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Chapter 6 Process Costing

LEARNING OBJECTIVES
Chapter 6 addresses the following questions: Q1 How are costs assigned to mass-produced products? Q2 What are equivalent units, and how do they relate to the production process? Q3 How is the weighted average method used in process costing? Q4 How is the FIFO method used in process costing? Q5 What alternative methods are used for mass production? Q6 How is process costing performed for multiple production departments? Q7 How are spoilage costs handled in process costing? Q8 What are the uses and limitations of process cost information? These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual exercises and problems.

COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems. Questions Having a Single Correct Answer: No Symbol This question requires students to recall or apply knowledge as shown in the textbook. This question requires students to extend knowledge beyond the applications e shown in the textbook. Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10): Step 1 skills (Identifying) Step 2 skills (Exploring) Step 3 skills (Prioritizing) Step 4 skills (Envisioning)

6-2

Cost Management

QUESTIONS
6.1 Weighted average and FIFO process costing produce similar equivalent unit costs whenever the unit cost of production does not change or whenever there are no beginning or ending work-in-process inventories. In addition, the equivalent unit costs will be similar if the number of equivalent units produced during the period is large relative to inventories. A process would complete more units during the period than it started when there are more units in beginning inventory than in ending inventory. This approach would overstate the cost of spoiled units because partially complete units would be treated as if they had received 100% of direct materials and conversion costs, regardless of the amount actually allocated to those units. If the beginning and ending inventories are the same from one period to the next, the number of units started is equal to the number of units completed and transferred out. This means that WIP inventory can be ignored when calculating equivalent units. However, if costs change from one period to the next, then the cost allocated to ending WIP will not be the same as the cost allocated to beginning WIP. Judgment is needed to determine the percentage complete that is used in process costing calculations. Each unit or batch of units is complete to a different degree than other units or batches because the process is continuous. The percent complete is an average completion percentage that is estimated using judgment. If the percent completion in year 1 is overestimated, then the equivalent units for those units will be too high in year 1. In turn, this will cause the cost per equivalent unit in year 1 to be understated. In year 2, this misstatement will cause the equivalent units for completion of beginning WIP to be too low. The understatement of equivalent units will cause the cost per equivalent unit to be overstated in year 2. The weighted average method ignores the period in which product is started. In addition, costs from beginning inventories are added to costs of this period. All products completed are then given an average cost, regardless of when they were started. The FIFO method, on the other hand, tracks work completed and costs from the prior period separately from work completed and costs incurred during the current period. Under FIFO, beginning WIP consists of last periods costs and work valued separately. At the end of the accounting period, this periods costs to complete these units are added. Then the total costs for beginning WIP from last period and this period are summed and attached to the beginning inventory units that were completed this period. Then the units started and completed this period are valued using this periods costs. If an organizations costs fluctuate regularly, the FIFO method will reflect the most current costs so that managers can investigate changes in cost more quickly. Goods that are mass-produced have uniform specifications and are made in large batches or on a continuous assembly line. Services that are mass-produced are performed using the same skills and time and each task is very similar. Goods that are custom produced come

6.2 6.3

6.4

6.5

6.6

6.7

6.8

Chapter 6: Process Costing

6-3

in many variations and are made to specifications that vary with each order. Many services are custom, such as accounting, health care, and law services because each customer requires different inputs to match their needs. While it is relatively easy to track costs for custom made goods by attaching tags or using individual records to log costs of materials and labor, it is impossible to trace costs to mass-produced units. Job order costing is used for custom products. Direct material and labor costs are traced to each product and overhead costs are allocated using some allocation base that is labor or machine related. For mass-production, process costing is used. Equivalent units are calculated to account for units that are partially complete. Direct materials costs are allocated separately. Direct labor and overhead are combined and called conversion costs. These are allocated to complete and partially completed units. 6.9 They should be counted as ending WIP inventory in the department. Completed units imply that the units have been transferred to the next department or to finished goods, which is not the case with these units. This is what is referred to as "continuous processing." Units just entering the process have had little done to them, while units just about to leave the process have had all or most of the conversion done. On average, the units in process are 50% complete as to conversion. The cost of spoiled units is added to the total cost of goods transferred and increases the cost per unit. Job costing is often used when products are manufactured in batches. In this firm, a single batch would have a specific sized wire and specific length of nail. The cost of each type of nail will depend primarily on the cost of the type of wire used and the time required for each type. Therefore job costing is the most appropriate method. This information would be lost if process cost techniques were employed. Here are three factors. 1. If inspection costs are high and the cost to produce a single unit is very low, managers may decide to reduce the number of time units are inspected. In this case, inspection might occur only when units are completed. 2. If production costs are high and units go through several different departments, inspection may take place earlier in the manufacturing process so that spoiled units are caught when they are relatively incomplete. 3. If a firm is developing a strategy of high quality products, inspection may take place more often to insure that products are free of defects. Advantages of reducing spoilage include saving the cost of the spoiled units and being able to sell those units and increasing the contribution margin. In addition, in some industries all firms need to compete on quality, and increased spoilage may lead to increased defects in units sold, harming the reputation of the company resulting in a loss of market share. Disadvantages might be that the costs incurred do not guarantee that spoilage will be significantly reduced, or that the benefits in improved quality will be worth the costs.

6.10

6.11 6.12

6.13

6.14

6-4

Cost Management

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

Summarize Physical and Equivalent Units


Beginning WIP 9,000 9,000 3,600 Complete Beginning WIP 0 0 5,400 Work This Period Start Start and Ending Complete WIP 38,000 12,000 38,000 38,000 12,000 3,600 Total Work Performed This Period 50,000 50,000 47,000 Total Units to Account for 59,000 Total Work 59,000 50,600

Physical Units Equivalent Units: Direct Materials Conversion Costs

A. Weighted average equivalent units for direct materials is 59,000 (total work this period) because the ending units get 100% credit for direct materials, since direct materials are added at the beginning of processing. Equivalent units for conversion costs are 50,600 (total work this period) because ending inventory units are only 30% complete and, hence, have only 30% of the conversion costs (since conversion costs are incurred evenly during production). B. FIFO equivalent units are found under Total Work Performed This Period. Therefore direct materials equivalent units are 50,000 (excludes beginning inventory because direct materials were added last period and includes ending inventory because materials were added this period), and equivalent units for conversion costs are 47,000 (excluding work done on beginning WIP but including this periods work to complete those units and including the portion of work completed on ending WIP.

Chapter 6: Process Costing 6.16 Fine Fans A and B Assumptions for October: Work performed:
Beginning WIP % complete direct materials % complete conversion costs Units started Units completed and transferred out Ending WIP % complete direct materials % complete conversion costs

6-5

Costs:
9,000 100% 20% 100,000 94,000 15,000 100% 60% Beginning WIP (FIFO and Weighted Average) Direct materials Conversion costs Total beginning WIP costs Costs added this month Direct materials Conversion costs Total costs added Total costs to account for $ 18,000 36,000 54,000 100,000 200,000 300,000 $354,000

Summarize Physical and Equivalent Units


Beginning WIP (20%) 9,000 9,000 1,800 Complete Beginning WIP (80%) 0 0 7,200 Work This Period Start Start Total Work and Ending Performed Complete WIP (60%) This Period 85,000 15,000 100,000 85,000 85,000 15,000 9,000 100,000 101,200 Total Units to Account for 109,000 Total Work 109,000 103,000

Physical Units Equivalent Units: Direct Materials Conversion Costs

Calculate Actual Cost Per Equivalent Unit Weighted Average:


Direct materials: Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work Beginning WIP + Direct materials cost = Equivalent units for total work $118,000 109,000 $236,000 103,000 = $ 1.08 = 2.29 $3.37

Total cost per equivalent unit:

First-in, First-out:
Direct materials: Conversion costs: _____________Direct materials cost_____________ Equivalent units for total work performed this period ______________Conversion costs______________ Equivalent units for total work performed this period = $100,000 100,000 = $200,000 101,200 = $ 1.00 = 1.98 $2.98

Total cost per equivalent unit:

6-6

Cost Management

6.17 Journal Entry for Abnormal Spoilage [Note: This problem requires students to extend concepts about journal entries for spoilage from Chapter 5 to Chapter 6.] When spoiled units are sold, the net realizable value offsets the cost. In this case the total cost of spoiled units is $16,000 (80*$200). However, $2,000 is recovered by selling the spoiled units for their net realizable value. The journal entry follows. Loss from Abnormal Spoilage Cash Work-in-Process inventory 6.18 Journal Entry for Normal and Abnormal Spoilage A. Number of spoiled units = 10,000 8,000 = 2,000 Cost of spoiled units = 2,000*$5 = $10,000 B. When all spoilage is normal, the total cost of units (good and spoiled) is transferred into finished goods. That cost is $50,000 (10,000*$5). The journal entries follow. Finished Goods Inventory Work-in-Process Inventory $50,000 $50,000 $14,000 2,000 $16,000

C. For abnormal spoilage, only the cost of good units is transferred to finished goods. The cost of spoiled units is recorded as a separate loss. The cost of good units is $40,000 (8,000*$5). Finished Goods Inventory Loss from Abnormal Spoilage Work-in-Process Inventory $40,000 10,000 $50,000

Chapter 6: Process Costing 6.19 through 6.22 Felix and Sons Assumptions for December: Work performed:
Beginning WIP % complete direct materials % complete conversion costs Units started (12,000 8,000 + 6,000) Units completed and transferred out Ending WIP % complete direct materials % complete conversion costs

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Costs:
8,000 100% 75% 10,000 12,000 6,000 100% 50% Beginning WIP (FIFO and Weighted Average) Direct materials Conversion costs Total beginning WIP costs Costs added this month Direct materials Conversion costs Total costs added Total costs to account for $ 19,200 7,200 26,400 31,200 21,600 52,800 $79,200

Summarize Physical and Equivalent Units


Beginning WIP (30%) 8,000 8,000 6,000 Complete Beginning WIP (75%) 0 0 2,000 Work This Period Start Start Total Work and Ending Performed Complete WIP (50%) This Period 4,000 6,000 10,000 4,000 4,000 6,000 3,000 10,000 9,000 Total Units to Account for 18,000 Total Work 18,000 15,000

Physical Units Equivalent Units: Direct Materials Conversion Costs

Calculate Actual Cost Per Equivalent Unit Weighted Average:


Direct materials: Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work Beginning WIP + Direct materials cost = Equivalent units for total work $50,400 18,000 $28,800 15,000 = $ 2.80 = 1.92 $4.72

Total cost per equivalent unit: First-in, First-out: Direct materials: Conversion costs:

_____________Direct materials cost_____________ Equivalent units for total work performed this period ______________Conversion costs______________ Equivalent units for total work performed this period

= $31,200 10,000 = $21,600 9,000

= $ 3.12 = 2.40 $5.52

Total cost per equivalent unit:

6-8

Cost Management

Process Cost Reports for December 31


First-in, First-Out Computation Units From November cost report 8,000 0x$3.12 2,000x$2.40 _____ 8,000 4,00 0 12,00 0 6,000 6,000x$3.12 3,000x2.40 _____ 18,000 18,720 7,200 25,920 $79,200 6,000x$2.80 3,000x$1.92 _____ 18,000 Costs $26,400 0 4,800 4,800 31,200 Weighted Average Computation Units Costs

Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Total units completed and transferred out Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Accounted For

4,000x$5.52

22,080 53,280 (8,000+4,000)x$4.7 2 12,00 0 6,000 16,800 5,760 22,560 $79,200 $56,640

6.23 Humphrey Manufacturing A and B Assumptions for April: Work performed:


Beginning WIP % complete direct materials % complete conversion costs Units started (8,000+40,000-6,000) Units completed and transferred out Ending WIP % complete direct materials % complete conversion costs

Costs:
6,000 100% 40% 42,000 40,000 8,000 100% 25% Beginning WIP (FIFO and Weighted Average) Direct materials Conversion costs Total beginning WIP costs Costs added this month Direct materials Conversion costs Total costs added Total costs to account for $ 7,500 2,125 9,625

70,000 42,500 112,500 $122,125

Chapter 6: Process Costing Summarize Physical and Equivalent Units


Beginning WIP (40%) 6,000 6,000 2,400 Complete Beginning WIP (60%) 0 0 3,600 Work This Period Start Start Total Work and Ending Performed Complete WIP (25%) This Period 34,000 8,000 42,000 34,000 34,000 8,000 2,000 42,000 39,600

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Physical Units Equivalent Units: Direct Materials Conversion Costs

Total Units to Account for 48,000 Total Work 48,000 42,000

Calculate Actual Cost Per Equivalent Unit Weighted Average:


Direct materials: Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work Beginning WIP + Direct materials cost = Equivalent units for total work $77,500 48,000 $44,625 42,000 = $ 1.6146 = 1.0625 $2.6771

Total cost per equivalent unit:

First-in, First-out:
Direct materials: Conversion costs: _____________Direct materials cost_____________ Equivalent units for total work performed this period ______________Conversion costs______________ Equivalent units for total work performed this period = $70,000 42,000 = $42,500 39,600 = = $1.6667 1.0732 $2.7399

Total cost per equivalent unit:

6-10 Cost Management Process Cost Reports for April


First-in, First-Out Computation Units Costs From March cost report 6,000 $ 9,625 0x$1.6667 3,600x$1.0732 _____ 6,000 34,000x$2.739 9 34,00 0 40,000 8,000 8,000x$1.667 2,000x1.073 _____ 48,000 13,336 2,146 15,482 $122,128 8,000x$1.6146 2,000x$1.0625 _____ 48,000 0 3,864 3,864 13,489 Weighted Average Computation Units Costs

Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Total units completed and transferred out Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Accounted For

93,157 106,646 40,000x$2.677 1 40,00 0 8,000 12,917 2,125 15,042 $122,126 $107,084

Differences in total costs are due to rounding errors. If a spreadsheet is used to make these calculations, the totals will have fewer rounding errors. C. Journal entries for weighted average method for April: Work in process inventory $70,000 Raw materials inventory $70,000 To record the cost of raw materials used in production during April. Work in process inventory $42,500 Wages and accounts payable $42,500 To record the conversion costs incurred in production during April. Finished goods $107,084 Work in process inventory $107,084 To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage).

Chapter 6: Process Costing 6-11 Journal entries for FIFO method for April: Work in process inventory $70,000 Raw materials inventory $70,000 To record the cost of raw materials used in production during April. Work in process inventory $42,500 Wages and accounts payable $42,500 To record the conversion costs incurred in production during April. Finished goods $106,646 Work in process inventory $106,646 To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage). 6.24 For Seniors Only A. Process costing is appropriate in this situation because the returns are very similar in the amount of time and therefore cost to complete each one. If the returns were more complex or extra research was needed on certain ones, process costing would no longer be appropriate because there would be too much variation between different returns. B. To determine the costs for April, last years cost data is needed as well as data from previous months. Additional information required is the approximate number of returns will be done, the salary paid to the employees, overhead costs, the number of employees that will be hired for the month, the amount of time each will work, and the amount of time it takes for each return. Also, an estimate is needed for the number of returns that are likely to be in progress at the beginning of April. C. The first step in determining the cost for April returns is to find the total units in progress and their percent completion. In addition, the number of returns to be completed in April needs to be estimated. Last years data will be useful in estimating this years volume. Using data mentioned in part B, costs are categorized as direct materials or conversion costs. An equivalent cost per unit for the tax returns can then be estimated. Once the number of returns for the month of April has been predicted, the equivalent costs can be estimated and a total cost for that month can be predicted. It is likely that there will be no ending WIP inventory, because tax returns are due April 15 and this organizations clients are likely to file by the due date rather than request extensions.

