CHAPTER 4

Process Costing and Hybrid Product-Costing

Systems

ANSWERS TO REVIEW QUESTIONS

4-1 In a job-order costing system, costs are assigned to batches or job orders of
production. Job-order costing is used by firms that produce relatively small numbers
of dissimilar products. In a process-costing system, costs are averaged over a large
number of product units. Process costing is used by firms that produce large
numbers of nearly identical products.

4-2 Process costing would be an appropriate product-costing system in the following

industries: petroleum, food processing, lumber, chemicals, textiles, and electronics.
Each of these industries is involved in the production of very large numbers of
highly similar products.

4-3 Process costing could be used in the following nonmanufacturing enterprises:

processing of tests in a medical diagnostic laboratory, processing of tax returns by
the Internal Revenue Service, and processing of loan applications in a bank.

4-4 Product-costing systems are used for the following purposes:

(a) In financial accounting: Product costs are needed to value inventory on the
balance sheet and to compute the cost-of-goods-sold expense on the income
statement.

(b) In managerial accounting: Product costs are needed for planning, for cost
control, and to provide managers with data for decision making.

(c) In reporting to interested organizations: Product cost information is used to

report on relationships between firms and various outside organizations. For
example, hospitals keep track of the costs of medical procedures that are
reimbursed by insurance companies or by the federal government under the
Medicare program.

4-5 An equivalent unit is a measure of the amount of productive effort applied in the
production process. In process costing, costs are assigned to equivalent units rather
than to physical units.

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Managerial Accounting, 6/e 4-1
4-6 The following four steps are used in process costing:

(a) Analysis of physical flow of units: All of the units in the beginning and ending
inventories, those started during the period, and those transferred out to finished
goods are accounted for.

(b) Calculation of equivalent units: The equivalent units of activity are computed for
direct material and for conversion.

(c) Computation of unit costs: The costs per equivalent unit for direct material and
conversion are computed.

(d) Analysis of total costs: The cost of the goods completed and transferred out and
the cost of the ending work-in-process inventory are determined.

4-7 (a) Journal entry to enter direct-material costs into Work-in-Process Inventory
account:
Work-in-Process Inventory: Department A .................... XXX
Raw-Material Inventory.......................................... XXX
(b) Journal entry to record transfer of goods from the first to the second department
in the production sequence:
Work-in-Process Inventory: Department B .................... XXX
Work-in-Process Inventory: Department A ......... XXX
4-8 Transferred-in costs are the costs assigned to partially completed products that
have been transferred from one production department into the next department.

4-9 The $182,000 of transferred-in costs were incurred prior to January 1 and in the
mixing department. The costs must have been incurred prior to January 1, because
they are included in the cost of the beginning work-in-process inventory on that
date. Moreover, these costs must have been incurred in the mixing department,
because they have been transferred into the cooking department.

4-10 The name ''weighted-average method'' comes from the fact that the cost per
equivalent unit computed under this method is a weighted average of costs incurred
during the current period and costs incurred during prior periods.

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4-2 Solutions Manual
4-11 The difference between normal and actual costing lies in the calculation of the
manufacturing-overhead cost of the current period. Under actual costing, the
manufacturing-overhead cost of the current period is the actual overhead cost
incurred during the period. Under normal costing, the current-period manufacturing
overhead is computed as the product of the predetermined overhead rate and the
actual level of the cost driver used to apply manufacturing overhead.

4-12 If manufacturing overhead were applied according to some activity base (or cost
driver) other than direct labor, then direct-labor costs and manufacturing-overhead
costs would be accounted for separately instead of being combined into one
account called "conversion costs." Thus, instead of two columns for direct-material
and conversion costs, there would be three columns: direct material, direct labor,
and manufacturing overhead.

4-13 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
significantly. 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. In contrast, direct-material costs are accumulated by
job order or by batch, and job-order costing is used to assign direct-material costs to
products.

4-14 The departmental production report is the key document in a process-costing

system rather than the job-cost sheet used in job-order costing. The departmental
production report shows the analysis of the physical flow of units, the calculation of
equivalent units, the computation of the cost per equivalent unit, and the analysis of
the total costs incurred in the production department. The report shows the cost of
the ending work-in-process inventory as well as the cost of the goods completed and
transferred out of the department.

