Chapter 6 Process Costing -...

Chapter 6: Process Costing 239

Chapter 6Process Costing

LEARNING OBJECTIVES

Chapter 6 addresses the following questions:

LO1 Assign costs to mass-produced products using equivalent units to the production process.LO2 Apply and compare FIFO and weighted average methods in process costing.LO3 Apply alternative methods in mass production for multiple departmentsLO4 Describe how spoilage costs are handled in process costing.LO5 Explain how process costing information affects managers’ incentives and decisions

These learning questions (LO1 through LO5) are cross-referenced in the textbook to individual exercises and problems.

© 2012 John Wiley and Sons Canada, Ltd.

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QUESTIONS

6.1 Weighted average and FIFO process costing produce similar equivalent unit costs whenever the unit cost of production does not change or whenever there are no beginning or ending work-in-process inventories. In addition, the equivalent unit costs will be similar if the number of equivalent units produced during the period is large relative to inventories.

6.2 A process would complete more units during the period than it started when there are more units in beginning inventory than in ending inventory.

6.3 This approach would overstate the cost of spoiled units because partially complete units would be treated as if they had received 100% of direct materials and conversion costs, regardless of the amount actually allocated to those units.

6.4 If the beginning and ending inventories are the same from one period to the next, the number of units started is equal to the number of units completed and transferred out. This means that WIP inventory can be ignored when calculating equivalent units. However, if costs change from one period to the next, then the cost allocated to ending WIP will not be the same as the cost allocated to beginning WIP.

6.5 Judgment is needed to determine the percentage complete that is used in process costing calculations. Each unit or batch of units is complete to a different degree than other units or batches because the process is continuous. The percent complete is an average completion percentage that is estimated using judgment.

6.6 If the percent completion in year 1 is overestimated, then the equivalent units for those units will be too high in year 1. In turn, this will cause the cost per equivalent unit in year 1 to be understated. In year 2, this misstatement will cause the equivalent units for completion of beginning WIP to be too low. The understatement of equivalent units will cause the cost per equivalent unit to be overstated in year 2.

6.7 The weighted average method ignores the period in which product is started. In addition, costs from beginning inventories are added to costs of this period. All products completed are then given an average cost, regardless of when they were started. The FIFO method, on the other hand, tracks work completed and costs from the prior period separately from work completed and costs incurred during the current period. Under FIFO, beginning WIP consists of last period’s costs and work valued separately. At the end of the accounting period, this period’s costs to complete these units are added. Then the total costs for beginning WIP from last period and this period are summed and attached to the beginning inventory units that were completed this period. Then the units started and completed this period are valued using this period’s costs. If an organization’s costs fluctuate regularly, the FIFO method will reflect the most current costs so that managers can investigate changes in cost more quickly.

6.8 Goods that are mass-produced have uniform specifications and are made in large batches or on a continuous assembly line. Services that are mass-produced are performed using



the same skills and time and each task is very similar. Goods that are custom produced come in many variations and are made to specifications that vary with each order. Many services are custom, such as accounting, health care, and law services because each customer requires different inputs to match their needs. While it is relatively easy to track costs for custom made goods by attaching tags or using individual records to log costs of materials and labour, it is impossible to trace costs to mass-produced units. Job order costing is used for custom products. Direct material and labour costs are traced to each product and overhead costs are allocated using some allocation base that is labour or machine related. For mass-production, process costing is used. Equivalent units are calculated to account for units that are partially complete. Direct materials costs are allocated separately. Direct labour and overhead are combined and called conversion costs. These are allocated to complete and partially completed units.

6.9 They should be counted as ending WIP inventory in the department. Completed units imply that the units have been transferred to the next department or to finished goods, which is not the case with these units.

6.10 This is what is referred to as "continuous processing." Units just entering the process have had little done to them, while units just about to leave the process have had all or most of the conversion done. On average, the units in process are 50% complete as to conversion.

6.11 The cost of spoiled units is added to the total cost of goods transferred and increases the cost per unit.

6.12 Job costing is often used when products are manufactured in batches. In this firm, a single batch would have a specific sized wire and specific length of nail. The cost of each type of nail will depend primarily on the cost of the type of wire used and the time required for each type. Therefore job costing is the most appropriate method. This information would be lost if process cost techniques were employed.

6.13 Here are three factors. 1. If inspection costs are high and the cost to produce a single unit is very low, managers may decide to reduce the number of time units are inspected. In this case, inspection might occur only when units are completed. 2. If production costs are high and units go through several different departments, inspection may take place earlier in the manufacturing process so that spoiled units are caught when they are relatively incomplete. 3. If a firm is developing a strategy of high quality products, inspection may take place more often to insure that products are free of defects.

6.14 Three factors that managers consider are :1) saving the cost of the spoiled units,2)being able to sell those units therebyincreasing the contribution margin and 3) in some industries all firms need to compete on quality, and increased spoilage may lead to increased defects in units sold, harming the reputation of the company resulting in a loss of market share.

6.15 The Lake Wobegon effect occurs when managers or employees overrate their own performance. Managers may believe that their operations are above average even though


242 Cost Management

they may not have benchmark information about competitors’ operations or other manufacturing plant benchmarks. If managers believe their operations are better than average, they may not emphasize improvements. It is also possible that their operations are below average and they do not realize this.



MULTIPLE CHOICE

6.16. In process costing, if the units in beginning inventory are at less than 100% completion, what will be the cost of production per equivalent unit for the period under weighted-average costing during periods of rising prices?

a) The same as the cost per equivalent unit under FIFO b) Higher than the cost per equivalent unit under FIFO c) The relationship is indeterminated) Lower than the cost per equivalent unit under FIFO

Ans: D

6.17. In process costing, the journal entry to record factory overhead applied would include which of the following?

a) A debit to work in processb) A credit to work in process c) A debit to cost of goods soldd) A credit to cost of goods sold

Ans: A

Use the following information to answer Question 6.18 to 6.20.

The information below pertains to production activities in the refining department of Burn Corporation. All units in work in process (WIP) were costed using the FIFO cost flow assumption.

Refining Department UnitsPercentage of Completion

Conversion Costs

WIP, February 1 25,000 80% $ 22,000 Units started and cost incurred during February 135,000 $ 143,000 Units completed and transferred to the mixing department

100,000

WIP, February 28 ? 50% $ ?

6.18. What were the conversion costs per equivalent unit of production last period and this period, respectively?

a) $1.10 and $1.30b) $1.10 and $1.45c) $1.30 and $1.30d) $1.30 and $1.43

Ans: A (25,000 * .80 = 20,000 EU; $22,000 / 20,000 = $1.10)(25,000+135,000-100,000 = 60,000; 60,000 * 50% = 30,000 EU)(30,000 + 100,000 = 130,000 EU; $143,000 + $22,000 = $165,000)($165,000 / 130,000 EU= 1.2692 round to 1.30)


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6.19. What was the conversion cost in the work in process inventory account at February 28?

a) $39,000b) $39,600c) $42,500d) $45,000

Ans: A (from 6.18: 30,000 EU * $1.30 = $39,000)

6.20. What was the per-unit conversion cost of the units started last period and completed this period?

a) $0.86b) $1.14c) $1.25d) $1.30

Ans: B [(80% * $1.10) + (20% * $1.30) = $1.14]



EXERCISES

6.21 Equivalent Units, No Beginning WIP -- Carina Medical Supplies

A. With no beginning WIP and all units started and completed, the total cost is divided by number of units started and completed to calculate equivalent unit costs.

Direct materials equivalent unit cost= $360,000/200,000 units = $1.80 per unit

Conversion equivalent unit cost= $380,000/200,000 units = $1.90 per unit

B. 180,000 units started and completed; 20,000 in ending WIP

Direct materials are added at the beginning of processing, so all units started (200,000 units) were 100% complete with respect to direct materials. Direct materials equivalent unit cost = $360,000/200,000 units = $1.80 per unit

Conversion equivalent units:Started and completed 180,000 unitsEnding WIP (20,000 × 50% complete) 10,000 units

Total 190,000 unitsConversion equivalent unit cost = $380,000/190,000 units = $2.00 per unit

C. The direct materials equivalent unit costs were the same in Parts A and B because the units in ending WIP were 100% complete with respect to direct materials. However, for conversion costs, the ending WIP was only 50% complete so the 20,000 units in ending WIP counted as only 10,000 equivalent units. Because the denominator was smaller in Part A than in Part B, the conversion cost per unit was larger in Part B compared to Part A.