6-12 Cost Management

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

2. Summarize Physical and Equivalent Units


Beginning WIP (33%) 15,000 0 0 5,000 Complete Beginning WIP (67%) 0 0 15,000 10,000 Work This Period Start Start Total Work and Ending Performed Complete WIP (40%) This Period 82,000 11,000 93,000 82,000 82,000 82,000 11,000 0 4,400 93,000 97,000 96,400 Total to Account for 108,000

Physical Units Equivalent Units: Transferred-in Direct Materials Conversion Costs

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


Transferred-in: Direct materials: Conversion costs: _____________Transferred-in costs_____________ Equivalent units for total work performed this period _____________Direct materials cost_____________ Equivalent units for total work performed this period ______________Conversion costs______________ Equivalent units for total work performed this period = $224,130 93,000 = $166,840 97,000 = $315,228 96,400 = $ 2.41 = = 1.72 3.27 $7.40

Total cost per equivalent unit:

Chapter 6: Process Costing 6-13 4. Process cost report for the year
Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Total units completed and transferred out Ending WIP: Transferred-in Direct materials Conversion costs Total ending WIP cost Total Accounted For 11,000 x $2.41 0 x $1.72 4,400 x $3.27 _____ 108,000 82,000*$7.40 Computation From last year 15,00 x $1.72 10,000 x $3.27 _____ 15,000 82,000 97,000 11,000 26,510 0 14,388 40,898 $760,990 First-in, First-Out Units Costs 15,000 $ 54,792 25,800 32,700 58,500 113,292 606,800 720,092

Notice that the total costs summarized above ($760,990) are equal to the costs accounted for in the cost report. 6.26 Victorias Closet-A A. Preparation of process cost report using the weighted average method. Summary of unit information given in the problem:
WIP Units Beginning (25% complete) 11,000 Started 74,000 61,000 Good completed 8,000 Spoiled Ending (75% complete) 16,000 Summary of Spoilage Normal spoilage Abnormal spoilage Total 6,600 ??? 8,000

When computing equivalent units, notice that the ending WIP inventory units are considered 100% complete with respect to direct materials, since direct materials are added at the beginning of processing. However, the ending WIP inventory units are only 75% complete and, hence, have only 75% of the conversion costs (incurred evenly throughout production). Both normal and abnormal spoilage are assigned 100% of all costs because spoilage occurs just before inspection, which is at the 100% stage of completion. 1. Summarize Total Costs to Account For
Beginning WIP Current period costs Total costs to account for Direct Materials $220,000 1,480,000 $1,700,000 Conversion Costs $30,000 942,000 $972,000 Total Cost $ 250,000 2,422,000 $2,672,000

6-14 Cost Management 2. Summarize Physical and Equivalent Units


Complete Beginning Beginning WIP (25%) WIP (75%) 11,000 0 0 8,250 Work Performed This Period Start Start Total Work and Ending Performed Complete WIP (75%) This Period 58,000 16,000 74,000 58,000 58,000 16,000 12,000 74,000 78,250 Total Units to Account for 85,000 Total Work 85,000 81,000 Spoiled Units
(100%)

Physical Units

(8,000) (8,000) (8,000) 8,000 6,600 1,400

Equivalent Units: Direct Materials 11,000 Conversion Costs 2,750 Total Spoilage Less Normal Spoilage Abnormal Spoilage

3. Calculate Cost per Equivalent Unit: Weighted Average


Direct materials: Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work Beginning WIP + Direct materials cost = Equivalent units for total work $1,700,000 85,000 $972,000 81,000 = $20 = 12 $32

Total cost per equivalent unit:

4. Weighted Average Process Cost Report for January


Computation Total units completed and transferred out: Good units Normal spoilage Total transferred out Abnormal spoilage Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Good Units Accounted For Total Accounted For (11,000 + 58,000 8,000) x$32 6,600 x $32 1,400*$32 16,000 16,000 x $20 12,000 x $12 85,000 8,000 77,000 $2,672,000 320,000 144,000 464,000 Units 61,000 ______ 61,000 Costs $1,952,000 211,200 2,163,200 44,800

B. Journal entries: Work in process inventory $1,480,000 Raw materials inventory $1,480,000 To record the cost of raw materials used in production during January. Work in process inventory $942,000 Wages and accounts payable $942,000 To record the conversion costs incurred in production during January.

Chapter 6: Process Costing 6-15 Finished goods $2,163,200 Work in process inventory $2,163,200 To record the cost of 61,000 units transferred to finished goods during January (includes the cost of normal spoilage). Abnormal spoilage loss $44,800 Work in process inventory To record the cost of abnormal spoilage during January. 6.27 Victorias Closet-B A. This problem is identical to problem 6.26, except that the FIFO method is used instead of the weighted average method. The first two parts of the process cost report are identical under the two methods. Therefore, the following solution shows only the last two parts of the process cost report. 3. Calculate Cost per Equivalent Unit: FIFO
Direct materials: Conversion costs: _____________Direct materials cost_____________ Equivalent units for total work performed this period ______________Conversion costs______________ Equivalent units for total work performed this period = $1,480,000 74,000 = $942,000 78,250 = $20.0000 = 12.0383 $32.0383

$44,800

Total cost per equivalent unit:

4. FIFO Process Cost Report for Victorias Closet


Computation Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Normal spoilage Units completed and transferred out Abnormal spoilage Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Good Units Accounted For Total Costs Accounted For 1,400*$32.0383 16,000 16,000 x $20 12,000 x $12.0383 _____ 85,000-8,000 77,000 $2,671,998 320,000 144,460 464,460 50,000*$32.0383 6,600*$32.0383 0x$20 8,250*$12.0383 _____ 11,000 50,000 ______ 61,000 Units 11,000 Costs $ 250,000 0 99,316 99,316 349,316 1,601,915 211,453 2,162,684 44,854

6-16 Cost Management B. A standard cost report would be the same as the FIFO cost report from a format standpoint. However, the standard costs would be used instead of equivalent unit costs. That is the only difference. C. If Victorias Closet wants to set a benchmark for productivity, standard costs are appropriate. A standard cost is an estimate of cost under efficient operations and therefore acts as a benchmark or budget with which actual costs can be compared. The standards need to be updated regularly, though. 6.28 Kim Mills-A Summary of information given in the problem:
Beginning Started Ending WIP Units 20,000 ???? 90,000 Good completed 7,000 Spoiled 17,000 Summary of Spoilage Normal spoilage Abnormal spoilage Total 3,600 ???? 7,000

A. Abnormal spoilage = 7,000 3,600 = 3,400 units B. Spoilage costs = 7,000 x $1,000 = $7,000,000 C. The opportunity costs of spoilage can be measured in several ways. First, in addition to the cost of the spoiled units, there is also the contribution margin foregone because the products could not be sold. In addition, there are the opportunity costs of bad units that are sold because they pass through inspection without having been detected as spoiled. Through word of mouth or services such as Consumer Reports or Good Housekeeping, a companys reputation may suffer and the organization loses market share. These costs can be considerable, especially if competitors have reputations for high quality with similar prices. 6.29 Kim Mills-B A. If inspection occurs when units are 40% complete, direct materials have already been added, but conversion costs will only be 40% added. Equivalent units for direct materials = 100% x 7,000 units = 7,000 units Equivalent units for conversion costs = 40% x 7,000 units = 2,800 units B. Abnormal spoilage for conversion costs = 2,800 (total spoilage per Part A) 1,800 (normal spoilage) = 1,000 units. C. Here are several advantages of inspecting units earlier in their manufacturing process: Kim saves the rest of the conversion cost that would be added.

Chapter 6: Process Costing 6-17 Units are removed from further handling (storage and control), except to dispose of them. If the manufacturing process further down the line would tend to hide the defects, a larger number of defective units are identified, and Kim avoids selling defective units to customers. 6.30 Red Dog Products A and B. Weighted average and FIFO process costing reports: Summarize Physical and Equivalent Units
Beginning WIP (30%) 20,000 20,000 6,000 Complete Beginning WIP (70%) 0 0 14,000 Work This Period Start Start Total Work and Ending Performed Complete WIP (50%) This Period 68,000 12,000 80,000 68,000 68,000 12,000 6,000 80,000 88,000 Total Units to Account for 100,000 Total Work 100,000 94,000

Physical Units Equivalent Units: Direct Materials Conversion Costs

Calculate Actual Cost Per Equivalent Unit First-in, First-out:


Direct materials: Conversion costs: _____________Direct materials cost_____________ Equivalent units for total work performed this period ______________Conversion costs______________ Equivalent units for total work performed this period = $220,000 80,000 = $74,000 88,000 = $ 2.75 = 0.84 $3.59

Total cost per equivalent unit:

Weighted Average:
Direct materials: Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work Beginning WIP + Direct materials cost = Equivalent units for total work $245,000 100,000 $77,000 94,000 = $ 2.45 = 0.82 $3.27

