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CHAPTER 5

PROCESS COSTING AND OPERATION COSTING


ANSWERS TO QUESTIONS
5.1 Job costing and process costing can be regarded as representing the two
extremes on a continuum of traditional product costing. Operation costing
would be placed partway along that continuum.
Whereas job costing identifies the cost of the resources consumed (e.g.
material, labour and overheads) in the individual job orders or batches of
output that consumed those resources, process costing identifies the cost of
resources consumed in processes or departments that consume the
resources. Hence, job costing accumulates the costs of each job while
process costing accumulates the cost of each process and then averages
these costs across the products that pass through the process. The sense of
this can be seen by comparing (a) the suitability of accumulating the costs
incurred in the manufacture of an individual, custom made, Lamborghini,
with (b) the suitability of accumulating the process costs of a big
production run of Ford Falcons, and then dividing the costs by the number
of cars processed. Similarly we would cost a wedding dress in a different
way to costing a school uniform.
Between these two extremes it is possible to use a mixture of job costing
and process costing. Typically this occurs when different materials are used
for individual jobs that are processed in the same way, or when different
outputs pass through a different sequence of processes. Direct materials can
be costed to individual jobs. The rest of the costs for those jobs are incurred
in converting the direct material to the finished product. These conversion
costs can be accumulated using process costing methods. Costing systems
that use elements of both job costing and process costing are called hybrid
costing systems. Operation costing is a hybrid costing system that applies to
repetitive production environments.

5.2 Process costing would be an appropriate product costing system in the


following industries: petroleum, food processing, timber processing,
chemicals, textiles and electronics. Each of these industries is involved in
the production of very large numbers of highly similar products that
undertake similar processes. Products can be goods or services so students
may include suitable service outcomes in this answer. For example, process
costing could be used in the following non-manufacturing businesses:
processing of tests in a medical diagnostic laboratory, processing of tax
returns by the Taxation Office, and processing of loan applications in a
bank.

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5.3 Timber mills are well suited to process costing because converting trees to
timber involves a series of repetitive processes such as milling, drying and
processing. The outputs of the processes are alike and there is a continuous
production line. The costs can be accumulated through process departments
as the product passes from one to another.

5.4 An equivalent unit is a measure of the amount of production inputs that are
applied to physical units in the production process. In process costing, costs
are assigned to equivalent units rather than physical units. The concept of
equivalent units can be ignored when there are no work-in-process
inventories or when the work-in-process inventory levels are stable over
time. For example, there will be no need to record work-in-process
inventory in businesses where the completion of the production process
coincides with the end of the accounting period. These businesses are likely
to include beverage producers where the production line is shut down (and
cleaned) at the end of each day and frozen foods manufacturers where
goods must be completed and frozen at the end of processing. The stability
of work-in-process inventory levels over time will be influenced by the
stability in the supply of inputs and in the demand for the finished goods.
The processing of motor vehicle registrations may be an example of a
production process associated with stable levels of work in process
inventory.

5.5 Exhibit 5.3 uses the weighted average method to calculate unit costs. In this
method of process costing the direct material costs incurred in this period
are added to the cost of direct materials in the opening work in process.
This total direct material cost is then divided by the number of equivalent
units to which those costs relate. In this Exhibit the direct material costs in
the opening inventory plus the direct material costs that are added during
the period total $560 000. The equivalent units of direct materials from the
opening inventory and those started during the period are 400 000. The
direct material cost per equivalent unit is therefore $(560 000/400 000) or
$1.40. Using the same approach for the conversion costs: the conversion
costs in the opening inventory plus the conversion costs incurred in the
current period total $146 150. The equivalent units of conversion in the
opening inventory plus the conversion effort for the current period total 395
000 equivalent units. The conversion cost per equivalent unit is therefore
$(146 150/395 000) or $0.37. The total cost per equivalent unit is therefore
$1.77, calculated as follows:

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Total cost Direct material Conversion cost
per equivalent unit = cost + per equivalent unit
per equivalent unit
= $1.40 + $0.37

5.6 The cost of goods transferred out is calculated as the number of physical
units multiplied by the total equivalent cost per unit. The total cost of work
in process is calculated by taking into account the number of equivalent
units remaining for both direct material and conversion cost and
multiplying these units by the respective cost per equivalent units.

5.7 The difference between the two methods relates to the calculation of the
relevant total equivalent units for the period.
Under the weighted average method, the equivalent units of activity for the
month relate to the closing work in process inventory and the units
completed and transferred out. Thus, in Exhibit 5.2, the total EUs for direct
material are 400 000 and for conversion cost are 395 000.
Under the FIFO method, the equivalent units of activity in the beginning
work in process inventory are subtracted from the total equivalent units for
the period to arrive at the new equivalent units of activity for the current
period. In Exhibit 5.7, the total EUs that were calculated in Exhibit 5.2
using the weighted average cost method are reduced by the EUs of inputs
received by 20 000 physical units in the opening WIP, to arrive at 380 000
EUs of direct material and 393 000 EUs of conversion cost.
The result is that under the weighted average method the total costs for
opening work in process inventory plus the cost of resources consumed this
period are averaged over all work that they relate to, both that performed in
the previous period and that performed on the current period. Using FIFO
we work out the cost per unit only for the work performed in the current
period by dividing the cost of resources consumed in this period by the
measure of work performed in this period. We then work out the equivalent
units of activity required to finish off the units in the opening inventory and
add the cost of that activity to the opening inventory costs. We separately
cost the units both started and finished in this period and also the closing
inventory.

5.8 The name first-in-first-out, or FIFO, is used as it assumes that the units
transferred to finished goods inventory at any time are those that were
started earliest and the units remaining in the work in process inventory at

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any time are those that were started last. Hence, any resource cost changes
are isolated to current activity by leaving the opening inventory costs as
part of the cost of the units that were started in the previous period, then
adding the share of this periods costs that relate to completing (or finishing
off) those units. The costs incurred in this period are only associated with
the work that is done in this period.

5.9 Under the weighted average cost method the total equivalent cost per unit is
the total of the average of the cost per equivalent unit for the opening work
in process and the units commenced during the month for the two inputs to
production. In Exhibit 5.3, the average cost per EU for direct material is
$1.40 and for conversion cost is $0.37.
For FIFO it is assumed that the old units are completed before new units are
commenced. Thus, to calculate the total cost per equivalent unit, the units in
opening work in process are first subtracted from the total of the units
completed and the closing work in process units to give the equivalent units
that relate to new production. A cost per equivalent unit is then calculated
for each input to production, based on costs incurred in the current period.
In Exhibit 5.8 the cost per EU for material is $1.33 and for conversion cost
is $0.36. These costs relate to the new production that commenced during
the period.
Under both methods there is a matching of the costs of resources consumed
with the activity performed in the consumption of those resources. Using
the weighted average method the resource costs and activity relate to the
current period plus those from the previous period that are in the opening
inventory. Using FIFO, the cost per equivalent unit relates only to the
resource costs and activity in the current period.

5.10 The production report for the WAC method is much simpler than that for
the FIFO method as the closing work in process and goods completed are
costed using a single equivalent cost per unit for each input to production.
Under the FIFO method the closing work in process is costed using the cost
per equivalent unit of the most recent production for each input to
production. The cost of completed goods is a combination of the costs of

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the opening work in process inventory and the costs per equivalent unit of
new production, for each input to production.