4-15 There is no direct material in the March 1 work in process for the stitching
department because direct material (rawhide lacing) is added at the end of the
process in that department.

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Managerial Accounting, 6/e 4-3
SOLUTIONS TO EXERCISES
EXERCISE 4-16 (10 MINUTES)

The general formula for all three cases is the following:

Work-in-process, + Units started Units completed = Work-in-process,

beginning during month during month ending

Using this formula, the missing amounts are:

1. 9,000 pounds

2. 12,500 yards

3. 72,000 liters

EXERCISE 4-17 (20 MINUTES)

CALCULATION OF EQUIVALENT UNITS: HEALTHY LIFE STYLES, INC.

Weighted-Average Method
Percentage
of Percentage
Completion of
with Completion
Respect to with Equivalent Units
Physical Direct Respect to Direct
Units Material Conversion Material Conversion
Work in process, January 1.... 30,000 70% 50%
Units started during the year.. 140,000
Total units to account for ....... 170,000

Unit completed and transferred

out during the year ............ 145,000 100% 100% 145,000 145,000
Work in process, December 31 25,000 75% 20% 18,750 5,000
Total units accounted for........ 170,000 ______ _______
Total equivalent units.............. 163,750 150,000

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4-4 Solutions Manual
EXERCISE 4-18 (15 MINUTES)

CALCULATION OF EQUIVALENT UNITS: PETROTECH COMPANY - AMARILLO PLANT

Weighted-Average Method
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, July 1.......................... 1,900,000 30%
Units started during July ....................... 750,000
Total units to account for ...................... 2,650,000

Units completed and transferred

out during July................................... 2,400,000 100% 2,400,000 2,400,000
Work in process, July 30 ....................... 250,000 70% 250,000 175,000
Total units accounted for....................... 2,650,000 ________ ________
Total equivalent units............................. 2,650,000 2,575,000

EXERCISE 4-19 (15 MINUTES)

1. 5,500 equivalent units (refer to (a) in the following table)

2. 4,140 equivalent units (refer to (b) in the following table)

CALCULATION OF EQUIVALENT UNITS: ANDROMEDA GLASS COMPANY

Weighted-Average Method
Percentage
of Equivalent Units
Completion with
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, August 1 ..... 2,000 60%
Units started during August ... 3,500
Total units to account for ....... 5,500

Units completed and transferred

out during August............ 3,800 100% 3,800 3,800
Work in process, August 31 ... 1,700 20% 1,700 340
Total units accounted for........ 5,500 _____ ____
Total equivalent units.............. (1) 5,500 (2) 4,140

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Managerial Accounting, 6/e 4-5
EXERCISE 4-20 (30 MINUTES)

All three of these companies manufacture large amounts of relatively homogeneous

products (i.e., lumber and paper). Therefore, process costing is an appropriate product-
costing system.

EXERCISE 4-21 (15 MINUTES)

CALCULATION OF COST PER EQUIVALENT UNIT: DULUTH GLASS COMPANY

Weighted-Average Method
Direct
Material Conversion Total
Work in process, February 1 ................. $ 43,200 $ 40,300 $ 83,500
Costs incurred during February............ 135,000 190,000 325,000
Total costs to account for...................... $178,200 $230,300 $408,500
Equivalent units ...................................... 16,500 47,000
Costs per equivalent unit....................... $10.80* $4.90 $15.70

*$10.80 = $178,200 16,500

$4.90 = $230,300 47,000

EXERCISE 4-22 (15 MINUTES)

CALCULATION OF COST PER EQUIVALENT UNIT: MONTANA LUMBER COMPANY

Weighted-Average Method
Direct
Material Conversion Total
Work in process, June 1 ........................... $ 74,900 $167,000 $ 241,900
Costs incurred during June...................... 380,700 625,000 1,005,700
Total costs to account for......................... $455,600 $792,000 $1,247,600
Equivalent units ......................................... 6,700 1,600
Costs per equivalent unit.......................... $68* $495 $563

*$68 = $455,600 6,700

$495 = $792,000 1,600

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4-6 Solutions Manual
EXERCISE 4-23 (25 MINUTES)