6.22 Equivalent Units Under Weighted Average - Francisco’s

Assumptions:Work performed in May:

Beginning WIP 9,000% complete direct materials 100%% complete conversion costs 40%Units started 50,000Units completed and transferred out 47,000Ending WIP 12,000% complete direct materials 100%% complete conversion costs 30%


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Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Total

Beginning Beginning and Ending Performed Units toWIP WIP Complete WIP This Period Account for

Physical Units 9,000 0 38,000 12,000 50,000 59,000

Equivalent Units: Total WorkDirect Materials 9,000 0 38,000 12,000 50,000 59,000Conversion Costs 3,600 5,400 38,000 3,600 47,000 50,600

Weighted average equivalent units for direct materials is 59,000 (total work this period) because the ending units get 100% credit for direct materials, since direct materials are added at the beginning of processing. Equivalent units for conversion costs are 50,600 (total work this period) because ending inventory units are only 30% complete and, hence, have only 30% of the conversion costs (since conversion costs are incurred evenly during production).

6.23 Equivalent Units, FIFO - Francisco’s

Assumptions:Work performed in May:

Beginning WIP 9,000% complete direct materials 100%% complete conversion costs 40%Units started 50,000Units completed and transferred out 47,000Ending WIP 12,000% complete direct materials 100%% complete conversion costs 30%


Beginning Beginning and Ending Performed Units toWIP WIP Complete WIP This Period Account for

Physical Units 9,000 0 38,000 12,000 50,000 59,000


FIFO equivalent units are found under Total Work Performed This Period. Therefore direct materials equivalent units are 50,000 (excludes beginning inventory because direct materials were added last period and includes ending inventory because materials were added this period), and equivalent units for conversion costs are 47,000 (excluding work done on beginning WIP but including this period’s work to complete those units and including the portion of work completed on ending WIP.



6.24 Equivalent Unit Cost Under Weighted Average - Fine Fans

Assumptions for October:

Work performed: Costs:Beginning WIP 9,000 Beginning WIP

% complete direct materials 100% Direct materials NT$ 18,000

% complete conversion costs 20% Conversion costs 36,000

Units started 100,000 Total beginning WIP costs 54,000

Units completed and transferred out 94,000 Costs added this month

Ending WIP 15,000 Direct materials 100,000

% complete direct materials 100% Conversion costs 200,000

% complete conversion costs 60% Total costs added 300,000Total costs to account for NT$354,000


Beginning Beginning and Ending Performed Units toWIP (20%) WIP (80%) Complete WIP (60%) This Period Account for

Physical Units 9,000 0 85,000 15,000 100,000 109,000


Calculate Actual Cost per Equivalent Unit

Weighted Average:Direct materials: Beginning WIP + Direct materials cost = $118,000 = $ 1.08

Equivalent units for total work 109,000

Conversion costs: Beginning WIP + Conversion cost = $236,000 = 2 .29 Equivalent units for total work 103,000

Total cost per equivalent unit: $3 .37


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6.25 Equivalent Unit Cost, FIFO - Fine Fans

Assumptions for October:

Work performed: Costs:

Beginning WIP 9,000

Beginning WIP (FIFO and Weighted Average)

% complete direct materials 100% Direct materials $ 18,000


Units started 100,000 Total beginning WIP costs 54,000




% complete conversion costs 60% Total costs added 300,000Total costs to account for $354,000



Physical Units 9,000 0 85,000 15,000 100,000 109,000


Calculate Actual Cost Per Equivalent Unit

First-in, First-out:Direct materials: _____________Direct materials cost_____________ = $100,000 = $ 1.00

Equivalent units for total work performed this period 100,000

Conversion costs: ______________Conversion costs______________ = $200,000 = 1 .98 Equivalent units for total work performed this period 101,200


6.26 Cumulative Exercise (Chapter 5): Abnormal Spoilage Calculation

[Note: This exercise requires application of knowledge from Chapter 5.]

When spoiled units are sold, the net realizable value offsets the cost. In this case the total cost of spoiled units is $16,000 (80×$200). However, $2,000 is recovered by selling the spoiled units for their net realizable value. So the total cost for abnormal spoilage is $14,000 ($16,000 - $2,000)



6.27 Abnormal Spoilage Journal Entry

[Note: This problem requires students to extend concepts about journal entries for spoilage from Chapter 5 to Chapter 6.]

A) When spoiled units are sold, the net realizable value offsets the cost. In this case the total cost of spoiled units is $16,000 (80*$200). However, $2,000 is recovered by selling the spoiled units for their net realizable value. The journal entry for normal spoilage follows:

Finished Goods Inventory 14,000Cash 2,000Work-in-Process inventory $16,000

B) The journal entry for abnormal spoilage follows.

Loss from Abnormal Spoilage $14,000Cash 2,000Work-in-Process inventory $16,000

6.28 Normal and Abnormal Spoilage , Solve for Unknown

Number of spoiled units = 10,000 – 8,000 = 2,000Cost of spoiled units = 2,000*$5 = $10,000

6.29 Journal Entry for Normal and Abnormal Spoilage

A. When all spoilage is normal, the total cost of units (good and spoiled) is transferred into finished goods. That cost is $50,000 (10,000*$5). The journal entries follow.

Finished Goods Inventory $50,000Work-in-Process Inventory $50,000

B For abnormal spoilage, only the cost of good units is transferred to finished goods. The cost of spoiled units is recorded as a separate loss. The cost of good units is $40,000 (8,000*$5).

Finished Goods Inventory $40,000Loss from Abnormal Spoilage 10,000

Work-in-Process Inventory $50,000


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6.30 Solving for Unknowns, Equivalent Units, FIFO -- Reliable FittingsA. Use physical units to determine the number of units started:

Beginning WIP units + Units started – Units completed = Ending WIP units6,000 + Units started – 20,000 = 8,000Units started = 8,000 + 20,000 – 6,000 = 22,000 units

B Equivalent units under the FIFO method include only work performed during the current period; equivalent units in beginning WIP are excluded:

Direct materials are added at the beginning of processing, so equivalent units = number of units started = 22,000 units

Conversion costs:Complete beginning WIP inventory: 6,000 units × (1–60%) 2,400 unitsStarted and completed:

22,000 units completed – 6,000 units beg. WIP 16,000 unitsStart ending WIP inventory: 8,000 units × 40% 3,200 units

Total equivalent units 21,600 units

6.31 Solving for Unknowns, Equivalent Units, Weighted Average -- Reliable Fittings

A. Use physical units to determine the number of units started:

Beginning WIP units + Units Started – Units Completed = Ending WIP units6,000 + Units Started – 20,000 = 8,000Units started = 8,000 + 20,000 – 6,000 = 22,000 units (Same as 6.30)

B Equivalent units under the weighted average method include both beginning WIP and work performed during the current period:

Direct materials:Units completed 20,000 unitsStart ending WIP inventory: 8,000 units × 100% 8,000 units


Conversion costs:Units completed 20,000 unitsStart ending WIP inventory: 8,000 units × 40% 3,200 units




6.32 through 6.35 Cost per Equivalent Unit and Account for Costs Under Weighted Average and FIFO -- Felix and Sons

Assumptions for December:


Beginning WIP 8,000




Units started (12,000 – 8,000 + 6,000) 10,000 Total beginning WIP costs 26,400




% complete conversion costs 50% Total costs added 52,800Total costs to account for $79,200



Physical Units 8,000 0 4,000 6,000 10,000 18,000







First-in, First-out:Direct materials: _____________Direct materials cost_____________ = $31,200 = $ 3.12





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Process Cost Reports for December 31First-in, First-Out Weighted Average

Computation Units Costs Computation Units Costs

Beginning WIPFrom November cost report 8,000 $26,400

Costs to complete beginning WIP:

