HorngrenIMA14eSM_ch14.doc

14-A1

CHAPTER 14

COVERAGE OF LEARNING OBJECTIVES

LEARNING OBJECTIVEFUNDA-

MENTAL

ASSIGN-MENT

MATERIALCRITICAL THINKING EXERCISES AND EXERCISESPROBLEMSCASES, NIKE 10K, EXCEL, COLLAB. & INTERNET EXERCISES

LO1: Distinguish between job-order costing and process costing.A1,B116,18,20,2949,51,52

LO2: Prepare summary journal entries for the typical transactions of a job-costing system.22,2541

LO3: Use an activity-based-costing system in a job-order environment.

LO4: Show how service organizations use job costing.17,2342

LO5: Explain the basic ideas underlying process costing and how they differ from job costing.3052

LO6: Compute output in terms of equivalent units.A2,B231,32,33,3644,45,46,47

LO7: Compute costs and prepare journal entries for the principal transactions in a process-costing system.A2,B232,33,34,35,37,3843,45,46,47

LO8: Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method.A3,B34850

LO9: Use backflush costing with a JIT production system.A4,B419

JOB-COSTING AND PROCESS-COSTING SYSTEMS14-A1 (15-20 min.) Answers are in thousands.

1.a.Direct materials inventory

360

Cash

360

b.Work in process inventory

330

Direct materials inventory

330

c.Work in process inventory

125

Accrued payroll

125

d.Factory department overhead control175

Various accounts

175

(80 + 55 + 40 = 175)

e.Work in process inventory

225

Factory department overhead

control

225

(180% x 125)

f.Finished goodsinventory

625

Work in process inventory

625

g.Cost of goods sold

400

Finished goods inventory

400

2.

Direct Materials Inventory _

Finished Goods Inventory ___

a.

360b.

330f.

625g.

400

* Bal. 30

* Bal.225

Work in Process Inventory Cost of Goods Sold____b.

330f.625

g.

400

c.

125

e.

225

Factory Department

680

Overhead Control_____* Bal. 55

d.

175e.

225

* 12/31/X7 Balance

14-A2 (10-15 min.)

1.

(Step 2)

(Step 1)

Equivalent Units

PhysicalDirectConversion

Flow of ProductionUnitsMaterialsCostsStarted and completed17,00017,00017,000

Work in process, ending inventory2,000

Direct materials added: 2,000 x 1

2,000

Conversion costs added: 2,000 x .5

1,000

Total accounted for19,000

Total work done

19,00018,000Total costs to account for (Step 3):$150,800$60,800$90,000

Divide by equivalent units (Step 4)

19,00018,000

Unit costs$ 8.20$ 3.20$ 5.002.Totals Details

Application of costs (Step 5):

To units completed and transferred to

Testing, 17,000 units ($8.20)$139,400To units not completed and still in

process, Feb. 28, 2,000 units:

Direct materials$ 6,400 2,000($3.20)

Conversion costs 5,0001,000($5.00)

Work in process, Jan. 31$ 11,400Total costs accounted for$150,800

14-A3(25-30 min.)

(Step 2)

(Step 1)

_ Equivalent Units___

Physical Direct Conversion

Flow of ProductionUnits Materials Costs

Work in process, beg. inv.10,000 (25%)*

Started80,000

To account for90,000

Completed and transferred out

during current period70,000 70,00070,000

Work in process, end. inv.20,000 (50%)*20,00010,000

Units accounted for90,000

Work done to date

90,00080,000

____Details__

DirectConversion

CostsTotalsMaterialsCosts

Work in process, beg. inv.$ 175,500$138,000$ 37,500

Costs added currently 1,486,500 852,000 634,500(Step 3)Total costs to account for$1,662,000$990,000$672,000

(Step 4)Divisor, equivalent units for

work done to date 90,000 80,000

Cost per equivalent unit$ 19.40$ 11.00$ 8.40(Step 5)Application of Costs

Completed and transferred

(70,000 units)$1,358,00070,000 ($19.40)

Work in process, ending inv.

(20,000 units):


Conversion costs 84,00010,000($8.40)

Total work in process$ 304,000

Total costs accounted for$1,662,000*Degree of completion for conversion costs.

14-A4(15-20 min.)