Total cost per equivalent unit:

6-18 Cost Management Process Cost Reports for Molding Department: May
First-in, First-Out Computation Units Costs From April cost report 20,000 $ 28,000 0x$2.75 14,000x$0.84 _____ 20,000 68,000x$3.59 68,00 0 88,000 12,000 12,000x$2.75 6,000x$0.84 _____ 100,000 33,000 5,040 38,040 $321,920 12,000x$2.45 6,000x$0.82 _____ 100,000 0 11,760 11,760 39,760 244,120 283,880 (88,000)x$3.27 88,000 12,000 29,400 4,920 34,320 $322,080 $287,760 Weighted Average Computation Units Costs

Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Total units completed and transferred out Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Accounted For

The total costs to account for disagree with the total calculated in part 1 because of differences due to rounding the cost per equivalent unit. If students used a spreadsheet for these calculations they would have no error. C. Factors that would affect the choice of accounting method include: The stability of input prices The need for current price information Whether managers want to compare a standard cost to actual costs Whether beginning and ending inventory levels are large or small 6.31 Empire Forging Summary of information given in the problem:
Beginning Started Ending WIP Units 60,000 ???? 420,000 Good completed 36,000 Spoiled 68,000 Summary of Spoilage Normal spoilage Abnormal spoilage Total 12,600 ?? 36,000

A. Abnormal spoilage = Total spoilage Normal spoilage = 36,000 12,600 = 23,400 units

Chapter 6: Process Costing 6-19 B. Units started in May: Refer to the above T-Account, and solve for the unknown number of units started 60,000 + Started 420,000 36,000 = 68,000 Started = 464,000 C. Percentage of good units allowed for spoilage is 3% (12,600/420,000). Total spoiled units as a percentage of good units is 8.6% (36,000/420,000). When spoilage rates increase dramatically, it is likely that more spoiled units are sold as good units because they have been overlooked in the inspection process. This leads to more returns and potential loss of market share. In addition, the cost of good units increases, and so the contribution margin on those units decreases. It is also possible that more units have been reworked, and these could be lower quality than first run units, and rework also increases the cost of good units. D. Below are examples of arguments that could be made; students may think of additional arguments. The costs of undetected spoiled units can be quite high. Customers are unhappy with defective units and may not purchase the goods again, so market share could be lost. In addition, if the defect causes any type of harm, the company could be subject to legal action and may have to pay a settlement or high legal fees. These costs are difficult to value. It is much easier to determine the cost of quality improvements, such as more frequent inspections, quality circles with employees to elicit suggestions for improvements, or redesigning the product or manufacturing process to reduce defects. Because of the uncertainty of the costs of spoiled units, the company should analyze costs for returned units and warranty work, develop better tracking systems so that all spoiled units are counted (whether they are reworked or not), and hire a marketing company to identify customers who have quit using its products to determine if quality was a factor in this decision. Once the managers have more information, they will better understand the costs and benefits of quality problems and quality initiatives.

6-20 Cost Management 6.32 The Rally Company A sample spreadsheet showing the solution for this problem is available on the Instructors web site for the textbook (available at www.wiley.com/college/eldenburg). A. Weighted average: Following are excerpts from the sample spreadsheet for this problem.
Input Area for Assumptions
Work Performed: Work in Process: Units % complete direct materials % complete conversion costs Units started Units completed and transferred out Spoiled Units: Normal Abnormal Costs: Beginning Work in Process: Direct materials Conversion costs Costs Added This Month: Direct materials Conversion costs $4,000 $3,200 $36,000 $32,000 * Note: Only good units are transferred out Beg. WIP 2,000 100% 80% End. WIP 100% 25% 18,000 14,800 Ending WIP Units were not given, so they must be calculated: Beginning WIP Units started Total to account for Transferred out* 1,000 Normal spoilage 1,000 Abnormal spoilage Ending WIP

2,000 18,000 20,000 -14,800 -1,000 -1,000 3,200

1. Summarize Total Costs to Account For


Beginning WIP Current period costs Total costs to account for Direct Conversion Materials Costs $4,000 $3,200 $36,000 $32,000 $40,000 $35,200 Total Costs $7,200 $68,000 $75,200

2. Summarize Physical and Equivalent Units


Work Performed This Period Beginning Complete Start Start Total Work WIP Beg. WIP and End. WIP Performed 80% 20% Complete 25% This Period 2,000 0 14,800 3,200 18,000 Total Units to Acct for 20,000 Spoiled Units 100% (2,000)

Physical Units Equivalent Units: Direct Materials Conversion Costs Total Spoilage Less Normal Spoilage Abnormal Spoilage

2,000 1,600

0 400

14,800 14,800

3,200 800

18,000 16,000

20,000 17,600

(2,000) (2,000) 2,000 1,000 1,000

Chapter 6: Process Costing 6-21


3. Calculate Cost Per Equivalent Unit Weighted Average:
Direct Materials: Conversion Costs: Total Cost Per Equivalent Unit Total Cost $40,000 $35,200 Total Units 20,000 17,600

$2.0000 $2.0000 $4.0000

4. Weighted Average Process Cost Report for January


Cost Per Unit Total units completed and transferred out: Good units Normal spoilage Total transferred out Abnormal spoilage Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Good Units Accounted For Total Accounted For $4.0000 $4.0000 Equivalent Units Spoiled Units Good Units 14,800 1,000 Total $59,200 $4,000 $63,200 $4,000 3,200 $2.0000 $2.0000 3,200 800 _____ (Total to account for - Total spoiled) 18,000 $75,200 $6,400 $1,600 $8,000

$4.0000

1,000

B. Journal entries for weighted average method: Work in process inventory $36,000 Raw materials inventory $36,000 To record the cost of raw materials used in production during July. Work in process inventory $32,000 Wages and accounts payable $32,000 To record the conversion costs incurred in production during July. Finished goods $63,200 Work in process inventory $63,200 To record the cost of 14,800 units transferred to finished goods during July (includes the cost of normal spoilage). Abnormal spoilage loss $4,000 Work in process inventory To record the cost of abnormal spoilage during July. $4,000

6-22 Cost Management C. FIFO: Following are excerpts from the sample spreadsheet for this problem. The input section and the sections for steps 1 and 2 are identical to the spreadsheet shown in Part A above. Therefore, only the sections for steps 3 and 4 are shown below.
3. Calculate Cost Per Equivalent Unit FIFO:
Direct Materials: Conversion Costs: Total Cost Per Equivalent Unit Current Cost $36,000 $32,000 Current Units 18,000 16,000

$2.0000 $2.0000 $4.0000

4. FIFO Process Cost Report for January


Cost Per Unit Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out Good units started, completed, and trans. out Normal spoilage Total units completed and transferred out Abnormal spoilage Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Good Units Accounted For Total Accounted For $4.0000 1,000 3,200 $2.0000 $2.0000 3,200 800 _____ (Total to account for - Total spoiled) 18,000 $75,200 $6,400 $1,600 $8,000 $4.0000 $4.0000 1,000 Equivalent Units Spoiled Units Good Units 2,000 Total $7,200 $0 $800 $800 $8,000 $51,200 $4,000 $63,200 $4,000

$2.0000 $2.0000

0 400 _____ 2,000 12,800 _____ 14,800

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

Chapter 6: Process Costing 6-23 6.33 Toddler Toys Solutions below are provided first for the weighted average method. Then solutions for the FIFO method are presented. WEIGHTED AVERAGE SOLUTION A. If a student chose the weighted average method, its main advantage is that it is a little less complex to calculate. The disadvantage is that the cost information is not as current as FIFO information. B. Here is a cost report using the weighted average method. 1. Summarize Total Costs to Account For
Beginning WIP Current period costs Total costs to account for Transferred-in $ 4,000 36,000 $40,000 Direct Materials $ 2,000 18,000 $20,000 Conversion Costs Total Cost $ 1,600 $ 7,600 16,000 70,000 $17,600 $77,600

2. Summarize Physical and Equivalent Units


Complete Beginning Beginning WIP (80%) WIP (20%) 2,000 0 0 0 400 Work Performed This Period Start Start Total Work and Ending Performed Complete WIP (25%) This Period 14,800 3,200 18,000 14,800 14,800 14,800 3,200 0 800 18,000 14,800 16,000 Total Units to Account for 20,000 Total Work 20,000 16,800 17,600 Spoiled Units
(100%)