Direct materials 0x$3.12 0Conversion costs 2,000x$2.40 4,800

Total costs added this period _____ 4,800

Total cost of beginning WIP transferred out 8,000 31,200

New units started, completed, and transferred out 4,000x$5.52

4,000 22,080

Total units completed and transferred out

12,000 53,280 (12,000)x$4.72 12,000 $56,640

Ending WIP: 6,000 6,000Direct materials 6,000x$3.12 18,720 6,000x$2.80 16,800Conversion costs 3,000x$2.40 7,200 3,000x$1.92 5,760

Total ending WIP cost _____ 25,920 _____ 22,560

Total Accounted For18,00

0 $79,200 18,000 $79,200

6.36 Equivalent Units, Weighted Average, Production Pattern -- Wilson Company

A. Summary of physical units:Year 1 Year 2 Year 3

Beginning inventory 0 1,000 1,000Units started 45,000 50,000 25,000Ending inventory (1,000 ) (1,000 ) (1,000)

Units completed 44,000 50,000 25,000

B. Equivalent units under the weighted average method

Direct Materials: Year 1 Year 2 Year 3Units completed 44,000 50,000 25,000Ending inventory (100%) 1,000 1,000 1,000

Equivalent units 45,000 51,000 26,000

Conversion Costs: Year 1 Year 2 Year 3Units completed 44,000 50,000 25,000Ending inventory (50%) 500 500 500

Total equivalent units 44,500 50,500 25,500



C. Once every slot on the assembly line is full, units completed will be the same as units started (assuming no spoilage).

6.37 Cost Report, No Beginning WIP

A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg).

This exercise does not specify whether the process cost report should be prepared using the FIFO or the weighted average method. However, with no beginning inventory, the two methods are the same. Following are the calculations.


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6.38 Units Transferred In, No Direct Material, No Beginning WIP


This exercise does not specify whether costs should be calculated using the FIFO or weighted average method. However, with no beginning inventory, the two methods are the same. Although the exercise does not request a cost report, the easiest way to answer Parts A and B is to first prepare a cost report:

Note: Units in ending WIP = Units transferred in – Units completed= 6,000 – 5,000 = 1,000

A. Cost for equivalent units completed during the period = $23,000

B. Cost for ending WIP = $3,050



6.39 Weighted Average, Cost Report, Labour and Overhead Allocated Separately -- Germain Company


Note: In this exercise, the conversion costs must be separated into two cost pools because labour costs are incurred when units are one-half complete, while overhead costs are incurred evenly throughout production.

Note: Number of units completed and transferred out = 8,000 + 70,000 – 12,000 = 66,000


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6.40 FIFO, Cost Report -- Yellow Crate Company


Note: Units started and completed = Units started – Units in ending WIP= 98,000 – 10,000 = 88,000



6.41 Weighted Average, Cost Report -- Red Dog Products



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6.42 FIFO, Cost Report -- Red Dog Products


Note: Units in beginning WIP = Units completed – Units started and completed= 88,000 – 68,000 = 20,000



PROBLEMS

6.43 Costs and Journal Entries Under Weighted Average and FIFO - Humphrey Manufacturing

A and BAssumptions for April:


Beginning WIP 6,000




Units started 42,000 Total beginning WIP costs $ 9,625


Ending WIP 8,000 Direct materials $ 70,000


% complete conversion costs 25% Total costs added $112,500Total costs to account for $122,125



Physical Units 6,000 0 34,000 8,000 42,000 48,000


Units started and completed = 40,000 – 6,000 = 34,000







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First-in, First-out:Direct materials: _____________Direct materials cost_____________ = $70,000 = $1.6667




Process Cost Reports for AprilFirst-in, First-Out Weighted Average


Beginning WIPFrom March cost report 6,000 $ 9,625


Direct materials 0x$1.6667 0Conversion costs 3,600x$1.0732 3,864



New units started, completed, and transferred out

34,000x$2.7399

34,000 93,157

Total units completed and transferred out 40,000 106,646

40,000x$2.6771

40,000 $107,084

Ending WIP: 8,000 8,000Direct materials 8,000x$1.667 13,336 8,000x$1.6146 12,917Conversion costs 2,000x1.073 2,146 2,000x$1.0625 2,125


Total Accounted For 48,000 $122,12848,00

0 $ 122 ,126

Differences in total costs are due to rounding errors. If a spreadsheet is used to make these calculations, the totals will have fewer rounding errors.

C. Journal entries for weighted average method for April:

Work in process inventory $70,000Raw materials inventory $70,000To record the cost of raw materials used in production during April.

Work in process inventory $42,500Wages and accounts payable $42,500To record the conversion costs incurred in production during April.



Finished goods $107,084Work in process inventory $107,084To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage).

Journal entries for FIFO method for April:

Work in process inventory $70,000Raw materials inventory $70,000To record the cost of raw materials used in production during April.

Work in process inventory $42,500Wages and accounts payable $42,500To record the conversion costs incurred in production during April.

Finished goods $106,646Work in process inventory $106,646To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage).

6.44 Process Costing for a Service - For Seniors Only

A. Process costing is appropriate in this situation because the returns are very similar in the amount of time and therefore cost to complete each one. If the returns were more complex or extra research was needed on certain ones, process costing would no longer be appropriate because there would be too much variation between different returns.

B. To determine the costs for April, last year’s cost data is needed as well as data from previous months. Additional information required is the approximatenumber of returns will be done, the salary paid to the employees, overhead costs, the number of employees that will be hired for the month, the amount of time each will work, and the amount of time it takes for each return. Also, an estimate is needed for the number of returns that are likely to be in progress at the beginning of April.

C. The first step in determining the cost for April returns is to find the total units in progress and their percent completion. In addition, the number of returns to be completed in April needs to be estimated. Last year’s data will be useful in estimating this year’s volume. Using data mentioned in part B, costs are categorized as direct materials or conversion costs. An equivalent cost per unit for the tax returns can then be estimated. Once the number of returns for the month of April has been predicted, the equivalent costs can be estimated and a total cost for that month can be predicted. It is likely that there will be no ending WIP inventory,because tax returns are due April 30 and this organization’s clients are likely to file by the due date rather than request extensions.


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6.45 FIFO Process Costing, Transferred-In Costs, Direct Materials Added During Process - Benton Industries

1. Summarize Total Costs to Account ForFIFO:

Transferred-in Direct Materials Conversion Costs Total CostBeginning WIP $ 40,470 $ 0 $ 14,322 $ 54,792Current period costs 224,130 166,840 315,228 706,198

Total costs to account for $264,600 $166,840 $329,550 $760,990

2. Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work

Beginning Beginning and Ending Performed Total toWIP (33%) WIP (67%) Complete WIP (40%) This Period Account for

Physical Units 15,000 0 82,000 11,000 93,000 108,000

Equivalent Units:Transferred-in 15,000 0 82,000 11,000 93,000 108,000Direct Materials (at 60%) 0 15,000 82,000 0 97,000 97,000Conversion Costs 5,000 10,000 82,000 4,400 96,400 101,400

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

Transferred-in: _____________Transferred-in costs_____________ = $224,130 = $ 2.41Equivalent units for total work performed this period 93,000

Direct materials: _____________Direct materials cost_____________ = $166,840 = 1.72Equivalent units for total work performed this period 97,000





4. Process cost report for the yearFirst-in, First-Out

Computation Units CostsBeginning WIP From last year 15,000 $ 54,792Costs to complete beginning WIP:Direct materials 15,000 x $1.72 25,800Conversion costs 10,000 x $3.27 32,700Total costs added this period _______ 58,500


New units started, completed, and transferred out 82,000*$7.40 82,000 606,800


Ending WIP: 11,000Transferred-in 11,000 x $2.41 26,510Direct materials 0 x $1.72 0Conversion costs 4,400 x $3.27 14,388Total ending WIP cost _______ 40,898

Total Accounted For 108,000 $760,990

Notice that the total costs summarized above ($760,990) are equal to the costs accounted for in the cost report.

