chapter 4 - california state university, northridgehcbus012/docs/230 solution fall...

Chapter 4Systems Design: Process Costing

Solutions to Questions

4-1 A process costing system should be used in situations where a homogeneous product is produced on a continuous basis.

4-21. Job-order costing and process costing

have the same basic purposes—to as-sign materials, labor, and overhead cost to products and to provide a mechanism for computing unit product costs.

2. Both systems use the same basic manu-facturing accounts.

3. Costs flow through the accounts in basi-cally the same way in both systems.

4-3 Cost accumulation is simpler under process costing because costs only need to be assigned to departments—not separate jobs. A company usually has a small number of processing departments, whereas a job-order costing system often must keep track of the costs of hundreds or even thousands of jobs.

4-4 In a process costing system, a Work in Process account is maintained for each separate processing department.

4-5 The journal entry would be:Work in Process, Firing.. .XXXX

Work in Process, Mixing....................

XXXX

4-6 The costs that might be added in the Firing Department include: (1) costs transferred in from the Mixing Department; (2) materials costs added in the Firing Department; (3) labor costs added in the Firing Department; and (4)

overhead costs added in the Firing Department.

4-7 Under the weighted-average method, equivalent units of production consist of units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department’s ending work in process inventory.

4-8 The company will want to distinguish between the costs of the metals used to make the medallions, but the medals are otherwise identical and go through the same production processes. Thus, operation costing is ideally suited for the company’s needs.

4-9 Under the weighted-average method, each unit transferred out of the department is counted as one equivalent unit—regardless of in what period the work was done to complete the units. Under the FIFO method, only the work done in the current period is counted. Units transferred out are divided into two parts. One part consists of the units in the beginning inventory. Only the work needed to complete these units is shown as part of the equivalent units for the current period. The other part of the units transferred out consists of the units started and completed during the current period.

4-10 The weighted-average method mixes costs from the current period with costs from the prior period. Thus, under the weighted-average method, the department’s apparent performance in the current period is influenced to some

© The McGraw-Hill Companies, Inc., 2008. All rights reserved.Solutions Manual, Chapter 4 141

extent by what happened in a prior period. In contrast, the FIFO method cleanly separates the costs and work of the current period from those of the prior period. This makes the FIFO method superior to the weighted-average method for cost control because current performance should be measured in relation to costs of the current period only.

4-11 Operating departments are the units in an organization within which the central purposes of the organization are carried out; these departments usually generate revenue. By contrast, service departments provide support or assistance to the operating departments. Examples of service departments include laundry services in a hotel or hospital, internal auditing, airport maintenance services (ground crews), cafeteria, personnel, cost accounting, and so on.

4-12 Service department costs are allocated to products and services in two stages. Service department costs are first allocated to the operating departments. These allocated costs are then included in

the operating departments’ overhead rates, which are used to cost products and services.

4-13 Interdepartmental services exist whenever two service departments provide services to each other.

4-14 Under the direct method, interdepartmental services are ignored; service department costs are allocated directly to operating departments.

4-15 Under the step-down method, the costs of the service department performing the greatest amount of service for the other service departments are allocated first, the costs of the service department performing the next greatest amount of service are allocated next, and so forth through all the service departments. Once a service department’s costs have been allocated, costs are not reallocated back to it under the step-down method.

© The McGraw-Hill Companies, Inc., 2008. All rights reserved.142 Managerial Accounting, 12th Edition

Exercise 4-1 (20 minutes)a. To record issuing raw materials for use in production:

Work in Process—Molding Department.. 28,000Work in Process—Firing Department..... 5,000

Raw Materials.................................. 33,000

b. To record direct labor costs incurred:Work in Process—Molding Department.. 18,000Work in Process—Firing Department..... 5,000

Wages Payable................................ 23,000

c. To record applying manufacturing overhead:Work in Process—Molding Department.. 24,000Work in Process—Firing Department..... 37,000

Manufacturing Overhead................. 61,000

d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department:

Work in Process—Firing Department..... 67,000Work in Process—Molding Department

67,000

e. To record transfer of finished bricks from the Firing Department to the finished goods warehouse:

Finished Goods...................................... 108,000Work in Process—Firing Department

108,000

f. To record Cost of Goods Sold:Cost of Goods Sold................................ 106,000

Finished Goods................................ 106,000


Exercise 4-2 (10 minutes)Weighted-Average Method

Equivalent Units

MaterialsConver-

sionUnits transferred to the next department 410,000 410,000Ending work in process:

Materials: 30,000 units × 70% com-plete................................................... 21,000

Conversion: 30,000 units × 50% com-plete................................................... 15,000

Equivalent units of production................. 431,000 425,000



Materials Labor Overhead TotalWork in process, May 1... $ 14,550 $23,620 $118,100Cost added during May. . . 88,350 14,330 71,650 Total cost (a)................... $102,900 $37,950 $189,750Equivalent units of

production (b)...............1,200 1,100 1,100

Cost per equivalent unit (a) ÷ (b)........................

$85.75 $34.50 $172.50 $292.75



Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production........... 300 100Cost per equivalent unit.................... $31.56 $9.32Cost of ending work in process

inventory....................................... $9,468 $932$10,40

0

Units completed and transferred out:Units transferred to the next

department.................................... 1,300 1,300Cost per equivalent unit.................... $31.56 $9.32Cost of units completed and

transferred out...............................$41,02

8 $12,116$53,14

4


Exercise 4-5 (10 minutes)FIFO Method

Materi-als

Conver-sion

To complete beginning work in process:Materials: 400 units x (100% – 75%)........... 100Conversion: 400 units x (100% – 25%)........ 300

Units started and completed during the pe-riod (42,600 units started – 500 units in ending inventory)........................................ 42,100 42,100

Ending work in processMaterials: 500 units x 80% complete.......... 400 Conversion: 500 units x 30% complete....... 150

Equivalent units of production......................... 42,600 42,550


Exercise 4-6 (10 minutes)FIFO method

Materi-als Labor

Over-head

Total

Cost added during May (a)................................... $82,560 $52,920 $132,300