Physical Units

(2,000)

Equivalent Units: Transferred in 2,000 Direct Materials 2,000 Conversion Costs 1,600 Normal spoilage Abnormal Spoilage Total spoilage

(2,000) (2,000) 1,000 1,000 2,000

3. Calculate Cost Per Equivalent Unit (Weighted Average) Transferred-in: Direct materials: Conversion costs: Beginning WIP + Transferred-in costs Equivalent units for total work Beginning WIP + Direct materials cost Equivalent units for total work Beginning WIP + Direct materials cost Equivalent units for total work = = = $40,000 = $ 2.0000 20,000 $20,000 = 16,800 $17,600 = 17,600 1.1905 1.0000 ______ $4.1905

Total cost per equivalent unit:

6-24 Cost Management 4. Process Cost Reports for Assembly Department in August (Weighted Average) Computation Units Units completed and transferred out 14,800*$4.1905 14,800 Normal spoilage 1,000 x $4.1905 Total cost transferred out Abnormal spoilage Ending work in process: Transferred-in Direct materials Conversion costs Total ending WIP cost Total Accounted For C. Journal entries: Work in process inventory-Assembly Dept. $36,000 Work in process inventory-Plastics Dept. $36,000 To record the cost of units transferred from the plastics department during August. Work in process inventory-Assembly Dept. $18,000 Raw materials inventory $18,000 To record the cost of raw materials used in production during August. Work in process inventory-Assembly Dept. $16,000 Wages and accounts payable $16,000 To record the conversion costs incurred in production during August. Finished goods inventory $66,210 Work in process inventory-Assembly Dept. $66,210 To record the cost of 14,800 units transferred to finished goods during August (includes the cost of normal spoilage). Abnormal spoilage loss $4,190 Work in process inventory-Assembly Dept. To record the cost of abnormal spoilage during August. $4,190 1,000 x $4.1905 3,200 3,200 x $2.0 0 x $1.1905 800 x $1.00 _____ 18,000 6,400 0 800 7,200 $77,600

Costs $62,020 4,190 66,210 4,190

Chapter 6: Process Costing 6-25 FIFO SOLUTION A. If a student chose FIFO, its main advantage is that the costs are more current, the disadvantage is that it is a bit more complex to calculate. B. Here is a cost report using the FIFO method. Notice that the first two parts are identical to the report under the weighted average method. 1. Summarize Total Costs to Account For
Beginning WIP Current period costs Total costs to account for Transferred-in $ 4,000 36,000 $40,000 Direct Materials $ 2,000 18,000 $20,000 Conversion Costs Total Cost $ 1,600 $ 7,600 16,000 70,000 $17,600 $77,600

2. Summarize Physical and Equivalent Units


Complete Beginning Beginning WIP (80%) WIP (20%) 2,000 0 0 0 400 Work Performed This Period Start Start Total Work and Ending Performed Complete WIP (25%) This Period 14,800 3,200 18,000 14,800 14,800 14,800 3,200 0 800 18,000 14,800 16,000 Total Units to Account for 20,000 Total Work 20,000 16,800 17,600 Spoiled Units
(100%)

Physical Units

(2,000)

Equivalent Units: Transferred in 2,000 Direct Materials 2,000 Conversion Costs 1,600 Normal spoilage Abnormal Spoilage Total spoilage

(2,000) (2,000) 1,000 1,000 2,000

3. Calculate Cost Per Equivalent Unit (FIFO) Transferred-in: _________Transferred-in costs__________ = Equiv. units for work performed this period $36,000 18,000 $18,000 14,800 $16,000 16,000 = $2.0000 = = 1.2162 1.0000 ______ $4.2162

Direct materials: __________Direct materials cost_________ = Equiv. units for work performed this period Conversion costs: ___________Conversion costs__________ = Equiv. units for work performed this period Total cost per equivalent unit:

6-26 Cost Management 4. Process Cost Reports for Assembly Department: June Beginning WIP from May cost report Costs to complete beginning WIP: Transferred in Direct materials Conversion costs Total costs added this period First-in, First-Out Computation Units 2,000 0 x $2 0 x $1.2162 400*$1 _____ 2,000 12,800 Costs $ 7,600 0 0 400 400 8,000 53,968 4,216 14,800 66,184 4,216 3,200 3,200 x $2.00 0 x $1.2162 800 x $1 _____ 18,000 6,400 0 800 7,200 $77,600

Total cost of beginning WIP transferred out New units started, completed, and trans. out Normal spoilage 12,800*$4.2162 1,000 x $4.2162

Total units completed and transferred out Abnormal spoilage Ending WIP: Transferred-in Direct materials Conversion costs Total ending WIP cost Total Accounted For C. Journal entries: 1,000 x $4.2162

Work in process inventory-Assembly Dept. $36,000 Work in process inventory-Plastics Dept. $36,000 To record the cost of units transferred from the plastics department during August. Work in process inventory-Assembly Dept. $18,000 Raw materials inventory $18,000 To record the cost of raw materials used in production during August. Work in process inventory-Assembly Dept. $16,000 Wages and accounts payable $16,000 To record the conversion costs incurred in production during August. Finished goods inventory $66,184 Work in process inventory-Assembly Dept. $66,184 To record the cost of 14,800 units transferred to finished goods during August (includes the cost of normal spoilage).

Chapter 6: Process Costing 6-27 Abnormal spoilage loss $4,216 Work in process inventory-Assembly Dept. To record the cost of abnormal spoilage during August. 6.34 Britains Health and Safety Commission A. Accounting for each cost in a process costing system would be as follows: Lost worker time would be part of conversion costs. Employer-paid medical costs would be conversion costs. Training to replace workers would require two separate ways to recognize the cost. Costs of training such as classrooms, materials, and instructors, would not be assigned to manufacturing; they would be assigned to a support department. However, the employee time for training is probably part of conversion costs. Record-keeping would not be part of manufacturing costs, but instead would be part of the accounting department costs. B. Examples of the responsibilities for each group are discussed below. Students might have identified additional responsibilities. Governments set up agencies such as Britains Health and Safety Commission and the U.S. Occupational Safety and Health Administration (OSHA; part of the U.S. Department of Labor) to establish and regulate safety standards for workers. Employers are responsible for keeping their employees safe by monitoring accident rates, identifying problem areas, improving the physical environment to prevent accidents, training workers to improve their safety habits, and monitoring compliance with company standards. Employers are also responsible for complying with governmental regulations. Managers oversee employees and are therefore responsible for the safety of employees directly under their supervision. Managers set the tone by determining the priority of safety within a company. They also need to track health and safety problems and make improvements in their physical environment and also give workers training in safety habits. In addition, managers are responsible for ensuring that their companies comply with governmental regulations. Workers are responsible for their own safety and any team members safety. This responsibility includes meeting or exceeding employer standards, as well as adopting a proactive approach toward their own and others safety. Customers are not typically held responsible for safety. However, customers can choose to investigate the safety records and practices of companies with which they do business. They can establish policies of doing business only with companies having acceptable safety performance. This type of policy can be most important for goods and services produced in less-developed countries. In addition, each customer should work at improving their own safety habits and alert the organizations that they frequent when any safety concerns arise.