6.46 Process Costing Under Weighted Average, Spoilage, Journal Entries - Victoria’s Closet

A. Preparation of process cost report using the weighted average method.

Summary of unit information given in the problem:

WIP Units Summary of SpoilageBeginning (25% complete) 11,000Started 74,000 61,000 Good completed Normal spoilage 6,600

8,000 Spoiled Abnormal spoilage ???Ending (75% complete) 16,000 Total 8,000

When computing equivalent units, notice that the ending WIP inventory units are considered 100% complete with respect to direct materials, since direct materials are added at the beginning of processing. However, the ending WIP inventory units are only 75% complete and, hence, have only 75% of the conversion costs (incurred evenly throughout production). Both normal and abnormal spoilage are assigned 100% of all costs because spoilage occurs just before inspection, which is at the 100% stage of completion.


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1. Summarize Total Costs to Account ForDirect Materials Conversion Costs Total Cost

Beginning WIP $220,000 $30,000 $ 250,000Current period costs 1,480,000 942,000 2,422,000

Total costs to account for $1,700,000 $972,000 $2,672,000

2. Summarize Physical and Equivalent Units Work Performed This Period Complete Start Start Total Work Total Spoiled

Beginning Beginning and Ending Performed Units to UnitsWIP (25%) WIP (75%) Complete WIP (75%) This Period Account for (100%)

Physical Units 11,000 0 58,000 16,000 74,000 85,000 (8,000)

Equivalent Units: Total WorkDirect Materials 11,000 0 58,000 16,000 74,000 85,000 (8,000)Conversion Costs 2,750 8,250 58,000 12,000 78,250 81,000 (8,000)

Total Spoilage 8,000Less Normal Spoilage 6,600

Abnormal Spoilage 1,400

3. Calculate Cost per Equivalent Unit: Weighted Average

Direct materials: Beginning WIP + Direct materials cost = $1,700,000 = $20Equivalent units for total work 85,000

Conversion costs: Beginning WIP + Conversion cost = $972,000 = 12Equivalent units for total work 81,000

Total cost per equivalent unit: $32

4. Weighted Average Process Cost Report for JanuaryComputation Units Costs

Total units completed and transferred out:Good units (11,000 + 58,000 – 8,000) x$32 61,000 $1,952,000Normal spoilage 6,600 x $32 ______ 211,200

Total transferred out 61,000 $2,163,200

Abnormal spoilage 1,400 x $32 44,800

Ending WIP: 16,000Direct materials 16,000 x $20 320,000Conversion costs 12,000 x $12 144,000

Total ending WIP cost 464,000

Total Good Units Accounted For 85,000 – 8,000 77,000Total Accounted For $2,672,000

B. Journal entries:

Work in process inventory $1,480,000Raw materials inventory $1,480,000To record the cost of raw materials used in production during January.



Work in process inventory $942,000Wages and accounts payable $942,000To record the conversion costs incurred in production during January.

Finished goods $2,163,200Work in process inventory $2,163,200To record the cost of 61,000 units transferred to finished goods during January (includes the cost of normal spoilage).

Abnormal spoilage loss $44,800Work in process inventory $44,800To record the cost of abnormal spoilage during January.

6.47 Process Costing Under FIFO, Spoilage, - Victoria’s Closet

A. This problem is identical to problem 6.31, except that the FIFO method is used instead of the weighted average method. The first two parts of the process cost report are identical under the two methods. Therefore, the following solution shows only the last two parts of the process cost report.

3. Calculate Cost per Equivalent Unit: FIFO

Direct materials: _____________Direct materials cost_____________ = $1,480,000 = $20.0000Equivalent units for total work performed this period 74,000




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4. FIFO Process Cost Report for Victoria’s ClosetComputation Units Costs

Beginning WIP 11,000 $ 250,000Costs to complete beginning WIP:

Direct materials 0x$20 0Conversion costs 8,250*$12.0383 99,316



New units started, completed, and transferred out 50,000*$32.0383 50,000 1,601,915

Normal spoilage 6,600*$32.0383 ______ 211,453

Units completed and transferred out 61,000 2,162,684

Abnormal spoilage 1,400*$32.0383 44,854

Ending WIP: 16,000Direct materials 16,000 x $20 320,000Conversion costs 12,000 x $12.0383 144,460

Total ending WIP cost ______ 464,460

Total Good Units Accounted For 85,000-8,000 77,000Total Costs Accounted For $2,671,998

6.48 Standard Costing, Spoilage, - Victoria’s Closet

A. A standard cost report would be the same as the FIFO cost report from a format standpoint. However, the standard costs would be used instead of equivalent unit costs. That is the only difference.

B. If Victoria’s Closet wants to set a benchmark for productivity, standard costs are appropriate. A standard cost is an estimate of cost under efficient operations and therefore acts as a benchmark or budget with which actual costs can be compared. The standards need to be updated regularly, though.

6.49 Cumulative Problem (Chapter 4): Normal and Abnormal Spoilage, Quality Decision, Opportunity Costs - Kim Mills

Summary of information given in the problem:

WIP Units Summary of SpoilageBeginning 20,000Started ???? 90,000 Good completed Normal spoilage 3,600

7,000 Spoiled Abnormal spoilage ????Ending 17,000 Total 7,000

A. Abnormal spoilage = 7,000 – 3,600 = 3,400 units



B. Spoilage costs = 7,000 x $1,000 = $7,000,000

C. The opportunity costs of spoilage can be measured in several ways. First, in addition to the cost of the spoiled units, there is also the contribution margin foregone because the products could not be sold. In addition, there are the opportunity costs of bad units that are sold because they pass through inspection without having been detected as spoiled. Through word of mouth or services such as Consumer Reports or Good Housekeeping, a company’s reputation may suffer and the organization loses market share. These costs can be considerable, especially if competitors have reputations for high quality with similar prices.

6.50 Spoilage with Inspection Point Other Than 100% - Kim Mills

A. If inspection occurs when units are 40% complete, direct materials have already been added, but conversion costs will only be 40% added.

Equivalent units for direct materials = 100% x 7,000 units = 7,000 unitsEquivalent units for conversion costs = 40% x 7,000 units = 2,800 units

B. Abnormal spoilage for conversion costs = 2,800 (total spoilage per Part A) – 1,440(normal spoilage) = 1,360units.

C. Here are several advantages of inspecting units earlier in their manufacturing process:• Kim saves the rest of the conversion cost that would be added.• Units are removed from further handling (storage and control), except to dispose

of them.• If the manufacturing process further down the line would tend to hide the defects,

a larger number of defective units are identified, and Kim avoids selling defective units to customers.

6.51 Normal and Abnormal Spoilage, Quality Improvements - Empire Forging

Summary of information given in the problem:WIP Units Summary of Spoilage

Beginning 60,000Started ???? 420,000 Good completed Normal spoilage 12,600

36,000 Spoiled Abnormal spoilage ??Ending 68,000 Total 36,000

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


268 Cost Management

B. Units started in May: Refer to the above T-Account, and solve for the unknown number of units started

60,000 + Started – 420,000 – 36,000 = 68,000Started = 68,000 – 60,000 + 420,000 + 36,000Started = 464,000

C. Percentage of good units allowed for spoilage is 3% (12,600/420,000). Total spoiled units as a percentage of good units is 8.6% (36,000/420,000). When spoilage rates increase dramatically, it is likely that more spoiled units are sold as good units because they have been overlooked in the inspection process. This leads to more returns and potential loss of market share. In addition, the cost of good units increases, and so the contribution margin on those units decreases. It is also possible that more units have been reworked, and these could be lower quality than first run units, and rework also increases the cost of good units.

D. Below are examples of arguments that could be made; students may think of additional arguments.

The costs of undetected spoiled units can be quite high. Customers are unhappy with defective units and may not purchase the goods again, so market share could be lost. In addition, if the defect causes any type of harm, the company could be subject to legal action and may have to pay a settlement or high legal fees. These costs are difficult to value. It is much easier to determine the cost of quality improvements, such as more frequent inspections, quality circles with employees to elicit suggestions for improvements, or redesigning the product or manufacturing process to reduce defects.

Because of the uncertainty of the costs of spoiled units, the company should analyze costs for returned units and warranty work, develop better tracking systems so that all spoiled units are counted (whether they are reworked or not), and hire a marketing company to identify customers who have quit using its products to determine if quality was a factor in this decision. Once the managers have more information, they will better understand the costs and benefits of quality problems and quality initiatives.