Equivalent units of production (b)................. 16,000 14,000 14,000

Cost per equivalent unit (a) ÷ (b).......................... $5.16 $3.78 $9.45 $18.39



Materi-als

Conver-sion

Total

Ending work in process inventory:Equivalent units of production......... 800 200Cost per equivalent unit.................. $4.40 $1.30Cost of ending work in process in-

ventory........................................ $3,520 $260 $3,780

Units transferred out:Cost in beginning work in process

inventory..................................... $2,700 $380 $3,080Cost to complete the units in be-

ginning work in process inven-tory:

Equivalent units of production re-quired to complete the begin-ning inventory........................... 400 700

Cost per equivalent unit................ $4.40 $1.30Cost to complete the units in be-

ginning inventory....................... $1,760 $910 $2,670Cost of units started and completed this pe-riod:

Units started and completed this period (8,000 units completed and transferred to the next de-partment – 1,000 units in begin-ning work in process inventory). 7,000 7,000

Cost per equivalent unit................ $4.40 $1.30Cost of units started and com-

pleted this period.......................$30,80

0 $9,100$39,90

0Total cost of units transferred out. . . $45,65

0


Exercise 4-8 (15 minutes)Service Departments Operating Departments

Admini-stration

Physical Plant

ServicesUndergradu-ate Programs

Graduate Programs Total

Departmental costs be-fore allocations.............

$2,070,000 $720,000 $23,650,000

$2,980,000

$29,420,000

Allocations:Administration costs

(40/45, 5/45)............(2,070,000

) 1,840,000 230,000Physical Plant costs

(250/300, 50/300)*... (720,000) 600,000 120,000 Total costs after alloca-

tion............................... $ 0 $ 0 $26,090,000$3,330,00

0$29,420,0

00

*Based on the space occupied by the two operating departments, which is 300,000 square feet.


Exercise 4-9 (15 minutes) Service

DepartmentsOperating

Departments

Admini-stration

Build-ing Ser-

vices GroceriesCoffee Shop Total

Departmental costs before alloca-tions.............................................

$200,000

$60,000

$3,860,000

$340,000

$4,460,000

Allocations:Administration costs

(320/3,200, 2,720/3,200, 160/3,200)*..............................

(200,000) 20,000 170,000 10,000

Building Services costs (9,500/10,000, 500/10,000)†....

(80,000)

76,00 0

4,00 0

Total costs after allocation.............$ 0 $ 0

$4,106,000

$354,000

$4,460,000

*Based on employee hours in the other three departments, 320 + 2,720 + 160 = 3,200.†Based on space occupied by the two operating departments, 9,500 + 500 = 10,000.

Both the Building Services Department costs of $60,000 and the Administration costs of $20,000 that have been allocated to the Building Services Department are allocated to the two operating departments.


Exercise 4-10 (10 minutes)Work in Process—Mixing..........................................330,000

Raw Materials Inventory..................................... 330,000Work in Process—Mixing..........................................260,000Work in Process—Baking.........................................120,000

Wages Payable.................................................... 380,000Work in Process—Mixing..........................................190,000Work in Process—Baking.........................................90,000

Manufacturing Overhead.................................... 280,000Work in Process—Baking.........................................760,000

Work in Process—Mixing..................................... 760,000Finished Goods........................................................980,000

Work in Process—Baking..................................... 980,000



1Materials Labor

Over-head

Units transferred to the next de-partment.................................... 790,000 790,000 790,000

Ending work in process:Materials: 50,000 units × 60%

complete.................................. 30,000 Labor: 50,000 units × 20%

complete.................................. 10,000 Overhead: 50,000 units × 20%

complete.................................. 10,000 Equivalent units of production...... 820,000 800,000 800,000

2. Materi-als Labor

Over-head

Cost of beginning work in process....................................... $ 68,600

$ 30,000 $ 48,000

Costs added during the period...... 907,200 370,000 592,000

Total cost (a).................................$975,80

0$400,00

0 $640,000Equivalent units of production

(b)............................................... 820,000 800,000 800,000Cost per equivalent unit (a) ÷ (b). $1.19 $0.50 $0.80



1 Materi-als Labor

Over-head

To complete beginning work in process:Materials: 80,000 gallons ×

(100% − 80%)............................. 16,000Labor: 80,000 gallons ×

(100% − 75%)............................. 20,000Overhead: 80,000 gallons ×

(100% − 75%)............................. 20,000Units started and completed dur-

ing the period......................... 710,000 710,000 710,000Ending work in process:

Materials: 50,000 gallons × 60%. . . 30,000 Labor: 50,000 gallons × 20%......... 10,000 Overhead: 50,000 gallons × 20%. . 10,000

Equivalent units of production.......... 756,000 740,000 740,000

Materi-als Labor

Over-head

Cost added during the period (a)......$907,20

0$370,00

0$592,00

0Equivalent units of production (b).... 756,000 740,000 740,000Cost per equivalent unit (a) ÷ (b). . .` $1.20 $0.50 $0.80


Exercise 4-13 (45 minutes)FIFO method1. Computation of the total cost per equivalent unit of production:

Cost per equivalent unit of production for material... $18.20Cost per equivalent unit of production for conver-

sion......................................................................... 23.25

Total cost per equivalent unit of production.............. $41.45

2. Computation of equivalent units in ending inventory:Materials Conversion

Units in ending inventory.... 300 300 Percentage completed........ 80% 40%Equivalent units of produc-

tion................................... 240 120

3. Computation of equivalent units required to complete the beginning inventory:

Materials ConversionUnits in beginning inven-

tory................................... 400 400Percentage uncompleted.... 30% 70%Equivalent units of produc-

tion................................... 120 280

4. Units transferred to the next department.... 4,400 Less units from the beginning inventory...... 400 Units started and completed during the

period......................................................... 4,000


Exercise 4-13 (continued)5.