1.Materials inventories45,000

Accounts payable

45,000

Conversion costs 30,000

Accrued payroll

11,000

Miscellaneous accounts

19,000

Finished goods inventories (2,000 x $37)74,000

Materials inventories (2,000 x $22)

44,000

Conversion costs (2,000 x $15)

30,000

Cost of goods sold (1,980 x $37)73,260

Finished goods inventories

73,260

2.Cost of goods sold3,000

Conversion costs

3,000

To recognize actual conversion costs that were

$3,000 greater than the amount applied to the

products.

14-B1(20-25 min.) Entries are in British pounds ().

1.a.Direct materials inventory

109

Accounts payable

109

b.Work in process inventory

95


95

c.Work in process inventory

105

Accrued payroll

105

d.Factory department overhead control 90

Various accounts, such as cash or

accounts payable

90

e.Work in process inventory

84

Factory department overhead control

84

f.Finished goodsinventory

280


280

g.Cost of goods sold

350

Finished goodsinventory

350

h.Accounts receivable

600

Sales

600

2.

Direct Materials Inventory Finished Goods Inventory_

* Bal. 18

b.95

* Bal.100g.350a.

109

f.

280

* Bal. 32

* Bal. 30

Work in Process Inventory

Cost of Goods Sold

* Bal. 25f.

280

g.

350

b. 95

c.105

e. 84

Factory Department

309

Overhead Control

* Bal. 29

d.

90e.84

* 12/31/X7 Balance

14-B2(10-15 min.)

1.

(Step 2)

Equivalent Units

(Step 1)

Physical DirectConversion

Flow of Production

Units Materials Costs

Started and completed

600,000 600,000 600,000

Work in process, ending inv.300,000 300,000 150,000*

Units accounted for

900,000

Units work done to date

900,000 750,000Total costs to account for (Step 3)$2,295,000$1,620,000 $675,000

Divide by equivalent

units (Step 4)

900,000 750,000

Unit costs $2.70 $1.80 $ .90*300,000 x .5

2.


Totals

Details

To units completed and

transferred to Finishing,

600,000 units ($2.70)

$1,620,000To units not completed and still

in process, end, 300,000 units:

Direct materials

$ 540,000 300,000 ($1.80)

Conversion costs

135,000 150,000($.90)

Work in process, end

$ 675,000Total costs accounted for

$2,295,00014-B3(25-35 min.)

(Step 2)

(Step 1)

____Equivalent Units____Physical Direct Conversion

Flow of Production

Units Materials Costs

Work in process, beg. inv. 550 (40%)*

Started

7,150

To account for

7,700

Completed and transferred

out during current period,

550 + 7,150 400

7,300

7,300

7,300

Work in process, end. inv. 400 (20%)* 400

80

Units accounted for

7,700

Work done to date

7,700

7,380

__Details_____

DirectConversion

Costs

__Totals_ Materials Costs

Work in process, beg. inv.$ 5,104$ 3,190 $ 1,914

Costs added currently

101,064 65,340 35,724(Step 3) Total costs to account for $106,168$68,530 $37,638

(Step 4) Divisor, equivalent units

For work done to date

7,700 7,380

Cost per equivalent unit $14.00 $8.90 $5.10(Step 5)Application of Costs

Completed, (7,300 units) $102,2007,300 ($14.00)

Work in process, ending inventory

(400 units):

Direct materials (400)$ 3,560400($8.90)

Conversion costs (80) 408 80($5.10)

Total work in process$ 3,968

Total costs accounted for$106,168*Degree of completion for conversion costs.

14-B4(15 min.)

1.Materials inventories

15,500

Accounts payable

15,500

Conversion costs

6,300

Accrued payroll and

mscellaneous accounts

6,300

Cost of goods sold (1,500 x $14)

21,000

Materials inventories (1,500 x $9.80)

14,700

Conversion costs (1,500 x $4.20)

6,300

2.Conversion costs

300

Cost of goods sold

300

To recognize actual conversion costs that were

$300 less than the amount applied to the products.

14-1Three purposes of product costing are to satisfy differing demands for (a) inventory valuation and income determination in accordance with generally accepted accounting principles, (b) income tax reporting, and (c) guiding strategic and operational decision-making.

14-2The distinction between the job cost and the process cost methods centers largely around how product costing is accomplished. Unlike process costing, which deals with broad averages and great masses of like units, the essential feature of the job-cost method is the attempt to apply costs to specific jobs that may consist of either a single physical unit (a custom sofa) or a few like units (a dozen tables) in a distinct batch or job lot.