6.52 Process Costing Under Weighted Average and FIFO, Spoilage, Journal Entries - The Rally Company

A sample spreadsheet showing the solution for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg).

A. Weighted average: Following are excerpts from the sample spreadsheet for this problem.

Input Area for AssumptionsWork Performed:

Work in Process: Beg. WIP End. WIP Units 2,000 Ending WIP Units were not given, % complete direct materials 100% 100% so they must be calculated: % complete conversion costs 80% 25% Beginning WIP 2,000Units started 18,000 Units started 18,000Units completed and transferred out 14,800 Total to account for 20,000Spoiled Units: Transferred out* -14,800 Normal 1,000 Normal spoilage -1,000 Abnormal 1,000 Abnormal spoilage -1,000

Ending WIP 3,200Costs:

Beginning Work in Process: * Note: Only good units Direct materials $4,000 are transferred out Conversion costs $3,200Costs Added This Month: Direct materials $36,000 Conversion costs $32,000

1. Summarize Total Costs to Account ForDirect Conversion Total

Materials Costs CostsBeginning WIP $4,000 $3,200 $7,200

Current period costs $36,000 $32,000 $68,000Total costs to account for $40,000 $35,200 $75,200

2. Summarize Physical and Equivalent Units

Beginning Complete Start Start Total Work Total SpoiledWIP Beg. WIP and End. WIP Performed Units to Units

80% 20% Complete 25% This Period Acct for 100%Physical Units 2,000 0 14,800 3,200 18,000 20,000 (2,000)

Equivalent Units:

Direct Materials 2,000 0 14,800 3,200 18,000 20,000 (2,000) Conversion Costs 1,600 400 14,800 800 16,000 17,600 (2,000)

Total Spoilage 2,000

Less Normal Spoilage 1,000 Abnormal Spoilage 1,000

Work Performed This Period


270 Cost Management

3. Calculate Cost Per Equivalent Unit

Weighted Average: Total Total

Cost Units

Direct Materials: $40,000 20,000 $2.0000

Conversion Costs: $35,200 17,600 $2.0000

Total Cost Per Equivalent Unit $4.0000

4. Weighted Average Process Cost Report for JanuaryCost Per Equivalent Spoiled Good

Unit Units Units Units TotalTotal units completed and transferred out:

Good units $4.0000 14,800 $59,200 Normal spoilage $4.0000 1,000 $4,000

Total transferred out $63,200

Abnormal spoilage $4.0000 1,000 $4,000

Ending WIP: 3,200 Direct materials $2.0000 3,200 $6,400

Conversion costs $2.0000 800 $1,600Total ending WIP cost _____ $8,000

Total Good Units Accounted For (Total to account for - Total spoiled) 18,000

Total Accounted For $75,200

B. Journal entries for weighted average method:

Work in process inventory $36,000Raw materials inventory $36,000

To record the cost of raw materials used in production during July.

Work in process inventory $32,000Wages and accounts payable $32,000

To record the conversion costs incurred in production during July.

Finished goods $63,200Work in process inventory $63,200

To record the cost of 14,800 units transferred to finished goods during July (includes the cost of normal spoilage).

Abnormal spoilage loss $4,000Work in process inventory $4,000

To record the cost of abnormal spoilage during July.



C. FIFO: Following are excerpts from the sample spreadsheet for this problem.

The input section and the sections for steps 1 and 2 are identical to the spreadsheet shown in Part A above. Therefore, only the sections for steps 3 and 4 are shown below.

3. Calculate Cost Per Equivalent Unit

FIFO: Current Current

Cost Units

Direct Materials: $36,000 18,000 $2.0000

Conversion Costs: $32,000 16,000 $2.0000

Total Cost Per Equivalent Unit $4.0000

4. FIFO Process Cost Report for JanuaryCost Per Equivalent Spoiled Good

Unit Units Units Units TotalBeginning WIP 2,000 $7,200

Costs to complete beginning WIP: Direct materials $2.0000 0 $0

Conversion costs $2.0000 400 $800Total costs added this period _____ $800

Total cost of beginning WIP transferred out 2,000 $8,000

Good units started, completed, and trans. out $4.0000 12,800 $51,200

Normal spoilage $4.0000 1,000 _____ $4,000

Total units completed and transferred out 14,800 $63,200

Abnormal spoilage $4.0000 1,000 $4,000

Ending WIP: 3,200

Direct materials $2.0000 3,200 $6,400 Conversion costs $2.0000 800 $1,600

Total ending WIP cost _____ $8,000

Total Good Units Accounted For (Total to account for - Total spoiled) 18,000Total Accounted For $75,200

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

It appears that Rally’s costs did not change from last period to this period. If costs change slowly, the weighted average method would be the easiest report to prepare.


272 Cost Management

6.53 Choice of Costing Method, Process Cost Report, Transferred-In Units, Spoilage - Toddler Toys

Solutions below are provided first for the weighted average method. Then solutions for the FIFO method are presented.

WEIGHTED AVERAGE SOLUTION

A. If a student chose the weighted average method, its main advantage is that it is a little less complex to calculate. The disadvantage is that the cost information is not as current as FIFO information.

B. Here is a cost report using the weighted average method.

1. Summarize Total Costs to Account ForTransferred-in Direct Materials Conversion Costs Total Cost

Beginning WIP $ 4,000 $ 2,000 $ 1,600 $ 7,600Current period costs 36,000 18,000 16,000 70,000




Physical Units 2,000 0 14,800 3,200 18,000 20,000 (2,000)

Equivalent Units: Total WorkTransferred in 2,000 0 14,800 3,200 18,000 20,000Direct Materials (at 75%) 2,000 0 14,800 0 14,800 16,800 (2,000)Conversion Costs 1,600 400 14,800 800 16,000 17,600 (2,000)

Normal spoilage 1,000Abnormal Spoilage 1,000

Total spoilage 2,000

3. Calculate Cost Per Equivalent Unit (Weighted Average)

Transferred-in: Beginning WIP + Transferred-in costs = $40,000 = $ 2.0000Equivalent units for total work 20,000

Direct materials: Beginning WIP + Direct materials cost = $20,000 = 1.1905Equivalent units for total work 16,800

Conversion costs: Beginning WIP + Conversion cost = $17,600 = 1.0000Equivalent units for total work 17,600 ______




4. Process Cost Reports for Assembly Department in August (Weighted Average)Computation Units Costs

Units completed and transferred out 14,800 x $4.1905 14,800 $62,019Normal spoilage 1,000 x $4.1905 4,191

Total cost transferred out 66,210

Abnormal spoilage 1,000 x $4.1905 4,191

Ending work in process: 3,200Transferred-in 3,200 x $2.0 6,400Direct materials 0 x $1.1905 0Conversion costs 800 x $1.00 800

Total ending WIP cost _____ 7,200


C. Journal entries:

Work in process inventory-Assembly Dept. $36,000Work in process inventory-Plastics Dept. $36,000

To record the cost of units transferred from the plastics department during August.

Work in process inventory-Assembly Dept. $18,000Raw materials inventory $18,000

To record the cost of raw materials used in production during August.

Work in process inventory-Assembly Dept. $16,000Wages and accounts payable $16,000

To record the conversion costs incurred in production during August.

Finished goods inventory $66,210Work in process inventory-Assembly Dept. $66,210

To record the cost of 14,800 units transferred to finished goods during August (includes the cost of normal spoilage).

Abnormal spoilage loss $4,191Work in process inventory-Assembly Dept. $4,191

To record the cost of abnormal spoilage during August.


274 Cost Management

FIFO SOLUTION

A. If a student chose FIFO, its main advantage is that the costs are more current, the disadvantage is that it is a bit more complex to calculate.

B. Here is a cost report using the FIFO method. Notice that the first two parts are identical to the report under the weighted average method.