Materi-als

Conver-sion

Total

Ending work in process inventory:Equivalent units of production.......................................... 240 120Cost per equivalent unit.................................................... $18.20 $23.25Cost of ending work in process inventory......................... $4,368 $2,790 $7,158

Units transferred out:Cost from the beginning work in process inventory.......... $4,897 $2,989 $7,886Cost to complete the units in beginning work in process inventory:

Equivalent units of production required to complete the units in beginning inventory................................ 120 280

Cost per equivalent unit............................................... $18.20 $23.25Cost to complete the units in beginning inventory....... $2,184 $6,510 $8,694

Cost of units started and completed this period:Units started and completed this period....................... 4,000 4,000Cost per equivalent unit............................................... $18.20 $23.25Cost of units started and completed this period........... $72,80

0 $93,000$165,8

00Total cost of units transferred out.................................... $182,3

80



Materials

Labor & Overhead

Pounds transferred to the Packing Depart-ment during May...........................................

490,000 490,000

Work in process, May 31:Materials: 20,000 pounds × 100% com-

plete........................................................... 20,000 Labor and overhead: 20,000 pounds ×

90% complete............................................. 18,000

Equivalent units of production.........................510,00

0 508,000



Materials

Labor & Overhead

To complete the beginning work in process:Materials: 30,000 pounds × (100% −

100%)......................................................... 0Labor and overhead:

30,000 pounds × (100% − 55%)................ 13,500Pounds started and completed during May

(480,000 pounds started − 20,000 pounds in ending inventory)......................................

460,000 460,000

Ending work in process:Materials: 20,000 pounds × 100% com-

plete........................................................... 20,000 Labor and overhead: 20,000 pounds ×

90% complete............................................. 18,000

Equivalent units of production.........................480,00

0 491,500


Exercise 14-16 (20 minutes)Service


DepartmentsAd-

mini-stra-tive

Jani-to-rial

Mainte-nance Prep

Finish-ing Total

Costs before allocation....................$84,00

0$67,80

0 $36,000$256,10

0$498,60

0$942,50

0Allocation:

Administrative: (60/1,200; 240/1,200; 600/1,200; 300/1,200)..................................

(84,000) 4,200 16,800 42,000 21,000

Janitorial: (10,000/100,000; 20,000/100,000; 70,000/100,000).........................

(72,000) 7,200 14,400 50,400

Maintenance: (10,000/40,000; 30,000/40,000)........................... (60,000) 15,000 45,000

Total cost after allocations............... $ 0 $ 0 $ 0 $327,50

0$615,00

0$942,50

0


Exercise 14-17 (20 minutes)Service


DepartmentsAd-

mini-stra-tive

Jani-to-rial

Equip-ment

Mainte-nance Prep

Finish-ing Total

Costs before allocation................$84,00

0 $67,800 $36,000$256,10

0$498,60

0$942,50

0Allocation:

Administrative: (600/900; 300/900).................................

(84,000) 56,000 28,000

Janitorial: (20,000/90,000; 70,000/90,000)....................... (67,800) 15,067 52,733

Equipment Maintenance: (10,000/40,000; 30,000/40,000)....................... (36,000) 9,000 27,000

Total cost after allocations........... $ 0 $ 0 $ 0 $336,16

7$606,33

3$942,50

0



1.Materi-

alsConver-

sionUnits transferred to the next process....... 300,000 300,000Ending work in process:

Materials: 40,000 units × 50% com-plete..................................................... 20,000

Conversion: 40,000 units × 25% com-plete..................................................... 10,000

Equivalent units of production.................. 320,000 310,000

2. Materi-als

Conver-sion

Cost of beginning work in process...........$ 56,60

0 $ 14,900

Cost added during the period.................. 385,00

0 214,500

Total cost (a)...........................................$441,60

0 $229,400Equivalent units of production (b)........... 320,000 310,000Cost per equivalent unit (a) ÷ (b)............ $1.38 $0.74

3.

Materials

Conversion

Total

Ending work in process inventory:Equivalent units of

production (see above)... 20,000 10,000Cost per equivalent unit

(see above)..................... $1.38 $0.74Cost of ending work in

process inventory......................... $27,600 $7,400 $35,000

Units completed and transferred out:Units transferred to the

next department............. 300,000 300,000Cost per equivalent unit $1.38 $0.74


(see previous exercise)...Cost of units completed

and transferred out.........$414,00

0 $222,000$636,00

0


Problem 4-19 (45 minutes)Weighted-Average Method

1.

Equivalent Units of Production

Materials

Conversion

Transferred to next department................ 450,000

450,000

Ending work in process:Materials: 80,000 units x 75% complete. 60,000 Conversion: 80,000 units x 25% complete...............................................

20,00 0

Equivalent units of production.................. 510,00 0

470,000

2.

Cost per Equivalent Unit

Materials

Conversion

Cost of beginning work in process.......... $ 36,550

$ 13,500

Cost added during the period................. 391,85 0

287,300

Total cost (a)........................................... $428,40 0

$300,800

Equivalent units of production (b).......... 510,000 470,000Cost per equivalent unit, (a) ÷ (b)......... $0.84 $0.64

3.

Applying Costs to Units

Materials

Conversion

Total

Ending work in process inventory:

Equivalent units of production (materials: 80,000 units x 75% complete; conversion:

60,000 20,000


80,000 units x 25% complete).......................

Cost per equivalent unit... $0.84 $0.64Cost of ending work in process inventory........... $50,400 $12,800 $63,200

Units completed and transferred out:Units transferred to the next department.................... 450,000 450,000

Cost per equivalent unit... $0.84 $0.64Cost of units completed and transferred out...............

$378,000 $288,000

$666,000


Problem 4-19 (continued)4.

Cost Reconciliation

Costs to be accounted for:Cost of beginning work in process in-ventory($36,500 + $13,500)............................ $ 50,050

Costs added to production during the period($391,850 + $287,300)........................ 679,150

Total cost to be accounted for................ $729,200 Costs accounted for as follows:

Cost of ending work in process inven-tory....................................................... $ 63,200

Cost of units completed and transferred out........................................................ 666,000

Total cost accounted for......................... $729,200


Problem 4-20 (45 minutes)FIFO method1.


Materi-als

Conver-sion

To complete beginning work in process:Materials: 70,000 units x (100% − 70%) 21,000Conversion: 70,000 units x (100% −

40%).................................................... 42,000Units started and completed during the

period (460,000 units started − 80,000 units in ending inventory).......................

