Solution Manual04

CHAPTER 4Process Costing and Hybrid Product-Costing Systems

ANSWERS TO REVIEW QUESTIONS

4-1 In a job-order costing system, costs are assigned to batches or job orders of production. Job-order costing is used by firms that produce relatively small numbers of dissimilar products. In a process-costing system, costs are averaged over a large number of product units. Process costing is used by firms that produce large numbers of nearly identical products.

4-2 Process costing would be an appropriate product-costing system in the following industries: petroleum, food processing, lumber, chemicals, textiles, and electronics. Each of these industries is involved in the production of very large numbers of highly similar products.

4-3 Process costing could be used in the following nonmanufacturing enterprises: processing of tests in a medical diagnostic laboratory, processing of tax returns by the Internal Revenue Service, and processing of loan applications in a bank.

4-4 Product-costing systems are used for the following purposes:

(a) In financial accounting: Product costs are needed to value inventory on the balance sheet and to compute the cost-of-goods-sold expense on the income statement.

(b) In managerial accounting: Product costs are needed for planning, for cost control, and to provide managers with data for decision making.

(c) In reporting to interested organizations: Product cost information is used to report on relationships between firms and various outside organizations. For example, hospitals keep track of the costs of medical procedures that are reimbursed by insurance companies or by the federal government under the Medicare program.

4-5 An equivalent unit is a measure of the amount of productive effort applied in the production process. In process costing, costs are assigned to equivalent units rather than to physical units.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies, Inc.Managerial Accounting, 5/e 4-1

4-6 The following four steps are used in process costing:

(a) Analysis of physical flow of units: All of the units in the beginning and ending inventories, those started during the period, and those transferred out to finished goods are accounted for.

(b) Calculation of equivalent units: The equivalent units of activity are computed for direct material and for conversion.

(c) Computation of unit costs: The costs per equivalent unit for direct material and conversion are computed.

(d) Analysis of total costs: The cost of the goods completed and transferred out and the cost of the ending work-in-process inventory are determined.

4-7 (a) Journal entry to enter direct-material costs into Work-in-Process Inventory account:

Work-in-Process Inventory: Department A..................... XXXRaw-Material Inventory........................................... XXX

(b) Journal entry to record transfer of goods from the first to the second department in the production sequence:

Work-in-Process Inventory: Department B..................... XXXWork-in-Process Inventory: Department A.......... XXX

4-8 Transferred-in costs are the costs assigned to partially completed products that have been transferred from one production department into the next department.

4-9 The $175,000 of transferred-in costs were incurred prior to January 1 and in the mixing department. The costs must have been incurred prior to January 1, because they are included in the cost of the beginning work-in-process inventory on that date. Moreover, these costs must have been incurred in the mixing department, because they have been transferred into the cooking department.

4-10 The name ''weighted-average method'' comes from the fact that the cost per equivalent unit computed under this method is a weighted average of costs incurred during the current period and costs incurred during prior periods.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies, Inc.4-2 Solutions Manual

4-11 The difference between normal and actual costing lies in the calculation of the manufacturing-overhead cost of the current period. Under actual costing, the manufacturing-overhead cost of the current period is the actual overhead cost incurred during the period. Under normal costing, the current-period manufacturing overhead is computed as the product of the predetermined overhead rate and the actual level of the cost driver used to apply manufacturing overhead.

4-12 If manufacturing overhead were applied according to some activity base (or cost driver) other than direct labor, then direct-labor costs and manufacturing-overhead costs would be accounted for separately instead of being combined into one account called "conversion costs." Thus, instead of two columns for direct-material and conversion costs, there would be three columns: direct material, direct labor, and manufacturing overhead.

4-13 Operation costing is a hybrid product-costing system that is used when conversion activities are very similar across product lines, but the direct materials differ significantly. This is often the case in batch manufacturing operations. Conversion costs are accumulated by department, and process-costing methods are used to assign these costs to products. In contrast, direct-material costs are accumulated by job order or by batch, and job-order costing is used to assign direct-material costs to products.

4-14 The departmental production report is the key document in a process-costing system rather than the job-cost sheet used in job-order costing. The departmental production report shows the analysis of the physical flow of units, the calculation of equivalent units, the computation of the cost per equivalent unit, and the analysis of the total costs incurred in the production department. The report shows the cost of the ending work-in-process inventory as well as the cost of the goods completed and transferred out of the department.

4-15 There is no direct material in the March 1 work in process for the stitching department because direct material (rawhide lacing) is added at the end of the process in that department.


SOLUTIONS TO EXERCISES

EXERCISE 4-16 (10 MINUTES)

The general formula for all three cases is the following:

Work-in-process, beginning

+ Units started during month

– Units completed during month

= Work-in-process,ending

Using this formula, the missing amounts are:

1. 12,000 units

2. 5,300 kilograms

3. 750,000 gallons


All three of these companies manufacture large numbers of relatively homogeneous products (i.e., lumber and paper). Therefore, process costing is an appropriate product-costing system.



1. 6,000 equivalent units (refer to (a) in the following table)

2. 4,400 equivalent units (refer to (b) in the following table)

CALCULATION OF EQUIVALENT UNITS: RAINBOW GLASS COMPANYWeighted-Average Method

Physical Units

Percentage of

Completion with Respect to Conversion

Equivalent Units

Direct Material Conversion

Work in process, October 1.... 1,000 60%Units started during October. . 5,000Total units to account for........ 6,000

Units completed and transferred out during October........... 4,000 100% 4,000 4,000

Work in process, October 31. . 2,000 20% 2,000 400Total units accounted for........ 6,000 _____ ____Total equivalent units.............. (a) 6,000 (b) 4,400


CALCULATION OF EQUIVALENT UNITS: TERRA ENERGY COMPANY - LODI PLANTWeighted-Average Method

Physical Units

Percentage of

Completion with

Respect to Conversion

Equivalent UnitsDirect

Material ConversionWork in process, November 1................ 2,000,000 25%Units started during November.............. 950,000 Total units to account for....................... 2,950,000

Units completed and transferredout during November......................... 2,710,000 100% 2,710,000 2,710,000

