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Chapter 4Systems Design: Process Costing

Solutions to Questions

4-1 A process costing system is appropriate when a homogeneous product is produced on a continuous basis.

4-2 Process costing and job-order costing are similar in the following ways:1. Both systems have the same basic

purposes, which are to assign materials, labor, and overhead cost to products and to provide a mechanism for computing unit costs.

2. Both systems use the same basic accounts.

3. Cost flows through the accounts in basically the same way in both systems.

4-3 Costs are accumulated by department in a process costing system.

4-4 Cost accumulation is simpler under process costing because costs only need to be identified by department—not by separate job. Usually a company has only a few departments, whereas there can be hundreds or even thousands of jobs in a job-order costing system.

4-5 A Work in Process account is maintained for each separate processing department in a process costing system.

4-6 The journal entry to transfer the costs of partially completed goods from the Mixing Department to the Firing Department would be:

Work in Process, Firing.........XXXX

Work in Process, Mixing.. XXXX

4-7 The costs that might be added to the Firing Department’s Work in Process account would include: (1) cost transferred in from the Mixing Department, (2) materials cost, (3) labor cost, and (4) overhead cost.

4-8 Under the weighted-average method, the 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.

4-9 A quantity schedule shows the physical flow of units through a department during a period. It serves several purposes. First, it provides the manager with information about activity in his or her department and also shows the manager the stage of completion of any in-process units. Second, it provides data for computing the equivalent units and for preparing the other parts of the production report.

4-10 A unit of product accumulates cost in each department that it passes through, with the costs of one department added to the costs of the preceding department in a snowballing fashion.

© The McGraw-Hill Companies, Inc., 2005. All rights reserved.Solutions Manual, Chapter 4 137

Brief Exercise 4-1 (30 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

© The McGraw-Hill Companies, Inc., 2005. All rights reserved.138 Introduction to Managerial Accounting, 2nd Edition

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

Equivalent Units

MaterialsConversio

nUnits transferred to the next

department 410,000 410,000Work in process, October 31:

30,000 units × 70% 21,00030,000 units × 50% 15,000

Equivalent units 431,000 425,000


Brief Exercise 4-3 (15 minutes)Weighted-Average Method

1. Work in process, May 1................................................ 80,000Started into production during May............................. 300,000Total kilograms in process........................................... 380,000Deduct work in process, May 31.................................. 50,000 Completed and transferred out during May................. 330,000

2. Kilograms to be accounted for:Work in process, May 1 (materials 80% complete;

conversion 20% complete)..................................... 80,000Started into production during the month................. 300,000

Total kilograms to be accounted for............................ 380,000Kilograms accounted for as follows:

Transferred out during the month............................. 330,000Work in process, May 31 (materials 40% complete;

conversion 10% complete)..................................... 50,000 Total kilograms accounted for..................................... 380,000


Brief Exercise 4-4 (15 minutes)1.

Materials Labor OverheadWork 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

2.Cost per EU for materials $ 85.75Cost per EU for labor 34.50Cost per EU for overhead 172.50

Total cost per EU$292.7

5


Brief Exercise 4-5 (30 minutes)1. Computation of the total cost per EU:

Cost per EU for materials $24.00Cost per EU for labor 7.00Cost per EU for overhead 14.00 Total cost per EU $45.00

2. Computation of equivalent units in ending inventory:

Materials LaborOverhea

dUnits in ending inventory 1,500 1,500 1,500Percentage completed 90% 40% 40%Equivalent units of

production1,350 600 600

3. Cost ReconciliationTotal Cost

Materials Labor

Over-head

Cost accounted for as follows:

Transferred to the next department: 18,000 units at $45.00 per unit

$810,000 18,000 18,000 18,000

Work in process, ending:Materials, at $24.00 per

EU 32,400 1,350Labor, at $7.00 per EU 4,200 600Overhead, at $14.00 per

EU 8,400 600Total work in process 45,000

Total cost$855,00

0


Exercise 4-6 (15 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


Exercise 4-7 (20 minutes)Weighted-Average Method

Quantity

Schedule

Pounds to be accounted for:Work in process, May 1

(materials 100% complete, labor and overhead 55% complete) 30,000

Started into production during May 480,000

Total pounds to be accounted for510,000

Equivalent Units

MaterialsLabor &

OverheadPounds accounted for as follows:

Transferred to Packing Department during May* 490,000 490,000 490,000

Work in process, May 31 (materials 100% complete, labor and overhead 90% complete) 20,000 20,000 18,000

Total pounds accounted for 510,000 510,000 508,000 *30,000 + 480,000 – 20,000 = 490,000.