1. Summarize Total Costs to Account ForTransferred-in Direct Materials Conversion Costs Total Cost

Beginning WIP $ 4,000 $ 2,000 $ 1,600 $ 7,600Current period costs 36,000 18,000 16,000 70,000




Physical Units 2,000 0 14,800 3,200 18,000 20,000 (2,000)

Equivalent Units: Total WorkTransferred in 2,000 0 14,800 3,200 18,000 20,000Direct Materials 2,000 0 14,800 0 14,800 16,800 (2,000)Conversion Costs 1,600 400 14,800 800 16,000 17,600 (2,000)

Normal spoilage 1,000Abnormal Spoilage 1,000

Total spoilage 2,000

3. Calculate Cost Per Equivalent Unit (FIFO)

Transferred-in: _________Transferred-in costs__________ = $36,000 = $2.0000Equiv. units for work performed this period 18,000

Direct materials: __________Direct materials cost_________ = $18,000 = 1.2162Equiv. units for work performed this period 14,800

Conversion costs:___________Conversion costs__________ = $16,000 = 1.0000Equiv. units for work performed this period 16,000 ______




4. Process Cost Reports for Assembly Department: JuneFirst-in, First-Out

Computation Units CostsBeginning WIP from May cost report 2,000 $ 7,600Costs to complete beginning WIP:

Transferred in 0 x $2 0Direct materials 0 x $1.2162 0Conversion costs 400 x $1 400

Total costs added this period _____ 400


New units started, completed, and trans. out 12,800 x $4.2162 12,800 53,967

Normal spoilage 1,000 x $4.2162 4,216


Abnormal spoilage 1,000 x $4.2162 4,216

Ending WIP: 3,200Transferred-in 3,200 x $2.00 6,400Direct materials 0 x $1.2162 0Conversion costs 800 x $1 800

Total ending WIP cost _____ 7,200


C. Journal entries:

Work in process inventory-Assembly Dept. $36,000Work in process inventory-Plastics Dept. $36,000

To record the cost of units transferred from the plastics department during August.

Work in process inventory-Assembly Dept. $18,000Raw materials inventory $18,000

To record the cost of raw materials used in production during August.

Work in process inventory-Assembly Dept. $16,000Wages and accounts payable $16,000

To record the conversion costs incurred in production during August.

Finished goods inventory $66,183Work in process inventory-Assembly Dept. $66,183

To record the cost of 14,800 units transferred to finished goods during August (includes the cost of normal spoilage).


276 Cost Management

Abnormal spoilage loss $4,216Work in process inventory-Assembly Dept. $4,216

To record the cost of abnormal spoilage during August.

6.54 Process Costing Under Weighted Average and FIFO, Spoilage, Rework - Cellular Advantage

A sample spreadsheet for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg).

A. Weighted Average Method

1. Summarize Total Costs to Account ForDirect Materials Conversion Costs Total Cost

Beginning WIP $ 440,000 $ 60,000 $ 500,000Current period costs 2,960,000 1,884,000 4,844,000

Total costs to account for $3,400,000 $1,944,000 $5,344,000



Physical Units 22,000 0 116,000 32,000 148,000 170,000 (16,000)

Equivalent Units: Total WorkDirect Materials 22,000 0 116,000 32,000 148,000 170,000 (16,000)Conversion Costs 6,600 15,400 112,000* 19,200 146,600 153,200 (12,000)

Equivalent UnitsDirect Conversion

Physical Materials CostsUnits (100%) (75%)

Total Spoilage 16,000Less Normal Spoilage 13,200 13,200 9,900

Abnormal Spoilage 2,800 2,800 2,100

* Because inspection takes place when units are 75% complete, spoiled units are removed when units are 100% complete with respect to direct materials and 75% complete with respect to conversion costs. This also means that 25% of the conversion cost work is never performed on spoiled units. Therefore, the number of equivalent units started and completed for conversion costs is calculated as:

Total physical units started and completed 116,000Less spoiled units not completed [16,000 x (1-75%)] (4,000)

Equivalent units started and completed for conversion costs 112,000



3. Calculate Cost per Equivalent Unit: Weighted Average

Direct materials: Beginning WIP + Direct materials cost = $3,400,000 = $20.0000Equivalent units for total work 170,000

Conversion costs: Beginning WIP + Conversion cost = $1,944,000 = 12 .6893 Equivalent units for total work 153,200


4. Weighted Average Process Cost ReportComputation Units Costs

Total units completed and transferred out:Good units (22,000+116,000–16,000)x$32.6893 122,000 $3,988,094Normal spoilage:

Direct materials 13,200 x $20 264,000Conversion costs 9,900 x $12.6893 _______ 125,624

Total transferred out 122,000 4,377,718

Abnormal spoilageDirect materials 2,800 x $20 56,000Conversion costs 2,100 x $12.6893 26,648

Total abnormal spoilage 82,648


Total ending WIP cost _______ 883,634

Total Good Units Accounted For 170,000 – 16,000 154,000Total Accounted For $5,344,000

B: FIFO MethodThe summary of physical and equivalent units and the summary of costs to account for are the same as those shown above for the weighted average method. Thus, the solution below shows only steps 3 and 4.

3. Calculate Cost per Equivalent Unit: FIFO

Direct materials: _____________Direct materials cost_____________ = $2,960,000 = $20.0000Equivalent units for total work performed this period 148,000

Conversion costs: ______________Conversion costs______________ = $1,884,000 = 12 .8513 Equivalent units for total work performed this period 146,600



278 Cost Management

4. FIFO Process Cost ReportComputation Units Costs

Beginning WIP 22,000 $ 500,000Costs to complete beginning WIP:

Direct materials 0x$20 0Conversion costs 15,400 x $12.8513 197,910

Total costs added this period ______ 197,910


New units started, completed, and transferred out 100,000 x $32.8513 100,000 3,285,130

Normal spoilageDirect materials 13,200 x $20 264,000Conversion costs 9,900 x $12.8513 ______ 127,228

Units completed and transferred out 122,000 4,374,267

Abnormal spoilageDirect materials 2,800 x $20 56,000Conversion costs 2,100 x $12.8513 26,988

Total abnormal spoilage 82,988


Total ending WIP cost ______ 886,745

Total Good Units Accounted For 170,000-16,000 154,000Total Costs Accounted For $5,344,000

C. Because spoilage increases the cost of good units, most organizations want to minimize the number of units spoiled. By setting limits on normal spoilage, incentive is provided for managers and operations employees to keep spoilage under the limit. The accounting system combines the cost of normal spoilage with good units, so the amount of cost incurred for normal spoilage is not obvious. Many organizations view spoilage as part of the cost of producing good units. However, when spoilage amounts become large, abnormal spoilage is recorded and these amounts are more obvious to managers, so that quality problems can be investigated.

D. Rework costs are hidden in the accounting system because units reworked go through the manufacturing process twice, but are counted only once. Therefore, it is difficult to track rework costs, and the financial effects of rework.



6.55 Two Departments, Two Periods, FIFO and Weighted Average, Estimate Accuracy - Rausher Industries

A. FIFO process costing report and calculations for the current year and the budget for next year:

FIFO CURRENT YEAR

Physical Flow of Units: Current PeriodDepartment 1 Department 2

WIP beginning 0 0Started 12,000Transferred in 9,000

Total to account for 12,000 9,000Ending WIP 3,000 2,000

Completed and transferred out 9,000 7,000

1. Summarize Total Costs to Account For (Current Year)Transferred-in Direct Materials Conversion Costs Total Cost

Department 1:Beginning WIP not applicable $ 0 $ 0 $ 0Current period costs not applicable 36,000 14,040 50,040

Total costs to account for not applicable $36,000 $14,040 $50,040

Department 2:Beginning WIP $ 0 not applicable $ 0 $ 0Current period costs 38,700 not applicable 32,760 71,460

Total costs to account for $38,700 not applicable $32,760 $71,460

2. Summarize Physical and Equivalent Units (Current Year) Work This Period

Complete Start Start Total Work TotalBeginning Beginning and Ending Performed Units to

WIP WIP Complete WIP This Period Account forDepartment 1: (0%) (0%) (60%)

Physical Units 0 0 9,000 3,000 12,000 12,000

Equivalent Units: Total WorkDirect Materials 0 0 9,000 3,000 12,000 12,000Conversion Costs 0 0 9,000 1,800 10,800 10,800

