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CHAPTER 8

Process-Costing Systems

ANSWERS TO REVIEW QUESTIONS

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

ANSWERS TO CRITICA& ANA&'SIS

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

$aterials La"or O!erhead *ransferred

In

$aterials La"or (verhead

$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

la(or 2!er+ead

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

la(or 2!er+ead

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

la(or 2!er+ead

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

la(or 2!er+ead Total

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

la(or 2!er+ead Total

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

la(or 2!er+ead Total

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

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