1. For the sake of brevity, only the portion of the quantity schedule from which the equivalent units are computed is shown below.

Quantity Equivalent Units (EU)

Schedule Materials

Conversion

Units accounted for as follows:Transferred to the next process 300,000 300,000 300,000Work in process, June 30

(materials 50% complete, conversion 25% complete) 40,000 20,000 10,000

Total units accounted for 340,000 320,000 310,000

2. Total Cost

Materials

Conversion

Whole Unit

Cost to be accounted for:

Work in process, June 1$ 71,50

0$ 56,60

0 $ 14,900Cost added by the department 599,500 385,000 214,500

Total cost to be accounted for (a)$671,00

0$441,60

0 $229,400Equivalent units (b) 320,000 310,000Cost per equivalent unit (a) ÷ (b) $1.38 + $0.74 = $2.12



TotalEquivalent Units

(EU)

CostMaterial

sConversio

nCost accounted for as follows:

Transferred to the next process:300,000 units at $2.12 each $636,00

0 300,000 300,000Work in process, June 30:

Materials, at $1.38 per EU 27,600 20,000Conversion, at $0.74 per EU

7,400 10,000Total work in process 35,000

Total cost accounted for$671,00

0



1. Quantity

Schedule

Gallons to be accounted for:Work in process, May

1 (materials 80% complete, labor and overhead 75% complete) 80,000

Started into production 760,000

Total gallons accounted for 840,000

Equivalent Units Material

s LaborOverhea

dGallons accounted for as

follows:Transferred to the

next department 790,000 790,000 790,000 790,000Work in process, May

31 (materials 60% complete, labor and overhead 20% complete) 50,000 30,000 10,000 10,000

Total gallons accounted for 840,000 820,000 800,000 800,000


Exercise 4-10 (continued)2. Total

CostsMaterial

s LaborOverhea

dWhole Unit

Cost to be accounted for:Work in process, May

1$ 146,60

0 $ 68,600$

30,000 $ 48,000Cost added during the

month 1,869,20

0 907,200 370,000 592,000 Total cost to be

accounted for (a)$2,015,80

0$975,80

0$400,00

0 $640,000Equivalent units (b) — 820,000 800,000 800,000Cost per equivalent unit

(a) ÷ (b) $1.19 + $0.50 + $0.80 = $2.49


Problem 4-11 (30 minutes)Weighted-Average Method

1. The computation of equivalent units would be:Quantit

y Equivalent Units (EU)Schedul

eMaterial

s LaborOverhea

dUnits accounted for as

follows:Transferred to the next

department 35,600 35,600 35,600 35,600Work in process, April 30

(materials 80% complete, labor and overhead 60% complete) 7,400 5,920 4,440 4,440

Total units and equivalent units of production 43,000 41,520 40,040 40,040

2. The cost reconciliation follows:Total Equivalent Units (EU)

CostMaterial

s Labor OverheadCost accounted for as

follows:Transferred to the next

department: 35,600 units × $2.90 per unit

$103,240 35,600 35,600 35,600

Work in process, April 30:Materials, at $0.50 per

EU 2,960 5,920Labor, at $1.10 per EU 4,884 4,440Overhead, at $1.30 per

EU 5,772 4,440Total work in process 13,616

Total cost$116,85

6


Problem 4-12 (45 minutes)Weighted-Average Method1. The equivalent units for the month would be:

QuantityEquivalent Units

(EU)Schedul

eMaterial

sConversio

nUnits accounted for as follows:

Transferred to next department 92,000 92,000 92,000

Work in process, May 30 (materials 75% complete; conversion 50% complete) 14,000 10,500 7,000

Total units and equivalent units of production 106,000 102,500 99,000

2. Total Cost

Materials

Conversion

Whole Unit

Work in process, May 1

$ 16,400 $ 5,900 $ 10,500

Cost added during the month 431,200

194,20 0 237,000

Total cost (a)$447,60

0$200,10

0 $247,500Equivalent units of

production (b) 102,500 99,000Cost per EU (a) ÷ (b) $1.95 + $2.50 = $4.45

3. Total units transferred.............................................92,000Less units in the beginning inventory...................... 6,000 Units started and completed during

May.......................................................................86,000

4. No, the manager should not be rewarded for good cost control. The reason for the Mixing Department’s low unit cost for May is traceable to the fact that costs of the prior month have been averaged in with May’s costs in computing the lower, $1.95 per unit figure. This is a major criticism of the weighted-average


method in that the figures computed for product costing purposes can’t be used to evaluate cost control or measure performance for the current period.



Quantity Schedule and Equivalent Units

Quantity Schedul

eUnits to be accounted for:

Work in process, April 1 (materials 85% complete; conversion 60% complete) 7,000

Started into production 88,000Total units 95,000

Equivalent Units (EU)

Materials

Conversion

Units accounted for as follows:Transferred to bottling: 82,000 82,000 82,000Work in process, April 30

(materials 60% complete, conversion 20% complete) 13,000 7,800 2,600

Total units and equivalent units of production 5 95,000 89,800 84,600


Problem 4-13 (continued)Costs per Equivalent Unit

TotalCost Materials

Conversion

Whole Unit

Cost to be accounted for:Work in process, April 1 $ 14,800 $ 6,800 $ 8,000Cost added during April 249,730 105,450 144,280 Total cost (a) $264,530 $112,250 $152,280

Equivalent units of production (b) 89,800 84,600Cost per EU (a) ÷ (b) $1.25 + $1.80 = $3.05

Cost ReconciliationTotal Equivalent Units (EU)

Cost MaterialsConversio


Transferred to bottling:82,000 units × $3.05 per unit $250,100 82,000 82,000

Work in process, April 30:Materials, at $1.25 per EU 9,750 7,800Conversion, at $1.80 per EU 4,680 2,600

Total work in process 14,430 Total cost $264,530



1. 2., and 3.


Quantity

Schedule

Units to be accounted for:Work in process, July 1

(materials 100% complete; labor and overhead 90% complete) 15,000

Started into production 160,000Total units 175,000

Equivalent Units (EU)Material

s LaborOverhea

dUnits accounted for as follows:

Transferred out 155,000 155,000 155,000 155,000Work in process, July 31

(materials 40% complete; labor and overhead 10% complete) 20,000 8,000 2,000 2,000

Total units and equivalent units of production 175,000 163,000 157,000 157,000


Problem 4-14 (continued)Cost per Equivalent Unit

Total Cost Materials Labor Overhead

Whole Unit


Work in process, July 1$

53,120 $ 14,100 $ 22,680 $ 16,340Cost added during the

month 558,660 142,380 237,940 178,340


0 $156,480 $260,620 $194,680Equivalent units of production

(b) 163,000 157,000 157,000Cost per EU (a) ÷ (b) $0.96 + $1.66 + $1.24 = $3.86

Cost ReconciliationEquivalent Units (EU)

Total Cost Materials Labor

Overhead

Cost accounted for as follows:Transferred out:

155,000 units × $3.86 per unit

$598,300 155,000 155,000 155,000

Work in process, July 31:Materials, at $0.96 per EU

7,680 8,000Labor, at $1.66 per EU 3,320 2,000


Overhead, at $1.24 per EU 2,480 2,000

Total work in process 13,480

Total cost$611,78

0



1. A completed production report follows:


Quantity Schedul

eUnits to be accounted for:

Work in process, March 1 (materials 100% complete; labor and overhead 60% complete) 4,500