5.11 Under the weighted average method, the cost of the beginning work in
process inventory is added to the cost incurred during the current period in
order to determine the weighted average cost per equivalent unit. Under the
FIFO method, the cost of the beginning work in process inventory is not
added to the cost of the current period to determine cost per EU. Rather, the
cost of the beginning work in process inventory is assumed to be completed
first and then new production units are commenced. The costs of opening
WIP are kept separate from the costs of the current period. The cost per
equivalent unit is then used to calculate the cost of finishing off the opening
WIP during the current period.

5.12 Estimating the cost of spoilage highlights the cost of wasted resources,
which may focus the attention of management.
Normal spoilage is considered to be a normal aspect of the production
process. It is relatively constant, statistically predictable, and unavoidable
without incurring excessive costs to improve the production process. As a
consequence, it is considered to be a normal cost in the production of the
good units that emerge from the process and can be included in the cost of
good units completed and transferred out. Abnormal spoilage is that level
of spoiled units outside the normally acceptable range, caused by factors
not normally encountered. By isolating the cost of abnormal spoilage,
managements attention is drawn to a matter that needs to be investigated. It
should be treated as a period cost and expensed in the current period.

5.13 Using the weighted average method it does not matter which units are
spoiled. When using FIFO it is necessary to identify how many spoiled
units are from those in process at the beginning of the period, and how
many of the units started this period are spoiled. In practice it is very
difficult to separately account for spoilage between the two different
categories of production.

5.14 Operation costing is a hybrid product costing system that is used when
conversion activities are very similar across product lines, but the direct
materials differ. This is often the case in batch manufacturing operations.
Conversion costs are accumulated by department, and process costing
methods are used to assign these costs to products. Different products may
go through some, or all, of the processes. Direct material costs are

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accumulated by job order or batch, and job costing methods are used to
assign direct material costs to products.

5.15 The wine producers should use process costing when they are producing
single product line or different wine products on different production lines.
On the other hand, the wine producers should use operation costing when
the wines are produced in batches utilising some repetitive processes but
basically different processes and different grape varieties for different type
of wines.

5.16 The essential element in any answer to this question is that the students
demonstrate an understanding of job costing, process costing and hybrid
systems. An example could be canning, where the food that is canned
changes but the canning process remains the same. There may even be
different preparation processes for different foods.

5.17 If manufacturing overhead costs were assumed to be incurred at a


different rate to direct labour costs, or were related to a different cost driver,
then direct labour costs and manufacturing overhead costs would be
accounted for separately instead of being combined into one account called
conversion costs. Thus, in the process costing schedules, instead of having
two columns, one for direct material costs and one for conversion costs,
there would be three columns: direct material costs, direct labour costs and
manufacturing overhead costs.

5.18 The percentage of completion is important in calculating the equivalent


units of production for the period. Without this, the monthly reports would
be distorted because of an inaccurate treatment of opening and closing work
in process inventory. In an operation costing system the concept of
equivalent units still exists, but only in relation to conversion costs (as
direct material costs are traced directly to the product), so the stage of
completion will still be important.

5.19 There are many processes in service firms and service departments, and
where these processes are repetitive process costing is as suitable as when
the products are goods. Examples include processing cheques in banks,
processing claims in an insurance company, cleaning rooms in a hotel and
checking in passengers at an airport.

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5.20 Transferred-in costs are the costs assigned to the units transferred from
one production department to another. For example, in timber milling logs
are harvested into rough sawn timber in a process known as green milling.
These logs are then treated to ensure wood preservation and protection from
insects. The costs of the green milled timber are transferred into (and
therefore become part of the costs of) the wood preservation process, in the
same way as any direct materials or conversion costs. Similarly, wine
production involves de-stemming and crushing of grapes following by the
fermentation process and other processes. In the fermentation process, the
transferred-in costs from the de-stemming and crushing process are treated
as an input to the fermentation process.

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SOLUTIONS TO EXERCISES
EXERCISE 5.21 (10 minutes) Physical flow of units: manufacturer
The general formula for all three cases is the following:
Units Units Work in
Work in
started completed
process, + = process
during this during
beginning ending
month month
Using this formula, the missing amounts are:
1 18 000 kilograms
2 6250 metres
3 144 000 litres

EXERCISE 5.22 (15 minutes) Equivalent units; FIFO and weighted


average: manufacturer
1 7000 equivalent units (refer to (c) in the following table).
2 5880 equivalent units (refer to (d) in the following table).
3 11 000 equivalent units (refer to (a) in the following table).
4 8280 equivalent units (refer to (b) in the following table).

Percentage Equivalent units


of
completion
with respect
Physical to Direct Conversi
units conversion material on
Work in process, 1 June 4 000 60%
Units started during June 7 000
Total units to account for 11 000
Units completed and transferred
out 7 600 100% 7 600 7 600
during June
Work in process, 30 June 3 400 20% 3 400 680
Total units accounted for 11 000 _____ _____

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Total equivalent units 11 000a 8 280b
*Less: Equivalent units
represented in 1 June work in 4 000 2 400
process
*New equivalent units
accomplished in June only 7 000c 5 880d

* These two lines in the table are used only for the FIFO method (requirements
1 and 2 in the exercise).

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EXERCISE 5.23 (20 minutes) Physical flow and equivalent units;
weighted average: manufacturer
Calculation of equivalent units: Squeeze Ltd
Weighted average method
Percentage Percentag Equivalent units
of e of
completion completio
with n with
Physic respect to respect to Direct
al direct conversio materi Conversio
units materials n al n
Work in process, 1 January 40 60% 40%
000
Units started during the year 200
........................................... 000
Total units to account for .. 240
000
Unit completed and
transferred out during the 210 100% 100% 210 210 000
year .................................... 000 000
Work in process, 31 30 70% 20% 21 6 000
December 000 000
Total units accounted for ... 240 _____ _______
000 _
Total equivalent units ........ 231 216 000
000

EXERCISE 5.24 (15 minutes) Cost per equivalent unit; weighted


average
Calculation of cost per equivalent unit: Kimbos Glass Company
Weighted average method
Direct Conversio
material n Total
Work in process, 1 May ................. $21 $20 150 $41 750
600

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Costs incurred during May ............. 67 500 95 000 162 500
Total costs to account for ............... $89 $115 150 $204 250
100
Equivalent units .............................. 8 250 23 500
Costs per equivalent unit ................ $10.80 $4.90 $15.70

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EXERCISE 5.25 (20 minutes) Cost per equivalent unit; weighted
average and FIFO: timber mill

1 Weighted average method:


Direct Conversio Total
material n
Work in process, 1 June $130 000 $360 000 $490 000
Costs incurred during June 850 000 1 380 000 2 230 000
Total costs to account for $980 000 $1 740 $2 720
000 000
Equivalent units 14 000 3 480
Costs per equivalent unit $70 $500 $570

2 FIFO method:
Direct Conversio Total
material n
Work in process, 1 June These costs are not $490 000
included in the unit cost
calculation
Costs incurred during $850 000 $1 380 2 230 000
June 000
Total costs to account for 2 720 000
Equivalent units 8 500 2 000
Costs per equivalent unit $100 $690 $790

EXERCISE 5.26 (30 minutes) Weighted average cost and FIFO:


manufacturer
1
Direct Conversio Total
material n
Work in process, 1 July 16 350 43 425 59 775
Cost incurred during July 169 050 240 300 409 350
Total cost to account for 185 400 283 725 469 125