Department 2: (0%) (0%) (40%)Physical Units 0 0 7,000 2,000 9,000 9,000

Equivalent Units: Total WorkTransferred-In 0 0 7,000 2,000 9,000 9,000Conversion Costs 0 0 7,000 800 7,800 7,800


280 Cost Management

3. FIFO Cost Per Equivalent Unit (Current Year)

Department 1:

Direct materials: _____Current Period Direct materials cost_____ = $36,000 = $3.00Equivalent units for total work performed this period 12,000

Conversion costs: ______Current Period Conversion costs______ = $14,040 = 1 .30 Equivalent units for total work performed this period 10,800


Department 2:

Transferred-in costs: _____Current Period Transferred-in cost_____ = $38,700 = $4.30Equivalent units for total work performed this period 9,000



4. FIFO Process Cost Report (Current Year)Department 1 Department 2

Computation Units Costs Computation Units CostsBeginning WIP 0 $ 0 0 $ 0Costs to complete beginning WIP:

Transferred-in n/a 0Direct materials 0 n/aConversion costs 0 0

Total costs added this period _____ 0 _____ 0

Total cost of beginning WIP transferred out 0 0 0 0


9,000 38,700 7,000x$8.50 7,000 59,500

Total units completed and transferred out 9,000 38,700 7,000 59,500

Ending WIP: 3,000 2,000Transferred in n/a 2,000x$4.30 8,600Direct materials 3,000x$3.00 9,000 n/aConversion costs 1,800x$1.30 2,340 800x$4.20 3,360



0 $50,040 9,000 $71,460



FIFO BUDGET FOR NEXT YEAR

Physical Flow of Units: Next PeriodDepartment 1 Department 2

WIP beginning 3,000 2,000Started 15,000Transferred in 13,000

Total to account for 18,000 15,000Ending WIP 5,000 1,000

Completed and transferred out 13,000 14,000

1. Summarize Total Costs to Account For (Next Year)Transferred-in Direct Materials Conversion Costs Total Cost

Department 1:Beginning WIP not applicable $ 9,000 $ 2,340 $11,340Current period costs not applicable 48,600 14,545 63,145


Department 2:Beginning WIP $ 8,600 not applicable $ 3,360 $ 11,960Current period costs 55,631 not applicable 59,075 114,706


2. Summarize Physical and Equivalent Units (Next Year) Work This Period



Physical Units 3,000 0 10,000 5,000 15,000 18,000


Department 2: (40%) (60%) (70%)Physical Units 2,000 0 12,000 1,000 13,000 15,000

Equivalent Units: Total WorkTransferred-In 2,000 0 12,000 1,000 13,000 15,000Conversion Costs 800 1,200 12,000 700 13,900 14,700

3. FIFO Cost Per Equivalent Unit (Next Year)

Department 1:

Direct materials: _____Current Period Direct materials cost_____ = $48,600 = $3.2400Equivalent units for total work performed this period 15,000




282 Cost Management

Department 2:

Transferred-in costs: _____Current Period Transferred-in cost_____ = $55,631 = $4.2793Equivalent units for total work performed this period 13,000



4. FIFO Process Cost Report (Next Year)Department 1 Department 2


Beginning WIPCurrent yearcost report 3,000 $11,340

Current yearcost report 2,000 $ 11,960


Transferred-in n/a 0x$4.2793 0Direct materials 0x$3.24 0 n/aConversion costs 1,200x$1.0617 1,274 1,200x$4.25 5,100

Total costs added this period _____ 1,274 _____ 5,100

Total cost of beginning WIP transferred out 3,000 12,614 2,000 17,060


10,000 43,017

12,000x$8.5293

12,000 102,352

Total units completed and transferred out

13,000 55,631

14,000 119,412




0 $74,48515,00

0 $126,666

B. Weighted average process costing report and calculations for the current year and the budget for next year

WEIGHTED AVERAGE CURRENT YEAR

Because there are no beginning inventories in period one, the cost reports for FIFO and weighted-average are the same. See the preceding FIFO report.



WEIGHTED AVERAGE BUDGET FOR NEXT YEAR

1. Summarize Total Costs to Account For (Next Year—Weighted Average)Transferred-in Direct Materials Conversion Costs Total Cost

Department 1:Beginning WIP not applicable $ 9,000 $ 2,340 $11,340Current period costs not applicable 48,600 14,545 63,145


Department 2:Beginning WIP $ 8,600 not applicable $ 3,360 $ 11,960Current period costs 55,631 not applicable 59,075 114,706


2. Summarize Physical and Equivalent Units (Next Year) Work This Period



Physical Units 3,000 0 10,000 5,000 15,000 18,000


Department 2: (40%) (60%) (70%)Physical Units 2,000 0 12,000 1,000 13,000 15,000

Equivalent Units: Total WorkTransferred-In 2,000 0 12,000 1,000 13,000 15,000Conversion Costs 800 1,200 12,000 700 13,900 14,700

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

Department 1:

Direct materials: Beginning WIP + Current Period Direct materials cost = $57,600 = $3.2000Equivalent units for total work performed this period 18,000

Conversion costs: Beginning WIP + Current Period Conversion costs = $16,885 = 1 .0894 Equivalent units for total work performed this period 15,500


Department 2:

Transferred-in costs:Beginning WIP + Current Period Transferred-in cost = $64,231 = $4.2821Equivalent units for total work performed this period 15,000

Conversion costs: Beginning WIP + Current Period Conversion costs = $62,435 = 4 .2473 Equivalent units for total work performed this period 14,700



284 Cost Management

4. Weighted Average Process Cost Report (Next Year)Department 1 Department 2

Computation Units Costs Computation Units CostsTotal units completed and transferred out 13,000x$4.2894

13,000 55,762

14,000x$8.5294

14,000 119,412




0 $74,48515,00

0 $126,667

C. 1. If she better understands the flow of resources, she can more accurately determine

percentage completed. This seems like a way to improve accuracy.

2. More accurately estimating percentage completed would mean that cost per unit would better reflect the use of resources. In addition, the costs for each period would be more accurately identified with the units of that period. If it takes a lot of time to develop a more accurate estimate and if ending work in process inventory is relatively immaterial, the cost could be greater than the benefit.

MINI-CASES

6.56 Costs of Workplace Health and Safety - Britain’s Health and Safety Commission

A. Accounting for each cost in a process costing system would be as follows:• Lost worker time would be part of conversion costs.• Employer-paid medical costs would be conversion costs.• Training to replace workers would require two separate ways to recognize

the cost. Costs of training such as classrooms, materials, and instructors, would not be assigned to manufacturing; they would be assigned to a support department. However, the employee time for training is probably part of conversion costs.

• Record-keeping would not be part of manufacturing costs, but instead would be part of the accounting department costs.

B. Examples of the responsibilities for each group are discussed below. Students might have identified additional responsibilities.

• Employers are responsible for keeping their employees safe by monitoring accident rates, identifying problem areas, improving the physical environment to prevent accidents, training workers to improve their safety habits, and monitoring



compliance with company standards. Employers are also responsible for complying with governmental regulations.

• Managers oversee employees and are therefore responsible for the safety of employees directly under their supervision. Managers set the tone by determining the priority of safety within a company. They also need to track health and safety problems and make improvements in their physical environment and also give workers training in safety habits. In addition, managers are responsible for ensuring that their companies comply with governmental regulations.

• Workers are responsible for their own safety and any team members’ safety. This responsibility includes meeting or exceeding employer standards, as well as adopting a proactive approach toward their own and others’ safety.

• Customers are not typically held responsible for safety. However, customers can choose to investigate the safety records and practices of companies with which they do business. They can establish policies of doing business only with companies having acceptable safety performance. This type of policy can be most important for goods and services produced in less-developed countries. In addition, each customer should work at improving their own safety habits and alert the organizations that they frequent when any safety concerns arise.

• Governments set up agencies such as Britain’s Health and Safety Commission, the U.S. Occupational Safety and Health Administration (OSHA; part of the U.S. Department of Labor), and the Canadian Centre for Occupational Health and Safety in Canada to establish and regulate safety standards for workers.