Started into production 56,800Total Units 61,300

Equivalent Units (EU)

Materials

Labor & Overhead

Units accounted for as follows:Transferred to mixing 58,400 58,400 58,400Work in process, March 31

(materials 100% complete; labor and overhead 70% complete) 2,900 2,900 2,030

Total Units and equivalent units of production 61,300 61,300 60,430



Total Cost

Materials

Labor & Overhea

dWhole Unit

Cost to be accounted for:Work in process, March 1 $ 12,365 $ 9,125 $ 3,240Cost added during March 188,794 113,475 75,319


9$122,60

0 $78,559Equivalent units of production (b) 61,300 60,430Cost per EU (a) ÷ (b) $2.00 + $1.30 = $3.30

Cost ReconciliationEquivalent Units (EU)

Total Cost

Materials

Labor & Overhea

dCost accounted for as follows:

Transferred to mixing: 58,400 units × $3.30 per unit

$192,720 58,400 58,400

Work in process, March 31:Materials, at $2.00 per EU 5,800 2,900Labor and overhead, at $1.30 per

EU 2,639 2,030Total work in process 8,439

Total cost $201,15


9


Problem 4-15 (continued)2. In computing unit costs, the weighted-average method mixes

costs of the prior period in 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 cost control in the current period might be concealed to some degree by the unit costs that have been brought forward in the beginning inventory. The reverse could also be true in that poor cost control during a period might be concealed somewhat (or entirely) by the costs of the prior period that have been brought forward and added in with current period costs.



1. The equivalent units would be:Materials Labor Overhead

Units completed during the year 635,000 635,000 635,000

Work in process, December 31: 30,000 units

× 100% 30,00030,000 units

× 80% 24,000 24,000 Total

equivalent units (a) 665,000 659,000 659,000

The costs per equivalent unit would be:

Materials Labor OverheadWhole Unit

Work in process, January 1 $ 18,000 $ 9,555 $ 7,644 *

Cost added during the year 979,500 616,495 493,196 **

Total costs (b) $997,500 $626,050 $500,840Cost per EU

(b) ÷ (a) $1.50 + $0.95 + $0.76 = $3.21 * $9,555 × 80% = $7,644** $616,495 × 80% = $493,196


Problem 4-16 (continued)2. The amount of cost that should be assigned to the ending

inventories is:Work in Process

Finished Goods Total

Work in process:Materials:

30,000 units × $1.50 per unit $45,000 $ 45,000

Labor: 24,000 EU × $0.95 per EU 22,800 22,800

Overhead: 24,000 EU × $0.76 per EU 18,240 18,240

Finished goods: 12,000 units × $3.21 per unit $38,520 38,520

Total cost that should be assigned to inventories $86,040 $38,520 $124,560

3. The necessary adjustments would be:Work in Process

Finished Goods Total

Cost that should be assigned to inventories (above) $86,040 $ 38,520 $ 124,560

Year-end balances in the accounts 85,000 60,000 145,000

Difference $ 1,040 $(21,480) $(20,440)

Debit CreditWork in Process Inventory 1,040Cost of Goods Sold 20,440

Finished Goods 21,480


Problem 4-16 (continued)4. The simplest computation of the cost of goods sold would be:

Beginning finished goods inventory......................... 0Units completed during the year............................. 635,000 Units available for sale............................................635,000Less units in ending finished goods

inventory............................................................... 12,000 Units sold during the year........................................623,000Cost per equivalent unit (from part 1)..................... × $3.21

Cost of goods sold...................................................$1,999,83

0

Alternative computation:Total manufacturing cost incurred:

Materials (part 1)...................................................$ 997,50

0Labor (part 1)........................................................626,050Overhead (part 1).................................................. 500,840

Total manufacturing cost.........................................2,124,390Less cost assigned to inventories (part 2)............... 124,560

Cost of goods sold...................................................$1,999,83

0



1. a. Work in Process—Bending Department...................394,210Work in Process—Drilling Department.....................100,800

Raw Materials..................................................... 495,010

b. Work in Process—Bending Department...................638,144Work in Process—Drilling Department.....................250,600