14-3The basic record for the accumulation of job costs is the job-cost sheet or job-cost record. Exhibit 14-1 shows a Job-Cost Sheet, and it also shows the related source documents. A file of current job-cost sheets becomes the supporting details for the Work-in-Process Inventory account.

14-4Source documents include materials requisitions and labor time tickets (time cards).

14-5 Examples of service industries that use the job-costing approach include repairing, consulting, legal, accounting, painting, dentistry, and income tax preparation.

14-6 No, the amount of value-chain activity not captured in either job-cost or process-cost systems is independent of the type of operating system used.

14-7Examples of process costing include flour, glass, paint, and beer.

14-8Examples of process costing include handling of mail, income tax returns, automobile registrations, and drivers license examinations.

14-9Five key steps in process cost accounting are

Step 1:Summarize the flow of physical units

Step 2:Calculate output in terms of equivalent units

Step 3:Summarize the total costs to account for, which are the total debits in Work in Process (that is, the costs applied to Work in Process)

Step 4:Calculate unit costs

Step 5:Apply costs to units completed and to units in ending work in process

14-10 The first two steps concentrate on what is occurring in physical or engineering terms. The financial impact of the production process is measured in the final three steps.

14-11 (1 x 10,000) + (.5 x 5,000) = 12,500 full-time-equivalent students.

14-12 Beginning inventories + Units started = Units transferred out + Ending inventories.

14-13 Transferred-in costs are accounted for operationally the same as direct materials added at the beginning of a production process. They differ from direct material costs because they are a combination of direct material and conversion costs from a previous department; thus, calling them a direct-material cost is inappropriate.

14-14 When actual conversion costs exceed the amount applied, the excess in the conversion cost account is charged directly to cost of goods sold; the treatment is similar to accounting for underapplied overhead.

14-15 In addition to inventory valuation and income determination, managers want accurate job costs as guides to pricing and to allocating effort among particular products, services, or customers. They are also necessary in contracts that reimburse the cost of a product or service.

14-16 The most important point is that product costing is an averaging process. The unit cost used for inventory purposes is the result of taking some accumulated cost and dividing it by some measure of production. The basic distinction between job order costing and process costing is the breadth of the denominator: in job order costing, it is small (for example, one painting, 100 advertising circulars, or one special packaging machine); but in process costing, it is large (for example, thousands of pounds, gallons, or board feet).

14-17 No. Some service firms trace only direct-labor costs to individual jobs. However, with advances in computer technology and needs for better job-cost information because of competition, more service firms are tracing additional costs to jobs. The more costs that are traced to jobs instead of being allocated, the more accurate are the job costs.

14-18 The central product costing problem in process costing is how each department should compute the cost of goods transferred out and the cost of goods remaining in the department.

14-19 No, but they are especially appropriate for companies with just-in-time systems. Any company with small inventories might find backflush costing appealing.

14-20 (5 min.)

a. and d. are service-sector companies

b. is merchandising

c. is manufacturing14-21 (10-15 min.) You may wish to use T-accounts. Amounts are in millions of dollars. You can also use the expression: ending balance (of any account) equals the beginning balance plus additions less subtractions or EB = BB + A - S. In this case Purchased is additions and Used is subtractions.

1.8 + 5 - 7 = 6 (BB + A - S = EB)

2.8 + 9 - 6 = 11 (BB + A - EB = S)

3.5 + Purchases - 7 = 8. Purchases = 10

4.Beginning inventory + 8 - 3 = 7. Beginning inventory = 2

14-22 (10-15 min.) Amounts are in thousands of dollars.

1.Finished goods inventory

128


128

Finished goods = 72 + 56 = 128

2.Debits: 12 + 50 + 25 + 55 =142

Credits: 72 + 56 =128

Balance, April 30 143.Accounts receivable

101

Sales

101

Sale of Job A13

Cost of goods sold

72


72

Cost of Job A13 sold

14-23 (10-15 min.)

Cancer Research Project

Medical School

Unit

Reference

Date Quantity Cost Amount Summary

Direct Materials:

Var. medical suppliesJan. 5

$ 925

Various chemicalsJan. 7

780$ 1,705

Direct Labor:

Research associatesJan. 5-12 120 hrs. $32 $3,840

Research assistantsJan. 7-12 180 hrs. $19 3,420 7,260

Project overhead

applied

Jan. 12$7,260 x .70 $5,082 5,082Total costs

$14,04714-24 (10 min.)

