# Chapter 08 - Process-Costing Systems

CHAPTER 8
Process-Costing Systems
8.1 Equivalent units are computed in process costing because it enables companies to
assign costs to whole units rather than partial units. Equivalent units represent the
amount of work actually performed on products not yet complete translated to the
work required to complete an equivalent number of whole units. For example, four
units were started at the beginning of a month and each was ! percent complete at
the end of the month. "he work performed would be considered equivalent to the
work performed to complete one whole unit. "his calculation allows companies to
assign costs to one whole unit rather than four partially completed units.
8. #sing the basic cost flow equation, rearrange the terms to solve for the unknown
beginning inventory. From \$\$ % "& ' "( ) E\$, we have*
\$eginning &nventory % "ransfers &n ' "ransfers (ut ) Ending &nventory.
+earranging yields*
\$eginning &nventory ) "ransfers (ut % Ending &nventory ' "ransfers &n
8., -ith F&F( costing, the units in the beginning inventory are transferred out first.
"hese beginning inventory units carry with them the costs incurred in a previous
period plus the costs incurred this period to complete the beginning inventory. #nits
started and completed during the period are charged out using all current period
costs. -hile such a distinction is made by the department transferring the units out,
the department receiving the units usually ignores the distinction in costs incurred
in the prior department.
8.. #nder F&F( costing, the equivalent units represent only the work done in the current
period. #nder weighted/average costing, the equivalent units represent the work
associated with all of the costs charged to work in process regardless of the period
in which those costs were incurred 0i.e., including costs from prior periods that are
in beginning inventory1.
8.! 2rior department costs behave the same as direct materials, which are typically
added at the start of production. "hey are treated separately because they represent
the accumulation of costs from previous departments rather than the receipt of
materials from the stores area. &t is helpful to separate prior department costs from
other costs because the manager of the department receiving the transferred units
has no control over the costs incurred in prior departments. "hus, the prior
department costs are not useful for evaluating the performance of the manager of
the department receiving the units.
8-1
Chapter 08 - Process-Costing Systems
8.3 #sing the basic cost flow equation, rearrange the terms to solve for the unknown
transfers out. From \$\$ % "& ' "( ) E\$, we have*
\$eginning &nventory % "ransfers &n ' "ransfers (ut ) Ending &nventory.
+earranging yields*
"ransfers (ut ) \$eginning &nventory % "ransfers &n ' Ending &nventory
8.4 2rocess costing typically separates the costs of spoiled units from the costs of other
outputs of the period. 5ome process costing systems classify spoiled goods under
two categories*
11 6ormal spoilage, where the spoiled good is treated as a natural outcome of an
imperfect process and is counted as a normal cost of good units produced. "his
approach is in some disfavor as it can be interpreted as tolerance of spoilage.
1 7bnormal spoilage, where the spoiled good was not expected and is treated as a
cost of the period.
8.8 5poilage costs are similar to underapplied overhead because they are both costs in
excess of what was expected.
8.8 +elative costs and benefits of eig!ted-a"erage "s# \$I\$O costing%
Weighted-average costing
\$enefits 9osts
• Easier to learn and apply in
practice
• :ore appropriate than F&F( when
costs per unit do not materially
differ from one period to the next
• 6umbers are not reflective
of current year activity
• 9an hide signals that
process costs are changing
FIFO costing
\$enefits 9osts
• #nits are based on current period
activity
• :ore accurate at matching actual
costs to the period of production
• 9an signal process cost changes
which can warrant other changes
such as the pricing of products
• +equires detailed
information
• 9omplicated to calculate
8.1; (peration costing is a hybrid of <ob costing and process costing by adding
customi=ed materials to a continuous process. "he accounting is similar in that
costs of materials are assigned separately to <obs, like <ob costing. 9onversion
costs are assigned equally over each operation.
8-2
Chapter 08 - Process-Costing Systems
8-3
Chapter 08 - Process-Costing Systems
8.11 "o assign costs to specific lots of cereal or similarly mass/produced items requires a
lot of recordkeeping. 7ssuming products are all the same, a process costing system
provides sufficient information for control purposes. +ecordkeeping is simplified
since all costs in a given month are accumulated in one account and assigned at the
end of the period.
8.1 a. 9ertainly, >&F( process costing is possible. "his <ust means that cost of goods
completed exhausts all of current costs applied before dipping into beginning -&2
costs. Ending -&2, therefore, could contain mostly costs from beginning -&2.
"hough this does not mirror most production process flows, it would be possible to
measure costs this way so that cost of goods completed 0and cost of goods sold1
reflects current costs more accurately.
b. :ead-estvaco, 9orporation, a large paper producer, reports in its Form 1;/?s a
mix of inventory costing methods* @Cost is determined using the last-in, first-out
(LIFO) method for raw materials, finished goods and certain production materials,
where allowed for U.S. federal income ta purposes. Cost of all other in!entories is
determined "# the first-in, first-out (FIFO) or a!erage cost method.A
8.1, b. &f there is no beginning -&2 inventory, all costs assigned to cost of goods
completed 0and ending -&21 are current costs. "herefore, both weighted/average and
F&F( process costing always will generate the same cost of goods manufactured.
8.1. a. "otal equivalent units would be understated. 07 lower percentage completion
multiplied by the number of physical units results in lower equivalent units.1
b. 9osts per equivalent unit would be overstated. 0Fewer equivalent units divided
into the same costs results in higher costs per equivalent unit.1
c. 9osts assigned to cost of goods transferred out for the period would be
overstated. 0Bigher costs per unit result in over/costing.1
8.1! b. -eighted average costing considers both current costs and costs in beginning
-&2 inventory.
8.13 e. 6one of these answers is correct. 7nswer @aA is incorrect because it ignores
different degrees of completion. @bA is incorrect because it double/counts units
started that are still in ending -&2. @cA is incorrect because units in ending -&2
should be multiplied by the amount of work done this period, not the amount
necessary to complete them 0in the future1. @dA is incorrect because it defines
weighted average equivalent units and repeats the error of @c.A
8-4
Chapter 08 - Process-Costing Systems
8.14 6o process is 1;; percent error/free, and some spoilage is inevitable. :oreover, the
optimal level of spoilage usually is not =ero ' the cost of eliminating the last spoiled
unit may be prohibitively high. Bowever, treating spoilage as a normal cost of
production runs the risk of approving higher levels of spoilage than would be
achieved with less tolerance. +eporting spoilage separately is a step toward
recogni=ing the magnitude of an organi=ationCs spoilage problem. "he next step is to
determine the costs and benefits of reducing spoilage.
8.18 5ome organi=ations classify spoilage into normal and abnormal categories. "he rate
of normal spoilage usually is based on historical experience and is considered a
normal cost of production. 7ny amount of spoilage above that amount would be
treated as an extraordinary cost of the period. "his treatment of spoilage,
unfortunately, could result in complacency about higher than necessary levels of
spoilage. (ther organi=ations may be able to reduce spoilage and its wasted
resources and gain a cost advantage.