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Equivalent units 154 500 145 500
Cost per equivalent unit $1.20 1.95 $3.15

(a) 133 500 3.15 = $420 525*


(b) For material 154 500 133 = 21 000 equivalent units in work
500 in process
For conversion cost 145 = 12 000 equivalent units
500 133 500
21 000 1.20 = 25 200
12 000 1.95 = 23 400
$48 600*
* 420 525 + 48 600 = $469 125

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2
Direct Conversion Total
material
Work in process 1 July 59 775
Cost incurred during July 169 050 240 300 409 350
Total cost to account for 469 125

Equivalent units 139 500 140 250


Cost per equivalent unit 1.2118 1.7134 $2.9252

1. Cost of opening work in 59 775


process
2. Cost incurred to
complete opening work in
process inventory
Direct materials 0
Conversion 15 000 65% 16 706
1.7134
3. Cost incurred to
produce units started and 118 500
completed 2.9252 346 636
Total cost of goods $423 117
completed
Cost remaining in work in
process 31 July
Direct materials 21 000 25 448
1.2118
Conversion cost 12 000 20 561
1.7134
Closing work in process $46 009

Check:
Cost of goods completed 423 117
and transferred out
Cost of closing work in 46 009
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process
Total costs accounted for $469 126*
* There is a rounding error as many items were rounded up

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EXERCISE 5.27 (35 minutes) Weighted average cost and FIFO:
manufacturer
1 Weighted-average method:
Direct Conversion Total
material
Work in process, 1 $188 000 $88 800 $ 276
December 800
Costs incurred during $328 000 $545 600 873 600
December
Total cost to account for $516 000 $634 400 $1 150
400
Equivalent units 60 000 52 000
Costs per equivalent unit $8.60 $12.20 $20.80
(a) Cost of goods completed and transferred out during September:
number of units total cost per
= 50 000 $20.80 = $1 040 000
transferred out equivalent unit

(b) Cost remaining in 31 December work in process:


Direct material (10 000* $86 000
$8.60)
Conversion (2000* $12.20) 24 400
Total 110 400
Total costs accounted for $1 150 400

* Equivalent units in 31 December work in process:

Direct Conversio
material n
Total equivalent units (weighted 60 000 52 000
average)
Less: Units completed and (50 000) (50 000)
transferred out
Equivalent units and ending work 10 000 2 000
in process

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2 FIFO method:
Direct Conversio Total
material n
Work in process, 1 These costs are not $276 800
December included in the unit cost
calculation for September
Costs incurred during $328 000 $545 600 873 600
December
Total costs to account for $1 150
400

Equivalent units for 40 000 44 000


December only

Costs per equivalent unit $8.20 $12.40 $20.60

(a) Costs of goods


completed and
transferred out of the
Weaving Department
during December:

Cost of 1 December work


in process which is
transferred out first
$276 800

Cost incurred to finish


the 1 December work in
process inventory: 20 000 0.60 $12.40 148 800

Cost incurred to produce


units that were both
started and completed
during December: 30 000* $20.60 618 000

Total cost of goods $1 043


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completed and 600
transferred out
(b) Cost remaining in 31
December work in
process inventory:

Direct material (10 000 $82 000


$8.20)
Conversion (2 000 24 800
$12.80)
Total 106 800
Total costs accounted for $1 150
400

* Units started and completed = 30 000 = 50 000 20 000


See the calculation of the equivalent units in the ending work in process
given in requirement (1).

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EXERCISE 5.28 (10 Minutes) Weighted average versus FIFO; journal
entry: manufacturer
The amount in the journal entry would be the same under weighted average and
FIFO process costing, because the Stamping Department had no work in process
on January 1. When there is no opening WIP, the equivalent units and the cost
per EU will be the same under both methods. The products transferred out and
any closing WIP will be both costed at the same cost of any new units started
during that month.

EXERCISE 5.29 (15 minutes) Physical flow and equivalent units


including spoilage: manufacturer
1
Percentage
of Equivalent units
completion
with
Physical respect to Direct Convers
units conversion material ion

Work in process, 1 25 000 60%


January
Units started during 100 000
the year
Total units to 125 000
account for

Units completed and


transferred out 95 000 95 000 95 000
Units spoiled 10 000 66.7% 10 000 6 667
Work in process, 31 20 000 40 % 20 000 8 000
December
Total units 125 000
accounted for
Total equivalent 125 000 109 667

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units

2 When the weighted average method of process costing is used, the good
units transferred out, spoiled units and closing WIP are all costed at the
same rate per EU, which is the weighted average of the cost of opening
WIP and current costs. If the FIFO method is used, it would be necessary to
identify whether the spoiled units were from the previous period or the
current period. In most process cost industries this would be extremely
difficult, if not impossible.

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EXERCISE 5.30 (45 minutes) Operation costing: manufacturer
1 Diagram of production process:

Accumulated
by process

Accumulated
by batch

2 The product cost for each of the basketballs is calculated as follows:


Professional Scholastic
Direct material
Batch P25 ($20 000 1000) $20.00 0
Batch S33 ($30 000 3000) 0 $10.00
Conversion: Preparation 10.00 10.00
Department
Conversion: Finishing 7.00 7.00
Department
Conversion: Packaging 1.00 0
Department
Total product cost $38.00 $27.00
Both production departments worked on a total of 4000 balls each, but the
Packaging Department handled the 1000 professional balls only.

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3 Journal entries:
Work in process inventory: Preparation 19 000*
Department
Raw material inventory 19 000
* 19 000 = $20 000 of direct material for batch P25
$1000 of packaging material.
Work in process inventory: Preparation 30 000*
Department
Raw material inventory 30 000
* Direct material cost for batch S33.
Work in process inventory: Preparation 40 000*
Department
Applied conversion costs 40 000
* $40 000 = 4000 units $10 per unit.
Work in process inventory: Finishing 89 000*
Department
Work in process inventory: 89 000
Preparation Department
* $89 000 = $19 000 + $30 000 + $40 000.
Work in process inventory: Finishing 28 000*
Department
Applied conversion costs 28 000
* $28 000 = 4 000 units $7.00 per unit
Work in process inventory: Packaging 36 000*
Department
Finished goods inventory 81 000
Work in process inventory: Finishing 117 000
Department
*$36 000 = $19 000 + (1000 $10) + (1000 $7). These are costs
accumulated for batch P25 only.
$81 000 = $30 000 + (3000 $10) + (3000 $7). These are costs
accumulated for batch S33 only.
Work in process inventory: Packaging 2 000
Department
Raw material inventory 1 000*
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Applied conversion costs 1 000
* Cost of packaging material for batch P25
$1000 = 1000 units $1 per unit
Finished goods inventory 38 000*
Work in process inventory: Packaging 38 000
Department
$38 000 = $36 000 + $2000

[Check:
Costs incurred = $50 000 + 4000 x $10 + 4000 x $7
+ 1000 x $1 = $119 000
Costs transferred to Finished Goods = $81 000 + $38
000 = $119 000]

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EXERCISE 5.31 (10 minutes) (appendix) Cost flows in process
costing; journal entries: manufacturer

1 Work in process inventory: Pouring Department 3 270 000


Raw material inventory 210 000
Wages payable 1 020 000
Manufacturing overhead 2 040 000
2 Work in process inventory: Finishing Department 2 700 000
Work in process inventory: Pouring Department 2
700 000
3 Work in process inventory: Finishing Department 2 175 000
Raw material inventory 75 000
Wages payable 840 000
Manufacturing overhead 1 260 000
4 Finished goods inventory 1 200 000
Work in process inventory: Finishing Department 1
200 000

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SOLUTIONS TO PROBLEMS

PROBLEM 5.32 (50 minutes) Weighted average process costing:


manufacturer
1 Any example offered by the student should highlight the impact of having
opening and/or closing work in process inventory. The explanation of the
importance of equivalent units should also focus on the need to identify the
resources (direct materials and conversion effort) in opening and closing work
in process inventory in terms of equivalence to completed units. Costing units
that are only half complete, for instance, cannot be done on the basis of them
equating to fully complete units. Hence, 2000 units that have only received half
the conversion inputs required to complete the units would be recognised as
equating to 1000 completed units.