1.$6,500 + $3,900 = $10,400

2.$8,100

3.$3,200 + $8,800 = $12,000

14-25 (15 min.) Answers are in thousands of dollars.

1. a b c a b c

Construction Finished Cost of Construction Finished Cost of

in Process Houses, Houses in Process Houses, Houses

Job No. Sept. 30 Sept. 30 Sold Sept. Oct. 31 Oct. 31 Sold Oct.43

180

51

170

52

150

150

53 200

250161 115

135262 180

205371 118

154481 106 ___ ___ 1545 ___ ___

719 150 350 308 135 605

1200 + 50 2115 + 20 3180 + 25 4118 + 36 5106 + 48

2.

Sept. __ Oct.__

Finished houses inventory

500

590

Construction in process

500

590

Sept.: 180 + 170 + 150 = 500

Oct.: 250 + 135 + 205 = 590

3.Cash

345

Sales

345

To record sale of Job 53

Cost of houses sold

250

Finished houses inventory

250

To record cost of Job 53 sold

14-26 (30 min.)

The answers (in millions) are $15, $5, and $240.

Step-by-step entries are keyed alphabetically. The sequence depends on where the student prefers to start. You may wish to raise the question of whether the underapplied overhead should be prorated among the affected accounts at the end of the year.

__Direct Materials__ Work in Process

Bal. 15(a)210Bal. 5 (e) Completed420

(b)225

(a) Dir. Materials 210

240

210(c) Dir. Labor 125*

Bal. 30

(d) Applied overhead 200

___

540

420

Bal.

120

Finished Goods

Cost of Goods Sold

Bal.240(f)500

(f)500

(e)420

___

660

500 Bal.160

* $200 ( 160% = $125

14-27 (30 min.)

The answers (in millions) are $25, $22, and $32.

Step-by-step entries are keyed alphabetically. The sequence depends on where the student prefers to start. You may wish to raise the question of whether the underapplied overhead should be prorated among the affected accounts at the end of the year. Note the heavy ending Finished Goods.

Direct Materials

Work in Process

Bal.* 25(a)235

Bal.*

22 (e) Completed 493

(b)275

(a) Dir. Materials 235

300

235

(c) Dir. Labor 100

Bal.65

(d) Applied overhead 150

507

493

Bal.

14

Finished Goods

Cost of Goods SoldBal.* 32(f)350

(f)350

(e)493

525

350

Bal.175

* Let BB = beginning balance

Direct materials: BB + 275 235 = 65

BB = 25

Work in process: BB + 235 + 100 + 150 493 = 14

BB = 22

Finished goods: BB + 493 350 = 175

BB = 32

14-28 (5-10 min.)

Case A, $3,600,000 $2,000,000 = 180% of direct-labor cost

Case B, $5 x 450,000 = $2,250,000

Case C, $1,500,000 250,000 = $6 per machine hour

14-29 (5 min.)

Coca-Cola and Nally and Gibson are manufacturing companies. U. S. Post Office and Mckensey and Co. are service companies.

14-30 (5 min.)

(1)The debit to the work in process account when transferring a subcomponent from Process A to the assembly process is a transferred-in cost.

(2)The direct materials used in process A and assembly are variable-cost resources.

(3)Direct labor costs in process A and assembly are directly traced fixed- cost resources.

(4)An example of an indirect resource cost is the indirect material and indirect labor used for process A and the assembly process.

14-31 (5 min.)

The direct material is the limestone rock that is delivered to the plant. Because crushing and screening the rock can begin immediately, we assume that direct material is always 100% completed. Thus, the equivalent units of direct material is the entire 400 tons. The 320 tons of rock that have been stocked are 100% complete with respect to both direct labor and overhead. The 80 tons of rock that are in process at the end of March are 40% complete. This is 32 equivalent tons (80 tons x .40). Thus, the total work done during March is 400 tons of direct material and 352 (that is, 320 + 32) equivalent tons of direct labor and overhead.

14-32 (10-15 min.)

1.