380,000 380,000

Ending work in process:Materials: 80,000 units x 75% complete 60,000 Conversion: 80,000 units x 25% com-

plete.................................................... 20,000 Equivalent units of production.................... 461,00

0 442,000

2.


Materi-als

Conver-sion

Cost added during the period (a)........ $391,850 $287,300

Equivalent units of production (b)...... 461,000 442,000Cost per equivalent unit (a) ÷ (b)....... $0.85 $0.65

3. See the next page.

4.

Cost Reconciliation

Costs to be accounted for:Cost of beginning work in process inventory

($36,500 + $13,500)....................................$ 50,05

0Costs added to production during the period

($391,850 + $287,300)................................ 679,15

0


Total cost to be accounted for......................... $729,200

Costs accounted for as follows:Cost of ending work in process inventory........ $ 64,00

0Costs of units transferred out.......................... 665,20

0Total cost accounted for.................................. $729,20

0



Costs of Ending Work in Process Inventory and Units Transferred Out

Materi-als

Conver-sion

Total

Ending work in process inventory:Equivalent units of production........................................ 60,000 20,000Cost per equivalent unit................................................. $0.85 $0.65Cost of ending work in process inventory....................... $51,00

0 $13,000$64,00

0Units transferred out:

Cost in beginning work in process inventory.................. $36,550 $13,500

$50,050

Cost to complete the units in beginning work in process inven-tory:Equivalent units of production required to complete

the beginning inventory........................................... 21,000 42,000Cost per equivalent unit............................................. $0.85 $0.65Cost to complete the units in beginning inventory..... $17,85

0 $27,300$45,15

0Cost of units started and completed this period:

Units started and completed this period..................... 380,000 380,000

Cost per equivalent unit............................................. $0.85 $0.65Cost of units started and completed this period......... $323,0

00 $247,000$570,0

00Cost of units transferred out........................................... $665,2

00© The McGraw-Hill Companies, Inc., 2008. All rights reserved.168 Managerial Accounting, 12th Edition


1.


Materials

Conversion

Transferred to next department*............... 380,000

380,000

Ending work in process:Materials: 40,000 units x 75% complete. 30,000 Conversion: 40,000 units x 25% complete...............................................

10,000

Equivalent units of production.................. 410,00 0

390,000

*Units transferred to the next department = Units in beginning work in process + Units started into production − Units in ending work in process = 70,000 + 350,000 − 40,000 = 380,000

2.


Materials

Conversion

Cost of beginning work in process.......... $ 86,000

$ 36,000

Cost added during the period................. 447,00 0

198,000

Total cost (a)........................................... $533,000

$234,000

Equivalent units of production (b).......... 410,000 390,000Cost per equivalent unit, (a) ÷ (b)......... $1.30 $0.60

3.

Cost of Ending Work in Process Inventory and Units Transferred Out

Materials

Conversion

Total



Equivalent units of production (materials: 40,000 units x 75% complete; conversion: 40,0000 units x 25% complete)....................... 30,000 10,000




$494,000 $228,000

$722,000



Cost Reconciliation

Costs to be accounted for:Cost of beginning work in process in-ventory($86,000 + $36,000)............................ $122,000

Costs added to production during the period($447,000 + $198,000)........................ 645,000

Total cost to be accounted for................ $767,000 Costs accounted for as follows:

Cost of ending work in process inven-tory....................................................... $ 45,000

Cost of units completed and transferred out........................................................ 722,000

Total cost accounted for......................... $767,000


Problem 4-22 (45 minutes)FIFO Method1.


Materi-als

Conver-sion

To complete beginning work in process:Materials: 60,000 units x (100% − 60%) 24,000Conversion: 60,000 units x (100% −

30%).................................................... 42,000Units started and completed during the

period (510,000 units started − 70,000 units in ending inventory).......................

440,000 440,000

Ending work in process:Materials: 70,000 units x 80% complete 56,000 Conversion: 70,000 units x 40% com-

plete.................................................... 28,000 Equivalent units of production.................... 520,00

0 510,000

2.


Materi-als

Conver-sion

Cost added during the period (a)........ $468,000 $357,000

Equivalent units of production (b)...... 520,000 510,000Cost per equivalent unit (a) ÷ (b)....... $0.90 $0.70

3. See the next page.

4.

Cost Reconciliation

Costs to be accounted for:Cost of beginning work in process inventory

($27,000 + $13,000)....................................$ 40,00

0Costs added to production during the period

($468,000 + $357,000)................................ 825,00

0


Total cost to be accounted for......................... $865,000

Costs accounted for as follows:Cost of ending work in process inventory........ $ 70,00

0Costs of units transferred out.......................... 795,00

0Total cost accounted for.................................. $865,00

0



Costs of Ending Work in Process Inventory and Units Transferred Out

Materi-als

Conver-sion

Total

Ending work in process inventory:Equivalent units of production........................................ 56,000 28,000Cost per equivalent unit................................................. $0.90 $0.70Cost of ending work in process inventory....................... $50,40

0 $19,600$70,00

0Units transferred out:

Cost in beginning work in process inventory.................. $27,000 $13,000

$40,000

Cost to complete the units in beginning work in process inven-tory:Equivalent units of production required to complete

the beginning inventory........................................... 24,000 42,000Cost per equivalent unit............................................. $0.90 $0.70Cost to complete the units in beginning inventory..... $21,60

0 $29,400$51,00

0Cost of units started and completed this period:

Units started and completed this period..................... 440,000 440,000

Cost per equivalent unit............................................. $0.90 $0.70Cost of units started and completed this period......... $396,0

00 $308,000$704,0

00Cost of units transferred out........................................... $795,0

00© The McGraw-Hill Companies, Inc., 2008. All rights reserved.