Work in process, November 30.............. 240,000 80% 240,000 192,000Total units accounted for....................... 2,950,000 ________ ________Total equivalent units............................. 2,950,000 2,902,000



CALCULATION OF EQUIVALENT UNITS: FIT-FOR-LIFE FOODS CORPORATIONWeighted-Average Method

Physical Units

Percentage of

Completion with

Respect to Direct

Material

Percentage of

Completion with



Material ConversionWork in process, January 1.... 20,000 80% 60%Units started during the year. . 120,000Total units to account for........ 140,000

Unit completed and transferred out during the year............. 125,000 100% 100% 125,000 125,000

Work in process, December 31 15,000 70% 30% 10,500 4,500Total units accounted for........ 140,000 ______ _______Total equivalent units.............. 135,500 129,500


CALCULATION OF COST PER EQUIVALENT UNIT: IDAHO LUMBER COMPANYWeighted-Average Method

Direct Material Conversion Total

Work in process, November 1................... $ 65,000 $180,000 $ 245,000 Costs incurred during November............. 425,000 690,000 1,115,000 Total costs to account for......................... $490,000 $870,000 $1,360,000 Equivalent units.......................................... 7,000 1,740Costs per equivalent unit.......................... $70* $500† $570

*$70 = $490,000 ÷ 7,000†$500 = $870,000 ÷ 1,740



CALCULATION OF COST PER EQUIVALENT UNIT: OTSEGO GLASS COMPANYWeighted-Average Method


Work in process, June 1......................... $ 37,000 $ 36,750 $ 73,750 Costs incurred during June................... 150,000 230,000 380,000 Total costs to account for...................... $187,000 $266,750 $453,750 Equivalent units....................................... 17,000 48,500Costs per equivalent unit....................... $11.00* $5.50† $16.50

*$11.00 = $187,000 ÷ 17,000†$5.50 = $266,750 ÷ 48,500



SAVANNAH TEXTILES COMPANYWeighted-Average Method


Work in process, September 1.................. $ 94,000 $ 44,400 $138,400 Costs incurred during September............ 164,000 272,800 436,800 Total costs to account for......................... $258,000 $317,200 $575,200 Equivalent units.......................................... 60,000 52,000Costs per equivalent unit.......................... $4.30 $6.10 $10.40

1. Cost of goods completed andtransferred out during September:

..................................................50,000$10.4

0$520,000

2. Cost remaining in September 30work in process:

Direct material (10,000*$4.30) $43,000Conversion (2,000*$6.10)..... 12,200Total............................................... 55,200

Total costs accounted for................ $575,200

*Equivalent units in September 30 work in process:

DirectMaterial Conversion

Total equivalent units (weighted average)......................... 60,000 52,000

Units completed and transferred out................................. (50,000) (50,000) Equivalent units in ending work in process...................... 10,000 2,000



TULSA PAPERBOARD COMPANYWeighted-Average Method


Work in process, February 1.................... $ 5,500 $ 17,000 $ 22,500 Costs incurred during February.............. 110,000 171,600 281,600 Total costs to account for........................ $115,500 $188,600 $304,100 Equivalent units........................................ 110,000 92,000Costs per equivalent unit......................... $ 1.05 $ 2.05 $ 3.10

1. Cost of goods completed andtransferred out during February:

.................................................... 90,000$3.10

$279,000

2. Cost remaining in February 28 workin process:

Direct material (20,000*$1.05) $ 21,000Conversion (2,000*$2.05)..... 4,100Total............................................... 25,100

Total costs accounted for................. $304,100

*Equivalent units in February 28 work in process:


Total equivalent units (weighted average)....................... 110,000 92,000 Units completed and transferred out................................ (90,000) (90,000) Equivalent units in ending work in process..................... 20,000 2,000



1. Diagram of production process:Work-in-Process Inventory:

Preparation Department

Batch P25 Batch S33

Accumulatedby

department

Conversion costs: Direct-labor

Manufacturing overhead

Work-in-Process Inventory:Finishing Department

Batch P25 Batch S33

Accumulatedby

batch

Direct-material

costs

Work-in-Process Inventory:Packaging Department

Batch P25

Finished-Goods Inventory


EXERCISE 4-25 (CONTINUED)

2. The product cost for each basketball is computed as follows:

Professional ScholasticDirect material:.....................................................................

Batch P25 ($42,000 ÷ 2,000)........................................... $21.00 -0- Batch S33 ($45,000 ÷ 4,000)........................................... -0- $11.25

Conversion: Preparation Department............................... 7.50 7.50 Conversion: Finishing Department................................... 6.00 6.00 *Conversion: Packaging Department................................. .50 -0- Total product cost............................................................... $35.00 $24.75

*The two production departments each worked on a total of 6,000 balls, but the Packaging Department handled only the 2,000 professional balls.

3. Journal entries:

Work-in-Process Inventory: Preparation Department........... 39,500*Raw-Material Inventory................................................... 39,500

*$39,500 = $42,000 of direct material for batch P25 – $2,500 of packaging material

Work-in-Process Inventory: Preparation Department........... 45,000*Raw-Material Inventory................................................... 45,000

*Direct-material cost for batch S33.

Work-in-Process Inventory: Preparation Department........... 45,000*Applied Conversion Costs............................................. 45,000

*$45,000 = 6,000 units$7.50 per unit

Work-in-Process Inventory: Finishing Department............... 129,500*Work-in-Process Inventory: Preparation Department 129,500

*$129,500 = $39,500 + $45,000 + $45,000


EXERCISE 4-25 (CONTINUED)

Work-in-Process Inventory: Finishing Department............... 36,000*Applied Conversion Costs............................................. 36,000

*$36,000 = 6,000 units$6.00 per unit

Work-in-Process Inventory: Packaging Department............. 66,500*Finished-Goods Inventory....................................................... 99,000†

Work-in-Process Inventory: Finishing Department..... 165,500

*$66,500 = $39,500 + (2,000$7.50) + (2,000$6.00).

These are the costs accumulated for batch P25 only.†$99,000 = $45,000 + (4,000$7.50) +

(4,000$6.00).These are the costs accumulated for batch S33 only.