(Step 2)

(Step 1)

Equivalent Units


Flow of Production

Units

Materials

Costs

Started and completed650,000650,000650,000

Work in process, ending inv.220,000220,000132,000*


Work done to date

870,000782,000Total costs to account

for (Step 3)$4,514,200$3,654,000$860,200


870,000782,000

Unit costs$5.30$4.20$1.10*220,000 x .60

2.Totals

Details


To units completed and transferred,

650,000 units ($5.30)$3,445,000To units still in process, end,

220,000 units:



132,000($1.10)

Work in process, end$1,069,200

Total costs accounted for$4,514,20014-33(15-20 min.)

1.

(Step 2)

Equivalent Units

(Step 1)


Flow of Production

Units

Materials

Costs

Units started and completed68,00068,00068,000

Work in process, end:6,000

Materials added: 6,000 x .90

5,400

Conversion costs: 6,000 x .70

4,200


Work done to date

73,40072,2002.

Details

TotalDirectConversion

CostsMaterials

Costs

Costs to account for (Step 3)$602,620$205,520$397,100


73,40072,200

Unit costs$8.30$2.80$5.50Application of costs (Step 5):

To units completed and

transferred, 68,000($8.30)$564,400 To units still in process, end,

6,000 units:

Direct materials$ 15,1205,400($2.80)


4,200($5.50)

Work in process, end$ 38,220

Total costs accounted for$602,620

14-34(10-15 min.)

1.Work in process -- Assembly60,800


60,800

Materials added to production in February


Accrued payroll

50,000

Direct labor in February


Factory overhead

40,000

Factory overhead applied in February

4.Work in process -- Testing139,400

Work in process -- Assembly

139,400

Cost of goods completed and transferred in

February from Assembly to Testing

The Key T-account would show:

Work in Process -- Assembly

1.Direct materials60,8004.Transferred out

2.Direct labor50,000

to Testing139,400

3.Factory overhead 40,000

Costs to account for150,800

Bal. February 2811,400

14-35(10-15 min.)

1.Work in process -- Assembly1,620,000


1,620,000

Materials added to production


Accrued payroll

415,000

Direct labor


Factory overhead

260,000

Factory overhead applied

4.Work in process -- Finishing1,620,000

Work in process -- Assembly

1,620,000

Cost of goods completed and transferred

from Assembly to Finishing

The key T-account would show:

Work in Process -- Assembly

1.Direct materials1,620,0004.Transferred out

2.Direct labor415,000

to Finishing1,620,000

3.Factory overhead 260,000

costs to account for2,295,000

Balance675,000

14-36 (10-15 min.)

(Step 2)

(Step 1)Equivalent Units


Flow of ProductionUnitsMaterialsCosts

Work in process, beg. inventory*

20,000

Started 80,000

To account for100,000Completed and transferred out

(100,000-10,000)90,00090,00090,000

Work in process, ending inventory** 10,000 2,000a 1,000aUnits accounted for100,000Work done to date

92,00091,000

*Degree of completion: materials, 80%; conversion costs, 40%

**Degree of completion: materials, 20%; conversion costs, 10%

a.20 x 10,000 and .10 x 10,000

14-37(5-10 min.)

1.Work in process, Department A 65,340

Direct-materials inventory

65,340

2.Work in process, Department A35,724

Various accounts

35,724

3.Work in process, Department B 102,200

Work in process, Department A 102,200

14-38 (5-10 min.)

1.Work in process, Assembly Department852,000


852,000

2.Work in process, Assembly Department634,500

Various accounts

634,500

3.Work in process, Finishing Dept.1,358,000

Work in process, Assembly Dept.

1,358,000

14-39(10-15 min.)

Dell would most likely use a job-cost system with each order considered a job. Because each order is assembled from a set of common parts, there is a single cost for each part. Most of the parts are purchased, so the cost is the purchase price. If some parts are made, the production cost would be used as the cost of the part.

Each order would call for several materials, and each would be added to the order's job-cost sheet. Labor would be incurred in assembly, so the direct-labor cost could be allocated to each order based on the number of hours used for assembly. If assembly is highly automated, it is possible that no labor is considered "direct", and labor becomes one more overhead item.

Overhead costs would be allocated based on one or more cost drivers. Possible drivers include direct-labor hours or cost (if direct labor is measured separately), hours in assembly, or number of component parts. For a highly automated process, that latter would be a likely cost driver.

Testing and quality control costs might be part of overhead. Alternately, costs of testing final computers could be charged directly to the order (job). If different types of computers require different amounts of testing, this is a logical allocation method.