8.18 &f you overstate degrees of completion of ending -&2, you also will overstate the
amount of equivalent units of work done overall. "his will lead to a lower cost per
equivalent unit, and, if completed units are sold, cost of goods sold will be lower
than it should be 0and the periodCs income higher1. +elatively more cost will be
retained in ending -&2 than <ustified. &n future periods, either more than normal cost
will be added to actually complete these units in ending -&2, or the cost of ending
-&2 will be restated to reflect actual degrees of completion. &n either event, these
costs, once buried in ending -&2, will be expensed eventually. &f the individual
wishes to play this game, each period ending -&2 must be overstated even more,
until there is almost no more overstating to do. "he units may be shown as nearly
complete, but an audit would reveal otherwise, unraveling the whole scheme.
8-5
Chapter 08 - Process-Costing Systems
SO&UTIONS TO E(ERCISES
8.; 0; min1 Equivalent units computation, weighted/average method
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 1,;;;
#nits started 1,;;;
"otal units to account for 1,,;;;
Units accounted for%
9ompleted and transferred out 8,;;; 1;;E 1;;E 8,;;; 8,;;;
Ending -&2F .,;;; 1;E ;E .;; 8;;
"otal units accounted for 1,,;;; 8,.;; 8,8;;
0a1 0b1
F E& ) 1,;;; % 1,;;; ' 8,;;; ) .,;;;
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8.1 0,; min1 Equivalent units computation, F&F( method 07ppendix 71
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersio
n
\$aterials Con!ersion
Units to account for%
\$eginning -&2 1,;;; ;E 1!E ;; 1!;
#nits started 1,;;;
"otal units to account for 1,,;;;
Units accounted for%
9ompleted and transferred out*
From beginning inventory 1,;;; 8;E 8!E 8;; 8!;
5tarted and completed 8,;;; 1;;E 1;;E 8,;;; 8,;;;
#nits in ending -&2F .,;;; 1;E ;E .;; 8;;
"otal units accounted for 1,,;;;
9urrent period equivalent units 0a1 8,;; 0b1 8,3!;
F E& ) 1,;;; % 1,;;; / 8,;;; ) .,;;;
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-6
Chapter 08 - Process-Costing Systems
8. 0; min1 Equivalent units computed, weighted/average method
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2F 4,;;;
#nits started !,;;;
"otal units to account for ,,;;;
Units accounted for%
9ompleted and transferred out ,;;; 1;;E 1;;E ,;;; ,;;;
Ending -&2 1;,;;; ;E 1;E ,;;; 1,;;;
"otal units accounted for ,,;;; 0a1 .,;;; 0b1 ,,;;;
F\$& ) ,;;; % 1;,;;; ' !,;;; ) 4,;;;
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8., 0,; min1 Equivalent units computed, F&F( method 07ppendix 71
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2F 4,;;; !!E 4;E ,,8!; .,8;;
#nits started !,;;;
"otal units to account for ,,;;;
Units accounted for%
"o complete beginning -&2 4,;;; .!E ,;E ,,1!; ,1;;
5tarted and completedFF 1!,;;; 1;;E 1;;E 1!,;;; 1!,;;;
Ending -&2 1;,;;; ;E 1;E ,;;; 1,;;;
"otal units accounted for ,,;;;
9urrent period equivalent units ;,1!; 18,1;;
F\$& ) 1;,;;; % ,;;; ' !,;;;
FF1!,;;; units started and completed ) ,;;; total transferred out ' 4,;;; transferred out that was
in beginning inventory
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-7
Chapter 08 - Process-Costing Systems
8.. 0; min1 Equivalent units computed, weighted/ average method
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 3,;;;
#nits started .;,;;;
"otal units to account for .3,;;;
Units accounted for%
9ompleted and transferred out ,;,;;; 1;;E 1;;E ,;,;;; ,;,;;;
Ending -&2 13,;;; 1;;E .;E 13,;;; 3,.;;
"otal units accounted for .3,;;; 0a1 .3,;;; 0b1 ,3,.;;
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8.! 0,; min1 Equivalent units computed, F&F( 07ppendix 71
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 !; 1;;E .;E !; 1;;
#nits started 1,;;;
"otal units to account for 1,!;
Units accounted for%
9ompleted and transferred out*
From beginning inventory !; ;E 3;E ; 1!;
5tarted and completed 8;; 1;;E 1;;E 8;; 8;;
Ending inventory ;; 1;;E 4;E ;; 1.;
"otal units accounted for 1,!;
Ganuary equivalent units 1,;;; 1,;8;
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-8
Chapter 08 - Process-Costing Systems
8.3 0; min1 9osts per equivalent unit computed, weighted average method
Flow of units
2hysical units
&ercent
complete
\$aterials
'(ui!.
Units
\$aterials
Units to account for%
\$eginning -&2 3;,;;;
#nits started 13;,;;;
"otal units to account for ;,;;;
Units accounted for%
9ompleted and transferred out 14;,;;; 1;;E 14;,;;;
Ending -&2 !;,;;; 1;;E !;,;;;
"otal units accounted for ;,;;; ;,;;;
Costs to account for \$aterials
9osts in beginning -&2 H 1,,;;
9urrent period costs ,!,;;
"otal costs to account for H .8,.;;
9ost per equivalent unit H ;.F
F H;. ) H.8,.;; ÷ ;,;;; E#
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8.4 0,; min1 Equivalent units computed, F&F( 07ppendix 71
Flow of units 2hysical units
)egree of
Completion
'(ui!alent
Units
Units to account for%
\$eginning -&2 .;,;;; 3;E .,;;;
#nits started 4;;,;;;
"otal units to account for 4.;,;;;
Units accounted for%
\$eginning -&2 .;,;;; .;E 13,;;;
5tarted and completedF 3;,;;; 1;;E 3;,;;;
Ending -&2 8;,;;; ;E 13,;;;
"otal units accounted for 4.;,;;;
7pril equivalent units 3!,;;;
F 3;,;;; units started and completed ) 33;,;;; total transferred out ' .;,;;; transferred
out that was in beginning inventory
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-9
Chapter 08 - Process-Costing Systems
8.8 0.; min1 9ost per equivalent unit with spoilage, weighted average method
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 1!;
#nits started 1,;;;
"otal units to account for 1,1!;
Units accounted for%
9ompleted and transferred out 4!; 1;;E 1;;E 4!; 4!;
5poilage 1;; 1;;E 1;;E 1;; 1;;
Ending -&2 ,;; .;E ;E 1; 3;
"otal units accounted for 1,1!; 84; 81;
Costs to account for *otal Costs \$aterials Con!ersion
9osts in beginning -&2 H 3. H .88 H 1,3
9urrent period costs 8,;. !,4; ,,,
"otal costs to account for 8,333 3,;8 ,,.!8
9ost per equivalent unit H 1;.; H 3..;F H ,.8;FF
F H3..; ) H3,;8 ÷ 84; E#
FF H,.8; ) H,,.!8 ÷ 81; E#
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-10
Chapter 08 - Process-Costing Systems
8.8 0,; min1 9ost assignment to units transferred out, spoilage, and ending inventory
0using costs from exercise 8.81, weighted/average
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 1!;
#nits started 1,;;;
"otal units to account for 1,1!;
Units accounted for%
9ompleted and transferred out 4!; 1;;E 1;;E 4!; 4!;
5poilage 1;; 1;;E 1;;E 1;; 1;;
Ending -&2 ,;; .;E ;E 1; 3;
"otal units accounted for 1,1!; 84; 81;
Costs to account for *otal Costs \$aterials Con!ersion
9osts in beginning -&2 H 3. H .88 H 1,3
9urrent period costs 8,;. !,4; ,,,
"otal 9osts to account for 8,333 3,;8 ,,.!8
9ost per equivalent unit H 1;.; H 3..; H ,.8;
Costs assigned *otal Costs \$aterials Con!ersion
9ompleted and transferred out H 4,3!; H .,8;;
a
H ,8!;
b

5poilage 1,;; 3.;
c
,8;
d

Ending -&2 883 438
e
8
f

"otal costs assigned H 8,333 H 3,;8 H ,,.!8
a
H.,8;; ) H3..; x 4!; E.#.