TUSCALOOSA PAPERBOARD COMPANY

Weighted-Average Method
Direct
Material Conversion Total
Work in process, March 1 ........................ $ 10,900 $ 28,950 $ 39,850
Costs incurred during March .................. 112,700 160,200 272,900
Total costs to account for........................ $123,600 $189,150 $312,750
Equivalent units ........................................ 103,000 97,000
Costs per equivalent unit......................... $1.20 $1.95 $3.15

1. Cost of goods completed and

transferred out during March:
number of units total cost per
....................... 89,000 $3.15 $280,350
transferred out equivalent unit

2. Cost remaining in March 31 work

in process:

Direct material (14,000* $1.20). $ 16,800

Conversion (8,000* $1.95) ........ 15,600
Total ............................................... 32,400
Total costs accounted for................. $312,750

*Equivalent units in March 31 work in process:

Direct
Material Conversion
Total equivalent units (weighted average)....................... 103,000 97,000
Units completed and transferred out................................ (89,000) (89,000)
Equivalent units in ending work in process .................... 14,000 8,000

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Managerial Accounting, 6/e 4-7
EXERCISE 4-24 (25 MINUTES)

RALEIGH TEXTILES COMPANY

Weighted-Average Method
Direct
Material Conversion Total
Work in process, November 1 .................. $ 85,750 $ 16,900 $ 102,650
Costs incurred during November ............ 158,000 267,300 425,300
Total costs to account for......................... $243,750 $284,200 $527,950
Equivalent units ......................................... 62,500 49,000
Costs per equivalent unit.......................... $3.90 $5.80 $9.70

1. Cost of goods completed and

transferred out during November:
number of units total cost per
..................... 47,000 $9.70 $455,900
transferred out equivalent unit

2. Cost remaining in November 30

work in process:

Direct material (15,500* $3.90) $60,450

Conversion (2,000* $5.80)........ 11,600
Total............................................... 72,050
Total costs accounted for................ $527,950

*Equivalent units in November 30 work in process:

Direct
Material Conversion
Total equivalent units (weighted average)........................ 62,500 49,000
Units completed and transferred out................................. (47,000) (47,000)
Equivalent units in ending work in process ..................... 15,500 2,000

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4-8 Solutions Manual
EXERCISE 4-25 (45 MINUTES)

1. Diagram of production process:

Work-in-Process Inventory:
Preparation Department

Batch P25 Batch S33

Accumulated Conversion costs:

by Direct-labor
department Manufacturing
overhead
Work-in-Process Inventory:
Finishing Department

Batch P25 Batch S33

Accumulated Direct-
by material
batch costs

Work-in-Process Inventory:
Packaging Department

Batch P25

Finished-Goods Inventory

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Managerial Accounting, 6/e 4-9
EXERCISE 4-25 (CONTINUED)

2. The product cost for each basketball is computed as follows:

Professional Scholastic
Direct material:.....................................................................
Batch P25 ($42,000 2,000)........................................... $21.00 -0-
Batch S33 ($45,000 4,000)........................................... -0- $11.25
Conversion: Preparation Department .............................. 7.50 7.50
Conversion: Finishing Department .................................. 6.00 6.00
*Conversion: Packaging Department ................................ .50 -0-
Total product cost .............................................................. $35.00 $24.75

*The two production departments each worked on a total of 6,000 balls, but the Packaging
Department handled only the 2,000 professional balls.

3. Journal entries:

Work-in-Process Inventory: Preparation Department .......... 39,500*

Raw-Material Inventory................................................... 39,500

*$39,500 = $42,000 of direct material

for batch P25 $2,500 of packaging material

Work-in-Process Inventory: Preparation Department .......... 45,000*

Raw-Material Inventory................................................... 45,000

*Direct-material cost for batch S33.

Work-in-Process Inventory: Preparation Department .......... 45,000*

Applied Conversion Costs............................................. 45,000

*$45,000 = 6,000 units $7.50 per unit

Work-in-Process Inventory: Finishing Department .............. 129,500*

Work-in-Process Inventory: Preparation Department 129,500

*$129,500 = $39,500 + $45,000 + $45,000

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4-10 Solutions Manual
EXERCISE 4-25 (CONTINUED)

Work-in-Process Inventory: Finishing Department .............. 36,000*

Applied Conversion Costs............................................. 36,000

*$36,000 = 6,000 units $6.00 per unit

Work-in-Process Inventory: Packaging Department ............ 66,500*

Finished-Goods Inventory ....................................................... 99,000
Work-in-Process Inventory: Finishing Department..... 165,500

*$66,500 = $39,500 + (2,000 $7.50) + (2,000 $6.00).