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2
Production report: Rigby Ltd
Weighted average method
Percentag Equivalent units
e of
completio
n with
respect to
Physical conversio Direct Conversio
units n material n
Work in process, 1 March ...... 20 000 40%
Units started during March ..... 40 000
Total units to account for ....... 60 000
Units completed and
transferred
out during March ........... 50 000 100% 50 000 50 000
Work in process, 31 March .... 10 000 20% 10 000 2 000
Total units accounted for ........ 60 000 _____ _____
Total equivalent units ............. 60 000 52 000

Direct Conversio Total


material n
Work in process, 1 March ...... $78 $ 23 200 $101
000 200
Costs incurred during March .. 252 132 384
000 800 800
Total costs to account for ....... $330 $156 $486
000 000 000
Equivalent units ...................... 60 000 52 000
Costs per equivalent unit ........ $5.50 $3.00 $8.50
Cost of goods completed and transferred out during March:
number of units total cost per
..................................... 50 000 $8.50 $425 000
transferred out equivalent unit

Cost remaining in 31 March work in process inventory:

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Direct material:
number of cost per

equivalent equivalent .......................................... 10 000 $5.50 $55 000
units of unit of

direct material direct material

Conversion:
number of cost per

equivalent equivalent .......................................... 2 000 $3.00 6 000
units of
unit of

direct material direct material

Total cost of 31 March work in process ............................................. $61 000

Check: Cost of goods completed and transferred out $425 000


Cost of 31 March work in process inventory 61 000
Total costs accounted for .............................. $486 000

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3 Production report for March: Rigby Ltd (in Excel
spreadsheet), if the degree of completion of conversion cost
in ending WIP was 70 % instead of 20%
Production report: Rigby Ltd
Weighted average method
Percentag Equivalent units
e of
completio
n with
Physica respect to
l conversio Direct Conversio
units n material n
Work in process, 1 March ...... 20 000 40%
Units started during March ..... 40 000

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Total units to account for ....... 60 000
Units completed and
transferred
out during March ........... 50 000 100% 50 000 50 000
Work in process, 31 March .... 10 000 70% 10 000 7 000
Total units accounted for ........ 60 000 _____ _____
Total equivalent units ............. 60 000 57 000

Direct Conversi Total


material on
Work in process, 1 March ...... $78 000 $ 23 200 $101
200
Costs incurred during March .. 252 000 132 800 384
800
Total costs to account for ....... $330 000 $156 000 $486
000
Equivalent units ...................... 60 000 57 000

Costs per equivalent unit ........ $5.50 $2.74 $8.24


Cost of goods completed and transferred out during October:
number of units total cost per
..................................... 50 000 $8.24 $412 000
transferred out equivalent unit

Cost remaining in 31 October work in process inventory:


Direct material:
number of cost per

equivalent equivalent .......................................... 10 000 $5.50 $55 000
units of unit of

direct material direct material

Conversion:
number of cost per

equivalent equivalent .......................................... 7 000 $2.74 19 180
units of unit of

direct material direct material

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Total cost of 31 October work in process .......................................... $ 74 180

Check: Cost of goods completed and transferred out $412 000


Cost of 31 October work in process inventory 74 180
Total costs accounted for .............................. $486 180*

* difference of $180 due to rounding error with cost per EU of conversion cost
which is more accurately 2.73684211

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PROBLEM 5.33 (45 minutes) Weighted average process costing:
manufacturer
1
Equivalent units:
(a)
Percentag Equivalent units
e of
completio
n with
respect to Direct
Physica conversio materi Conversio
l units n al n
Work in process, 1 May ..... 25 000 40%
Units started during May .... 30 000
Total units to account for ... 55 000
Units completed and
transferred out during May . 35 000 100% 35 000 35 000
Work in process, 31 May ... 20 000 80% 20 16 000
000
Total units accounted for .... 55 000
Total equivalent units ......... 55 000 51 000

(b Costs per equivalent unit:


)
Direct
material Conversion Total
Work in process, 1 May ......... $143 000 $ 474 700 $ 617 700
Costs incurred during May ..... 165 000 2 009 000 2 174 000
Total costs to account for........ $308 000 $2 483 700 $2 791 700
Equivalent units ...................... 55 000 51 000
Costs per equivalent unit ........ $5.60 $48.70 $54.30

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(c Cost of goods completed and transferred out during May:
)

number of units total cost per


................................ 35 000
$1 900 500
transferred out equivalent unit $54.30

Cost remaining in 31 May work in process inventory:

Direct material:

number of cost per



equivalent equivalent .................................
units of
unit of

direct material direct material
20 000 $112 000
$5.60

Conversion:

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number of cost per

equivalent equivalent ..........................................
units of unit of

conversion conversion
16 000 779 200
$48.70

Total cost of 31 May work in process .......................................... $ 891 200

Check: Cost of goods completed and transferred out ................ $1 900 500
Cost of 31 May work in process inventory ....................... 891 200
Total costs accounted for................................................... $2 791 700

2 Finished goods $1 900 500


Work in process $1
900 500

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PROBLEM 5.34 (35 minutes) Weighted average process costing;
analysis of equivalent units: manufacturer
1 Direct material cost was $1 404 000:
XY634 $267
000
AA788 689
000
GU321 448
000
Total $1 404
000
Bigears Telco Ltd's total direct labour payroll amounted to $126 500 for
6325 hours of work ($126 500 $20 per hour). Thus, conversion cost was
$506 000:
Direct $126 500
labour

Overhead applied (6325 hours 379 500
$60)
$506 000
Total
..

2 Goods completed during April cost $1 872 000 (24 000 units $78), as the
following calculations show:
Percentage of Equivalent units
completion
Physica with respect to Direct Conversi
l units conversion material on

Work in process, 1 April 4 000 75%


Units started during April 25 000
Total units to account for 29 000
Units completed and
transferred out during April

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24 000 100% 24 000 24 000
Work in process, 30 April 5 000 40% 5 000 2 000
Total units accounted for 29 000
Total equivalent units 29 000 26 000

Direct Conversio Total


material n

Work in process, 1 April $ 220 $ 66 000 $ 286


000 000
Costs incurred during April 1 404 506 000 1 910 000
000
Total costs to account for $1 624 $572 000 $2 196
000 000
Equivalent units 29 000 26 000
Cost per equivalent unit. $56 $22 $78

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3 The cost of the ending work in process inventory is $324 000:
Direct material (5000 $56) $280
000
Conversion cost (2000 $22) 44 000
Total $324
000

4 (a) No material would be added during May. All material is introduced at


the start of the manufacturing process and these units were started in
April.
(b) Since the work in process inventory is 40 per cent complete at the end
of April, 60 per cent of the conversion would be done in May.
5 Given that the ending work in process inventory is at the 40 per cent stage
of completion, these units would not have reached the 70 per cent stage,
which is the stage where HH887 is added. Therefore, there would be zero
equivalent units with respect to part HH887 in the work in process
inventory at the end of April.