Work-in-Process Inventory: Packaging Department............. 3,500Raw-Material Inventory................................................... 2,500*Applied Conversion Costs............................................. 1,000†

*Cost of packaging material for batch P25.†$1,000 = 2,000 units$.50 per unit

Finished-Goods Inventory....................................................... 70,000*Work-in-Process Inventory: Packaging Department... 70,000

*$70,000 = $66,500 + $3,500



1. Work-in-Process Inventory: Pouring Department............... 1,090,000Raw-Material Inventory.................................................. 70,000Wages Payable............................................................... 340,000Manufacturing Overhead............................................... 680,000

2. Work-in-Process Inventory: Finishing Department............. 900,000Work-in-Process Inventory: Pouring Department....... 900,000

3. Work-in-Process Inventory: Finishing Department............. 725,000Raw-Material Inventory................................................ 25,000Wages Payable.............................................................. 280,000Manufacturing Overhead............................................. 420,000

4. Finished-Goods Inventory...................................................... 400,000Work-in-Process Inventory: Finishing Department... 400,000


SOLUTIONS TO PROBLEMS

PROBLEM 4-27 (50 MINUTES)

1. Physical flow of units:

Physical Units

Work in process, 1/1/x1............................................................................ 200,000Units started during 20x1......................................................................... 1,000,000Total units to account for......................................................................... 1,200,000

Units completed and transferred out during 20x1................................. 900,000Work in process, 12/31/x1........................................................................ 300,000Total units accounted for......................................................................... 1,200,000

2. Equivalent units:

Physical Units

Percentage of

Completion with


Equivalent Units


Work in process, 1/1/x1............... 200,000 80%Units started during 20x1............ 1,000,000Total units to account for............ 1,200,000

Units completed and transferredout during 20x1........................ 900,000 100% 900,000 900,000

Work in process, 12/31/x1........... 300,000 50% 300,000 150,000Total units accounted for............ 1,200,000 ________ ________Total equivalent units.................. 1,200,000 1,050,000


PROBLEM 4-27 (CONTINUED)

3. Costs per equivalent unit:


Work in process, 1/1/x1.................................. $ 200,000 $ 504,000a $ 704,000Costs incurred during 20x1........................... 1,300,000 3,192,000b 4,492,000Total costs to account for.............................. $1,500,000 $3,696,000 $5,196,000Equivalent units.............................................. 1,200,000 1,050,000Costs per equivalent unit............................... $1.25c $3.52d $4.77e

aConversion cost = direct labor + overhead= direct labor + (60%direct labor)= 160%direct labor= 160%$315,000= $504,000

bConversion cost = 160%direct labor= 160%$1,995,000= $3,192,000

c$1.25 = $1,500,000 ÷ 1,200,000d$3.52 = $3,696,000 ÷ 1,050,000e$4.77 = $1.25 + $3.52



4. Cost of ending inventories:

Cost of goods completed and transferred out:

.................................................. 900,000$4.77

$4,293,000

Cost remaining in 12/31/x1 work-in-process inventory:

Direct material:

...................

300,000$1.25

$375,000

Conversion:

...................

150,000$3.52

528,000

Total cost of 12/31/x1 work in process....................................................... $903,000

Check: Cost of goods completed and transferred out............................ $4,293,000Cost of 12/31/x1 work-in-process inventory............................... 903,000 Total costs accounted for............................................................. $5,196,000

The cost of the ending work-in-process inventory is $903,000

Ending finished-goods inventory: Of the 900,000 units completed during 20x1, 200,000 units remain in finished-goods inventory on December 31, 20x1. Therefore:

$4,293,000(200,000 ÷ 900,000) = $954,000*

The cost of the ending finished-goods inventory is $954,000.

*Also, $954,000 = 200,000$4.77 per unitPROBLEM 4-28 (45 MINUTES)

1. Physical Units

Work in process, June 1............................................................................. 50,000


Units started during June.......................................................................... 200,000Total units to account for........................................................................... 250,000

Units completed and transferred out during June.................................. 190,000Work in process, June 30........................................................................... 60,000 Total units accounted for........................................................................... 250,000

2.

Physical Units

Percentage of

Completion with


Equivalent Units


Work in process, June 1........... 50,000 40%Units started during June......... 200,000 Total units to account for......... 250,000

Units completed and transferredout during June.................... 190,000 100% 190,000 190,000

Work in process, June 30......... 60,000 60% 60,000 36,000 Total units accounted for......... 250,000 Total equivalent units............... 250,000 226,000

3.Direct

Material Conversion TotalWork in process, June 1................ $120,000 $ 34,400 $154,400 Costs incurred during June.......... 492,500 349,800 842,300 Total costs to account for............. $612,500 $384,200 $996,700 Equivalent units.............................. 250,000 226,000Costs per equivalent unit.............. $2.45 $1.70 $4.15



4. Cost of goods completed and transferred out during June:

.................................................... 190,000$4.15

$788,500

Cost remaining in June 30 work-in-process inventory:

Direct material:

.................

60,000$2.45

$147,000

Conversion:

..................

36,000$1.70

61,200

Total cost of June 30 work in process......................................................... $208,200

Check: Cost of goods completed and transferred out............................... $788,500 Cost of June 30 work-in-process inventory................................... 208,200 Total costs accounted for................................................................ $996,700



The missing amounts are shown below. A completed production report follows.

Units started during July........................................................................................ 45,000Units completed and transferred out during July................................................ 50,000Total equivalent units: conversion........................................................................ 56,000

Work in process, July 1: conversion..................................................................... $ 79,800Costs incurred during July: direct material.......................................................... 371,850Cost per equivalent unit: conversion.................................................................... 13.20Cost of goods completed and transferred out during July................................. 1,072,500Cost remaining in ending work-in-process inventory: direct material.............. 123,750

PRODUCTION REPORT: VESUVIUS TILE COMPANYWeighted-Average Method

Physical Units

Percentage of

Completion with



Material ConversionWork in process, July 1.................... 20,000 30%Units started during July.................. 45,000Total units to account for................. 65,000

Units completed and transferred out during July............................. 50,000 100% 50,000 50,000

Work in process, July 31.................. 15,000 40% 15,000 6,000 Total units accounted for................. 65,000 _____ _____ Total equivalent units....................... 65,000 56,000




Work in process, July 1...................................... $164,400 $ 79,800 $ 244,200 Costs incurred during July................................. 371,850 659,400 1,031,250 Total costs to account for................................... $536,250 $739,200 $1,275,450 Equivalent units................................................... 65,000 56,000Costs per equivalent unit.................................... $8.25* $13.20† $21.45**

*$8.25 = $536,250 ÷ 65,000†$13.20 = $739,200 ÷ 56,000**$21.45 = $8.25 + $13.20

Cost of goods completed and transferred out during July:

............................................................50,000$21.45

$1,072,500

Cost remaining in July 31 work-in-process inventory:

Direct material:

.............................