These are the costs accumulated for batch P25 only.
$99,000= $45,000 + (4,000 $7.50) + (4,000 $6.00).
These are the costs accumulated for batch S33 only.

Work-in-Process Inventory: Packaging Department ............ 3,500

Raw-Material Inventory................................................... 2,500*
Applied Conversion Costs............................................. 1,000

*Cost of packaging material for batch P25.

$1,000 = 2,000 units $.50 per unit

Finished-Goods Inventory ....................................................... 70,000*

Work-in-Process Inventory: Packaging Department... 70,000

*$70,000 = $66,500 + $3,500

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Managerial Accounting, 6/e 4-11
EXERCISE 4-26 (10 MINUTES)

1. Work-in-Process Inventory: Preparation Department ........ 1,635,000

Raw-Material Inventory ................................................. 105,000
Wages Payable............................................................... 510,000
Manufacturing Overhead .............................................. 1,020,000

2. Work-in-Process Inventory: Finishing Department ............ 1,350,000

Work-in-Process Inventory: Preparation Department 1,350,000

3. Work-in-Process Inventory: Finishing Department ............ 1,087,500

Raw-Material Inventory................................................ 37,500
Wages Payable ............................................................. 420,000
Manufacturing Overhead............................................. 630,000

4. Finished-Goods Inventory ..................................................... 600,000

Work-in-Process Inventory: Finishing Department .. 600,000

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4-12 Solutions Manual
SOLUTIONS TO PROBLEMS
PROBLEM 4-27 (45 MINUTES)

1. Physical flow of units: Physical

Units
Work in process, June 1............................................................................. 40,000
Units started during June........................................................................... 190,000
Total units to account for ........................................................................... 230,000

Units completed and transferred out during June .................................. 180,000

Work in process, June 30........................................................................... 50,000
Total units accounted for ........................................................................... 230,000

2. Equivalent units:
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, June 1........... 40,000 38%
Units started during June......... 190,000
Total units to account for ......... 230,000

Units completed and transferred

out during June .................... 180,000 100% 180,000 180,000
Work in process, June 30......... 50,000 55% 50,000 27,500
Total units accounted for ......... 230,000
Total equivalent units ............... 230,000 207,500

3. Costs per equivalent unit:

Direct
Material Conversion Total
Work in process, June 1 ............... $110,500 $ 22,375 $132,875
Costs incurred during June.......... 430,000 320,000 750,000
Total costs to account for............. $540,500 $342,375 $882,875
Equivalent units............................. 230,000 207,500
Costs per equivalent unit.............. $2.35 $1.65 $4.00

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Managerial Accounting, 6/e 4-13
PROBLEM 4-27 (CONTINUED)

4. Cost of goods completed and transferred out during June:

number of units total cost per

........................ 180,000 $4.00 $720,000
transferred out equivalent unit

Cost remaining in June 30 work-in-process inventory:

Direct material:

number of cost per

equivalent equivalent .......................... 50,000 $2.35 $117,500
units of unit of

direct material direct material

Conversion:

number of cost per

equivalent equivalent ...................................... 27,500 $1.65 45,375
units of unit of

conversion conversion

Total cost of June 30 work in process ........................................................ $162,875

Check: Cost of goods completed and transferred out .............................. $720,000

Cost of June 30 work-in-process inventory................................... 162,875
Total costs accounted for ................................................................ $882,875

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-14 Solutions Manual
PROBLEM 4-28 (45 MINUTES)

1. Physical flow of units:

Physical
Units
Work in process, April 1............................................................................. 10,000
Units started during April........................................................................... 100,000
Total units to account for........................................................................... 110,000

Units completed and transferred out during April .................................. 80,000

Work in process, April 30........................................................................... 30,000
Total units accounted for.................................................................................. 110,000

2. Equivalent units:
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, April 1 ............. 10,000 20%
Units started during April ........... 100,000
Total units to account for ........... 110,000

Units completed and

transferred out during April ... 80,000 100% 80,000 80,000
Work in process, April 30 30,000 33 1/3% 30,000 10,000
Total units accounted for............ 110,000 ______ _____
Total equivalent units.................. 110,000 90,000