b
H,8!; ) H,.8; x 4!; E.#.
c
H3.; ) H3..; x 1;; E.#.
d
H,8; ) H,.8; x 1;; E.#.
e
H438 ) H3..; x 1; E.#.
f
H8 ) H,.8; x 3; E.#.
9osts for units completed and transferred out total H4,3!;, spoilage costs total H1,;;, and
ending inventory costs total H883.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-11
Chapter 08 - Process-Costing Systems
8.,; 0,; min1 9osts per equivalent unit 0with spoilage1 computed, weighted average
a.
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 8,;;;
#nits started 1.,;;;
"otal units to account for ,;;;
Units accounted for%
9ompleted and transferred out 14,;;; 1;;E 1;;E 14,;;; 14,;;;
5poilage !;; 1;;E !;E !;; !;
Ending -&2 .,!;; 8;E .;E ,,3;; 1,8;;
"otal units accounted for ,;;; 1,1;; 18,;!;
Costs to account for *otal Costs \$aterials Con!ersion
9osts in beginning -&2 H 88,3; H ,1,.;; H 33,83;
9urrent period costs 88!,.; ,8;,3;; !;.,3.;
"otal costs to account for H88,,!;; .,;;; !41,!;;
9ost per equivalent unit H !; H ;F H ,;FF
F H; ) H.,;;; ÷1,1;; E.#.
FF H,; ) H!41,!;; ÷18,;!; E.#.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-12
Chapter 08 - Process-Costing Systems
8.,1 0.; min1 9ost assignment to units transferred out, spoilage, and ending inventory
0using costs from exercise 8.,;1, weighted average
6ote* 7nswers might differ due to rounding the cost per equivalent unit calculation.
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 8,;;;
#nits started 1.,;;;
"otal units to account for ,;;;
Units accounted for%
9ompleted and transferred out 14,;;; 1;;E 1;;E 14,;;; 14,;;;
5poilage !;; 1;;E !;E !;; !;
Ending -&2 .,!;; 8;E .;E ,,3;; 1,8;;
"otal units accounted for ,;;; 1,1;; 18,;!;
Costs to account for *otal Costs \$aterials Con!ersion
9osts in beginning -&2 H 88,3; H ,1,.;; H 33,83;
9urrent period costs 88!,.; ,8;,3;; !;.,3.;
"otal costs to account for H88,,!;; .,;;; !41,!;;
9ost per equivalent unit H !; H ; H ,;
Costs assigned *otal Costs \$aterials Con!ersion
9ompleted and transferred out H 8!;,;;; H,.;,;;;
a
H !1;,;;;
b

5poilage 14,!;; 1;,;;;
c
4,!;;
d

Ending -&2 13,;;; 4,;;;
e
!.,;;;
f
"otal costs assigned H 88,,!;; H .,;;; H !41,!;;
a
H,.;,;;; ) H; x 14,;;; E.#.
b
H!1;,;;; ) H,; x 14,;;; E.#.
c
H1;,;;; ) H; x !;; E.#.
d
H4,!;; ) H,; x !; E.#.
e
H4,;;; ) H; x ,,3;; E.#.
f
H!.,;;; ) H,; x 1,8;; E.#.
9osts for units completed and transferred out total H8!;,;;;, spoilage costs total H14,!;;,
and ending inventory costs total H13,;;;.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-13
Chapter 08 - Process-Costing Systems
8., 03; min1 7ssign costs to products, operation costing 07ppendix \$1
a. Dirt "ouring -heelchairs
6umber of units produced .; 8; !;
9osts*
Direct materialsF H 4,;;; H13,;;; H.;,;;;
9onversion costs'\$asic 7ssCyFF .,;;; 8,;;; !,;;;
9onversion costs/5pecial 7ssCyFFF 8,3;; ; 1;,;;;
"otal 2roduct 9osts H1;!,3;; H.,;;; H!!,;;;
9ost per #nit 0total costsIunits1 H..; H,;; H1,1;;
F Equals number of units produced times the cost of direct materials per unit* for Dirt
bikes, H4,;;; ) H,;; x .; units
FF Equals number of units produced times H1;; per unit* for Dirt bikes, H.,;;; ) H1;; x
.; units
FFF Equals number of units produced times cost per unit for special assembly* for Dirt
bikes, H8,3;; ) H.; x .; units
b.