15,000$8.25 $ 123,750

Conversion:

.............................

6,000$13.20 79,200

Total cost of July 31 work in process....................................................... $202,950

Check: Cost of goods completed and transferred out... $1,072,500Cost of July 31 work-in-process inventory......... 202,950 Total costs accounted for..................................... $1,275,450


1. a.


Physical Units

Percentage of

Completion with



Material ConversionWork in process, May 1.................... 25,000 40%Units started during May.................. 30,000Total units to account for................. 55,000

Units completed and transferred out during May.......... 35,000 100% 35,000 35,000

Work in process, May 31.................. 20,000 80% 20,000 16,000Total units accounted for................. 55,000 _____ _____Total equivalent units....................... 55,000 51,000

b.Direct

Material Conversion Total

Costs per equivalent unit $5.60 $48.70 $54.30*

*$54.30 = $5.60 + $48.70



c. Cost of goods completed and transferred out during May:

35,000 $54.30 $1,900,500

Cost remaining in May 31 work-in-process inventory:

Direct material:

......................20,000 $5.60 $112,000

Conversion:

...............................16,000 $48.70

779,200

Total cost of May 31 work in process.................................................... $891,200

Check: Cost of goods completed and transferred out............................. $1,900,500Cost of May 31 work-in-process inventroy ................................ 891,200 Total costs accounted for.............................................................. $2,791,700

2. Journal entry:

Finished-Goods Inventory................................................ 1,900,500Work-in-Process Inventory.................................................................. 1,900,500



1.Physical

Units Work in process, April 1............................................................................. 10,000 Units started during April........................................................................... 100,000 Total units to account for........................................................................... 110,000

Units completed and transferred out during April................................... 80,000 Work in process, April 30........................................................................... 30,000 Total units accounted for...................................................................................... 110,000

2.

PhysicalUnits

Percentage of

Completion with



Material ConversionWork in process, April 1...................10,000 20%Units started during April.................100,000 Total units to account for.................110,000

Units completed andtransferred out during April.........80,000 100% 80,000 80,000

Work in process, April 30 30,000 33 1/3% 30,000 10,000 Total units accounted for.................110,000 ______ _____ Total equivalent units....................... 110,000 90,000

3.Direct

Material Conversion TotalWork in process, April 1.....................................$ 22,000 $ 4,500 $ 26,500 Costs incurred during April................................ 198,000 158,400 356,400 Total costs to account for...................................$220,000 $162,900 $382,900 Equivalent units...................................................110,000 90,000Costs per equivalent unit....................................$2.00 $1.81 $3.81



4. Cost of goods completed and transferred out during April:

.............................................................80,000$3.81

$304,800

Cost remaining in April 30 work-in-process inventory:

Direct material:

.............................

30,000$2.00

$60,000

Conversion:

.............................

10,000$1.81

18,100

Total cost of April 30 work-in-process.................................................... $78,100

Check: Cost of goods completed and transferred out......................... $304,800Cost of April 30 work-in-process inventory............................. 78,100Total costs accounted for.......................................................... $382,900



1.

Physical Units

Percentage of

Completion with



Material ConversionWork in process, August 1............... 40,000 80%Units started during August............. 80,000Total units to account for................. 120,000

Units completed and transferredout during August......................... 100,000 100% 100,000 100,000

Work in process, August 31............. 20,000 30% 20,000 6,000Total units accounted for................. 120,000 ______ ______Total equivalent units....................... 120,000 106,000

2.Direct

Material Conversion Total

Costs per equivalent unit $1.15 $10.28 $11.43*

*$11.43 = $1.15 + $10.28

3. Cost of goods completed and transferred out during August:

..........................................................100,000$11.43

$1,143,000



4. Cost remaining in August 31 work-in-process inventory:

Direct material:

.............................

20,000$1.15 $23,000

Conversion:

.............................

6,000$10.28 61,680

Total cost of August 31 work in process..................................................... $ 84,680

Check: Cost of goods completed and transferred out.............................. $1,143,000Cost of August 31 work-in-process inventory............................... 84,680 Total costs accounted for:............................................................... $1,227,680

5. Journal entry:

Finished-Goods Inventory................................................. 1,143,000Work-in-Process Inventory..................................... 1,143,000



1. Direct material cost was $1,404,000:

XY634……….. $ 267,000AA788………. 689,000GU321………. 448,000 Total……. $1,404,000

Goodson’s total direct-labor payroll amounted to $126,500 for 6,325 hours of work ($126,500 ÷ $20 per hour). Thus, conversion cost was $506,000:

Direct labor……………………………….…….. $126,500Overhead applied (6,325 hours x $60)…….. 379,500 Total………………………………………….. $506,000

2. Goods completed during April cost $1,872,000 (24,000 units x $78) as the following calculations show:

PhysicalUnits

PercentageOf

CompletionWith


Equivalent Units


Work in process, April 1………………. 4,000 75%Units started during April…………….. 25,000Total units to account for…………….. 29,000

Units completed and transferred out during April…………………….. 24,000 100% 24,000 24,000Work in process, April 30…………….. 5,000 40% 5,000 2,000 Total units accounted for……………... 29,000Total equivalent units………………….. 29,000 26,000



DirectMaterial Conversion Total

Work in process, April 1…………………… $ 220,000 $ 66,000 $ 286,000Costs incurred during April………………. 1,404,000 506,000 1,910,000 Total costs to account for…………………. $1,624,000 $572,000 $2,196,000Equivalent units……………………………... 29,000 26,000Cost per equivalent unit…………………… $56a $22b $78c

a$1,624,000 ÷ 29,000 = $56b$572,000 ÷ 26,000 = $22c$56 + $22 = $78

3. The cost of the ending work-in-process inventory is $324,000:

Direct material (5,000 x $56)…….. $280,000Conversion cost (2,000 x $22)….. 44,000 Total……………………………. $324,000

4. (a) No material would be added during May. All material is introduced at the start of Goodson’s manufacturing process, and these units were begun in April.