PROBLEM 5.35(30 minutes) Analysis of work in process inventory


account; T-accounts: manufacturer

1 The ending work-in-process inventory consisted of 400 units (200 + 800


600).
2 The cost of goods completed during April totalled $57 000 (600 units
$95):

Percentage of Equivalent units


Physic completion Direct
al with respect materi Convers
units to conversion al ion
Work in process, 1 April 1 200 25%
Units started during April 800
Total units to account for 1000
Units completed and transferred 600 100% 600 600

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during April
Work in process, 30 April 400 75% 400 300
Total units accounted for 1000
Total equivalent units 1000 900

Direct
materi Conversi
al on Total
Work in process, 1 April $18 $9 000 $27
000 000
Costs incurred during April 64 45 000 109
500 500
Total costs to account for $82 $54 000 $136
500 500
Equivalent units 1 000 900
Cost per equivalent unit $82.50 $60.00 $142.5
0

Finished goods inventory 85 500


Work in process inventory 85 500

3 The cost of the 30 April work in process inventory is $51 000:


Direct material (400 $33
$82.50) 000
Conversion cost (300 $60) 18 000
Total $51
000

4 Equivalent units measure the amount of manufacturing activity (i.e. for


direct material or conversion) that has been applied to a batch of physical
units. If, for example, a company has 1000 physical units in process that are
30 per cent complete as to conversion, the firm has done the equivalent
amount of conversion activity as would be required to do all of the
conversion work for 300 units (1000 30%).
Equivalent units are needed to state manufacturing activity on a common
measurement scale. One cannot add completed units to units in process.

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Such a combination is like adding apples and oranges, as some units are
complete and some are incomplete. Instead, these units are first converted
to equivalent units, and the latter are then used in unit-cost calculations.

PROBLEM 5.36 (50 minutes) Missing data; FIFO; production report:


manufacturer
To complete this problem, students should place the information given into a
departmental production report format and work from there to calculate the
missing amounts.
The missing amounts are shown below. A completed production report follows.
b
Work in process, 1 July (in units) 40 000
c
Units started during July 80 000
a
Total units to account for 120 000
d
Total equivalent units: direct material 120 000
e
Total equivalent units: conversion 90 000
f
New equivalent units accomplished in July: 78 000
conversion
i
Work in process, 1 July: conversion $272 000
g
Costs incurred during July: conversion 1 762 800
h
Work in process, 1 July: total costs 880 000
j
Cost per equivalent unit: direct material 15.30
k
Cost per equivalent unit: conversion 22.60
l
Total cost per equivalent unit 37.90
m
Cost of goods completed and transferred out 2 649 800
during July
n
Cost remaining in ending work in process 765 000
inventory: direct material:
o
Cost remaining in ending work in process: 452 000
conversion
p
Total cost of 31 July work in process 1 217 000

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a
Total units to account for = units completed and transferred out + work
in process 31 July
= 70 000 + 50 000
= 120 000 units

b
Work in process, 1 July, = total equivalent units, direct material
units a. new equivalent
Total units
unitsto
accomplished
account for in July;
direct material
= 120 000 80 000
= 40 000 units

c
Units started during July = units completed and transferred out work
in process, August 1 + work in process, 31
July
= 70 000 40 000 + 50 000
= 80 000 units
d
Total equivalent units = units completed and transferred out + work
direct material* in process units, 31 July

* direct material is added at This must be the same as a above


the beginning of the process
= 70 000 + 50 000
= 120 000 units

e
Total equivalent units, = units completed and transferred out +
conversion (work in process units 31 July degree of
completion)
= 70 000 + (50 000 40%)
= 90 000 units

f
New equivalent units: = total equivalent units: conversion (work
conversion in process units, 1 July degree of
completion)

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= 90 000 (40 000 30%)
= 78 000 units

g
Cost incurred during July, = total costs incurred during July cost
conversion incurred during July, direct material
= $2 986 800 $1 224 000
= $1 762 800

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h
Work in process, 1 July, = total cost to account for total costs
total cost incurred during July
= $3 866 800 $2 986 800
= $880 000

i
Work in process, 1 July, = work in process, 1 July, total cost work
conversion in process 1 July, direct material
= $880 000 $608 000
= $272 000

j
Cost per equivalent unit, = cost incurred during July: direct material
direct material new equivalent units in July: direct
material
= $1 224 000 80 000
= $15.30

k
Cost per equivalent unit: = conversion costs during July new
conversion equivalent units: conversion
= $1 762 800 78 000
= $22.60

l
Total cost per equivalent = cost per equivalent unit: direct material
unit and cost per equivalent unit conversion
= $15.30 + $22.60
= $37.90

m, n, o, p: refer to the
following production report.

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Production report: Fantastic Plastics Ltd
Coating Department

Percentage Equivalent units


of
completion
with respect
Physical to Direct Conversio
units conversion material n
Work in process, 1 July 40 000 30%
Units started during July 80 000
Total units to account for 120 000
Units completed and
transferred out during
August 70 000 100% 70 000 70 000
Work in process, 31 July 50 000 40% 50 000 20 000
Total units accounted for 120 000 ______ ______
Total equivalent units 120 90 000
000
Less: Equivalent units
represented in 1 July
work in process 40 000 12 000
New equivalent units
accomplished in July
only 80 000 78 000

Direct Conversion Total


material
Work in process, 1 July These costs were incurred $880 000
during July. They are not
included in the unit cost
calculation for August.
Costs incurred during July $1 224 000 $1 762 800 2 986 800
Total costs to account for $3 866
800
Equivalent units for July 80 000 78 000

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only
Cost per equivalent unit $15.30 $22.60 $37.90
Cost of goods completed and transferred out of the Coating Department during
July:
Cost of 1 July work process inventory, which is transferred out first$880 000
Cost incurred to finish the 1 July work in process inventory:
cost per
number percentage of
equivalent
of conversion unit of 40 000 0.70 $22.60632 800

units remaining
conversion

Costs incurred to produce units that were both started and completed during
July:
number total cost per

of equivalent 30 000 $37.901 137 000

units unit

Total cost of goods completed and transferred out $2 649


800 (m)

Cost remaining in 31 July work in process inventory in the Coating Department:


Direct material:
number of
direct material
equivalent cost per 50 000 $15.30 $765 000
units of

equivalent unit
direct material

Conversion:
number of

equivalent conversion cost 20 000 $22.60 452 000
units of
per equivalent unit

conversion

Total cost of 31 July work in process $1 217 000

Units started and completed during July: 70 000 units completed and
transferred out minus 40 000 units in the 1 July work in process inventory.