3. Cost per equivalent unit:

Direct
Material Conversion Total
Work in process, April 1 ............................ $ 22,000 $ 4,500 $ 26,500
Costs incurred during April....................... 198,000 158,400 356,400
Total costs to account for.......................... $220,000 $162,900 $382,900
Equivalent units.......................................... 110,000 90,000
Costs per equivalent unit........................... $2.00* $1.81 $3.81

*$2.00 = $220,000 110,000

$1.81 = $162,900 90,000

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Managerial Accounting, 6/e 4-15
PROBLEM 4-28 (CONTINUED)

4. Cost of goods completed and transferred out during April:

number of units total cost per

........................... 80,000 $3.81 $304,800
transferred out equivalent unit

Cost remaining in April 30 work-in-process inventory:

Direct material:

number of cost per

equivalent equivalent
units of unit of .......................... 30,000 $2.00 $60,000

direct material direct material

Conversion:

number of cost per

equivalent equivalent
units of unit of .................................... 10,000 $1.81 18,100

conversion conversion

Total cost of April 30 work-in-process.................................................... $78,100

Check: Cost of goods completed and transferred out ........................ $304,800

Cost of April 30 work-in-process inventory ............................ 78,100
Total costs accounted for ......................................................... $382,900

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-16 Solutions Manual
PROBLEM 4-29 (50 MINUTES)

1. Physical flow of units:

Physical
Units
Work in process, 1/1/x4 ............................................................................ 210,000
Units started during 20x4 ......................................................................... 1,100,000
Total units to account for ......................................................................... 1,310,000

Units completed and transferred out during 20x4................................. 1,000,000

Work in process, 12/31/x4 ........................................................................ 310,000
Total units accounted for ......................................................................... 1,310,000

2. Equivalent units:

Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, 1/1/x4............... 210,000 83%
Units started during 20x4 ........... 1,100,000
Total units to account for ........... 1,310,000

Units completed and transferred

out during 20x4 ....................... 1,000,000 100% 1,000,000 1,000,000
Work in process, 12/31/x4........... 310,000 48% 310,000 148,800
Total units accounted for............ 1,310,000 ________ ________
Total equivalent units.................. 1,310,000 1,148,800

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Managerial Accounting, 6/e 4-17
PROBLEM 4-29 (CONTINUED)

3. Costs per equivalent unit:

Direct
Material Conversion Total
Work in process, 1/1/x4 .................................. $ 300,000 $ 620,800 $ 920,800
a

Costs incurred during 20x4 ........................... 1,403,000 3,400,000b 4,803,000

Total costs to account for .............................. $1,703,000 $4,020,800 $5,723,800
Equivalent units .............................................. 1,310,000 1,148,800
Costs per equivalent unit ............................... $1.30c $3.50d $4.80e

aConversion cost = direct labor + overhead

= direct labor + (100% direct labor)
= 200% direct labor
= 200% $310,400
= $620,800
bConversion cost = 200% direct labor
= 200% $1,700,000
= $3,400,000
c$1.30 = $1,703,000 1,310,000
d$3.50 = $4,020,800 1,148,800
e$4.80 = $1.30 + $3.50

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4-18 Solutions Manual
PROBLEM 4-29 (CONTINUED)

4. Cost of ending inventories:

Cost of goods completed and transferred out:

number of units total cost per

.................... 1,000,000 $4.80 $4,800,000
transferred out equivalent unit

Cost remaining in 12/31/x4 work-in-process inventory:

Direct material:
number of cost per

equivalent equivalent
units of unit of ........................ 310,000 $1.30 $403,000

direct material direct material
Conversion:
number of cost per

equivalent equivalent
units of unit of .................................. 148,800 $3.50 520,800

conversion conversion
Total cost of 12/31/x4 work in process ...................................................... $923,800

Check: Cost of goods completed and transferred out............................ $4,800,000

Cost of 12/31/x4 work-in-process inventory............................... 923,800
Total costs accounted for............................................................. $5,723,800

The cost of the ending work-in-process inventory is $923,800.

Ending finished-goods inventory: Of the 1,000,000 units completed during 20x4,

250,000 units remain in finished-goods inventory on December 31, 20x4. Therefore:

$4,800,000 (250,000 1,000,000) = $1,200,000*

The cost of the ending finished-goods inventory is $1,200,000.