14-40(15-25 min.)

1.

Ending inventory= Beginning inventory + Purchases - Usage

90= 70 + Purchases - 468

Purchases= 488

2.Total manufacturing costs= Direct + Direct + Factory

charged to production materials labor overhead

864= 468 + DL + .8 DL

864 - 468= 1.8 DL

1.8 DL= 396

DL= 220

3.Cost of goods= Cost of goods available - Beginning finished

manufacturedfor salegoods

= 1,004 - 100

= 9044.Cost of goods= Cost of goods available - Ending finished

sold

for sale goods

= 1,004 - 120

= 88414-41(25-35 min.)

1.Job 412 ($ 9,000 + $4,000 + $8,000)$21,000

Job 413 ($12,000 + $5,000 + $10,000) 27,000

Work-in-process inventory, April 30$48,000

2.The job-cost records indicate an overhead application rate of $8,000 $4,000 = 200% or $10,000 $5,000 = 200%.

3.a.Work-in-process inventory15,500


15,500

Job 412 of $2,500 + Job 414 of $13,000

b.Work-in-process inventory6,000

Accrued payroll

6,000

$1,500 + $2,500 + $2,000

c.Work-in-process inventory12,000

Factory department overhead control

12,000

$6,000 x 200%

d.Finished goods inventory (Job 412)28,000

Work-in-process inventory

28,000

$21,000 + $2,500 + $1,500 + 200% of $1,500

e.Cost of goods sold33,000


33,000

The $33,000 amount is given.

Direct Materials Inventory

Work-in-Process Inventory

Bal.19,000(a)15,500Bal.48,000(d)28,000

Bal.3,500

(a)15,500

(b)6,000

Accrued Payroll

(c) 12,000

(b)6,000

81,500

Bal.53,500

Fact. Dept. Overhead Control

Finished Goods Inventory

(c)12,000Bal.18,000(e)33,000

(d)28,000

Bal.13,000

Cost of Goods Sold

Bal.450,000

(e)33,000

Bal.483,000

4.Job 413 ($27,000 + $2,500 + 200% of $2,500)$34,500

Job 414 ($13,000 + $2,000 + 200% of $2,000) 19,000

Work-in-process inventory, May 31$53,50014-42(20 min.)

1.Overhead

Compensation for nonchargeable time, .15 x $3,600,000$ 540,000

Other costs 1,449,000

(a)Total overhead$1,989,000

(b)Direct labor, .85 x $3,600,000$3,060,000

Overhead application rate, (a) (b) 65%2.Hourly rate:

$60,000 (48 x 40) = $60,000 1,920$31.25

Many students will forget that "his work there" includes an overhead application:

Direct labor, 10 x $31.25$312.50

Applied overhead, $312.50 x .65 203.13

Total costs applied$515.63

We point out that direct-labor time on a job is usually compiled for all classes of engineers and then applied at their different compensation rates. Overhead is usually not applied on the piecemeal basis demonstrated here. Instead, it is applied in one step after all the labor costs of the job have been accumulated.

14-43(30-40 min.) See details below.

1.$265 per ton

2.$2,525

3.This requirement cannot be answered directly from the data using the weighted average process cost method. We must look at the equivalent units of conversion work done in May only:

Work done through the end of May302 tons

Work done before May (3/4 x 24 tons) 18 tons

Work done in May284 tons

Budget for 284 tons:

$16,000 + ($80 x 284) = $38,720

Budget - Actual = $38,720 - $40,670 = $1,950 unfavorable

During May, conversion costs were $1,950 (or 5%) above budget.

(Step 2)

(Step 1)

Equivalent Units


Flow of ProductionUnitsMaterialsCosts

Work in process, beg. inv.24 (3/4)*

Started288To account for312Completed and

transferred out during current period297297297

Work in process, end. inv. 15 (1/3)* 15 5Units accounted for312

Work done to date

312302*Degree of completion for conversion costs.

Details

DirectConversion

CostsTotalsMaterialsCosts

Work in process, beg. inv.$ 6,000$ 2,880*$ 3,120

Costs added currently 75,230 34,560* 40,670(Step 3) Total costs to account for$81,230$37,440$43,790

(Step 4) Divisor, equivalent units

for work done to date

312 302Cost per equivalent unit$ 265$ 120$ 145(Step 5) Application of CostsCompleted and transferred

(297 tons)$78,705297 ($265)

Work in process, end. inv.