D ) Dirt \$ike
" ) "ouring :otorcycle
- ) :otori=ed -heelchair
8-14
72,000 D -> 72,000 D 72,000 D -> 72,000D 72,000 D -> 72,000 D 72,000 D
16,000 T -> 16,000 T 16,000 T --- ----------------- ----------------- -> 16,000 T 16,000 T
40,000 W -> 40,000 W 40,000 W -> 40,000 W 40,000 W -> 40,000 W 40,000 W
24,000 D 24,000D -> 24,000 D 24,000D -> 24,000 D 24,000 D
8,000 T 8,000 T --- ----------------- ----------------- -> 8,000 T 8,000 T
5,000 W 5,000 W -> 5,000 W 5,000 W -> 5,000 W 5,000 W
9,600 D 9,600 D -> 9,600 D 9,600 D
10,000 W 10,000 W -> 10,000 W 10,000 W
72,000 D
16,000 T
40,000 W
24,000 D
8,000 T
5,000 W
9,600 D
10,000 W
Cost of Goods Sold
Materials I!etor" WI#-\$asi% &sse'(l" WI#-S)e%ial &sse'(l" *iis+ed Goods
Chapter 08 - Process-Costing Systems
8., 0continued1
c. 5outh 9entral -est
+evenue H8;,;;; H8;,;;; H8;,;;;
9osts
Dirt
1
14,3;; ..,;;; ..,;;;
"ouring

.,;;;
-heelchairs
,
..,;;; 11,;;;
2rofits H8,.;; H1,;;; H!,;;;
1
Equals H..; 0from part a above1 x units produced and sold to customer* for 5outh, H14,3;; ) H..;
x .; units

Equals H,;; 0from part a above1 x units produced and sold to customer* for 9entral, H.,;;; ) H,;;
x 8; units
,
Equals H1,1;; 0from part a above1 x units produced and sold to customer* for 5outh, H..,;;; )
H1,1;; x .; units
8-15
Chapter 08 - Process-Costing Systems
8.,, 03; min1 7ssign costs to products, operation costing 07ppendix \$1
a. 6icholson 2itt G. Dean
6umber of coats produced !; 1.; 3;
9osts*
Direct materialsF H !;,;;; H.,;;; H,;,;;;
9onversion costs'\$asic 7ssCyFF !,;;; 1.,;;; 3,;;;
9onversion costs/5pecial Fin.FFF ; 4,;;; ,.;;
"otal 2roduct 9osts H4!,;;; H3,,;;; H,8,.;;
9ost per #nit 0total costsIunits1 H,;; H.!; H3.;
F Equals number of units produced times the cost of direct materials per unit* for 6icholson coat,
H4,;;; ) H;; x !; units
FF Equals number of units produced times H1;; per unit* for 6icholson coat, H!,;;; ) H1;; x !;
units
FFF Equals number of units produced times cost per unit for special finishing* for 2itt coat, H4,;;; )
H!; x 1.; units
8-16
Chapter 08 - Process-Costing Systems
8.,, 0continued1
b.
50,000 , -> 50,000 , 50,000 , --- ---------------- --------------- -> 50,000 , 50,000 ,
42,000 # -> 42,000 # 42,000 # -> 42,000 # 42,000 # -> 42,000 # 42,000 #
-0,000 .D -> -0,000 .D -0,000 .D -> -0,000 .D -0,000 .D -> -0,000 .D -0,000 .D
25,000 , 25,000 , --- --------------- --------------- -> 25,000 , 25,000 ,
14,000 # 14,000 # -> 14,000 # 14,000 # -> 14,000 # 14,000 #
6,000 .D 6,000 .D -> 6,000 .D 6,000 .D -> 6,000 .D 6,000 .D
7,000 # 7,000 # -> 7,000 # 7,000 #
2,400 .D 2,400 .D -> 2,400 .D 2,400 .D
50,000 ,
42,000 #
-0,000 .D
, / ,i%+olso 25,000 ,
# / #itt 14,000 #
.D / .0 Dea 6,000 .D
7,000 #
2,400 .D
Cost of Goods Sold
Materials I!etor" WI#-\$asi% &sse'(l" WI#-S)e%ial *iis+i1 *iis+ed Goods
8-17
Chapter 08 - Process-Costing Systems
SO&UTIONS TO PRO)&E*S
8.,. 0.! min1 2roduction cost report, weighted/average method
a.
Jates 9ompany
2roduction 9ost +eport
:onth Ending :arch ,1
2hysical units Degree of 9ompletion Equivalent #nits
Flow of units \$aterials Con!ersion \$aterials Con!ersion
Units to account for%
\$eginning -&2 ,;;;
#nits started 1,;;;
"otal units to account for ,.,;;;
Units accounted for%
9ompleted and transferred out 8,;;; 1;;E 1;;E 8,;;; 8,;;;
Ending -&2 3,;;; 8;E 3;E .,8;; ,,3;;
"otal units accounted for ,.,;;; ,,8;; ,1,3;;
Costs to account for *otal Costs \$aterials Con!ersion
9osts in beginning -&2 H .8,8;; H,,3; H4,..;
9urrent period costs ,,,8;; 14,;;; 13,8;;
"otal 9osts to account for 8,,3;; ,8,,3; ..,.;
9ost per equivalent unit H 1.; H 1..;
Costs assigned *otal Costs \$aterials Con!ersion
9ompleted and transferred out H4,8;; H ,,,3;;
a
H ,8,;;
b
Ending -&2 1;,8;; !,43;
c
!,;.;
d
"otal costs assigned H 8,,3;; H ,8,,3; H ..,.;
a
H,,,3;; ) H1.; x 8,;;; E.#.
b
H,8,;; ) H1..; x 8,;;; E.#.
c
H!,43; ) H1.; x .,8;; E.#.
d
H!,;.; ) H1..; x ,,3;; E.#.
b. 9ost flows
Finished Joods &nventory H4,8;;
-&2 &nventory H4,8;;
*o transfer costs from +or,-in-&rocess in!entor# to Finished -oods
In!entor#.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-18
Chapter 08 - Process-Costing Systems
8.,! 03; min.1 2roduction cost report, F&F( method 07ppendix 71
6ote* 7nswers might differ because of rounding.
2roduction 9ost +eport 0F&F(1
:onth ending :arch ,1
:at. 9onv 9osts E#* :at E#* 9onv costs
#nits to account for
\$eg. -&2 ,;;;
#nits started 1,;;;
"otal to account for ,.,;;;
#nits to account for
-ork to complete \$eg &nv ,;;; !E ,;E !,!;; 3,3;;
5tarted and completed 3,;;; 1;;E 1;;E 3,;;; 3,;;;
#nits in End &nv 3,;;; 8;E 3;E .,8;; ,,3;;
"otal units accounted for ,.,;;; 13,,;; 13,;;
Flow of 9osts
9osts to be accounted for
9osts in \$eg &nv H.8,8;; H,,3; H4,..;
9urrent period costs ,,,8;; 14,;;; 13,8;;
"otal to be accounted for H8,,3;; H,8,,3; H..,.;
9osts per E#F H1.;.8. H1.;,4;.
9osts accounted for
9osts transferred out*
From \$eg &nv H.8,8;; H,,3; H4,..;
"o complete \$eg &nvFF 1,!8; !,4,3 3,8..
5tarted and completedFFF 1,.8; 3,!8 3,
"otal costs transferred out 4.,83; ,.,,!. .;,!;3
9osts in End &nvFFFF 8,4,8 !,;;3 ,,4,,
"otal costs accounted for H8,,3;;K H,8,,3; H..,.;K
8-19
Chapter 08 - Process-Costing Systems
8.,! 0continued1
Footnotes to table
F 9ost per E# 0equivalent unit1 equals current period costs divided by equivalent units of
work done in the current period* H1.;.8. ) H14,;;;I13,,;;L H1.;,4;.) H13,8;;I13,;;.
FF 9osts to complete beginning inventory equal equivalent units to complete beginning
inventory times cost per E#* H!,333 ) !,!;; x H1.;.8.L H3,8!! ) 3,3;; x H1.;,4;..
FFF 9osts of units started and completed equals units started and completed times cost per
E#* H3,!8 ) 3,;;; x H1.;.8.L H3, ) 3,;;; x H1.;,4;..