C. There are many possible answers to this question. Here are some issues that students might have considered as they developed their own answers. (These issues are organized using Steps for Better Thinking from Chapter 1 Appendix 1B.)

Identify: Ideally, the goal for companies should be to achieve perfect health and safety. However, this goal might not be attainable because it is not possible to identify all possible health and safety problems or to perfectly control worker actions. For example, researchers continue to investigate the association between various types of work and ergonomic problems such as discomfort, fatigue, and musculoskeletal disorders. It is not always easy to identify the types of actions or work arrangements that cause specific problems. A chemical believed to be safe may be found to cause previously-unforeseen medical problems. To complicate matters, workers may be unwilling to comply with health and safety practices. For example, employees may object to ergonomic seating or to an ergonomic computer keyboard. Or, they may fail to use safety equipment such as helmets or masks.

Exploring: Who are the major stakeholders in this issue? Worker health and safety obviously affects the well-being of individual workers and their families. It also has social implications. Injured or ill workers are less productive and may require greater social services than other people. From the company’s point of view, economic concerns exist. It might be very expensive to make a small improvement in worker health and


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safety. In addition, a company with high health and safety standards may be unprofitable if it sells goods and services in an industry where competitors adopt lower standards.

Prioritizing: There are many questions to ask when choosing values and making trade-offs for deciding on a company goal. Is it appropriate to weigh only the company’s cost and benefit? What are the company’s obligations to shareholders, workers, and society? How can the company attempt to meet all of its obligations in a morally acceptable way?

Envisioning: It is always possible to improve worker health and safety. New practices can be adopted as research provides new information about the causes of problems and ways to prevent them. Thus, an important aspect of a company’s goal should be to continuously improve. How can the company’s goal be worded to encourage continuous improvement?

6.57 Comparison of Actual to Standard Processing Costs, Use in Bonus Decisions - Computer Components Inc.

A. Here are several possible answers to this question; students may think of others. Actual costs can differ from standards because of changes in prices, as described in the problem. Differences can also result from deviations from standards in the efficiency with which raw materials or labour hours are used. For example, an equipment malfunction might slow production or spoil some units. Employees can work faster or slower than expected. The quality of materials can be better or worse than expected, causing deviations from the expected amount of spoilage or scrap. A new labour contract could be negotiated, increasing direct labour costs. Overhead costs can also be higher or lower than expected. There could be an increase in electricity rates or insurance costs. Equipment maintenance could be higher or lower than expected.

B. Kevin might or might not make the same argument if the supplier’s price had decreased. However, it appears that he might have been making his argument to avoid responsibility. From the information presented, Kevin has at least some control over the purchase price. He stated that he does not want to consider changing suppliers at this time, and a division manager often has control over the purchasing function for the division. If he was making his argument primarily to avoid responsibility, then he would probably make a different argument if the price had decreased. In that case, he would probably want to be rewarded for good performance.

C. Changing vendors could have many benefits, such as reducing costs, enhancing quality, improving delivery timeliness, etc. Changing vendors could also do the opposite—increase costs, decrease quality, and result in delivery delays. The relationship with the vendor may also be important. It may not be in the company’s best interests to drop a long-term and beneficial relationship. At the same time, it might be in the company’s interests to develop a relationship with a new supplier.



D. The practice of giving managers bonuses based on comparisons of actual to standard costs can motivate managers to achieve or exceed standards. In turn, achieving the standards can help the company meet profitability and other goals.

E. As discussed more completely in Chapter 10, the advantages of adopting such a policy is that employees are most likely to be motivated by a standard that is achievable. Vendor price increases or decreases should be reflected in the standard if they are not in the manager’s control. This improves the fairness and achievability of the standard. The disadvantages of adopting are that the standard should not be adjusted for vendor price changes that the manager can influence. In this case, the adjustment would reduce the manager’s motivation to control costs.

F. There is no one answer to this part. Sample solutions and a discussion of typical student responses will be included in assessment guidance on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg).

6.58 Integrating Across the Curriculum: Production Management: Batch versus continuous processing, usefulness of process costing

[Note: This problem assumes knowledge of Chapter 5 (job costing). The problem does NOT assume knowledge of JIT or backflush accounting, but Part B.2 encourages students to think about how process costing might be less complex in the absence of significant work in process inventories.]

A.1. Work in process inventories should greatly decrease. Currently, whole jobs are

waiting to be processed at each department. With continuous processing, these will disappear. The only in-process inventory will be jobs in process within a cell, most of which will be completed the next day. Because individual units are produced one by one, there will be very few individual units in process at any point in time.

Raw material inventory should almost disappear. The company currently carries a parts inventory. Under the new system, it would carry parts only for jobs in process.

2. Materials handling costs may decrease depending on the trade-off in increased time of delivering parts more frequently to cells and elimination of transfers between departments. Finished goods still need to be transported to shipping.

Machine set ups should all but disappear. Since each cell will be dedicated to one product line, machines can be permanently set for the product. Nonetheless, some adjustments will likely need to be made for different models, but the adjustments are probably minor.

3. There should be a substantial decrease in the number of defects. Instead of testing units after an entire batch has been completed, the units will be tested continuously. A faulty assembly or soldering operation should be caught (and corrective action


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taken) after only one or two units have been affected, not the entire order. In addition, fewer setting changes will be made to the equipment in assembly and soldering, which should reduce the likelihood that defects are caused by erroneous settings.

4. The ratio of units produced to units ordered should decrease. Under the current system the firm must estimate the number of units that will fail to pass inspection. They must produce enough units so that units produced minus defective units still yield enough units to satisfy the customer's order. To be highly confident that enough units will be produced to fill an order, an excess number of units is probably produced, on average. Under the new system a cell keeps on producing for an order until enough good units are achieved. Thus, only the minimum number of units needed will be produced.

5. The firm should experience a decrease in the workload for production scheduling. Instead of scheduling jobs through several departments, jobs need only be assigned to a single cell. Also, the need to expedite replacements for spoiled jobs should disappear as entire jobs should no longer be spoiled.

Machine utilization rates are likely to fall. If there are no orders for a particular product for a period of time, the cells dedicated to that product would be idle. In fact, this is the major tradeoff for adopting a job versus process orientation. If a firm makes many different products (requiring different kinds of processing on a variety of machines) but none of them in any significant quantity, then it cannot afford to dedicate equipment to each product line. However, as the breadth of the product line decreases or manufacturing processes become more similar, management should consider the benefits of switching to a process orientation.

6. This depends on the tradeoff between the various costs saved and the additional costs incurred to obtain separate equipment for each cell (if necessary) and the cost of idle equipment. However, total costs will probably decrease. Presumably, management will not make the change unless they study existing and expected future production patterns and expect the cost savings to be larger than the additional costs and as such average cost per unit will decline.

7. The change in system will probably make it more difficult to fill a customer’s rush order. No parts inventories are maintained and it will take approximately one week to receive new parts.

B.1. With a change from a job orientation to a process orientation, there does not appear to

be a need to know the cost for any particular order. The company could use process costing to compute the average materials and conversion cost for each type of product. For pricing or profitability analysis, the firm could add the cost of materials required for each model to the average conversion cost. This manufacturing situation is similar to a fast-food restaurant where managers may wish to track the relative profitability of food versus drinks, but there is no need to capture the cost of



hamburgers versus cheeseburgers, nor is there a need to know the profitability of a particular customer's order. Under process costing, costs could be measured and monitored to ensure that costs of each process are in control. This accounting system would cost less than the current job costing system because detailed data for each job would no longer be tracked.

2. First, there would be no need to keep track of raw material inventory. The cost of raw material purchases could be added directly to production. Second, the absence of significant work in process inventory reduces the need to calculate and track equivalent units. Units started would be roughly equal to units completed, so the company could adopt an actual cost system for each product line and simply record all production costs directly in cost of goods sold. This would also eliminate the need to choose between the FIFO and weighted average methods. The average materials and conversion cost for each type of product could be periodically measured and monitored to ensure that costs are in control. But it does not appear necessary to capture this information for units on a continuous basis. If desired, the small amount of jobs in process at the end of an accounting period could be handled through end of period adjustments rather than through a system that continuously tracks work in process inventory.


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