(15 tons):

Direct materials$ 1,80015($120)

Conversion costs 725

5($145)

Total work in process$ 2,525Total costs accounted for$81,230* $120 x 24 = $2,880; $120 x 288 = $34,560.

14-44 (15-20 min.)

1.Potato chips are a homogeneous product with low unit cost that must be processed through a sequence of continuous steps (sequential processing). Potato chips are produced continuously rather than to order. As a result, a process-cost system is the most logical cost accounting system to use for product-costing purposes.

2.Activity-based accounting systems are most beneficial when products and/or processes are characterized by diversity. Diversity can be in the volume of product produced or the degree of complexity in the production process across product lines. Since neither of these forms of diversity characterize the potato chip industry, it is doubtful that activity-based accounting would pass the cost-benefit test. It may be that some specialty producers of gourmet potato chips (for example, Saratoga Potato Chip Company in New York) may have sufficient diversity to warrant use of an activity-based accounting system.

3.Frito-Lay produces over 6,000 pounds of potato chips each hour, 24 hours a day. This translates into more than 52 million pounds per year. Since at any point in time the work-in-process amounts to no more that one-half an hour (it takes 30 minutes to completely produce the end product), work-in-process accounts for about 3,000/52,000,000 or .006 percent of total annual production. The implication is that work-in-process can be ignored for product-costing purposes due to its immaterial amount.

14-45 (15-20 min.)

1.(Step 2)

(Step 1)

Equivalent Units

PhysicalMaterialsConversion

Units

& Supplies

Costs

Units started and completed

1,800,0001,800,0001,800,000

Work in process, end

1,200,0001,200,000

960,000*

Units accounted for

3,000,000

-

-

Work done to date

3,000,0002,760,000* 1,200,000 x .8

2.

Details

TotalMaterialsConversion

Costs& Supplies

Costs

Cost to account for (Step 3)

$5,430,000$ 600,000$4,830,000


3,000,0002,760,000

Unit costs

$1.95$.20$1.753.Ending work in process, 1,200,000 units:

Materials and supplies, 1,200,000 x $.20

$ 240,000

Conversion costs, 960,000 x $1.75

1,680,000

Cost of 1,200,000 returns not yet completed

$1,920,00014-46 (20 min.)1.

(Step 2)

(Step 1)

Equivalent Units

PhysicalSofteningConversionFlow of ProductionUnitsPlasticCompoundCostsWork in process, beginning0

Started 60,000To account for60,000Completed40,00040,00040,00040,000

Work in process, ending20,000 (40%)20,000 0 8,000


Work done to date

60,00040,00048,000

Total

CostsCostsCosts to account for (Step 3)$572,000$300,000$80,000$192,000


60,000 40,000 48,000Cost per equivalent unit$11.00$5.00$2.00$4.002. Application of Costs (Step 5)Totals

Details

Units completed (40,000 x $11)$440,000Work in process, ending:

Material -- Plastic$100,000 20,000($5)

Conversion costs 32,0008,000($4)

Total work in process, ending$132,000Total costs accounted for$572,000

14-47 (20-30 min.)

1.

Step 2

(Step 1)

Equivalent Units

PhysicalDirect

Conversion

Flow of Production

Flow

MaterialsCartons

Costs

Units started and completed145,000145,000145,000145,000

Work in process, end5,000---------

Direct materials added:

5,000 x 1.00---5,000------

Cartons added: none

Conversion costs:

5,000 x .95

---------4,750


---

---

---Work done to date

150,000145,000149,750

Details

TotalDirect

Conversion

CostsMaterialsCartonsCosts

Costs accounted for (Step 3)3,767,0002,250,000319,0001,198,000

Divide by equivalent units

(Step 4)

150,000 145,000 149,750Unit costs25.2015.002.208.002. Application of costs (Step 5):

To units completed,

145,000 (25.20) 3,654,000Work in process, end,

5,000 units:

Direct materials 75,0005,000(15.00)


4,750(8.00)

Work in process, end 113,000Total costs accounted for3,767,00014-48(15-20 min.)

1.Materials and parts inventory287,000

Accounts payable or cash

287,000

Conversion costs92,000

Accrued payroll, accounts payable,

accumulated depreciation, etc.