Solutions Manual, Chapter 4 175

Problem 4-23 (45 minutes)

Food Admin. X-RayOut-pa-

tient OB GeneralSer-vices

Ser-vices

Ser-vices Clinic Care Hospital

Variable costs $73,150 $ 6,800 $38,100 $11,700$

14,850$

53,400Food Services allocation:

$1.90 per meal × 1,000 meals (1,900) 1,900

$1.90 per meal × 500 meals (950) 950$1.90 per meal × 7,000

meals (13,300) 0 13,300$1.90 per meal × 30,000

meals (57,000) 57,000Admin. Services allocation:

$0.50 per file × 1,500 files (750) 750$0.50 per file × 3,000 files (1,500) 1,500$0.50 per file × 900 files (450) 450$0.50 per file × 12,000 files (6,000) 6,000

X-Ray Services allocation:$4 per X-ray × 1,200 X-rays (4,800) 4,800$4 per X-ray × 350 X-rays (1,400) 1,400$4 per X-ray × 8,400 X-rays (33,600) 33,600

Total variable costs $ 0 $ 0 $ 0 $18,000$

30,000$150,00

0


Problem 4-23 (continued)

Food Admin. X-RayOut-pa-

tient OB GeneralSer-vices

Ser-vices

Ser-vices Clinic Care Hospital

Fixed costs $48,000 $33,040 $59,520 $26,958$

99,738$344,74

4Food Services allocation:

2% × $48,000 (960) 9601% × $48,000 (480) 480

17% × $48,000 (8,160) 0 8,16080% × $48,000 (38,400) 38,400

Admin. Services allocation:10% × $34,000 (3,400) 3,40020% × $34,000 (6,800) 6,80030% × $34,000 (10,200) 10,20040% × $34,000 (13,600) 13,600

X-Ray Services allocation:13% × $63,400 (8,242) 8,2423% × $63,400 (1,902) 1,902

84% × $63,400 (53,256) 53,256

Total fixed costs $ 0 $ 0 $ 0 $42,000$120,00

0$450,00

0

Total overhead costs $ 0 $ 0 $ 0 $60,000$150,00

0$600,00

0


Problem 4-23 (continued)Computation of allocation rates:

Variable Food Services:

Variable Admin. Services:

Variable X-Ray Services:



1.

Total units transferred to the next department.............................................. 30,000

Less units in the May 1 inventory............... 5,000 Units started and completed in May........... 25,000

2.

The equivalent units were:

Materials

Conversion

Transferred to next department........... 30,000 30,000Ending work in process:

Materials: 4,000 units x 75% complete..........................................

3,000

Conversion: 4,000 units x 50% complete..........................................

2,000

Equivalent units of production............. 33,000 32,000

3.

The costs per equivalent unit were:

Materials

Conversion

Cost of beginning work in process.......... £ 9,000 £ 4,400Cost added during the period................. 57,000 30,800 Total cost (a)........................................... £66,000 £35,200Equivalent units of production (b).......... 33,000 32,000Cost per equivalent unit, (a) ÷ (b)......... £2.00 £1.10

4.

The ending work in process figure is verified as follows:

Materials

Conversion

Total

Ending work in process inventory:Equivalent units of production (see above)............................. 3,000 2,000

Cost per equivalent unit............ £2.00 £1.10Cost of ending work in process £6,000 £2,200 £8,20


inventory................................. 0

5. Multiplying the unit cost figure of £3.10 per unit by 1,000 units does not provide a valid estimate of the incremental cost of processing an additional 1,000 units through the department. If there is sufficient idle capacity to process an additional 1,000 units, the incremental cost per unit is almost certainly less than £3.10 per unit because the conversion costs are likely to include fixed costs.



1.


Materials

Conversion

Transferred to next department*............... 270,000 270,000

Ending work in process:Materials: 45,000 pounds x 100% complete...............................................

45,00 0

Conversion: 45,000 pounds x 2/3 complete............................................... 30,000

Equivalent units of production.................. 315,000 300,000

*35,000 + 280,000 – 45,000 = 270,000.

2.


Materials Conversion

Cost of beginning work in process..........$ 43,400

$ 20,300

Cost added during the period................. 397,600 189,700 Total cost (a)........................................... $441,00

0$210,00

0Equivalent units of production (b).......... 315,000 300,000Cost per equivalent unit, (a) ÷ (b)......... $1.40 $0.70

3.

Cost of Ending Work in Process Inventory and Units Transferred Out

Materials

Conversion

Total


Equivalent units of production (see above). . 45,000 30,000

Cost per equivalent unit... $1.40 $0.70


Cost of ending work in process inventory........... $63,000 $21,000 $84,000



$378,000 $189,000

$567,000


Problem 4-25 (continued)4. In computing unit costs, the weighted-average method mixes

costs of the prior period with current period costs. Thus, under the weighted-average method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant when attempting to measure performance in the current period. Good (or bad) cost control in the current period might be concealed by the costs that have been brought forward in the beginning inventory.



1. The equivalent units are:

MaterialsConver-

sionUnits completed during the year............. 790,000 790,000Work in process, Dec. 31:

Materials: 30,000 units × 100% com-plete................................................... 30,000

Conversion: 30,000 units × 50% com-plete................................................... 15,000

Equivalent units of production................. 820,000 805,000

The costs per equivalent unit are:

MaterialsConver-

sionWork in process, Jan. 1............................ $ 22,000 $ 48,000Cost added during the year..................... 880,000 2,367,000

Total cost (a)........................................... $902,000$2,415,00

0Equivalent units of production (b)........... 820,000 805,000Cost per equivalent unit (a) ÷ (b)............ $1.10 $3.00

2. The amount of cost that should be assigned to the ending inventories is:

Materials

Conversion

Total


Equivalent units of production (see above). . 30,000 15,000


Finished goods inventory:Equivalent units............... 50,000 50,000Cost per equivalent unit... $1.10 $3.00


Cost of units completed and transferred out............... $55,000 $150,000

$205,000


Problem 4-26 (continued)3. The necessary adjustments would be:

Work in Process

Finished Goods Total

Total cost that should be as-signed to inventories (see above)