$4,216

6-28 Cost Management C. There are many possible answers to this question. Here are some issues that students might have considered as they developed their own answers. (These issues are organized using Steps for Better Thinking.) Uncertainties: Ideally, the goal for companies should be to achieve perfect health and safety. However, this goal might not be attainable because it is not possible to identify all possible health and safety problems or to perfectly control worker actions. For example, researchers continue to investigate the association between various types of work and ergonomic problems such as discomfort, fatigue, and musculoskeletal disorders. It is not always easy to identify the types of actions or work arrangements that cause specific problems. A chemical believed to be safe may be found to cause previously-unforeseen medical problems. To complicate matters, workers may be unwilling to comply with health and safety practices. For example, employees may object to ergonomic seating or to an ergonomic computer keyboard. Or, they may fail to use safety equipment such as helmets or masks. Exploring Perspectives: Who are the major stakeholders in this issue? Worker health and safety obviously affects the well-being of individual workers and their families. It also has social implications. Injured or ill workers are less productive and may require greater social services than other people. From the companys point of view, economic concerns exist. It might be very expensive to make a small improvement in worker health and safety. In addition, a company with high health and safety standards may be unprofitable if it sells goods and services in an industry where competitors adopt lower standards. Prioritizing: There are many questions to ask when choosing values and making trade-offs for deciding on a company goal. Is it appropriate to weigh only the companys cost and benefit? What are the companys obligations to shareholders, workers, and society? How can the company attempt to meet all of its obligations in a morally acceptable way? Envisioning: It is always possible to improve worker health and safety. New practices can be adopted as research provides new information about the causes of problems and ways to prevent them. Thus, an important aspect of a companys goal should be to continuously improve. How can the companys goal be worded to encourage continuous improvement? 6.35 Cellular Advantage A sample spreadsheet for this problem is available on the Instructors web site for the textbook (available at www.wiley.com/college/eldenburg). A. Weighted Average Method 1. Summarize Total Costs to Account For
Beginning WIP Current period costs Total costs to account for Direct Materials $ 440,000 2,960,000 $3,400,000 Conversion Costs $ 60,000 1,884,000 $1,944,000 Total Cost $ 500,000 4,844,000 $5,344,000

Chapter 6: Process Costing 6-29 2. Summarize Physical and Equivalent Units


Complete Beginning Beginning WIP (30%) WIP (70%) 22,000 0 0 15,400 Work Performed This Period Start Start Total Work and Ending Performed Complete WIP (60%) This Period 116,000 32,000 148,000 116,000 112,000* 32,000 19,200 148,000 146,600 Total Units to Account for 170,000 Total Work 170,000 153,200 Spoiled Units (75%) (16,000) (16,000) (12,000)

Physical Units

Equivalent Units: Direct Materials 22,000 Conversion Costs 6,600

Total Spoilage Less Normal Spoilage Abnormal Spoilage *

Physical Units 16,000 13,200 2,800

Equivalent Units Direct Conversion Materials Costs (100%) (75%) 13,200 2,800 9,900 2,100

Because inspection takes place when units are 75% complete, spoiled units are removed when units are 100% complete with respect to direct materials and 75% complete with respect to conversion costs. This also means that 25% of the conversion cost work is never performed on spoiled units. Therefore, the number of equivalent units started and completed for conversion costs is calculated as: Total physical units started and completed Less spoiled units not completed [16,000 x (1-75%)] Equivalent units started and completed for conversion costs 116,000 (4,000) 112,000

3. Calculate Cost per Equivalent Unit: Weighted Average


Direct materials: Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work Beginning WIP + Direct materials cost = Equivalent units for total work $3,400,000 170,000 $1,944,000 153,200 = = $20.0000 12.6893 $32.6893

Total cost per equivalent unit:

6-30 Cost Management 4. Weighted Average Process Cost Report


Computation Units Total units completed and transferred out: Good units (22,000+116,00016,000)x$32.6893 122,000 Normal spoilage: Direct materials 13,200 x $20 Conversion costs 9,900 x $12.6893 _______ Total transferred out 122,000 Abnormal spoilage Direct materials Conversion costs Total abnormal spoilage Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Good Units Accounted For Total Accounted For 2,800 x $20 2,100 x $12.6893 32,000 32,000 x $20 19,200 x $12.6893 _______ 170,000 16,000 154,000 $5,344,000 640,000 243,634 883,634 Costs $3,988,094 264,000 125,624 4,377,718 56,000 26,648 82,648

B: FIFO Method The summary of physical and equivalent units and the summary of costs to account for are the same as those shown above for the weighted average method. Thus, the solution below shows only steps 3 and 4. 3. Calculate Cost per Equivalent Unit: FIFO
Direct materials: Conversion costs: _____________Direct materials cost_____________ = Equivalent units for total work performed this period ______________Conversion costs______________ = Equivalent units for total work performed this period $2,960,000 148,000 $1,884,000 146,600 = $20.0000 = 12.8513 $32.8513

Total cost per equivalent unit:

Chapter 6: Process Costing 6-31 4. FIFO Process Cost Report


Computation Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Normal spoilage Direct materials Conversion costs Units completed and transferred out Abnormal spoilage Direct materials Conversion costs Total abnormal spoilage Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Good Units Accounted For Total Costs Accounted For 2,800 x $20 2,100 x $12.8513 32,000 32,000 x $20 19,200 x $12.8513 ______ 170,000-16,000 154,000 $5,344,000 640,000 246,745 886,745 100,000 x $32.8513 13,200 x $20 9,900 x $12.8513 0x$20 15,400 x $12.8513 ______ 22,000 100,000 Units 22,000 Costs $ 500,000 0 197,910 197,910 697,910 3,285,130 264,000 127,228 4,374,267 56,000 26,988 82,988

______ 122,000

C. Because spoilage increases the cost of good units, most organizations want to minimize the number of units spoiled. By setting limits on normal spoilage, incentive is provided for managers and operations employees to keep spoilage under the limit. The accounting system combines the cost of normal spoilage with good units, so the amount of cost incurred for normal spoilage is not obvious. Many organizations view spoilage as part of the cost of producing good units. However, when spoilage amounts become large, abnormal spoilage is recorded and these amounts are more obvious to managers, so that quality problems can be investigated. D. Rework costs are hidden in the accounting system because units reworked go through the manufacturing process twice, but are counted only once. Therefore, it is difficult to track rework costs, and the financial affects of rework.

6-32 Cost Management 6.36 Rausher Industries A. FIFO process costing report and calculations for the current year and the budget for next year: FIFO CURRENT YEAR Physical Flow of Units: Current Period WIP beginning Started Transferred in Total to account for Ending WIP Completed and transferred out Department 1 0 12,000 0 12,000 3,000 9,000 Department 2 0 0 9,000 9,000 2,000 7,000
Conversion Costs Total Cost $ 0 14,040 $14,040 $ 0 50,040 $50,040

1. Summarize Total Costs to Account For (Current Year)


Transferred-in Department 1: Beginning WIP Current period costs Total costs to account for Department 2: Beginning WIP Current period costs Total costs to account for not applicable not applicable not applicable Direct Materials $ 0 36,000 $36,000

0 38,700 $38,700

not applicable not applicable not applicable

0 32,760 $32,760

0 71,460 $71,460

2. Summarize Physical and Equivalent Units (Current Year)


Beginning WIP (0%) 0 0 0 (0%) 0 0 0 Complete Beginning WIP (0%) 0 0 0 (0%) 0 0 0 Work This Period Start Start and Ending Complete WIP (60%) 9,000 3,000 9,000 9,000 7,000 7,000 7,000 3,000 1,800 (40%) 2,000 2,000 800 Total Work Performed This Period 12,000 12,000 10,800 12,000 9,000 7,800 Total Units to Account for 15,000 Total Work 12,000 10,800 15,000 Total Work 9,000 7,800

Department 1: Physical Units Equivalent Units: Direct Materials Conversion Costs Department 2: Physical Units Equivalent Units: Transferred-In Conversion Costs

Chapter 6: Process Costing 6-33 3. FIFO Cost Per Equivalent Unit (Current Year)
Department 1: Direct materials: Conversion costs: _____Current Period Direct materials cost_____ Equivalent units for total work performed this period ______Current Period Conversion costs______ Equivalent units for total work performed this period = $36,000 12,000 = $14,040 10,800 = = $3.00 1.30 $4.30

Total cost per equivalent unit: Department 2: Transferred-in costs: Conversion costs: _____Current Period Transferred-in cost_____ Equivalent units for total work performed this period ______Current Period Conversion costs______ Equivalent units for total work performed this period = $38,700 9,000 = $32,760 7,800 = =

$4.30 4.20 $8.50

Total cost per equivalent unit:

4. FIFO Process Cost Report (Current Year)


Beginning WIP Costs to complete beginning WIP: Transferred-in Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Total units completed and transferred out Ending WIP: Transferred in Direct materials Conversion costs Total ending WIP cost Total Accounted For 9,000x$4.30 Department 1 Computation Units 0 Costs $ 0 n/a 0 0 _____ 0 9,00 0 9,000 3,000 3,000x$3 1,800x$1.30 _____ 12,000 n/a 9,000 2,340 11,340 $50,040 2,000x$4.30 800x$4.20 _____ 9,000 0 0 38,700 38,700 7,000x$8.50 _____ 0 7,000 7,000 2,000 8,600 n/a 3,360 11,960 $71,460 Department 2 Computation Units Costs 0 $ 0 0 n/a 0 0 0 59,500 56,640