(b) Since the work-in-process inventory is 40% complete at the end of April, 60% of the conversion would be done in May.

5. Given that the ending work-in-process inventory is at the 40% stage of completion, these units would not have reached the 70% point in April where HH887 is added. Therefore, there would be zero equivalent units with respect to part HH887 in the ending work-in-process inventory.



1. The ending work-in-process inventory consisted of 500 units (300 + 900 – 700).

2. The cost of goods completed during June totaled $57,400 (700 units x $82):

PhysicalUnits

PercentageOf

CompletionWith


Equivalent Units


Work in process, June 1………………. 300 30%Units started during June…………….. 900 Total units to account for……………... 1,200

Units completed and transferredduring June………………………….. 700 100% 700 700

Work in process, June 30……………... 500 60% 500 300 Total units accounted for……………… 1,200Total equivalent units………………….. 1,200 1,000


Work in process, June 1…………………… $15,000 $ 6,300 $21,300Costs incurred during June………………. 45,000 25,700 70,700 Total costs to account for…………………. $60,000 $32,000 $92,000Equivalent units……………………………... 1,200 1,000Cost per equivalent unit……………………. $50a $32b $82c

a$60,000 ÷ 1,200 = $50b$32,000 ÷ 1,000 = $32c$50 + $32 = $82

Finished-Goods Inventory…………………………… 57,400Work-in-Process Inventory…………………. 57,400

3. The cost of the June 30 work-in-process inventory is $34,600:

Direct materials (500 x $50)……... $25,000Conversion cost (300 x $32)…….. 9,600 Total……………………………… $34,600



4. Equivalent units measure the amount of manufacturing activity (i.e., for direct material or conversion) that has been applied to a batch of physical units. If, for example, a company has 600 physical units in process that are 40% complete as to conversion, the firm has done the equivalent amount of conversion activity as would be required to do all of the conversion work for 240 units (600 x 40%).

Equivalent units are needed to state manufacturing activity on a common measurement scale. One cannot add completed units to units in process. Such a combination is like adding apples and oranges, as some units are complete and some are incomplete. Instead, these units are first converted to equivalent units, and the latter are then used in unit-cost calculations.



The missing amounts are shown below. A completed production report follows.

Work in process, May 1 (in units).......................................................................... 15,000Units completed and transferred out during May................................................ 65,000Total equivalent units: conversion........................................................................ 71,000

Work in process, May 1: conversion..................................................................... $ 37,500Costs incurred during May: direct material.......................................................... 570,000Cost per equivalent unit: conversion.................................................................... 12.25Cost of goods completed and transferred out during May................................. 1,407,250Cost remaining in ending work-in-process inventory: direct material.............. 94,000

PRODUCTION REPORT: HERCULES TIRE AND RUBBER COMPANYWeighted-Average Method

Percentageof

Completionwith Equivalent Units

Physical Respect to DirectUnits Conversion Material Conversion

Work in process, May 1................. 15,000 20%Units started during May............... 60,000Total units to account for.............. 75,000

Units completed and transferredout during May..................... 65,000 100% 65,000 65,000

Work in process, May 31............... 10,000 60% 10,000 6,000Total units accounted for.............. 75,000 _____ _____Total equivalent units.................... 75,000 71,000




Work in process, May 1................. $135,000 $ 37,500 $ 172,500Costs incurred during May............ 570,000 832,250 1,402,250Total costs to account for............. $705,000 $869,750 $1,574,750Equivalent units.............................. 75,000 71,000Costs per equivalent unit.............. $9.40* $12.25† $21.65**

*$9.40 = $705,000 ÷ 75,000†$12.25 = $869,750 ÷ 71,000**$21.65 = $9.40 + $12.25



Cost of goods completed and transferred out during May:

.......................................................... 65,000$21.65 $1,407,250

Cost remaining in May 31 work-in-process inventory:

Direct material:

........................ 10,000$9.40 $94,000

Conversion:

......................... 6,000$12.25 73,500

Total cost of May 31 work-in-process................................................................ $167,500

Check: Cost of goods completed and transferred out....... $1,407,250Cost of May 31 work-in-process inventory............ 167,500Total costs accounted for....................................... $1,574,750



1. a.Percentage

ofCompletion

with RespectTax to

Returns Conversion(physical (labor and Equivalent Units

units) overhead) Labor OverheadReturns in process, February 1...... 200 25%Returns started in February............ 825 Total returns to account for............ 1,025

Returns completedduring February......................... 900 100% 900 900

Returns in process, February 28.... 125 80% 100 100 Total returns accounted for............ 1,025 ____ ____ Total equivalent units of activity.... 1,000 1,000

b.Labor Overhead Total

Returns in process, February 1................... £ 6,000 £ 2,500 £ 8,500Costs incurred during February.................. 89,000 45,000 134,000Total costs to account for............................ £95,000 £47,500 £142,500Equivalent units............................................. 1,000 1,000Costs per equivalent unit............................. £95.00 £47.50 £142.50

2. Cost of returns in process on February 28:

Labor: equivalent unitscost per equivalent unit100£95.00.................................................... £ 9,500

Overhead: equivalent unitscost per equivalent unit100£47.50.................................................... 4,750

Total cost of returns in process on February 28.......................................... £14,250



1. PRODUCTION REPORT: MIXING DEPARTMENT(Weighted-Average Method)

Percentageof

Completionwith Equivalent Units

Physical Respect to DirectUnits Conversion Material Conversion

Work in process, November 1....... 4,000 75%Units started during November.... 16,000 Total units to account for.............. 20,000

Units completed and transferredout during November.......... 15,000 100% 15,000 15,000

Work in process, November 30 5,000 20% 5,000 1,000Total units accounted for.............. 20,000 ____ _ _ ____Total equivalent units.................... 20,000 16,000