92,000

Finished goods inventory (11,500 x $32)368,000

Materials and parts inventory (11,500 x 24)276,000

Conversion costs (11,500 x $8)

92,000

2.Cost of goods sold368,000


368,000

All costs incurred during April are charged to cost of goods sold in April. This assumes that all altimeters are sold and shipped immediately upon production. Therefore, the balance in Finished Goods Inventory is zero at the end of the month.

3.Because the balance in the Conversion Costs account must be zero at the end of the month, and because only $92,000 was transferred out of the Conversion Costs account while $95,000 was added to the account, the remaining $3,000 must be transferred to Cost of Goods Sold:

Cost of goods sold3 ,000


14-49 (20-25 min.)

Contract manufacturers make apparel, footware, and equipment products for Nike. Almost all these products would be made through process manufacturing so the costing system would be a process-cost system. Nike distribution centers would probably use a job-order system based on retail account orders.

Nike operates 8 distribution centers in the United States. Four centers are located in California, 2 in Oregon, 1 in Tennessee, and 1 in New Hampshire. There are about 27,000 retail accounts (customers) in the United States.

The choice of cost-allocation base is a key to accurate costing of products and customers. Managers at the various distribution centers give much thought to the selection of plausible and reliable cost-allocation bases since there are many from which to choose for a specific activity- or cost-resource pool. The suggestions below should serve as a starting point for discussion.

The cost of the forklift resource could be allocated to the listed activities using the number of hours the forklift is used for each activity. The ABC system designer would ask a knowledgable manager for a percentage breakdown of the time the forklift is used for each of the activities. Then these percentages would be multiplied times the total cost of operating the forklift to calculate the allocation.

Occupancy costs could be allocated using the square feet of space used by each activity. Variable computer costs could be allocated using number of lines entered on the related source document (purchase order for supplies, sales order from customers, and invoices for payment from customers).

14-50 (30-40 min.) For the solution, see the Prentice Hall Web site, www.prenhall.com/

14-51 (45 min. or more)

The purpose of this exercise is to make students think about the characteristics of real production processes and how to account for them. Depending on the assumptions students make about the type of production process used in each of these examples, they may suggest a different type of accounting system than those listed below. These are just suggestions about what the groups might conclude.

a.Process costing, because there are large volumes of identical product.

b.Process costing. Although each application is unique, it is likely that identifying the differences and trying to account for them is not cost-benefit efficient.

c.Probably job costing. It depends on how many identical couches students think that Ethan Allan makes at one time. If each is unique, or if small batches are produced, a job-costing system is most likely used.

d.Job costing. Major construction projects are generally treated as a single job.

e.Process costing. Refining oil into gasoline is a classic process-costing environment, where there is a single continuous process.

f.Job costing. Each order at Kinkos is unique. The only question is whether it is cost-benefit efficient to determine job costs for each order.

g.Job costing. Each ship built is a single job, although there may be parts that are produced in a process that allows process costing.

14-52 (30-40 min.)

NOTE TO INSTRUCTOR. This solution is based on the Web sites as they were in early 2007. Be sure to examine the current Web sites before assigning this problem, as the information there may have changed.

1. Lands End is mainly a merchandising firm. The main activity of the firm is selling clothing to individuals, although the firm also engages in some corporate sales. Process-costing systems are used to determine the average cost of like products that are produced. Lands End purchased large quantities of finished products but the costs are readily determinable so averaging is not really necessary.

2. La-Z-Boy is a manufacturing firm. Its main activity is manufacturing furniture. The firm states that it has an extensive line of furniture products in many types and designs. The decision by La-Z-Boy to use a job-order cost system or a process-costing system (or some hybrid) depends on the nature of the products and production system. If the company produces large enough quantities of a type of furniture using the same processes, a process-cost system might be best. For small quantities of products that are custom manufactured for a specific customer, a job-order costing system might be best.

3. Tasty Baking Company is a manufacturing firm. The firm makes large volumes of snack cakes in a continuous process. The cakes are moving in a continuous flow through the factory. Because each cake is alike, produced in large volumes with small unit costs, a process-costing system would be ideal.

4. In the 2006 annual report, the types of inventories included finished goods, work-in-process, and raw materials. This information was found in the footnotes to the annual report. From the information in the financial statements and footnotes, it is not possible to determine what type of costing system the company uses.PAGE 880

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