FFFF 9osts in ending inventory equal number of equivalent units in ending inventory times
cost per E#* H!,;;3 ) .,8;; x H1.;.8.L H,,4,, ) ,,3;; x H1.;,4;..
K 6umbers do not add to total because of rounding. 0"otals are correct.1
b. "he F&F( approach is helpful when costs fluctuate significantly over time. 7 case
can be made for using the F&F( method for the company because this method tracks
costs by period, and helps identify increasing or decreasing costs by period. #sing
the F&F( approach would help the managers of this company see that it had lower
costs in the current period than in the previous period.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-20
Chapter 08 - Process-Costing Systems
8.,3 0.! min1 2roduction cost report, weighted/average method
a. 6ote* 7nswers might differ somewhat due to rounding the cost per equivalent unit
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-21
Flow of Units 2hysical 2ercentage 9omplete Equivalent #nits
Units to account for #nits )irect \$at Con!ersion )irect \$at Con!ersion
\$eginning -&2 1!,;;; 3;E 4;E
#nits 5tarted ;,;;;
"otal units to account for ,!,;;;
Units accounted for
9ompleted and transferred out ,;,;;; 1;;E 1;;E ,;,;;; ,;,;;;
Ending -&2 !,;;; 4;E 8;E ,,!;; .,;;;
"otal units accounted for ,!,;;; ,,,!;; ,.,;;;
Flow of Costs
Costs to "e accounted for )irect \$at Con!ersion
9osts in beginning -&2 1!,,;; H 8,8;; H 3,!;; H
9urrent period costs !,8;; 1,,!;; 1,,;;
"otal 9osts to be accounted for .1,1;; H ,,;; H 18,8;; H
9ost per equivalent unitF ;.33!4 H ;.!!8 H
9osts accounted for
#nits transferred out FF ,3,!!8 H 18,84; H 13,!88 H
Ending -&2 .,!. ,,,; ,1
"otal costs accounted for .1,1;; H ,,;; H 18,8;; H
F 9ost per equivalent unit equals total costs to be accounted for divided by total equivalent units
for example, cost per equivalent unit for direct materials ) H;.33!4 ) H,,;; I ,,,!;; E#
FF 9osts assigned to units transferred out equals cost per E# times E# completed and transferred out
for example, cost to complete units transferred out for direct materials costs
:c9ain
2roduction 9ost +eport 0weighted average1
For the :onth Ending Guly
9osts
Chapter 08 - Process-Costing Systems
b.
8-22
\$\$ 1!,,;;
"& !,8;;F "( ,3,!!8 "& ,3,!!8
E\$ .,!.
F"ransferred in costs equals direct materials costs plus conversion costs for the current periodL H!,8;;)H1,,!;;%H1,,;;
-&2 &nventory Finished Joods &nv.
Chapter 08 - Process-Costing Systems
8.,4 0.! min1 2roduction cost report, weighted/average
a. 6ote* 7nswers might differ due to rounding the cost per equivalent unit calculation.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-23
Flow of Units 2hysical 2ercentage 9omplete Equivalent #nits
Units to account for #nits )irect \$at Con!ersion )irect \$at Con!ersion
\$eginning -&2 ;,;;; 8;E 8;E
#nits 5tarted !;,;;;
"otal units to account for 4;,;;;
Units accounted for
9ompleted and transferred out .!,;;; 1;;E 1;;E .!,;;; .!,;;;
Ending -&2 !,;;; ,;E .;E 4,!;; 1;,;;;
"otal units accounted for 4;,;;; !,!;; !!,;;;
Flow of Costs
Costs to "e accounted for )irect \$at Con!ersion
9osts in beginning -&2 3!,;;; H ;,;;; H .!,;;; H
9urrent period costs 3,,;;; 4,;;; ,3,;;;
"otal 9osts to be accounted for 18,;;; H .4,;;; H 81,;;; H
9ost per equivalent unitF ;.88! H 1..44 H
9osts accounted for
#nits transferred out FF 1;3,!!8 H .;,83 H 33,4, H
Ending -&2 1,.. 3,41. 1.,44
"otal costs accounted for 18,;;; H .4,;;; H 81,;;; H
F 9ost per equivalent unit equals total costs to be accounted for divided by total equivalent units
for example, cost per equivalent unit for direct materials ) H;.88! ) H.4,;;; I !,!;; E#
FF 9osts assigned to units transferred out equals cost per E# times E# completed and transferred out
for example, cost to complete units transferred out for direct materials costs
\$enchmark 2roduction 9ompany
2roduction 9ost +eport 0weighted average1
For the :onth Ending December
9osts
Chapter 08 - Process-Costing Systems
b.
8-24
\$\$ 3!,;;;
"& 3,,;;;F "( 1;3,!!8 "& 1;3,!!8
E\$ 1,..
F"ransferred in costs* H3,,;;;)H4,;;;%H,3,;;;
-&2 &nventory Finished Joods &nv.
Chapter 08 - Process-Costing Systems
8.,8 03; min1 2roduction cost report, F&F( 07ppendix 71
a. 6ote* 7nswers might differ due to rounding the cost per equivalent unit calculation.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8.,8 0continued1
b.
c. #sing weighted/average costing, ending -&2 &nventory was H1,... #sing the F&F(
costing approach, ending -&2 &nventory was H1!,48. "he difference is attributable
to a lower current cost per equivalent unit using F&F(, which is ultimately assigned
to ending -&2 &nventory 0and the most recent completed inventory transferred out1.
"he F&F( approach is helpful when costs fluctuate significantly over time. 7 case
can be made for using the F&F( method for 6eedles 2roduction 9ompany because
this method tracks costs by period, and helps identify increasing or decreasing
costs by period. #sing the F&F( approach would help the company identify that it
had lower costs in the current period.

8-25
\$\$ 3!,;;; "( 3!,;;; "& 3!,;;;
"& 3,,;;;F "( .4,4FF "& .4,4
E\$ 1!,48 E\$ 11,4
F"ransferred in costs equals direct materials costs plus conversion costs for the current period
H3,,;;; ) H4,;;; % ,3,;;;
FF 9urrent period costs transferred out ) costs to complete beg. -&2 % current costs of units started and completed
H.4,4 ) H.,8;! % H.,814
-&2 &nventory Finished Joods &nv.
Chapter 08 - Process-Costing Systems
8.,8 0.; min1 5olving for unknownsMweighted/average
a. 7nswer* .,,!; units.
5tart with the formula* transferred out 0"(1 ) beginning inventory 0\$&1 % transferred in 0"&1 '
ending inventory 0E&1.
"( ) .,1;; % ,,!;; ' ,,!;
"( ) .,,!;
b. 7nswer* H!,,,;;.
First compute the cost per equivalent unit from ending inventory*
H.,!;;I03,;;; x .1 ) H,.4!
6ext, multiply the cost per equivalent unit by the total equivalent units for the period to
derive the total costs 0including \$& costs1*
H,.4! x 18,;;; ) H34,!;;.