Work in process, November 1....... $ 22,800 $ 46,510 $ 69,310Costs incurred during November. 81,600* 196,690 † 278,290Total costs to account for............. $104,400 $ 243,200 $347,600Equivalent units.............................. 20,000 16,000

Costs per equivalent unit.............. $5.22 $15.20 $20.42

*$81,600 = $10,000 + $51,000 + (4,000 ÷ 10,000)($51,500)†$196,690 = $103,350 + (.40)($103,350) + $52,000



Cost of goods completed and transferred out during November:

..........................................................15,000$20.42 $306,300

Cost remaining in November 30 work-in-process inventory

Direct material:

............................. 5,000$5.22 $26,100

Conversion

.........................1,000$15.20 15,200

Total cost of November 30 work in process...................................................... $41,300

Check: Cost of goods completed and transferred out......... $306,300 Cost of November 30 work-in-process inventory. . . 41,300 Total costs accounted for.......................................... $347,600

2. a. Work-in-Process Inventory: Mixing Department............. 81,600

Raw-Material Inventory............................................ 81,600

b. Work-in-Process Inventory: Mixing Department............. 103,350

Wages Payable.......................................................... 103,350

c. Work-in-Process Inventory: Mixing Department............. 93,340*Manufacturing Overhead......................................... 93,340

*$93,340 = (.40)($103,350) + ($52,000)

d. Work-in-Process Inventory: Finishing Department........ 306,300Work-in-Process Inventory: Mixing Department.. . 306,300



1. The unit costs and total costs for each of the products manufactured by Plasto Corporation during the month of May are calculated as follows:

Extrusion Form Trim FinishUnits produced..................... 16,000 11,000 5,000 2,000 Material costs........................ $192,000 $ 44,000 $15,000 $12,000

Unit material cost.......... 12.00 4.00 3.00 6.00 Conversion costs*................ 392,000 132,000 69,000 42,000

Unit conversion cost..... 24.50 12.00 13.80 21.00

*Direct labor and manufacturing overhead.



Unit CostsPlastic Sheets

Standard Model

Deluxe Model

Executive Model

Material costs:Extrusion........................ $12.00 $12.00 $12.00 $12.00

Form................................ 4.00 4.00 4.00 Trim................................. 3.00 3.00 Finish.............................. 6.00

Conversion costs:Extrusion........................ 24.50 24.50 24.50 24.50 Form................................ 12.00 12.00 12.00 Trim................................. 13.80 13.80 Finish.............................. _ _ _ 21.00

Total unit cost....................... $36.50 $52.50 $69.30 $96.30 Units produced.....................

5,000 6,000 3,000 2,000

Total product cost*............... $182,500 $315,000 $207,900 $192,600

*Total costs accounted for:

Product Total Product CostsPlastic sheets $182,500 Standard model 315,000 Deluxe model 207,900 Executive model 192,600 Total $898,000

2. Journal entries:

Work-in-Process Inventory: Extrusion.............................. 584,000Raw-Material Inventory............................................. 192,000Applied Conversion Costs....................................... 392,000

Finished-Goods Inventory.................................................. 182,500Work-in-Process Inventory: Extrusion.................... 182,500

Work-in-Process Inventory: Forming................................ 577,500Work-in-Process Inventory: Extrusion.................... 401,500Raw-Material Inventory............................................. 44,000Applied Conversion Costs....................................... 132,000


Finished-Goods Inventory.................................................. 315,000


Work-in-Process Inventory: Forming...................... 315,000

Work-in-Process Inventory: Trimming.............................. 346,500Work-in-Process Inventory: Forming...................... 262,500Raw-Material Inventory............................................. 15,000Applied Conversion Costs....................................... 69,000

Finished-Goods Inventory.................................................. 207,900Work-in-Process Inventory: Trimming.................... 207,900

Work-in-Process Inventory: Finishing............................... 192,600Work-in-Process Inventory: Trimming.................... 138,600Raw-Material Inventory............................................. 12,000Applied Conversion Costs....................................... 42,000

Finished-Goods Inventory.................................................. 192,600Work-in-Process Inventory: Finishing.................... 192,600



1. Conversion cost per unit in department I:

t

*Note that all of the products sold after processing in departments I, II, or III were produced orginally in department I.

2. Conversion cost per unit in department II:

*Note that all of the products sold after processing in departments II and III were colored in department II.

3. Cost of a clear glass sheet:

=direct material perunit in department I +

conversion cost perunit in department I



4. Cost of an unetched, colored glass sheet:

=cost per clearglass sheet +

direct materialper unit in department II +

conversion cost perunit in department II

5. Cost of an etched, colored glass sheet:

=cost per unetched

colored glass sheet +conversion cost perunit in department III


1. Conversion costs:

Rolling Molding Punching DippingDirect labor.................................... $300,000 $112,000 $128,000 $ 45,000 Manufacturing overhead............... 450,000 168,000 192,000 67,500 Total conversion cost.................... $750,000 $280,000 $320,000 $112,500

Total units produced: Rolling only............................. 20,000 Rolling, molding, punching 8,000 8,000 Rolling, molding, punching,

dipping................................ 3,000

Conversion cost per unit.............. $37.50 $35.00 $40.00 $37.50



2. Product costs:

CeralamSheets Sold Nonreflective Reflectiveafter Ceralam Ceralam Total

Rolling Housings Housings CostsDirect material:

Ceralam sheets.................... $480,000 $200,000 $120,000 $ 800,000Chemical dip........................ 30,000 30,000

Conversion costs:Rolling.................................. 450,000a 187,500a 112,500a 750,000

Molding................................. 175,000b 105,000b 280,000 Punching.............................. 200,000c 120,000c 320,000 Dipping................................. _______ ________ 112,500d 112,500

Total cost..................................... $930,000 $762,500 $600,000 $2,292,500Units manufactured.................... 12,000 5,000 3,000Unit cost...................................... $77.50 $152.50 $200.00

aNumber of unitsrolling cost per unit ($37.50)bNumber of unitsmolding cost per unit ($35.00)cNumber of unitspunching cost per unit ($40.00)dNumber of unitsdipping cost per unit ($37.50)

3. Journal entries:

Work-in-Process Inventory: Rolling.................................................1,550,000Raw-Material Inventory........................................................... 800,000*Applied Conversion Costs...................................................... 750,000†