$ 78,000 $205,000

$283,000

Year-end balances in the ac-counts 95,000 201,000

296,00 0

Error$(17,000

) $ 4,000 $(13,000

)Finished Goods Inventory 4,000Cost of Goods Sold 13,000

Work in Process Inventory 17,000

4. The cost of goods sold can be determined as follows:Beginning finished goods inventory......................... 0Units completed during the year............................. 790,000 Units available for sale............................................790,000Less units in ending finished goods inven-

tory........................................................................ 50,000 Units sold during the year........................................740,000Cost per whole unit ($1.10 + $3.00)........................ × $4.10

Cost of goods sold...................................................$3,034,00

0Alternative computation:Total manufacturing cost incurred:

Materials (part 1. above).......................................$ 902,00

0Conversion (part 1. above).................................... 2,415,000

Total manufacturing cost.........................................3,317,000Less cost assigned to inventories (part 3.

above)................................................................... 283,000

Cost of goods sold...................................................$3,034,00

0



1. a. Work in Process—Blending......................................147,600Work in Process—Bottling........................................45,000

Raw Materials.....................................................192,600b. Work in Process—Blending......................................73,200

Work in Process—Bottling........................................17,000Salaries and Wages Payable...............................90,200

c. Manufacturing Overhead.........................................596,000Accounts Payable................................................596,000

d. Work in Process—Blending......................................481,000Manufacturing Overhead....................................481,000

Work in Process—Bottling........................................108,000Manufacturing Overhead....................................108,000

e. Work in Process—Bottling........................................722,000Work in Process—Blending.................................722,000

f. Finished Goods........................................................920,000Work in Process—Bottling...................................920,000

g. Accounts Receivable................................................1,400,00

0Sales...................................................................1,400,000

Cost of Goods Sold...................................................890,000Finished Goods....................................................890,000



Work in Process—Bottling Work in Process—BlendingBal

.49,000 (f) 920,000 Bal

.32,800 (e) 722,000

(a) 45,000 (a) 147,600

(b) 17,000 (b) 73,200(d) 108,00

0(d) 481,00

0(e) 722,00

0Bal

.21,000 Bal

.12,600

Manufacturing Overhead Finished Goods(c) 596,00

0(d) 481,000 Bal

.20,000 (g) 890,000

(d) 108,000 (f) 920,000

Bal.

7,000 Bal.

50,000

Raw Materials Accounts PayableBal

.198,60

0(a) 192,600 (c) 596,000

Bal.

6,000

Salaries and Wages Payable

Sales

(b) 90,200 (g) 1,400,000

Accounts Receivable Cost of Goods Sold(g) 1,400,00

0(g) 890,000


Case 4-28 (120 minutes) This case is difficult—particularly part 3, which requires analyti-

cal skills. Because there are no beginning inventories, it makes no differ-

ence whether the weighted-average or FIFO method is used by the company. You may choose to specify that the FIFO method be used rather than the weighted-average method.

1.

Computation of the Cost of Goods Sold:

Transferred In Conversion

Units completed and sold................. 250,000 250,000Ending work in process:

Transferred in: 20,000 units x 100% complete..... 20,000

Conversion: 20,000 units x 25% complete....... 5,000

Equivalent units of production......... 270,000 255,000


Cost of beginning work in process. . . $ 0 $ 0

Cost added during the period........... 49,221,000 16,320,00 0

Total cost (a).................................... $49,221,000

$16,320,000

Equivalent units of production (b).... 270,000 255,000Cost per equivalent unit, (a) ÷ (b). . . $182.30 $64.00

Cost of goods sold = 250,000 units × ($182.30 + $64.00) per unit = $61,575,000.

2. The estimate of the percentage completion of ending work in process inventories affects the unit costs of finished goods and therefore the cost of goods sold. Thad Kostowski would like the estimated percentage completion of the ending work in process to be increased. The higher the percentage of completion of


ending work in process, the higher the equivalent units for the period and the lower the unit costs.

3. Increasing the percentage of completion can increase net operating income by reducing the cost of goods sold. To increase net operating income by $62,500, the cost of goods sold would have to be decreased by $62,500 from $61,575,000 down to $61,512,500. See the next page for the necessary calculations.


Case 4-28 (continued)The percentage of completion, X, affects the cost of goods

sold by its effect on the unit cost, which can be determined as follows:

Unit cost = $182.30 +

And the cost of goods sold can be computed as follows:Cost of goods sold = 250,000 × Unit cost

Since cost of goods sold must be reduced down to $61,512,500, the unit cost must be $246.05 ($61,512,500 ÷ 250,000 units). Thus, the required percentage completion, X, to obtain the $62,500 reduction in cost of goods sold can be found by solving the following equation:

Thus, changing the percentage completion to 30% will decrease cost of goods sold and increase net operating income by $62,500 as verified on the next page.


Case 4-28 (continued)3. (continued)

Computation of the Cost of Goods Sold:


Units completed and sold................. 250,000 250,000Ending work in process:

Transferred in: 20,000 units x 100% complete..... 20,000

Conversion: 20,000 units x 30% complete....... 6,000

Equivalent units of production......... 270,000 256,000


Cost of beginning work in process. . . $ 0 $ 0

Cost added during the period........... 49,221,000 16,320,00 0

Total cost (a).................................... $49,221,000

$16,320,000

Equivalent units of production (b).... 270,000 256,000Cost per equivalent unit, (a) ÷ (b). . . $182.30 $63.75

Cost of goods sold = 250,000 units × ($182.30 per unit + $63.75 per unit) = $61,512,500.

4. Carol is in a very difficult position. Collaborating with Thad Kostowski in subverting the integrity of the accounting system is unethical by almost any standard. To put the situation in its starkest light, Kostowski is suggesting that the production managers lie in order to get their bonus. Having said that, the peer pressure to go along in this situation may be intense. It is difficult on a personal level to ignore such peer pressure. Moreover, Carol probably prefers not to risk alienating people she might need to rely on in the future. On the other hand, Carol should be careful not to accept at face value Kostowski’s assertion that all of the other managers are “doing as much as


they can to pull this bonus out of the hat.” Those who engage in unethical or illegal acts often rationalize their own behavior by exaggerating the extent to which others engage in the same kind of behavior. Other managers may actually be very uncomfortable “pulling strings” to make the target profit for the year.