6-34 Cost Management FIFO BUDGET FOR NEXT YEAR Physical Flow of Units: Next Period WIP beginning Started Transferred in Total to account for Ending WIP Completed and transferred out Department 1 3,000 15,000 0 18,000 5,000 13,000
Direct Materials $ 9,000 48,600 $57,600

Department 2 2,000 0 13,000 15,000 1,000 14,000


Conversion Costs Total Cost $ 2,340 14,545 $16,885 $11,340 63,145 $74,485

1. Summarize Total Costs to Account For (Next Year)


Transferred-in Department 1: Beginning WIP Current period costs Total costs to account for Department 2: Beginning WIP Current period costs Total costs to account for not applicable not applicable not applicable

$ 8,600 55,631 $64,231

not applicable not applicable not applicable

$ 3,360 59,075 $62,435

$ 11,960 114,706 $126,666

2. Summarize Physical and Equivalent Units (Next Year)


Beginning WIP (60%) 3,000 3,000 3,000 (40%) 2,000 2,000 800 Complete Beginning WIP (40%) 0 0 1,200 (60%) 0 0 1,200 Work This Period Start Start and Ending Complete WIP (50%) 10,000 5,000 10,000 10,000 12,000 12,000 12,000 5,000 2,500 (70%) 1,000 1,000 700 Total Work Performed This Period 15,000 15,000 13,700 13,000 13,000 13,900 Total Units to Account for 18,000 Total Work 18,000 15,500 15,000 Total Work 15,000 14,700

Department 1: Physical Units Equivalent Units: Direct Materials Conversion Costs Department 2: Physical Units Equivalent Units: Transferred-In Conversion Costs

3. FIFO Cost Per Equivalent Unit (Next Year)


Department 1: Direct materials: Conversion costs: _____Current Period Direct materials cost_____ Equivalent units for total work performed this period ______Current Period Conversion costs______ Equivalent units for total work performed this period = $48,600 15,000 = $14,545 13,700 = = $3.2400 1.0617 $4.3017

Total cost per equivalent unit:

Chapter 6: Process Costing 6-35


Department 2: Transferred-in costs: Conversion costs: _____Current Period Transferred-in cost_____ Equivalent units for total work performed this period ______Current Period Conversion costs______ Equivalent units for total work performed this period = $55,631 13,000 = $59,075 13,900 = = $4.28 4.25 $8.53

Total cost per equivalent unit:

4. FIFO Process Cost Report (Next Year)


Department 1 Computation Units Current year cost report 3,000 Costs $11,340 n/a 0 1,274 _____ 3,000 10,00 0 13,00 0 5,000 5,000x$3.24 2,500x$1.0617 _____ 18,000 n/a 16,200 2,654 18,854 $74,485 1,000x$4.28 700x$4.25 _____ 15,000 1,274 12,614 Computation Current year cost report 0x$4.28 1,200x$4.25 _____ 2,000 Department 2 Units 2,000 Costs $ 11,960 0 n/a 5,100 5,100 17,060

Beginning WIP Costs to complete beginning WIP: Transferred-in Direct materials Conversion costs Total costs added this period Total cost of beginning WIP transferred out New units started, completed, and transferred out Total units completed and transferred out Ending WIP: Transferred in Direct materials Conversion costs Total ending WIP cost Total Accounted For

0x$3.24 1,200x$1,0617

10,000x$4.3017

43,017 55,631

12,000x$8.53

12,000 14,000 1,000

102,352 119,412 4,279 n/a 2,975 7,254 $126,666

B. Weighted average process costing report and calculations for the current year and the budget for next year WEIGHTED AVERAGE CURRENT YEAR Because there are no beginning inventories in period one, the cost reports for FIFO and weighted-average are the same. See the preceding FIFO report.

6-36 Cost Management WEIGHTED AVERAGE BUDGET FOR NEXT YEAR 1. Summarize Total Costs to Account For (Next YearWeighted Average)
Transferred-in Department 1: Beginning WIP Current period costs Total costs to account for Department 2: Beginning WIP Current period costs Total costs to account for not applicable not applicable not applicable Direct Materials $ 9,000 48,600 $57,600 Conversion Costs Total Cost $ 2,340 14,545 $16,885 $11,340 63,145 $74,485

$ 8,600 55,762 $64,362

not applicable not applicable not applicable

$ 3,360 59,075 $62,435

$ 11,960 114,837 $126,797

2. Summarize Physical and Equivalent Units (Next Year)


Beginning WIP (60%) 3,000 3,000 3,000 (40%) 2,000 2,000 800 Complete Beginning WIP (40%) 0 0 1,200 (60%) 0 0 1,200 Work This Period Start Start and Ending Complete WIP (50%) 10,000 5,000 10,000 10,000 12,000 12,000 12,000 5,000 2,500 (70%) 1,000 1,000 700 Total Work Performed This Period 15,000 15,000 13,700 13,000 13,000 13,900 Total Units to Account for 18,000 Total Work 18,000 15,500 15,000 Total Work 15,000 14,700

Department 1: Physical Units Equivalent Units: Direct Materials Conversion Costs Department 2: Physical Units Equivalent Units: Transferred-In Conversion Costs

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


Department 1: Direct materials: Conversion costs: Beginning WIP + Current Period Direct materials cost Equivalent units for total work performed this period Beginning WIP + Current Period Conversion costs Equivalent units for total work performed this period = $57,600 18,000 = $16,885 15,500 = = $3.2000 1.0894 $4.2894

Total cost per equivalent unit: Department 2: Transferred-in costs:Beginning WIP + Current Period Transferred-in cost Equivalent units for total work performed this period Conversion costs: Beginning WIP + Current Period Conversion costs Equivalent units for total work performed this period = $64,362 15,000 = $62,435 14,700 = =

$4.2908 4.2473 $8.5381

Total cost per equivalent unit:

Chapter 6: Process Costing 6-37 4. Weighted Average Process Cost Report (Next Year)
Total units completed and transferred out Ending WIP: Transferred in Direct materials Conversion costs Total ending WIP cost Total Accounted For Department 1 Computation Units 13,00 0 13,000x$4.2894 5,000
5,000x$3.20 2,500x$1.0894

Costs 55,762 n/a 16,000 2,723 18,723 $74,485

Department 2 Units 14,00 0 14,000x$8.5381 Computation 1,000


1,000x$4.2908 700x$4.2473

Costs 119,533 4,291 n/a 2,973 7,264 $126,797

_____ 18,000

_____ 15,000

C. 1. If she better understands the flow of resources, she can more accurately determine percentage completed. This seems like a way to improve accuracy. 2. More accurately estimating percentage completed would mean that cost per unit would better reflect the use of resources. In addition, the costs for each period would be more accurately identified with the units of that period. If it takes a lot of time to develop a more accurate estimate and if ending work in process inventory is relatively immaterial, the cost could be greater than the benefit. 6.37 Computer Components A. Here are several possible answers to this question; students may think of others. Actual costs can differ from standards because of changes in prices, as described in the problem. Differences can also result from deviations from standards in the efficiency with which raw materials or labor hours are used. For example, an equipment malfunction might slow production or spoil some units. Employees can work faster or slower than expected. The quality of materials can be better or worse than expected, causing deviations from the expected amount of spoilage or scrap. A new labor contract could be negotiated, increasing direct labor costs. Overhead costs can also be higher or lower than expected. There could be an increase in electricity rates or insurance costs. Equipment maintenance could be higher or lower than expected. B. Kevin might or might not make the same argument if the suppliers price had decreased. However, it appears that he might have been making his argument to avoid responsibility. From the information presented, Kevin has at least some control over the purchase price. He stated that he does not want to consider changing suppliers at this time, and a division manager often has control over the purchasing function for the division. If he was making his argument primarily to avoid responsibility, then he would probably make a different argument if the price had decreased. In that case, he would probably want to be rewarded for good performance. C. Changing vendors could have many benefits, such as reducing costs, enhancing quality, improving delivery timeliness, etc. Changing vendors could also do the oppositeincrease

6-38 Cost Management costs, decrease quality, and result in delivery delays. The relationship with the vendor may also be important. It may not be in the companys best interests to drop a long-term and beneficial relationship. At the same time, it might be in the companys interests to develop a relationship with a new supplier. D. The practice of giving managers bonuses based on comparisons of actual to standard costs can motivate managers to achieve or exceed standards. In turn, achieving the standards can help the company meet profitability and other goals. E. As discussed more completely in Chapter 10, employees are most likely to be motivated by a standard that is achievable. Vendor price increases or decreases should be reflected in the standard if they are not in the managers control. This improves the fairness and achievability of the standard. However, the standard should not be adjusted for vendor price changes that the manager can influence. In this case, the adjustment would reduce the managers motivation to control costs. F. There is no one answer to this part. Sample solutions and a discussion of typical student responses will be included in assessment guidance on the Instructors web site for the textbook (available at www.wiley.com/college/eldenburg).

