is:
                                                           55,000
   Overapplied overhead .......................................
             Cost of goods sold .................................   55,000




                                                       8-67
Chapter 08 - Process Costing


8-50. (45 min.) Job Costing, Process Costing, Choosing a Costing Method:
      Bouwens Corporation.
    This problem is computationally straight-forward, but requires the student to think
    about the use of the costs from the costing system and how to best reflect the
    production costs for a single product for two customer types.
a. The ―job‖ costs for each product are the unit costs in each building:
                                                   M-Solv      C-Solv
                                                   (B-155)     (B-159)
        Materials costs ....................        $14,000    $ 40,000
        Conversion costs ................            30,000     120,000
            Total costs ......................      $44,000    $160,000
        Units produced....................             2,000     10,000
        Unit cost ..............................         $22        $16


b. The ―process‖ costs for each product are the unit costs for both buildings divided by
   total production:
                                                   M-Solv      C-Solv
                                                   (B-155)     (B-159)    Total
        Materials costs ....................        $14,000    $ 40,000   $ 54,000
        Conversion costs ................            30,000     120,000    150,000
            Total costs ......................      $44,000    $160,000   $204,000
        Units produced....................             2,000     10,000     12,000
        Unit cost ..............................                              $17

c. Neither method best reflects the costs for the individual products. Jill is correct the
   military requires the use of a ―special‖ chemical and the costs assigned to M-Solv
   should reflect this. This suggests that the ―job‖ system in requirement (a) is correct. On
   the other hand, Jack is correct that the assignment of labor is not caused by product
   requirements. This suggests that the process system in requirement (b) is correct. The
   best system would be similar to an operations system where we accounted for the
   material cost by product and the conversion costs on a factory-wide basis.




                                                      8-68
Chapter 08 - Process Costing
8-50. (continued)
d. Compute the unit costs for materials and conversion costs separately.


                                                  M-Solv         C-Solv
                                                  (B-155)        (B-159)
        Materials costs ....................       $14,000       $ 40,000
        Units produced ....................           2,000        10,000
        Unit cost (materials) ............                  $7            $4

    Then compute conversion costs for the factory:
                                                  M-Solv         C-Solv
                                                  (B-155)        (B-159)       Total
        Conversion costs .................          30,000        120,000      $150,000
        Units produced ....................           2,000        10,000        12,000
        Unit cost (conversion)..........                                         $12.50

    Now, compute the unit product cost:
                                                  M-Solv         C-Solv
                                                  (B-155)        (B-159)
        Unit materials costs .............            $7.00         $4.00
        Conversion costs .................            12.50         12.50
            Total costs .......................     $19.50         $16.50




                                                     8-69

				
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