*$800,000 = direct-material cost for ceralam sheets†$750,000 = conversion cost in rolling operation



Finished-Goods Inventory.................................................................930,000*Work-in-Process Inventory: Rolling...................................... 930,000

*$930,000 = 12,000 ceralam sheets sold afterrolling$77.50 per unit

Cost of Goods Sold............................................................................930,000*Finished-Goods Inventory...................................................... 930,000

*$930,000 = cost of ceralam sheets sold afterrolling

Work-in-Process Inventory: Molding...............................................620,000*Work-in-Process Inventory: Rolling....................................... 620,000

*$620,000 = cost remaining in Work-in-Process Inventory: Rolling= $1,550,000 – $930,000

Work-in-Process Inventory: Molding...............................................280,000*Applied Conversion Costs...................................................... 280,000

*$280,000 = conversion cost in molding operation

Work-in-Process Inventory: Punching.............................................900,000*Work-in-Process Inventory: Molding..................................... 900,000

*$900,000 = cost remaining in Work-in-Process Inventory: Molding= $620,000 + $280,000

Work-in-Process Inventory: Punching.............................................320,000*Applied Conversion Costs...................................................... 320,000

*$320,000 = conversion cost in punching operation


Finished-Goods Inventory.................................................................762,500*Work-in-Process Inventory: Punching.................................. 762,500


*$762,500 = 5,000 nonreflective ceralam housingssold after punching$152.50 per unit

Cost of Goods Sold............................................................................762,500*Finished-Goods Inventory...................................................... 762,500

*$762,500 = cost of nonreflective ceralamhousings sold after punching

Work-in-Process Inventory: Dipping................................................457,500*Work-in-Process Inventory: Punching.................................. 457,500

*$457,500 = cost remaining in Work-in-ProcessInventory: Punching

= $900,000 + $320,000 – $762,500

Work-in-Process Inventory: Dipping................................................142,500Raw-Material Inventory........................................................... 30,000*Applied Conversion Costs...................................................... 112,500†

*$30,000 = direct-material cost for chemical dip†$112,500 = conversion cost in dipping operation

Finished-Goods Inventory.................................................................600,000*Work-in-Process Inventory: Dipping..................................... 600,000

*$600,000 = 3,000 reflective ceralam housingssold after dipping$200.00 per unit

Cost of Goods Sold............................................................................600,000Finished-Goods Inventory...................................................... 600,000



1. a. Cost of units completed and transferred to finished-goods inventory during May:

Units completed and transferred out............................................... 11,900Total cost per equivalent unit........................................................... _ $9.00 Cost of units completed and transferred out.................................. $107,100

b. To compute the cost of the Finishing Department's work-in-process inventory on May 31, first determine the number of units in ending work-in-process inventory, as follows:

Work-in-process inventory, May 1 (in units)................................... 1,400Add: Units transferred in................................................................... 14,000Units to account for........................................................................... 15,400Less: Units transferred to finished goods....................................... 11,900Work-in-process inventory, May 31 (in units)................................. 3,500

Then compute the transferred-in, direct-material, and conversion costs in the May 31 work-in-process inventory:

InputEquivalent

Units

Cost per Equivalent

Unit CostTransferred-in...................................................... 3,500 $5.00 = $17,500Direct material...................................................... 3,500 $1.00 = 3,500Conversion...........................................................3,50040% $3.00 = 4,200Total cost of May 31 work-in-process inventory...............................................$25,200

2. Equivalent units of transferred-in costs.................................................... 15,400Transferred-in cost per equivalent unit..................................................... $5.00 Total transferred-in cost.............................................................................. $77,000Deduct: Transferred-in cost in May 1 work-in-process inventory........... 6,750Total cost transferred in from the Assembly Department....................... $70,250

Journal entry to record transfer:

Work-in-Process Inventory: Finishing Department........................70,250Work-in-Process Inventory: Assembly Department................ 70,250


SOLUTIONS TO CASES

CASE 4-42 (45 MINUTES)

1. Equivalent units of material.......................................................................................8,000Equivalent units of conversion.................................................................................7,500

2. Cost per equivalent unit of material.........................................................................$3.30Cost per equivalent unit of conversion....................................................................$2.80

3. October 31 work-in-process inventory.....................................................................$4,700Cost of goods completed and transferred out........................................................$42,700

4. Weighted-average unit cost of completed leather belts.........................................$6.10

These answers are supported by the following process-costing schedules. The firm's cost per belt used for planning and control, $5.35, is substantially lower than the actual cost per belt incurred in October, $6.10. Management should investigate this situation to determine whether production costs can be reduced. If not, then the cost used for planning and control purposes should be changed to reflect the firm's actual experience.

CALCULATION OF EQUIVALENT UNITS: LAREDO LEATHER CO. - DALLAS PLANTWeighted-Average Method

Physical Units

Percentage of

Completion with



Material ConversionWork in process, October 1.............. 400 25%Units started during October........... 7,600Total units to account for................. 8,000

Units completed and transferred out during October.......................... 7,000 100% 7,000 7,000

Work in process, October 31............ 1,000 50% 1,000 500 Total units accounted for................. 8,000Total equivalent units....................... 8,000 7,500


CASE 4-42 (CONTINUED)

CALCULATION OF COSTS PER EQUIVALENT UNIT: DALLAS PLANTWeighted-Average Method


Work in process, October 1................................ $ 1,250 $ 300 $ 1,550 Costs incurred during October.......................... 25,150 20,700 45,850 Total costs to account for................................... $26,400 $21,000 $47,400 Equivalent units................................................... 8,000 7,500Costs per equivalent unit.................................... $3.30 $2.80 $6.10

ANALYSIS OF TOTAL COSTS: DALLAS PLANTWeighted-Average Method

Cost of goods completed and transferred out during October:

.......................................................... 7,000$6.10 $42,700

Cost remaining in October 31 work-in-process inventory:

Direct material:

.............................

1,000$3.30 $3,300

Conversion:

.............................