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Check: Cost of goods completed and transferred out $2
649 800
Cost of 31 July work in process inventory 1 217 000
Total costs accounted for $3 866 800

PROBLEM 5.37 (40 minutes) Process costing with spoilage; journal


entries: manufacturer
1 Schedule of equivalent units
Percentage Equivalent units
of
completion
with
Physica respect to Direct Conversio
l units conversion material n
Work in process, 1 100 000 60%
Units started in April 200 000
April
Total units to account 300 000
for
Units completed and
transferred out during 220 000 220 000 220 000
Units
April spoiled during 60 000 25% 60 000 15 000
Work in process, 30 20 000 80% 20 000 16 000
April
Total units accounted 300 000
April
Total equivalent units 300 000 251 000
for

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2 Unit cost and cost of goods completed and transferred out during April
Direct Conversi
material on Total
Work in process, 1 April $ 58 500 $ 24 000 $ 82 500
Costs incurred during April 114 000 76 400 190 400

Total costs to account for $172 500 $100 400 $272 900

Equivalent units 300 000 251 000

Cost per equivalent unit $0.575 $0.40 $0.975

3 Cost of goods completed and transferred out during April


Direct Conversi
material on Total
Cost of goods transferred (spoilage
not included):
Material (220 000 units @ $126 500
$0.575)
Conversion (220 000 units @ $88 000 $214 500
$0.40)
4 Cost of spoiled units in April
Material 60 000 units @ 0.575$34 500
Conversion 15 000 units @ $0.40 6 000
$40 500
5 Costs remaining in WIP at 30 April
Material 20 000 units @ $0.575$11 500
Conversion 16 000 units @ $0.40 6 400
$17 900
6 Journal entries
(a) Normal spoilage:
Finished goods inventory $255 000
WIP $255 000

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(b) Abnormal spoilage:
Finished goods inventory $214 500
Loss on abnormal spoilage 40 500
WIP $255 000

7 If the FIFO method had been used, in the production report the new
equivalent units accomplished for the current month would need to be
calculated by reducing the total equivalent units by the number of
equivalent units in the opening WIP inventory. Also we would usually need
to make an assumption as to whether the spoiled units were started in the
previous period or in the current period. In this example, as the opening
WIP is at the 60% completion stage we know that these are all good units.
Spoiled units are detected at the 25% stage, so that means that the spoiled
units all came from units started in the current month.

PROBLEM 5.38 (45 minutes) Operation costing; unit costs; journal


entries: manufacturer
1 The unit costs and total costs for each of the products manufactured by
Goulburn Industries during the month of May are calculated as follows:
Extrusion Form Trim Finish
Units produced ............... 32 000 22 000 10 000 4 000
Material costs ................. $288 000 $ 66 000 $22 500 $18 000
Unit material cost ..... 9.00 3.00 2.25 4.50
Conversion costs* .......... 588 000 198 000 103 500 63 000
Unit conversion cost. 18.375 9.00 10.35 15.75
* Direct labour and manufacturing overhead.

Plastic Standard Deluxe Executive


Unit costs sheets model model model
Material costs:
Extrusion .................. $9.00 $9.00 $9.00 $9.00
Form ......................... 3.00 3.00 3.00
Trim .......................... 2.25 2.25
Finish ........................ 4.50

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Conversion costs:
Extrusion .................. 18.375 18.375 18.375 18.375
Form ......................... 9.00 9.00 9.00
Trim .......................... 10.35 10.35
Finish ........................ _ _ _ 15.75
Total unit cost................. $27.375 $39.375 $51.975 $72.225
Units produced ............... 10 000 12 000 6 000 4 000
Total product cost*......... $273 750 $472 500 $311 850 $288 900

* Total costs accounted


for:
Product Total product
costs
Plastic sheets $ 273 750
Standard model 472 500
Deluxe model 311 850
Executive model 288 900
Total $1 347 000

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2 Journal entries:
Work in process inventory: Extrusion ................... 876 000
Raw material inventory ................................. 288 000
Applied conversion costs .............................. 588 000
Finished goods inventory ....................................... 273 750
Work in process inventory: Extrusion .......... 273 750
Work in process inventory: Forming ..................... 866 250
Work in process inventory: Extrusion .......... 602 250
Raw material inventory ................................. 66 000
Applied conversion costs .............................. 198 000
Finished goods inventory ....................................... 472 500
Work in process inventory: Forming ............ 472 500
Work in process inventory: Trimming ................... 519 750
Work in process inventory: Forming ............ 393 750
Raw material inventory ................................. 22 500
Applied conversion costs .............................. 103 500
Finished goods inventory ....................................... 311 850
Work in process inventory: Trimming .......... 311 850
Work in process inventory: Finishing .................... 288 900
Work in process inventory: Trimming .......... 207 900
Raw material inventory ................................. 18 000
Applied conversion costs .............................. 63 000
Finished goods inventory ....................................... 288 900
Work in process inventory: Finishing ........... 288 900

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3 The spreadsheet will look like the statements in requirement 1 above but
the cells should have formulae where calculations are required. The value
of the 1000 units of the Deluxe model in work in process inventory at the
end of May is $48 095, calculated as follows:
Equivalent units
Material Conversion
% Qty % Qty
Entering trim operation:
5000 Deluxe units 100 5 100 5
(finished) 000 000
1000 Deluxe units
(remaining in ending work 1
in process) 100 000 60 600
4000 Executive units 100 4 100 4
(finished) 000 000
Total equivalent units 10 9
000 600

Unit cost Total costs


Deluxe model work in
process costs:
Extrusion material $9.00 $9 000
Form material 3.00 3 000
Trim material (100%) 2.25 2 250
Extrusion conversion 18.375 18 375
Form conversion 9.00 9 000
Trim conversion (60%) 6.47* 6 469*
Work in process costs $48.095 $48 094
*Conversion cost per equivalent unit in trim operation:
($45 000 + $58 500) 9600 units = $10.781 per equivalent unit. Since the
1000 units in closing inventory are 60 per cent complete as to conversion,
their cost is $6469 (600 EU x $10.781) or $6.47 per unit.

PROBLEM 5.39 (35 minutes) Operation costing: manufacturer

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Dept A Dept B Dept C
Glass sheets Coloured glass Etched glass
Direct costs
Material $450 000 $72 000 $0
Direct labour 38 000 22 000 38 000
Overhead 230 000 68 000 73 500
718 000 162 000 111 500
Transferred in costs 0 323 100 269 500
Total costs $718 000 $485 100 $381 000
Units produced 20 000 9 000 5 000
Unit cost $35.90 $53.90 $76.20

1 Conversion costs per unit, Department A, $268 000/20 000 units = $13.40
2 Conversion costs per unit, Department B, = $90 000/9 000 = $10 per unit
3 $35.90
4 $53.90
5 $76.20

PROBLEM 5.40 (45 minutes) Operation costing; unit costs; cost


flow; journal entries
1 Conversion costs:
Rolling Mouldi Punchi Dipping
ng ng
Direct labour $300 000 $112 $128 $45 000
000 000
Manufacturing overhead 450 000 168 192 67 500
000 000
Total conversion cost $750 000 $280 $320 $112
000 000 500

Total units produced:

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Rolling only 20 000
Rolling, moulding, punching 8 000 8 000
Rolling, moulding, punching, and 3 000
dipping
Conversion cost per unit $37.50 $35 $40 $37.50

2 Product cost
Non- Reflectiv
Ceralam reflective e
sheets sold Ceralam Ceralam Total
after rolling housings housings costs
Direct material:
Ceralam sheets $480 000 $200 $120 $800 000
000 000
Chemical dip 30 000 30 000

Conversion costs:
Rolling 450 000a 187 112 750 000
500a 500a
Moulding 175 105 280 000
000b 000b
Punching 200 120 320 000
000c 000c
Dipping _______ ______ 112 112
__ 500d 500
Total cost $930 000 $762 $600 $2 292
500 000 500
Units manufactured 12 000 5 000 3 000
Unit cost $77 50 $152.5 $200.00
0

a
Number of units rolling cost per unit ($37.50)
b
Number of units moulding cost per unit ($35.00)
c
Number of units punching cost per unit ($40.00)

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d
Number of units dipping cost per unit ($37.50)

3 Journal entries:
Work in process inventory: Rolling $1 550
000
Raw material inventory $800
000*
Applied conversion costs 750 000
* $800 000 = direct-material cost for Ceralam sheets

$750 000 = conversion cost in rolling operation

Finished goods inventory 930 000*


Work in process inventory: Rolling 930 000
* $930 000 = 12 000 Ceralam sheets sold after
rolling $77.50 per unit

Cost of goods sold ..............................................................