Salaries and Wages Payable............................... 888,744

c. Manufacturing Overhead.........................................685,000Accounts Payable................................................ 685,000

d. Work in Process—Bending Department...................493,584Manufacturing Overhead.................................... 493,584

Work in Process—Drilling Department.....................189,000Manufacturing Overhead.................................... 189,000

e. Work in Process—Drilling Department.....................1,536,99

0Work in Process—Bending

Department......................................................1,536,99

0

f. Finished Goods........................................................1,650,00

0Work in Process—Drilling

Department......................................................1,650,00

0

g. Accounts Receivable................................................2,700,00

0

Sales...................................................................2,700,00

0

Cost of Goods Sold...................................................1,600,00

0

Finished Goods....................................................1,600,00

0


Problem 4-17 (continued)2.

Accounts Receivable Raw Materials(g) 2,700,00

0Bal. 500,00

0495,010 (a)

Bal. 4,990

Work in ProcessBending Department

Work in ProcessDrilling Department

Bal.

45,369 1,536,990

(e) Bal.

10,000 1,650,000

(f)

(a) 394,210 (a) 100,800(b) 638,144 (b) 250,600(d) 493,584 (d) 189,000Bal.

34,317 (e) 1,536,990

Bal.

437,390

Finished Goods Manufacturing OverheadBal.

110,000 1,600,000

(g) (c) 685,000

682,584 (d)

(f) 1,650,000

Bal. 2,416

Bal.

160,000

Accounts Payable Salaries and Wages Payable685,000 (c) 888,744 (b)

Sales Cost of Goods Sold2,700,00

0(g) (g) 1,600,0

00


Problem 4-17 (continued)3. The production report for the Bending Department follows:


Quantity

Schedule

Units to be accounted for:Work in process, May 1 (materials 80%

complete, labor and overhead 60% complete)............................................................12,000

Started into production.........................................270,000Total units.............................................................282,000


s LaborOverhea

dUnits accounted for as follows:

Transferred to Drilling: 273,000 * 273,000 273,000 273,000Work in process, May 31 (materials 90%

complete, labor and overhead 60% complete)............................................................ 9,000 8,100 5,400 5,400

Total units and equivalent units of production...........................................................282,000 281,100 278,400 278,400

* 282,000 units – 9,000 units = 273,000 units


Problem 4-17 (continued)Costs per Equivalent Unit

Total Cost Materials LaborOverhea

dWhole Unit


Work in process, May 1 $ 45,369 $ 13,385 $ 18,880$

13,104

Cost added during May 1,525,938 394,210 638,144 493,58

4

Total cost (a) $1,571,307 $407,595 $657,024$506,68

8Equivalent units of production

(b) 281,100 278,400 278,400Cost per EU (a) ÷ (b) $1.45 + $2.36 + $1.82 = $5.63

Cost ReconciliationTotal Equivalent Units (EU)

Cost Materials LaborOverhea


Transferred to Drilling: 273,000; × $5.63 per unit $1,536,990 273,000 273,000 273,000

Work in process, May 31:Materials, at $1.45 per EU 11,745 8,100Labor, at $2.36 per EU 12,744 5,400Overhead, at $1.82 per EU 9,828 5,400

Total work in process 34,317 © The McGraw-Hill Companies, Inc., 2005. All rights reserved.

Solutions Manual, Chapter 4 169

Total cost $1,571,307



1. a. Work in Process—Drying Department......................540,460Work in Process—Salting Department.....................295,000

Raw Materials..................................................... 835,460

b. Work in Process—Drying Department......................397,970Work in Process—Salting Department.....................201,000

Salaries and Wages Payable............................... 598,970

c. Manufacturing Overhead.........................................542,000Accounts Payable................................................ 542,000

d. Work in Process—Drying Department......................208,170Work in Process—Salting Department.....................340,000

Manufacturing Overhead.................................... 548,170

e. Work in Process—Salting Department.....................1,200,00

0Work in Process—Drying

Department......................................................1,200,00

0

f. Finished Goods........................................................1,980,00

0Work in Process—Salting

Department......................................................1,980,00

0

g. Accounts Receivable................................................2,500,00

0

Sales...................................................................2,500,00

0

Cost of Goods Sold...................................................1,930,00

0

Finished Goods....................................................1,930,00

0


Problem 4-18 (continued)2.