Finally, subtract the \$& costs from the total costs to derive the materials costs incurred this
period*
H34,!;; / H1.,;; ) H!,,,;;.
c. 7nswer* ;; equivalent units
First, compute the cost of ending inventory*
E& ) \$& % "& ' "(
E& ) H1,8;; % H18,1;; / H18,;;
) H8;;
6ext compute the cost per equivalent unit*
H18,;; costs "(I.,8;; units "(
) H.
Finally* H8;;IH. ) ;; equivalent units
8-26
Chapter 08 - Process-Costing Systems
d. 7nswer* 1,;; units in the ending inventory
First, find the cost per equivalent unit*
H,,,3; "(I1,3;; units "( ) H.1;
6ext, find the equivalent units for materials costs in E&*
H3,;IH.1; ) ,;; equiv. units
Finally, if these units are !E complete, then the total number of units in E&
must be 1,;; 01,;; ) ,;;I.!1
8-27
Chapter 08 - Process-Costing Systems
8..; 03; min1 2roduction cost report, weighted average
a. 6ote* 7nswers might differ due to rounding the cost per equivalent unit calculation.
Flow of Units Degree of
9ompletion
Equivalent
#nits
Units to "e accounted for 2hysical units *rans. In \$at.ls Con!. *rans. In \$aterials Con!ersion
\$eginning -&2
1,;;; 1;;E 3;E 4!E 1,;;; 3;; 4!;
#nits "ransferred &n
3,;;;
"otal units to account for
4,;;;
Units accounted for
9ompleted and transferred outF
.,,;; 1;;E 1;;E 1;;E .,,;; .,,;; .,,;;
Ending -&2
,4;; 1;;E 8;E .!E ,4;; ,13; 1,1!
"otal units accounted for
4,;;; 4,;;; 3,.3; !,!1!
Equivalent units
4,;;; 3,.3; !,!1!
Costs to "e accounted for 9osts
*rans. In \$aterials Con!ersion
9osts in beginning -&2
H 8,1;,;;; H 4,1;;,;;; H 3;;,;;; H .;,;;;
9urrent period costs
!,14!,;;; .,,;;,;;; ,!;;,;;; 3,.4!,;;;
"otal 9osts to be accounted for
H 3;,8!,;;; H !;,,;;,;;; H ,,1;;,;;; H 3,88!,;;;
9ost per equivalent unit
H 4,18!.41 H .48.88 H 1,!;.,
Costs accounted for
9ompleted and "ransferred out
H ,8,,,8,;1. H ,;,888,!41 H ,;3,,.34 H !,,4!,84!
Ending -&2
1,8!3,883 18,.;1,.8 1,;,3,!,, 1,!18,;!
"otal costs accounted for
H 3;,8!,;;; H !;,,;;,;;; H ,,1;;,;;; H 3,88!,;;;
F .,,;; ) 4,;;; / ,4;;
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-28
Chapter 08 - Process-Costing Systems
8..; 0continued1
b. -&2
\$\$ 8,1;,;;;
"& !,14!,;;;F "( ,8,,,8,;1.
E\$ 1,8!3,883
F "ransfers/in cost represents the total of shredding process costs, direct material
costs, and conversion costsL H!,14!,;;; ) H.,,;;,;;; % H,!;;,;;; % H3,.4!,;;;
8-29
Chapter 08 - Process-Costing Systems
8..1 03; min1 2roduction cost report, weighted/average
a.
Degree (f 9ompletion Equivalent units
Units to "e accounted for
2hysical
#nits
*ransferred
In
In
\$eginning -&2 1,;;; 1;;E 1;;E 3;E !;E 1,;;; 1,;;; 3;; !;;
#nits transferred &n !,;;;
"otal units to account for 3,;;;
Units accounted for
9ompleted N transferred .,;;; 1;;E 1;;E 1;;E 1;;E .,;;; .,;;; .,;;; .,;;;
Ending -&2 ,;;; 1;;E 8;E 4;E ,!E ,;;; 1,8;; 1,.;; 4;;
"otal units accounted for 3,;;; 3,;;; !,8;; !,.;; .,4;;
Costs to "e accounted for 9osts
9osts in beginning -&2 H 3.,4;; H ,,;;; H ;,;;; H 4,;; H !,!;;
9urrent period costs ,1;,;;; 13;,;;; 83,;;; ,3,;;; 18,;;;
"otal costs to account for H ,4.,4;; H 18,;;; H 113,;;; H .,,;; H ,,!;;
9ost per equivalent unit H ,.;; H ;.;; H 8.;; H !.;;
Costs accounted for
9ompleted N transferred out H 3;,;;; H 18,;;; H 8;,;;; H ,,;;; H ;,;;;
Ending -&2 11.,4;; 3.,;;; H ,3,;;; H 11,;; H ,,!;;
"otal costs accounted for H ,4.,4;; H 18,;;; H 113,;;; H .,,;; H ,,!;;
b. "he weighted/average production analysis indicates that the assembling department has met its material cost target and
beat its labor cost target. Bowever, it has not met its overhead cost target of H..!; 0versus H!.;; actual cost1.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-30
Chapter 08 - Process-Costing Systems
8.. 0.! min1 2roduction cost report 0with spoilage1, weighted/average
a. 6ote* 7nswers might differ due to rounding the cost per equivalent unit calculation.
Flow of Units 2hysical units Degree of 9ompletion Equivalent #nits
Units to "e accounted for \$aterials Con!ersion \$aterials Con!ersion
\$eginning -&2 11,;;; 4!E 4;E
#nits 5tarted 3,;;;
"otal units to account for 14,;;;
Units accounted for
9ompleted and transferred 1,,8;; 1;;E 1;;E 1,,8;; 1,,8;;
5poilage ;; 1;;E 1;;E ;; ;;
Ending -&2 ,,;;; 8;E 3;E ,.;; 1,8;;
"otal units accounted for 14,;;; 13,.;; 1!,8;;
Costs to "e accounted for 9osts
9osts in beginning -&2 H .,3!; H ,,;; H 1,.!;
9urrent period costs ,1,8;; 13,;;; 1!,8;;
"otal 9osts to account for ,3,.!; 18,;; 14,!;
9ost per equivalent unit H1.141 H 1.;8
Costs accounted for
9ompleted and "ransferred out H ,1, H 13,1!3 H 1!,;33
5poilage .!, ,. 18
Ending -&2 .,44! ,81; 1,83!
"otal costs accounted for H ,3,.!; H 18,;; H 14,!;
b.
-&2
\$\$ .,3!;
"& ,1,8;; "( ,1,
5poilage .!,
E\$ .,44!
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-31
Chapter 08 - Process-Costing Systems
8.., 0.! min1 2roduction cost report 0with spoilage1, weighted/average
a. 6ote* +ounding is due to rounding the cost per equivalent unit calculation.