500$2.80 1,400

Total cost of October 31 work in process................................................ $4,700



Check: Cost of goods completed and transferred out....... $42,700Cost of October 31 work-in-process inventory...... 4,700 Total costs accounted for........................................ $47,400

5. If the units were 60 percent complete as of October 31, there would be 7,600 equivalent units with respect to conversion. (To see this, just change the 500 in the right-hand column of the table in the solution to requirement (4) to 600. This changes the last number in the right-hand column from 7,500 to 7,600.)

Now the unit cost of conversion drops from $2.80, as currently computed, to $2.76 (rounded, $21,000 ÷ 7,600). Thus, the unit cost drops from $6.10 to $6.06 (rounded).

As controller, Jeff Daley has an ethical obligation to refuse his friend's request to alter the estimate of the percentage of completion. What Daley can do is to help Murray think of some legitimate ways to bring about real cost reductions. Several ethical standards for management accountants (listed in Chapter 1) apply in this situation. Among the relevant standards are the following:

Competence:

Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

Objectivity:

Communicate information fairly and objectively.

Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented.


CASE 4-43 (60 MINUTES)

PRODUCTION REPORT: HOME GARDEN COMPANY - GRADING DEPARTMENTWeighted-Average Method

Physical Units

Percentage of

Completion with



Material ConversionWork in process, November 1.......... -0- —Units started during November........ 36,000Total units to account for................. 36,000

Units completed and transferred out during November................... 36,000 100% 36,000 36,000

Work in process, November 30........ -0- — -0- -0- Total units accounted for................. 36,000 _____ _____ Total equivalent units....................... 36,000 36,000


Work in process, November 1............................ -0- -0- -0-Costs incurred during November...................... $265,680 $86,400 $352,080Total costs to account for................................... $265,680 $86,400 $352,080Equivalent units................................................... 36,000 36,000Costs per equivalent unit.................................... $7.38 $2.40 $9.78

Cost of goods completed and transferred out of the Grading Department during November:

............................................................36,000$9.78 $352,080

Cost remaining in November 30 work-in-process inventory in theGrading Department........................................................................................ -0-

Check: Cost of goods completed and transferred out.............. $352,080Cost of November 30 work-in-process inventory......... -0-Total costs accounted for............................................... $352,080



PRODUCTION REPORT: HOME GARDEN COMPANY - SATURATING DEPARTMENTWeighted-Average Method

Physical Units

Percentage of

Completion with


Equivalent UnitsTransferred

in ConversionWork in process, November 1.......... 1,600 50%Units transferred in during November 36,000Total units to account for................. 37,600

Units completed and transferredout during November................... 35,600 100% 35,600 35,600

Work in process, November 30........ 2,000 50% 2,000 1,000 Total units accounted for................. 37,600 _____ _____ Total equivalent units....................... 37,600 36,600

Transferred In Conversion Total

Work in process, November 1............................ $ 13,850 $ 3,750 $ 17,600Costs incurred during November...................... 352,080* 85,920 438,000Total costs to account for................................... $365,930 $89,670 $455,600Equivalent units................................................... 37,600 36,600Costs per equivalent unit.................................... $9.7322 $2.45 $12.1822

*Cost of goods completed and transferred out of Grading Department during November, under the weighted-average method.



Cost of goods completed and transferred out of the Saturating Department during November:

..........................................................35,600$12.182

2$433,686†

Cost remaining in November 30 work-in-process inventory in the Saturating Department:

Transferred-in costs:

.........................

2,000$9.7322 $19,464†

Direct material:

None

Conversion:

.............................

1,000$2.45 2,450

Total cost of November 30 work in process............................................ $21,914

Check: Cost of goods completed and transferred out.............. $433,686Cost of November 30 work-in-process inventory......... 21,914 Total costs accounted for............................................... $455,600

†Rounded


CURRENT ISSUES IN MANAGERIAL ACCOUNTING

ISSUE 4-44

"BOTTLED UP: PROFITS AREN'T FLOWING LIKE THEY USED TO AT PACKAGED-GOODS COMPANIES. GREEN KETCHUP AND TUNA IN A POUCH SAVE HEINZ?, " FORTUNE, SEPTEMBER 18, 2000, JULIE CRESWELL.

1. Heinz is a food processor and manufactures large quantities of relatively homogeneous products. Thus, process costing would be an appropriate product costing system for Heintz.

2. Heinz has recently begun to compete for more noticeable and attractive shelve space, and, after years of neglect, the company has begun to market and package to reflect the growing demographic changes in America. By bringing on the StarKist Tuna in a Pouch it has recognized that eating habits have changed in America. The green ketchup in an EZ Squirt bottle is an attempt to gain a young audience because eating habits begin early. Fruit and Vegetable Wash is a new product offering.

ISSUE 4-45

“INTERNATIONAL PAPER SHUTTING PLANTS TO CUT SUPPLY,” THE WALL STREET JOURNAL, OCTOBER 19, 2000, ALLANNA SULLIVAN.

1. International paper would use process costing since they produce large quantities of relatively homogeneous products.

2. Paper supply costs and total production costs should be reduced. The fixed costs of the closed plants would be eliminated while the fixed costs of the remaining plants would remain stable. Production of the remaining plants would increase.

ISSUE 4-46

“U.S. IS UNLIKELY TO RELEASE MORE OIL SOON,” THE WALL STREET JOURNAL, OCTOBER 19, 2000, JOHN J. FLAKA. ALSO SEE “NO SURGE IN CRUDE DELIEVERIES EXPECTED,” THE WALL STREET JOURNAL, OCTOBER 16, 2000, BHUSHAN BAHREE.

1. The government's release of 30 million gallons of crude oil is only about one day's supply of oil for the United States, so I would have a negligible effect on the oil companies.

2. Oil companies would use process costing since they produce large quantities of relatively homogeneous products.


ISSUE 4-47

“GEORGIA-PACIFIC PROFIT DECLINES BY 43 PERCENT: SLUGGISH BUILDING PRODUCTS SECTOR CITED,” THE WALL STREET JOURNAL, OCTOBER 19, 2000, BETSY MCKAY.

1. Georgia-Pacific would use process costing since the company produces large quantities of relatively homogeneous products.

2. Lower prices for building materials would not directly affect the company’s product costs, but lower prices would pressure management to attempt to reduce product costs in order to remain price competitive in a weakening market.


Documents

Solution Manual04