Accounts Receivable Raw Materials(g) 2,500,00

0Bal. 850,00

0835,460 (a)

Bal. 14,540

Work in ProcessDrying Department

Work in ProcessSalting Department

Bal.

97,400 1,200,000

(e) Bal.

33,000 1,980,000

(f)

(a) 540,460 (a) 295,000(b) 397,970 (b) 201,000(d) 208,170 (d) 340,000Bal.

44,000 (e) 1,200,000

Bal.

89,000

Finished Goods Manufacturing OverheadBal.

57,000 1,930,000

(g) (c) 542,000

548,170 (d)

(f) 1,980,000

6,170 Bal.

Bal.

107,000

Accounts Payable Salaries and Wages Payable542,000 (c) 598,970 (b)

Sales Cost of Goods Sold2,500,00

0(g) (g) 1,930,0

00


Problem 4-18 (continued)3. The production report for the Drying Department follows:


Quantity

Schedule

Pounds to be accounted for:Work in process, December 1 (materials

90% complete, labor and overhead 80% complete)............................................................19,000

Started into production.........................................191,000 *Total pounds..........................................................210,000

Equivalent Units (EU)Materials Labor Overhead

Pounds accounted for as follows:Transferred to Salting:...........................................200,000 200,000 200,000 200,000Work in process, December 31 (materials

100% complete, labor and overhead 50% complete)............................................................ 10,000 10,000 5,000 5,000

Total pounds and equivalent units of production...........................................................210,000 210,000 205,000 205,000

* (200,000 pounds + 10,000 pounds) – 19,000 pounds = 191,000 pounds started



Total CostMaterial

s LaborOverhea

dWhole Unit

Cost to be accounted for:Work in process, December

1 $ 97,400 $ 47,540 $ 32,530 $ 17,330

Cost added during December 1,146,60

0 540,460 397,970 208,170

Total cost (a)$1,244,00

0$588,00

0$430,50

0 $225,500Equivalent units of production

(b) 210,000 205,000 205,000Cost per EU (a) ÷ (b) $2.80 + $2.10 + $1.10 = $6.00

Cost Reconciliation

Total Cost


s LaborOverhea


Transferred to Salting: 200,000 pounds at $6.00 per pound

$1,200,000 200,000 200,000 200,000

Work in process, December 31:Materials, at $2.80 per EU 28,000 10,000Labor, at $2.10 per EU 10,500 5,000


Overhead, at $1.10 per EU 5,500 5,000Total work in process 44,000

Total cost$1,244,00

0


Analytical Thinking (90 minutes)Weighted-Average Method

1. The revised production report follows:Quantity Schedule and Equivalent Units

Quantity Schedul

eUnits to be accounted

for:Work in process,

October 1 (material 100% complete, conversion 7/8 complete) 8,000

Received from the preceding department* 97,000

Total units to be accounted for 105,000

Equivalent Units (EU)Transferre

d InMaterial

sConver-

sionUnits accounted for as

follows:Transferred to

Stamping100,00

0 100,000 100,000 100,000Work in process,

October 31 (material 0% complete, conversion 2/5 complete) month 5,000 5,000 — 2,000

Total units accounted for

105,000 105,000 100,000 102,000

*100,000 + 5,000 – 8,000 = 97,000.