930 000*
Finished goods inventory 930 000
*$930 000 = cost of Ceralam sheets sold after
rolling

Work in process inventory: Moulding 620 000*


Work in process inventory: Rolling 620 000
*$620 000 = cost remaining in Work in process
inventory: Rolling
= $1 550 000 $930 000

Work in process inventory: Moulding 280 000*


Applied conversion costs 280 000
*$280 000 = conversion cost in moulding operation

Work in process inventory: Punching 900 000*


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Work in process inventory: Moulding 900 000
*$900 000 = cost remaining in Work in process
inventory: Moulding
= $620 000 + $280 000

Work in process inventory: Punching $320


000*
Applied conversion costs $320
000
*$320 000 = conversion cost in punching operation

Finished goods inventory ................................................... $762


500*
Work in process inventory: Punching $762
500
*$762 500 = 5 000 non-reflective Ceralam
housings sold after punching $152.50
per unit

Cost of goods sold ..............................................................


762 500*
Finished goods inventory 762 500
*$762 500 = cost of non-reflective Ceralam
housings sold after punching

Work in process inventory: Dipping 457 500*


Work in process inventory: Punching 457 500
*$457 500 = cost remaining in Work in process
inventory: Punching
= $900 000 + $320 000 $762 500

Work in process inventory: Dipping 142 500


Raw material inventory 30 000*

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Applied conversion costs 112 500
* $30 000 = direct material cost for chemical dip

$112 500 = conversion cost in dipping operation

Finished goods inventory 600 000*


Work in process inventory: Dipping 600 000
* $600 000 = 3 000 reflective Ceralam housings
sold after dipping
$200 per unit

Cost of goods sold .............................................................. $600


000
Finished goods inventory $600
000

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4 The spreadsheet will look like the statements in requirement 1 above but
the cells should have formulae where calculations are required.
Conversion costs assuming manufacturing overhead was applied at 200%
of direct labour:
Rolling Mouldi Punchi Dipping
ng ng
Direct labour $300 000 $112 $128 $45 000
000 000
Manufacturing overhead 600 000 224 256 90 000
000 000
Total conversion cost $900 000 $336 $384 $135
000 000 000

Total units produced:


Rolling only 20 000
Rolling, moulding, punching 8 000 8 000
Rolling, moulding, punching, and 3 000
dipping
Conversion cost per unit $45 $42 $48 $45

Product cost assuming direct material used in dipping was $45 000:
Non- Reflectiv
Ceralam reflective e
sheets sold Ceralam Ceralam Total
after rolling housings housings costs
Direct material:
Ceralam sheets $480 000 $200 $120 $800 000
000 000
Chemical dip 45 000 45 000

Conversion costs:
Rolling 540 000a 225 135 900 000
000a 000a
Moulding 210 126 336 000
000b 000b

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Punching 240 144 384 000
000c 000c
Dipping _______ ______ 135 135
__ 000d 000
Total cost $1 020 $875 $705 $2 600
000 000 000 00
Units manufactured 12 000 5 000 3 000
Unit cost $85 $175 $235

a
Number of units rolling cost per unit ($45)
b
Number of units moulding cost per unit ($42)
c
Number of units punching cost per unit ($48)
d
Number of units dipping cost per unit ($45)

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PROBLEM 5.41 (20 minutes) (appendix) Transferred-in costs; no
work in process: manufacturer

1 Cutting
Direct material $90 000
Direct labour 37 500
Overhead 4 050 ($45 000/15 000 hours
1350 hours)
$131 550
Sewing
Direct material $7 500
Direct labour 90 000
Overhead 28 800 ($24 000/3 000 hours
3600 hours)
$126 300
Total product costs = $131 550 + 126 300 = $257 850
Production units = 7500
Product cost per unit = $34.38

2 Work in process: Cutting $131 550


Direct material $90 000
Direct labour 37 500
Overhead 4 050

Work in process: Sewing $126 300


Direct material 7 500
Direct labour 90 000
Overhead 28 800

Work in process: Sewing 131 550


Work in process: Cutting 131 550

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Finished goods $257 850
Work in process: Sewing $257 850

3 The work in process accounts are useful control devices to monitor the total
cost in each department. Also, despite the companys policy there may
occasionally be months where work in process is unavoidable.

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PROBLEM 5.42 (20 minutes) (appendix) Transferred-in costs;
weighted average method: manufacturer
1 (a) Cost of units completed and transferred to finished goods inventory
during May:
Units completed and transferred out 11 900
Total cost per equivalent unit $9.00
Cost of units completed and transferred out $107 100

(b) To calculate the cost of the Finishing Department work in process


inventory on 31 May, first determine the number of units in ending
work in process inventory, as follows:
Work in process inventory, 1 May 1 400 units
Add: Units transferred in 14 000 units
Units to account for 15 400 units
Subtract: Units transferred to finish goods 11 900 units
Total 3 500 units
Then calculate the transferred-in costs, direct material cost, and conversion
cost in the 31 May work in process inventory:

Cost per
Equivalent equivalent
Input units unit Cost
Transferred in 3 500 $5.00 = $17
500
Direct material 3 500 $1.00 = 3 500
Conversion 3 500 $3.00 = 4 200
40%
Total cost of 31
May $25
work in process 200
inventory

2 Equivalent units of transferred-in costs 15 400

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Transferred-in cost per equivalent unit $5.00
Total transferred-in cost $77 000
Transferred-in cost in 1 May work in process inventory 6 750
Total cost transferred in from the Assembly Department $70 250

Journal entry to record transfer:


Work in process inventory: Finishing 70 250
Department
Work in process inventory: Assembly 70 250
Department

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SOLUTIONS TO CASES
CASE 5.43 (45 minutes) Weighted average process costing:
manufacturer

1a Equivalent units of material ...................................................................


8 500
Equivalent units of conversion ..............................................................
8 260

b Cost per equivalent unit of material.......................................................


$6.00
Cost per equivalent unit of conversion ..................................................
$7.00

c 31 October work in process inventory ...................................................


$3 520
Cost of goods completed and transferred out ........................................
$105 300

d Weighted-average unit cost of completed leather belts .........................


$13.00

These answers are supported by the following process costing schedules.


The firm's cost per belt used for planning and control, $11.50, is
substantially lower than the actual cost per belt incurred in October,
$13.00. Management should investigate this situation to determine whether
production costs can be reduced. If not, then the cost used for planning and
control purposes should be changed to reflect the firm's actual experience.