Flow of Units 2hysical units Degree of 9ompletion Equivalent #nits
Units to "e accounted for \$aterials Con!ersion \$aterials Con!ersion
\$eginning -&2 1,,;;; 4;E 3;E
#nits 5tarted 14,;;;
"otal units to account for ,;,;;;
Units accounted for
9ompleted and transferred ,!;; 1;;E 1;;E ,!;; ,!;;
5poilage 1,!;; 4!E 3;E 1,1! 8;;
Ending -&2 3,;;; 3;E !!E ,,3;; ,,,;;
"otal units accounted for ,;,;;; 4,! 3,4;;
Costs to "e accounted for 9osts
9osts in beginning -&2 H 18,!;; H 3,!;; H 1,;;;
9urrent period costs ,1,8;; 13,;;; 1!,8;;
"otal 9osts to account for H !;,,;; H ,!;; 4,8;;
9ost per equivalent unit H ;.83. H 1.;.1
Costs accounted for
9ompleted and "ransferred out H .,;1 H 18,!8. ,,.4
5poilage 1,838 8,1 8,4
Ending -&2 3,.11 ,84! ,,.,3
"otal costs accounted for H !;,,;; H ,!;; H 4,8;;
b.
-&2
\$\$ 18,!;;
"& ,1,8;; "( .,;1
5poilage 1,838
E\$ 3,.11
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-32
Chapter 08 - Process-Costing Systems
8... 0,; min1 "ransfer from 2rior Department, -eighted 7verage
a.
Flow of Units 2hysical
units
Degree of 9ompletion Equivalent #nits
Units to "e accounted for \$aterials Con!ersion \$aterials Con!ersion
\$eginning -&2 !,;;; ;E .;E
#nits transferred &n 1;,;;;
"otal units to account for 1.!,;;;
Units accounted for
9ompleted N transferred 1,,!;; 1;;E 1;;E 1,,!;; 1,,!;;
Ending -&2 1,!;; 1;;E ,;E 1,!;; ,,4!;
"otal units accounted for 1.!,;;; 1.!,;;; 1,3,!;
b.
Flow of Units
2hysical
units
Degree of 9ompletion Equivalent #nits
Units to "e accounted for
*ransferred
In
\$aterials Con!ersion *ransferred
In
\$aterials Con!ersion
\$eginning -&2 !;,;;; 1;;E ;E 8;E
#nits "ransferred &n ,;,;;;
"otal units to account for ,4;,;;;
Units accounted for
9ompleted N transferred ,,;,;;; 1;;E 1;;E 1;;E ,,;,;;; ,,;,;;; ,,;,;;;
Ending -&2 .;,;;; 1;;E ;E 8;E .;,;;; / ,3,;;;
"otal units accounted for ,4;,;;; ,4;,;;; ,,;,;;; ,33,;;;
8-33
Chapter 08 - Process-Costing Systems
SO&UTIONS TO CASES
8..! 03; min1 2ublic policy and process costing
a. \$;;; omitted
\$alance
Finished
goods -&2
\$\$ 0given1 H ., 8,F H 1,,838F
"& ) E\$ % "( ' \$\$F ,,;,,31 ,,!,41,
"( ) \$\$ % "& ' E\$FF ,8,4.8F ,,;,,31
E\$ 0given1 !,..!F 18,;F
F Jiven in the case.
FF "( is 9J5 for Finished Joods &nventory. "( for -&2 is the "& to Finished Joods
&nventory.
b. 2rocess costs per unit. 5tart by computing product line costs.
(perating profit ) 6et sales ' 5JN7 ' 9(J5.
5o, 9(J5 ) 6et sales ' 5JN7 ' (perating profit.
H;;; omitted.
2roduct line
6et sales
E
sales 5JN7F
(perating
profit
9J5
"imber products H 48,;.! 1.8,E H4,;!, H ,4,,;8 H ,.,38,
2aper and
paperboard
8,.,, !.!E 8,.4 011,8.1 83,;8
9onverted products 18;,344 !.3!E 14,;1, 0!,,4,1 188,;,4
"otal H ,3,1!! 1;;E H ,,,1, H 8. H ,8,4.8
F 7llocated to product line based on the product lineCs percent of total sales.
For example, H4,;!, ) H48,;.!IH,3,1!! x H,,,1,.
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-34
Chapter 08 - Process-Costing Systems
8..! 0continued1
"he following table answers both questions b and c*
2roduct area 9J5
5ales
quantity
Oear
cost per
unit
Oear 1
cost per
unit
E change
"imber products H ,.,38,,;;; 1..,;;;,;;; H .. H ., .E
2aper and
paperboard
83,;8,;;; 144,;;; !..!, !;.;1 8E
9onverted products 188,;,4,;;; !!,;;; 48;.!. 488.!8 /1E
"otal H,8,4.8,;;;
"he results in the last column are consistent with reduced conversion costs for
converted products ' despite increased material costs converted product costs have
declined. &t does not appear, however, that the company has reduced its conversion
costs for timber or paper sufficiently to offset increased material prices. "his
demonstrates the cost squee=e experienced by >ongview Fibre and others that
depend on more expensive, local timber. 5ome companies, such as -eyerhaeuser,
have secured long/term supplies from private lands in 9anada and have entered <oint
ventures to grow and harvest timber in 6ew Pealand and 5outh 7merica.
8-35
Chapter 08 - Process-Costing Systems
8..3 03; min1 9hoosing between <ob and process costing
7nswers will vary. 5ome large companies that have both commercial and
governmental customers include such defense contractors as \$oeing, Jeneral
Electric and Boneywell. :any consulting firms, including the \$ig ! accountancy
firms, service both governmental and commercial customers. :any firms that
provide &", food and maintenance services have both governmental and commercial
customers. 5ome universities offer programs for governmental employees, such as
people in the military services, and nongovernmental students. 06ote that
governmental is not limited to national governments, but includes local, county and
stateIprovincial governmental units.1
Jovernmental contracts sometimes require cost/plus fees, which necessitate <ob
costing. 9ompanies with governmental customers sometimes find that the profit
margins are smaller on governmental work, thus increasing the benefits of close
cost control that <ob costing provides. Jovernments might require <ob costing
because they are sub<ect to scrutiny by citi=ens who want to know how much is
spent on particular <obs or pro<ects.