© The McGraw-Hill Companies, Inc., 2003. All rights reserved.176 Managerial Accounting, 10th Edition

Analytical Thinking (continued)Costs per Equivalent Unit Total

CostTransferre

d In MaterialsConversio

nWhole Unit


Work in process, October 1$

22,420 $ 8,820 $ 3,400 $ 10,200Cost transferred in or added

during the month 205,980 81,480 27,600 96,900 Total cost to be accounted for

(a)$228,40

0 $ 90,300$

31,000 $107,100Equivalent units (b) 105,000 100,000 102,000Cost per equivalent unit (a) ÷

(b) $0.86 + $0.31 + $1.05 = $2.22

Cost Reconciliation Total Equivalent Units (EU)

CostTransferred

In MaterialsConversio


Transferred to Stamping:

100,000 units × $2.22 per unit...........................$222,00

0 100,000 100,000 100,000Work in process, October 31:

Transferred in cost, at $0.86 per EU.....................................................................4,300 5,000

Conversion, at $1.05 per EU............................... 2,100 2,000Total work in process............................................ 6,400

Total cost accounted for..........................................$228,40

0© The McGraw-Hill Companies, Inc., 2003. All rights reserved.

Solutions Manual, Chapter 4 177

2. The unit cost figure 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.


Ethics Case (120 minutes) This case is difficult—particularly part 3, which requires

analytical skills. Since there are no beginning inventories, it makes no

difference whether the weighted-average or FIFO method is used by the company. You may choose to assign the problem specifying that the FIFO method be used rather than the weighted-average method.

1. The computation of the cost of goods sold follows:Transferred

In ConversionEstimated completion 100% 25%

Computation of equivalent units:Completed and transferred

out 250,000 250,000Work in process, ending:

Transferred in, 20,000 units × 100% 20,000

Conversion, 20,000 units × 25% 5,000

Total equivalent units 270,000 255,000

Transferred In Conversion

Whole Unit

Cost to be accounted for:Work in process 0 0

Cost added during the month$49,221,00

0$16,320,00

0Total cost to be accounted for

(a)$49,221,00

0$16,320,00

0

Equivalent units (above) (b) 270,000 255,000Cost per equivalent unit (a) ÷

(b) $182.30 + $64.00=

$246.30Cost of goods sold = 250,000 units × $246.30 per unit =


$61,575,000


Ethics Case (continued)2. The estimate of the percentage completion of ending work in

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

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:


Ethics Case (continued)

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.


Ethics Case (continued)3. (continued)

Transferred In ConversionEstimated completion 100% 30%

Computation of equivalent units:Completed and transferred out 250,000 250,000Work in process, ending:

Transferred in, 20,000 units × 100% 20,000

Conversion, 20,000 units × 30% 6,000 Total equivalent units 270,000 256,000

Transferred In ConversionWhole Unit

Cost to be accounted for:Work in process 0 0

Cost added during the month $49,221,000$16,320,00

0

Total cost to be accounted for (a) $49,221,000$16,320,00

0Equivalent units (above) (b) 270,000 256,000

Cost per equivalent unit (a) ÷ (b) $182.30 + $63.75=$246.0

5

Cost of goods sold = 250,000 units × $246.05 per unit = $61,512,500


Ethics Case (continued)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.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. However, 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?


Communicating in Practice (30 minutes)Date: Current DateTo: Minesh PatelFrom: Student’s NameSubject: Production Report

Referring to the Production Report for the Shaping and Milling Department, please perform the following steps:

1. Ensure that the current balance in the Shaping and Milling Department Work in Process account is currently $734,675, which is the total cost to be accounted for in the Cost Reconciliation section of the Production Report.

2. Prepare the following journal entry for the 4,800 units that were transferred during the month from the Shaping and Milling Department to the Graphics Application Department:

Work in Process, Graphics Application.....................715,200Work in Process, Shaping and Milling.................. 715,200

3. After this entry is posted to the ledger, the Shaping and Milling Department account should have an ending account balance of $19,475, which is the total Work in Process, May 31 amount reflected in the Cost Reconciliation section of the Production Report.

If you have any questions, please do not hesitate to contact me.