Calculation of equivalent units: Leather Products Ltd Elizabeth


Plant
Weighted average method
Percentag Equivalent units
e of
completio
n with
respect to Direct
Physica conversio mater Conversio
l units n ial n
Work in process, 1 October .........500 30%
Units started during 8000
October.........................................

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Total units to account for .............
8500

Units completed and


transferred out 8100 100% 8100 8100
during October ...........................
Work in process, 31 400 40% 160
October......................................... 400
Total units accounted for .............
8500
Total equivalent units................... 8500 8260

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Calculation of costs per equivalent unit: Elizabeth Plant
Weighted average method
Direct Conversio Total
material n
Work in process, 1 October ....................
$ 2 000 $ 2 500 $ 4
500
Costs incurred during October .................
49 000 55 320 104
320
Total costs to account for .........................
$51 000 $57 820 $108
820
Equivalent units .......................................
8 500 8 260
Costs per equivalent unit .........................
$6.00 $7.00 $13.00

Analysis of total costs: Elizabeth Plant


Weighted average method
Cost of goods completed and transferred out during October:
number of units total cost per 8100 = $105 300
..................................
transferred out equivalent unit $13.00

Cost remaining in 31 October work in process inventory:


Direct material:
number of cost per

equivalent equivalent .......................................
units of unit of

direct material direct material
400 $6.00 = $2 400

Conversion:
number of cost per

equivalent equivalent ...............................................
units of unit of

conversion conversion
160 $7.00 = 1 120

Total cost of 31 October work in process ................................. $3 520

Check: Cost of goods completed and $105 300


transferred out ............................................

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Cost of 31 October work in process 3 520
inventory ....................................................
Total costs accounted for .............................. $108 820

2 The cost of manufacturing the belt is $13 per unit, which is different to the
$11.50 used for planning purposes. Using the incorrect cost the profit
margin would be overstated. If management were to use the incorrect cost
then it could result in wrong decisions.

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CASE 5.44 (60 minutes) (appendix) Sequential production
departments; FIFO method; JIT: manufacturer
Production report: Grading Department
(FIFO method)
Percentage Equivalent units
of
completion
with
Physical respect to Direct Convers
units conversion material ion
Work in process, 1 November 0 --
Units started during 36 000
November
Total units to account for 36 000
Units completed and
transferred out during 36 000 100% 36 000 36 000
November
Work in process, 31 0 -- -- 0
November
Total units accounted for 36 000 ______ ______
Total equivalent units 36 000 36 000
Less: Equivalent units
represented in 1 November 0 0
work in process
New equivalent units
accomplished in November
only 36 000 36 000

Direct Conversion Total


material
Work in process, 1 November 0 0 0
Costs incurred during $265 680 $86 400 $352 080
November
Total costs to account for $265 680 $86 400 $352 080
Equivalent units for 36 000 36 000
November only

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Cost per equivalent unit $7.38 $2.40 $9.78

Cost of goods completed and transferred out of the Grading Department during
November:
Cost of 1 November work in process inventory
0
Cost incurred to produce units that were both started and completed during
November
total cost per
(number of units) 36 000 $9.78 $352 080
equivalent unit

Total cost of goods completed and transferred out $352 080

Cost remaining in 30 November work in process inventory in the Grading


Department 0

Check: Cost of goods completed and transferred out $352 080


Cost of 30 November work in process inventory 0
Total costs accounted for $352 080

Production report: Saturating Department


(FIFO method)

Percentage Equivalent units


of
completion
with respect
Physical to Transfer Conversi
units conversion in on
Work in process, 1 1 600 50%
November
Units transferred in during 36 000
November
Total units to account for 37 600
Units completed and
transferred out during 35 600 100% 35 600 35 600

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November
Work in process, 30 2 000 50% 2 000 1 000
November
Total units accounted for 37 600
Total equivalent units 37 600 36 600
Less: equivalent units
represented in 1 November 1 600 800
work in process
New equivalent units
accomplished in November 36 000 35 800
only

Transferred in Conversion Total


Work in process, 1 These costs were incurred $17 600
November during a previous month. They
are not included in the unit cost
calculation for November.
Costs incurred during $352 080* $85 920 438 000
November
Total costs to account for $455 600
Equivalent units for 36 000 35 800
November only
Cost per equivalent unit $9.78 $2.40 $12.18
* Cost of goods completed and transferred out of Grading Department during
November, under the FIFO method.

Cost of goods completed and transferred out of the Saturating Department


during November:
Cost of 1 November work in process inventory which is transferred out first $17
600

Cost incurred to finish the 1 November work in process inventory:

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cost per
number percentage of
equivalent
of conversion
unit of
1600 .50 $2.40 1 920

units remaining
conversion

Cost incurred to produce units that were both started and completed during
November:
number
total cost per
of equivalent unit 34 000* $12.18 414 120

units

Total cost of goods completed and transferred out $433 640


* Units started and completed during November: 35 600 units completed and
transferred out minus 1 600 units in the
1 November work in process inventory.

Cost remaining in 30 November work in process inventory in the Saturating


Department:
Transferred-in costs:
number of equivalent transferred - in

units of transferred cost per 2000 $9.78 $19 560

in cost equivalent unit

Conversion:
number of equivalent conversion cost
1000 $2.40 2 400
units of conversion per equivalent unit

Total cost of 30 November work in process inventory $21


960

Check: Cost of goods completed and transferred out


433 640
Cost of 30 November work in process inventory 21 960
Total costs accounted for $455 600

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CASE 5.45 (60 minutes) (appendix) Sequential production
departments; weighted average method; JIT: manufacturer

Due to Home and Garden Products Ltds movement toward JIT inventory and
production methods, there is no work in process inventory in the Grading
Department on November 1. Therefore, the process costing calculations are
identical for this department under the FIFO and weighted average methods.
Thus, the solution given for the preceding problem, for the Grading Department,
is also valid for this problem. The cost of goods completed and transferred out
of the Grading Department in November is $352 080.

Production report: Saturating Department


(Weighted average method)
Percentage Equivalent units
of
Completion
with respect
Physic to Transfer Conversi
al units conversion red in on
Work in process, 1 1 600 50%
November
Units transferred in during 36 000
November
Total units to account for 37 600
Units completed and
transferred out during 35 600 100% 35 600 35 600
November
Work in process, 30 2 000 50% 2 000 1 000
November
Total units accounted for 37 600
Total equivalent units 37 600 36 600

Transferred in Conversion Total


Work in process, 1 $13 850 $3 750 $17 600
November
Costs incurred during 352 080* 85 920 438 000
November
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Total costs to account $365 930 $89 670 $455 600
for
Equivalent units 37 600 36 600
Cost per equivalent unit $9.7322 $2.45 $12.1822
* Cost of goods completed and transferred out of the Grading Department
during November under the weighted average method.
Cost of goods completed and transferred out of the Saturating Department
during November:
total cost per
number of units
equivalent 35 600 $12.1822
transferred out
unit
$433 686
Cost remaining in 30 November work in process inventory in the Saturating
Department:
Transferred-in costs:
number of cost per

equivalent equivalent 2000 $9.7322 $19 464
units of unit of

transferred - in cost transferred - in cost

Direct material: None


Conversion:
number of cost per

equivalent equivalent 1000 $2.45 2 450
units of unit of

conversion conversion

Total $21 194


Check: Cost of goods completed and transferred out
$433 686
Cost of 30 November work in process inventory 21 914
Total costs accounted for $455 600

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