8-36
Chapter 08 - Process-Costing Systems
8..4 03; min.1 5poilage costs, weighted/average
a. 6ormal vs abnormal spoilage* "he issue is whether any spoilage should be regarded
as normal. :any feel that this label implies that spoilage is acceptable, and that this
attitude is not competitive these days. 6ormal spoilage of ,;; <ackets at the first
inspection 0..1E of those inspected ) ,;; I 08,13; ' 8;;11 seems quite high for most
industries. 2resumably, the company will seek to eliminate the sources of the
abnormal spoilage, but why not seek to eliminate it allQ 7lthough the optimal amount
of spoilage 0or defects1 may be greater than =ero, @normalA spoilage implies
historical levels of spoilage that people have gotten used to.
b. 2roduction analysis
Flow of #nits Degree of 9ompletion Equivalent #nits
Units to "e accounted for
2hysical
units \$aterial
/0
\$aterial
/1
Con!ersion \$aterial
/0
\$aterial
/1
Con!ersion
\$eginning -&2 !3; 1;;E ;E !E
#nits started 4,3;;
"otal units to be
accounted for
8,13;
Units accounted for
9ompleted 3,3;; 1;;E 1;;E 1;;E 3,3;; 3,3;; 3,3;;
5poilage / 1st insp .3; 1;;E ;E 4;E .3; / ,
5poilage / nd insp ;; 1;;E 1;;E 1;;E ;; ;; ;;
Ending -&2 8;; 1;;E ;E !;E 8;; / .!;
#nits accounted for 8,13; 8,13; 3,8;; 4,!4
Costs to "e accounted for
\$eginning -&2 H 14,;;3 H1, !;; H / H .,!;3
9urrent period costs 3;!,; !,4;; 4.,1; 48,.;;
9osts to be accounted for
H3,3 H 3!,;; H 4.,1; H 8,8;3
9ost per equiv. unit H ,.!; H 1;.8; H ,4.,3
Costs accounted for
9ompleted H!,,,;,; H 1.,!;; H 41,8.; H .3,!8;
5poilage / 1st insp 3,881 1.,8!; / H 1,;,1
5poilage / nd insp 13,1! 3,!;; ,18; H 4,.4
Ending -&2 .3,;3, 8,!; / 13,81,
9osts accounted for H3,3 H 3!,;; H 4.,1; H 8,8;3
EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE
8-37
Chapter 08 - Process-Costing Systems
8..4 0continued1
c. +equired return on sales ) 01! / 4!1 I 1! ) .;E. 9urrent costs per unit equal H8;.43
0) H,.!; % H1;.8; % H,4.,31.
2 ) H8;.43 I 01 / ..;1
2 ) H1,..3;
"he target cost reduction ) H8;.43 ' H4! ) H!.43 per unit.
8..8 03; min.1 Ethics ' &ncreasing 2roduction to \$oost 2rofit
a. ?nowing that any units started in the last half of :arch will remain in -&2 &nventory
at the end of the month, management is attempting to allocate a higher proportion of
fixed costs 0primarily overhead costs1 to ending -&2 &nventory. "his in turn reduces
the proportion of costs allocated to goods transferred out to Finished Joods
&nventory. 5ince all goods transferred out during :arch were sold by :arch ,1,
fewer costs would ultimately be assigned to 9ost of Joods 5old for the month.
>ower 9ost of Joods 5old results in higher net income.
b. "he revised production cost report appears below. 7mounts may vary slightly due to
rounding.
8-38
Chapter 08 - Process-Costing Systems
8..8 cont.
*These costs cost per !" # !" trans\$erre% o&t or in en%ing in'entory(
Unit Information
Units
+board
feet,
Dire%t
'aterials
Dire%t
3its i (e1ii1 WI# I!etor" 4all %o')leted t+is )eriod5 250,000 6a 6a 6a
3its started ad %o')leted d7ri1 t+e )eriod 140,000 1008 1008 1008
3its started ad partially %o')leted d7ri1 t+e )eriod 225,000 808 858 908
Cost Information
Dire%t
'aterials
Dire%t
Costs i (e1ii1 WI# I!etor" 976,000 990,000 9150,000
Costs i%7rred d7ri1 t+e )eriod 995,000 9102,000 9150,000
Ste- .% S/mmary of P!ysica0 Units and E1/i"a0ent Unit Ca0c/0ations
3its to (e a%%o7ted for
#+"si%al
3its
3its i (e1ii1 WI# I!etor" 250,000
3its started d7ri1 t+e )eriod -65,000
Total 7its to (e a%%o7ted for 615,000
3its a%%o7ted for
#+"si%al
3its
Dire%t
'aterials
Dire%t
3its %o')leted ad trasferred o7t -90,000 -90,000 -90,000 -90,000
3its i edi1 WI# I!etor" 225,000 180,000 191,250 202,500
Total 7its a%%o7ted for 615,000 570,000 581,250 592,500
check: total units to be accounted for = total units accounted for? If so, amount = 0 ----> 0
Ste- 2% S/mmary of Costs to be Acco/nted for
Costs to (e a%%o7ted for
Dire%t
'aterials
Dire%t
Costs i (e1ii1 WI# I!etor" 976,000 990,000 9150,000 9-16,000
Costs i%7rred d7ri1 t+e )eriod 95,000 102,000 150,000 -47,000
Total %osts to (e a%%o7ted for 9171,000 9192,000 9-00,000 966-,000
check: total costs to be accounted for = total costs accounted for? If so, amount = \$0 ----> 90
Ste- 3% Ca0c/0ation of Cost -er E1/i"a0ent Unit
Dire%t
'aterials
Dire%t
Total %osts to (e a%%o7ted for 4a5 9171,000 9192,000 9-00,000
Total e:7i!alet 7its a%%o7ted for 4(5 570,000 581,250 592,500
Cost )er e:7i!alet 7it 4a5 6 4(5 900-000 900--0- 900506- 9101-67
Ste- 4% Assign Costs to Units Transferred O/t and Units in Ending WIP In"entory
Dire%t
'aterials
Dire%t
Costs assi1ed to 7its trasferred o7t; 9117,000 9128,826 9197,468 944-,294
Costs assi1ed to edi1 WI# I!etor"; 54,000 6-,174 102,5-2 219,706
Total %osts a%%o7ted for 966-,000
*ont! Ending *arc! 3.
E1/i"a0ent Units
Percent Com-0ete
5ata Entry Section
Pacific Siding Incor-orated
Preliminary Prod/ction Cost Re-ort
8-39
Chapter 08 - Process-Costing Systems
c. "he last section of the report 05tep .1 clearly identifies the impact of increasing
production. 5pecifically, comparing the costs assigned to units transferred out from
the 9ontrollerCs initial estimate to the revised report prepared in part " will identify
the impact on profit. 5ince all units transferred out were sold by :arch ,1, the costs
assigned to these units are ultimately included in 9ost of Joods 5old on the income
statement as of :arch ,1. "hus, if these costs decrease, 9ost of Joods 5old
decreases, and net income 0profit1 increases.
2rofit is estimated to increase by H88,,4 as a result of boosting production
at the end of :arch 0this amount may vary slightly due to rounding1. "his is
calculated as follows*
9osts assigned to units transferred out 0no increase
in production1 H!.1,31
9osts assigned to units transferred out 0with increase
in production1 ..,,8.
&ncrease in 2rofit H 88,,4
"he primary reason for this increase is that more overhead costs, most of which are
fixed, are allocated to units remaining in ending -&2 &nventory at :arch ,1.
d. "he request made by the 9E( and 9F( is not ethical if the only motivation is to
increase profit. "he case clearly states that 2acific 5iding does not expect an
increase in sales. 7bsent any additional customer demand, it appears that the only
reason to boost production is to manipulate profit. "his action places the company
in a precarious position starting the next fiscal year as inventory levels will reach
excessive levels.
8-40