Teamwork In Action

Reports similar to the following should be prepared by the Expert Teams and shared with the Learning Teams:

a. Quantity Schedule and Equivalent UnitsThe Quantity Schedule and Equivalent Units section of the production report: (1) accounts for all of the units that were in production during the period, and (2) computes the equivalent units of production. Imagine that you are the manager of a department in a factory. You are responsible for the units that pass through your department during the month. This section of the report summarizes that activity. In addition, it converts the information to equivalent units.The “work in process, beginning of the period” represents the number of units that are sitting in your department when you arrive at work on the first day of the month. These units were started last month. During the month, the department just before yours in the production process will transfer units into your department (or, if you are the first department in the process, raw materials will be transferred into your department during the month). These units are “started into production.” Also, during the month, your department will work on (or process) units. The units that have been completely processed are “transferred to the next department.” It is important to note that the units on hand at the beginning of the month plus the units that were transferred in must equal the units that were transferred out plus the units that were still on hand at the end of the period.To determine the department’s output for the period, the equivalent units of production are computed for both materials and conversion (labor and overhead). The equivalent units of production are determined by adding the number of completed units that were transferred to the next department and the equivalent units that are in the ending work in process inventory. The number of equivalent units in the ending work in process inventory is computed by multiplying the number of units on hand times the percent complete.


Teamwork In Action, continuedb. Costs per Equivalent UnitThe Costs per Equivalent Unit section of the production report: (1) summarizes the total costs that must be accounted for, and (2) documents the cost per equivalent unit. The “costs to be accounted for” section represents the costs added to the department’s Work in Process account during the period. The “work in process, beginning of period” is the beginning balance in the inventory account for this department. Note that this balance is broken out into its two components: materials and conversion. The “costs added” represent the materials and conversion costs that were debited to the work in process account during the period. Materials requisitions generate the amount used in the entry to record the material costs. The conversion costs are comprised of: (1) the direct labor wages paid to the employees who worked in the department during the period and (2) the overhead that was applied (using the department’s predetermined overhead rate) to the units that passed through the department during the period.The “materials cost per equivalent unit” is determined by dividing the total materials costs (the total of materials in the beginning inventory and the costs that were added during the period) by the number of equivalent units of production for materials (which is calculated in the Quantity Schedule and Equivalent Units section of the report). The “conversion cost per equivalent unit” is determined by dividing the total conversion costs (the total of conversion costs in the beginning inventory and the labor and overhead that were added during the period) by the number of equivalent units of production for conversion (which is calculated in the Quantity Schedule and Equivalent Units section of the report). The “whole unit cost per equivalent unit” is the total of the “material cost per equivalent unit” and the “conversion cost per equivalent unit.”

c. Cost ReconciliationThe Cost Reconciliation section of the production report summarizes the total costs that have been accounted for. This © The McGraw-Hill Companies, Inc., 2005. All rights reserved.188 Introduction to Managerial Accounting, 2nd Edition

section determines the amount that will be used in the entry to transfer units from this department’s work in process account to the next. This is referred to as


Teamwork In Action, continued“transferred to the next department” in this section of the report. Also, in addition to showing the components (materials and conversion) of the ending balance in this department’s work in process account (for use in preparing next month’s Production Report), this section proves that ending balance.The amount that is “transferred to the next department” is determined by multiplying the number of units transferred to the next department (which appears in the Quantity Schedule and Equivalent Units section of the report) by the whole unit cost per equivalent unit (which is calculated in the Costs per Equivalent Unit section of the report).The amount of “materials” in the ending work in process inventory for this department is determined by multiplying the number of equivalent units (for materials) that are in the ending work in process (which appears in the Quantity Schedule and Equivalent Units section of the report) by the materials cost per equivalent unit (which is calculated in the Costs per Equivalent Unit section of the report).The amount of “conversion” in the ending work in process inventory for this department is determined by multiplying the number of equivalent units (for conversion) that are in the ending work in process (which appears in the Quantity Schedule and Equivalent Units section of the report) by the conversion cost per equivalent unit (which is calculated in the Costs per Equivalent Unit section of the report).The “total work in process” is the sum of the amounts just calculated for “materials” and “conversion.” After all journal entries are made, this amount should appear as the ending balance in this department’s Work in Process account.Finally, the “total cost” is the sum of the costs transferred to the next department and the ending Work in Process inventory for this department. Note that this total must equal the total of the “costs to be accounted for” that appears in the Costs per Equivalent Unit section of the report.


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