Case 4-28 (continued)From a broader perspective, if the net profit figures reported by the managers in a division cannot be trusted, then the company would be foolish to base bonuses on the net profit figures. A bonus system based on divisional net profits presupposes the integrity of the accounting system. The company should perhaps reconsider how it determines the bonus. It is quite common for companies to pay an “all or nothing” bonus contingent on making a particular target. This inevitably creates powerful incentives to bend the rules when the target has not quite been attained. It might be better to have a bonus without this “all or nothing” feature. For example, managers could be paid a bonus of x% of profits above target profits rather than a bonus that is a preset percentage of their base salary. Under such a policy, the effect of adding that last dollar of profits that just pushes the divisional net profits over the target profit will add a few pennies to the manager’s compensation rather than thousands of dollars. Therefore, the incentives to misstate the net operating income are reduced. Why tempt people unnecessarily?


Case 4-29 (45 minutes)Weighted-Average Method

1. The revised computations follow:

Equivalent Units of ProductionTransferre

d In MaterialsConversi

onTransferred to next department................ 100,000 100,000 100,000Ending work in process:

Transferred in: 5,000 units x 100% complete...............................................

5,000

Materials: 5,000 units x 0% complete..... 0 Conversion: 5,000 units x 2/5 complete. . . 2,000

Equivalent units of production.................. 105,000 100,000 102,000

Transferred In Materials

Conversion

Cost of beginning work in process............ $ 8,820$ 3,400

$ 10,200

Cost added during the period................... 81,480 27,600 96,900 Total cost (a)............................................. $90,300

$31,000$107,10

0Equivalent units of production (b)............ 105,000 100,000 102,000Cost per equivalent unit, (a) ÷ (b)........... $0.86 $0.31 $1.05


Case 4-29 (continued)Transferre

d In MaterialsConversio

n TotalEnding work in process inventory:

Equivalent units of production (see above)........................................... 5,000 0 2,000

Cost per equivalent unit....................... $0.86 $0.31 $1.05Cost of ending work in process inventory....................................... $4,300 $0 $2,100 $6,400

Units completed and transferred out:Units transferred to the next department................................... 100,000

100,000 100,000

Cost per equivalent unit....................... $0.86 $0.31 $1.05Cost of units completed and transferred out.............................. $86,000

$31,000

$105,000

$222,000

2. The unit cost computed above is $2.22 (= $0.86 + $0.31 + $1.05) versus $2.284 on the original report. The unit cost on the report prepared by the accountant is high because none of the cost incurred during the month was assigned to the units in the ending work in process inventory.


Case 4-30 (60 minutes)FIFO Method

1.

Transferred In

Materi-als

Conver-sion

To complete beginning work in process:Transferred in: 8,000 units x 0%............................ 0Materials: 8,000 units x 0%................................... 0Conversion: 8,000 units x (1 − 7/8)....................... 1,000

Units started and completed during the period (97,000 units started − 5,000 units in ending in-ventory).................................................................. 92,000 92,000 92,000

Ending work in process:Transferred in: 5,000 units x 100% complete 5,000 Materials: 5,000 units x 0% complete................... 0 Conversion: 5,000 units x 2/5 complete................ 2,000

Equivalent units of production................................... 97,000 92,000 95,000

Transferred In

Materi-als

Conver-sion

Cost added during the period (a)...............................$81,480 $27,600

$96,900

Equivalent units of production (b)............................. 97,000 92,000 95,000Cost per equivalent unit (a) ÷ (b).............................. $0.84 $0.30 $1.02


Case 4-30 (continued)Transferred

InMateri-

alsConver-

sion TotalEnding work in process inventory:

Equivalent units of production................... 5,000 0 2,000Cost per equivalent unit............................ $0.84 $0.30 $1.02Cost of ending work in process inventory.. $4,200 $0 $2,040 $6,240

Units transferred out:Cost in beginning work in process inven-

tory......................................................... $8,820 $3,400 $10,200$22,42

0Cost to complete units in beginning work in process in-

ventory:Equivalent units of production required

to complete the beginning inventory (see above)........................................ 0 0 1,000

Cost per equivalent unit........................ $0.84 $0.30 $1.02Cost to complete units in beginning in-

ventory............................................... $0 $0 $1,020 $1,020Cost of units started and completed this

period:Units started and completed this pe-

riod..................................................... 92,000 92,000 92,000Cost per equivalent unit........................ $0.84 $0.30 $1.02Cost of units started and completed

this period................................................. $77,280

$27,600 $93,840

$198,720

Cost of units transferred out...................... $222,160


2. The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is that the FIFO method keeps the costs of the current period separate from the costs of the prior period. Thus, under the FIFO method, the company will be able to compare unit costs of the current period to those of the prior period to see how effective the cost-cutting program has been. Under the weighted-average method, however, costs carried over from the prior period are averaged in with costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort.


Case 4-31 (90 minutes)1. Step-down method:

Cafete-ria

Custo-dial Ser-

vices

Machinery Mainte-nance Milling

Finish-ing

Total costs before allocations........$320,00

0 $65,400 $ 93,600 $416,000$166,00

0Allocations:

Cafeteria (40/500; 60/500; 100/500; 300/500)1...................

(320,000) 25,600 38,400 64,000 192,000

Custodial Services (10,000/70,000; 40,000/70,000; 20,000/70,000)2........................ (91,000) 13,000 52,000 26,000

Machinery Maintenance (160,000/200,000; 40,000/200,000)3...................... (145,000) 116,000 29,000

Total overhead after allocations.... $ 0 $ 0 $ 0 $648,000$413,00

01 Based on 40 + 60 + 100 + 300 = 500 employees.2Based on 10,000 + 40,000 + 20,000 = 70,000 square feet.

3 Based on 160,000 + 40,000 = 200,000 machine-hours.


Case 4-31 (continued)2. Direct method:

Cafete-ria

Custo-dial Ser-

vices

Machinery Mainte-nance Milling Finishing

Total costs before allocations..........$320,00

0 $65,400 $93,600$416,00

0 $166,000Allocations:

Cafeteria (100/400; 300/400)1......(320,000

) 80,000 240,000Custodial Services

(40,000/60,000; 20,000/60,000)2 (65,400) 43,600 21,800Machinery Maintenance

(160,000/200,000; 40,000/200,000)3........................ (93,600 )

74,88 0 18,720

Total overhead after allocations...... $ 0 $ 0 $ 0 $614,48

0 $446,520

Divide by machine-hours.................÷160,00

0Divide by direct labor-hours............ ÷ 70,000 Predetermined overhead rate.......... $ 3.84 $ 6.38

1 Based on 100 + 300 = 400 employees.2 Based on 40,000 + 20,000 = 60,000 square feet.3 Based on 160,000 + 40,000 = 200,000 machine-hours.