Chapter 6: Process Costing 6-39

BUILD YOUR PROFESSIONAL COMPETENCIES


6.38 Focus on Professional Competency: Reporting A. Information used in process costing reports: Departments in the production process for which process accounting is performed Cost flow assumption (e.g., FIFO, weighted average) or standard costs Beginning WIP: units, percent complete, costs (direct materials, conversion costs, transferred-in costs) Costs incurred during the period (direct materials used, conversion costs incurred) Ending WIP: units, percent complete Spoilage: units, normal amount of spoilage Number of units started and transferred out Information required to perform calculations needed for a process costing report: Flow of costs in the production process o Point at which direct materials are added o Pattern in which conversion costs are incurred o Point(s) at which inspection occurs Assignment of costs in the accounting system for direct materials and conversion (this could include computation of depreciation, allocation of physical space costs, estimates for costs incurred but not yet paid, and so on) B. Chapter 6 introduced three methods for preparing a process costing report: FIFO, weighted average, and standard costs. Each method has pros and cons and results in different information for users. C. Objectivity is needed to avoid bias in the measurement of costs and other factors such as percent completion. Conciseness and clarity are needed to enhance communication. Managers are more likely to use the information in a process cost report if the report contains only important information that is easy to understand. D. There is no one answer to this question. The explanation of the cost report should be adapted to the characteristics and needs of the audiencein this case, non-accountant managers. It should not include technical accounting terms unless there is reason to believe that the managers know the terms. Also, most non-accountant managers are probably are more interested in the results of the report than in details about how it was prepared. They should be given details only for items involving judgment that would significantly affect the results. For example, it might be appropriate to point out that spoiled units were assumed to be removed at the end of production rather than at a midpointbut only if the point of inspection for spoilage would be likely to affect the results sufficiently to affect the managers decisions.

6-40 Cost Management E. In the Premier Plastics illustrations, the accountant is not serving as a spokesperson to people outside the organization. Instead, she is serving as a spokesperson within the organization; she was choosing a report to communicate the costs of producing products. Specific things she did as a spokesperson included: Focusing on the managers needssuch as their need to monitor costs for new equipment Choosing a cost flow assumption to provide managers with the most current cost information Gaining consensus by discussing her choice with the managers who will use the information Remaining alert for deviations from expectationssuch as the large spoilage identified for July, leading to a revision in the content of the process report to include normal and abnormal spoilage Alerting managers to potential competitor strengths and production problem areassuch as the discoloration quality problem in the plastics department. F. 1. The methods used to create process cost reports might require monitoring and updating because of changes in production processes or accounting systems. In addition, changes may be needed because the information that managers want changes. For example, successful competition in recent years has increasingly focused on the ability to control costs. Managers are likely to need more precise and timely information to effectively monitor costs. 2. Process cost reports can be used to monitor operating performance by allowing managers to observe trends in per-unit costs over time. Actual costs can also be compared with standard costs to evaluate whether operations are in controli.e., are meeting expectations or targeted levels of performance. 6.39 Integrating Across the Curriculum: Production Management [Note: This problem assumes knowledge of Chapter 5 (job costing). The problem does NOT assume knowledge of JIT or backflush accounting, but Part B.2 encourages students to think about how process costing might be less complex in the absence of significant work in process inventories.] A. 1. Work in process inventories should greatly decrease. Currently, whole jobs are waiting to be processed at each department. With continuous processing, these will disappear. The only in-process inventory will be jobs in process within a cell, most of which will be completed the next day. Because individual units are produced one by one, there will be very few individual units in process at any point in time. Raw material inventory should almost disappear. The company currently carries a parts inventory. Under the new system, it would carry parts only for jobs in process.

Chapter 6: Process Costing 6-41 2. Materials handling costs may decrease depending on the trade-off in increased time of delivering parts more frequently to cells and elimination of transfers between departments. Finished goods still need to be transported to shipping. Machine set ups should all but disappear. Since each cell will be dedicated to one product line, machines can be permanently set for the product. Nonetheless, some adjustments will likely need to be made for different models, but the adjustments are probably minor. 3. There should be a substantial decrease in the number of defects. Instead of testing units after an entire batch has been completed, the units will be tested continuously. A faulty assembly or soldering operation should be caught (and corrective action taken) after only one or two units have been affected, not the entire order. In addition, fewer setting changes will be made to the equipment in assembly and soldering, which should reduce the likelihood that defects are caused by erroneous settings. 4. The ratio of units produced to units ordered should decrease. Under the current system the firm must estimate the number of units that will fail to pass inspection. They must produce enough units so that units produced minus defective units still yield enough units to satisfy the customer's order. To be highly confident that enough units will be produced to fill an order, an excess number of units is probably produced, on average. Under the new system a cell keeps on producing for an order until enough good units are achieved. Thus, only the minimum number of units needed will be produced. 5. The firm should experience a decrease in the workload for production scheduling. Instead of scheduling jobs through several departments, jobs need only be assigned to a single cell. Also, the need to expedite replacements for spoiled jobs should disappear as entire jobs should no longer be spoiled. Machine utilization rates are likely to fall. If there are no orders for a particular product for a period of time, the cells dedicated to that product would be idle. In fact, this is the major tradeoff for adopting a job versus process orientation. If a firm makes many different products (requiring different kinds of processing on a variety of machines) but none of them in any significant quantity, then it cannot afford to dedicate equipment to each product line. However, as the breadth of the product line decreases or manufacturing processes become more similar, management should consider the benefits of switching to a process orientation. 6. This depends on the tradeoff between the various costs saved and the additional costs incurred to obtain separate equipment for each cell (if necessary) and the cost of idle equipment. However, total costs will probably decrease. Presumably, management will not make the change unless they study existing and expected future production patterns and expect the cost savings to be larger than the additional costs. 7. The change in system will probably make it more difficult to fill a customers rush order. No parts inventories are maintained, and it will take approximately one week to receive new parts.

6-42 Cost Management B. 1. With a change from a job orientation to a process orientation, there does not appear to be a need to know the cost for any particular order. The company could use process costing to compute the average materials and conversion cost for each type of product. For pricing or profitability analysis, the firm could add the cost of materials required for each model to the average conversion cost. This manufacturing situation is similar to a fast-food restaurant where managers may wish to track the relative profitability of food versus drinks, but there is no need to capture the cost of hamburgers versus cheeseburgers, nor is there a need to know the profitability of a particular customer's order. Under process costing, costs could be measured and monitored to ensure that costs of each process are in control. This accounting system would cost less than the current job costing system because detailed data for each job would no longer be tracked. 2. First, there would be no need to keep track of raw material inventory. The cost of raw material purchases could be added directly to production. Second, the absence of significant work in process inventory reduces the need to calculate and track equivalent units. Units started would be roughly equal to units completed, so the company could adopt an actual cost system for each product line and simply record all production costs directly in cost of goods sold. This would also eliminate the need to choose between the FIFO and weighted average methods. The average materials and conversion cost for each type of product could be periodically measured and monitored to ensure that costs are in control. But it does not appear necessary to capture this information for units on a continuous basis. If desired, the small amount of jobs in process at the end of an accounting period could be handled through end of period adjustments rather than through a system that continuously tracks work in process inventory.