Case 4-31 (continued)3. a. The amount of overhead cost assigned to the job would be:

Step-down method:Milling Department:

2,000 machine-hours × $4.05 per machine-hour................................................................ $ 8,100

Finishing Department:13,000 DLHs × $5.90 per DLH.......................... 76,700

Total overhead cost............................................. $84,800Direct method:

Milling Department:2,000 machine-hours × $3.84 per machine-

hour................................................................ $ 7,680Finishing Department:

13,000 DLHs × $6.38 per DLH.......................... 82,940 Total overhead cost............................................. $90,620

b. The step-down method provides a better basis for computing predetermined overhead rates than the direct method because it gives recognition to services provided between service departments. If this interdepartmental service is not recognized, then either too much or too little of a service department’s costs may be allocated to a producing department. The result will be an inaccuracy in the producing department’s predetermined overhead rate.For example, notice from the computations in (2) above that using the direct method and ignoring interdepartmental services causes the predetermined overhead rate in the Milling Department to fall to $3.84 per machine-hour (from $4.05 per machine-hour when the step-down method is used), and causes the predetermined overhead rate in the Finishing Department to rise to $6.38 per direct labor-hour (from $5.90 per direct labor-hour when the step-down method is used). These inaccuracies in the predetermined overhead rate affect bids for jobs. Since the direct method in this case understates the rate in the Milling Department and overstates the rate in the Finishing Department, it is not surprising that the company tends to bid low on jobs


requiring a lot of milling work and tends to bid too high on jobs that require a lot of finishing work.


Research and Application 4-32 (120 minutes)1. The processing departments for Anheuser Busch’s brewing

process are listed below in sequential order. The raw material inputs are listed in parentheses next to the department where they are added to the manufacturing process. The Mashing Department (ground barley malt, water, and

milled rice are added to production). The Straining Department (no raw materials are added). The Brew Kettle Department (hops are added to production). The Cooling Department (no raw materials are added). The Primary Fermentation Department (yeast is added to

production). The Beechwood Aging Department (beechwood chips are

added to production). The Filtering Department (no raw materials are added; brew-

masters perform final quality control check at this point). The Filling/Packaging Department (glass bottles or aluminum

containers as well as labels are added to production). The Shipping Department (cartons are added to production

and then finished goods are shipped)

2. The brewing process consumes fairly large amounts of manu-facturing overhead costs. This should be apparent to students based on the photographs that accompany the on-line tour. There are many pictures of large pieces of capital equipment that are used to make beer. Very few employees are shown in the photos contained in the on-line tour, which suggests that beer making is a capital intensive process. The depreciation costs associated with the equipment as well as the utility and maintenance costs incurred to run the equipment are three ex-amples of overhead costs. It is also worth noting that the equip-ment shown in the photographs is large in size, thereby sug-gesting that Anheuser Busch’s beer-making facilities occupy a large amount of square footage—all of which needs lighting, heat, insurance, etc. These are additional examples of manu-facturing overhead costs


Research and Application 4-32 (continued)3. The T-account model is shown below:

The T-account model shown above assumes that labor cost is incurred at each step of the process to operate and maintain the beer-making equipment. The Shipping Department adds packaging costs in the form of cartons. We also assume that equipment and labor costs are incurred to operate the carton packaging equipment. Once the beer has been packaged into cartons, we continue the flow of costs to finished goods.

4. While the on-line tour does not provide sufficient information to answer this question, it is reasonable to expect students to speculate that operation costing may be appropriate because each brand of beer uses different ingredients. Furthermore, some brands of beer go through a slightly different manufactur-ing process. These attributes of the brewing process suggest that some material costs and conversion costs may be as-signed to particular batches of production rather than being spread over the entire volume of production for a given period of time without regard to the brand of beer being manufac-tured.


Work in Process:

Filling/Pack.$$

Research and Application 4-32 (continued)To enrich this discussion, we recommend that you visit www.anheuser-busch.com. This web site requires viewers to be 21 years old, so we do not recommend having your students visit this site directly. Some excerpts from this web site that can be used to demonstrate the applicability of operation cost-ing are as follows: “Bud Light is brewed with a malt and hops ratio different

from Budweiser.” “Michelob is brewed with a superior ingredient blend…using

all imported hops and a high percentage of two-row barley malt.”

For Michelob Honey Lager – “Anheuser-Busch brewmasters combine two-row and caramel barley malt, a blend of im-ported and domestic hops, and a touch of honey to produce a full-bodied, slightly sweet beer.”

Michelob Ultra is brewed using the finest pale two-row and six-row barley, select grains, all-imported hops and a pure cultured yeast strain. The special choice of grains, combined with an extended mash process, produces a smooth, refresh-ing beer with fewer carbohydrates.”

Note to instructors: The requirements for this problem do not ask students to describe Anheuser’ Busch’s strategy. However, if you wish to broach this subject, Anheuser-Busch provides an interesting example of how a company tailors its business strategy to market segments. Anheuser-Busch succeeds first and foremost because of a product leadership customer value proposition. However, the company segments its market into no fewer than three main segments. The Michelob product family serves the high-priced, premium market segment. The Budweiser product family serves the mid-priced market segment. The Busch product family serves the low-priced market segment. Within each segment of the market, Anheuser-Busch strives to maintain a product leadership position by offering the best tasting beer available given the target price range. While Anheuser-Busch offers more than three product families that serve various niche markets,


http://www.anheuser-busch.com/

Michelob, Budweiser, and Busch are its three major brands.


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