*Also, $1,200,000 = 250,000 $4.80 per unit

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Managerial Accounting, 6/e 4-19
PROBLEM 4-30 (40 MINUTES)

1. Equivalent units:
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, August 1............ 40,000 80%
Units started during August.......... 80,000
Total units to account for .............. 120,000

Units completed and transferred

out during August...................... 100,000 100% 100,000 100,000
Work in process, August 31.......... 20,000 30% 20,000 6,000
Total units accounted for .............. 120,000 ______ ______
Total equivalent units .................... 120,000 106,000

2. Costs per equivalent unit:

Direct
Material Conversion Total
Total costs to account for $138,000 $1,089,680
Equivalent units 120,000 106,000

Costs per equivalent unit $1.15 $10.28 $11.43*

*$11.43 = $1.15 + $10.28

3. Cost of goods completed and transferred out during August:

number of units total cost per

..................... 100,000 $11.43 $1,143,000
transferred out equivalent unit

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-20 Solutions Manual
PROBLEM 4-30 (CONTINUED)

4. Cost remaining in August 31 work-in-process inventory:

Direct material:

number of cost per

equivalent equivalent
units of unit of ......................... 20,000 $1.15 $23,000

direct material direct material

Conversion:

number of cost per

equivalent equivalent
units of unit of ................................... 6,000 $10.28 61,680

conversion conversion

Total cost of August 31 work in process..................................................... $ 84,680

Check: Cost of goods completed and transferred out .............................. $1,143,000

Cost of August 31 work-in-process inventory............................... 84,680
Total costs accounted for................................................................ $1,227,680

5. Journal entry:

Finished-Goods Inventory................................................. 1,143,000

Work-in-Process Inventory..................................... 1,143,000

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Managerial Accounting, 6/e 4-21
PROBLEM 4-31 (40 MINUTES)

1. a. Equivalents units:
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, June 1 ............. 30,000 35%
Units started during June ........... 34,000
Total units to account for ........... 64,000

Units completed and

transferred out during June ... 40,000 100% 40,000 40,000
Work in process, June 30 ........... 24,000 75% 24,000 18,000
Total units accounted for............ 64,000 _____ _____
Total equivalent units.................. 64,000 58,000

b. Unit costs:
Direct
Material Conversion Total
Total costs to account for $348,800 $2,844,900
Equivalent units 64,000 58,000

Costs per equivalent unit $5.45 $49.05 $54.50*

*$54.50 = $5.45 + $49.05

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-22 Solutions Manual
PROBLEM 4-31 (CONTINUED)

c. Cost of goods completed and transferred out during June:

number of units total cost per

40,000 $54.50 $2,180,000
transferred out equivalent unit

Cost remaining in June 30 work-in-process inventory:

Direct material:

number of cost per

equivalent equivalent 24,000 $5.45 $130,800
units of unit of

direct material direct material

Conversion:

number of cost per

equivalent equivalent .............................. 18,000 $49.05 882,900
units of unit of

conversion conversion

Total cost of June 30 work in process ................................................... $1,013,700

Check: Cost of goods completed and transferred out ............................ $2,180,000

Cost of June 30 work-in-process inventory ............................... 1,013,700
Total costs accounted for.............................................................. $3,193,700

2. Journal entry:

Finished-Goods Inventory............................................. 2,180,000

Work-in-Process Inventory .................................. 2,180,000

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-23
PROBLEM 4-32 (35 MINUTES)

1. Direct material cost was $1,390,000:

JR1163 ................................ $ 225,000

JY1065 ................................ 710,000
DC0766 ............................... 455,000
Total .............................. $1,390,000

Texarkana Corporations total direct-labor payroll amounted to $134,274 for 6,394

hours of work ($134,274 $21 per hour). Thus, conversion cost was $575,460:

Direct labor... $134,274

Overhead applied (6,394 hours x $69).. 441,186
Total.. $575,460

2. Goods completed during April cost $2,002,000 (26,000 units x $77) as the following
calculations show:

Percentage
Of
Completion Equivalent Units
With
Physical Respect to Direct
Units Conversion Material Conversion

Work in process, April 1. 3,000 80%

Units started during April.. 27,000
Total units to account for.. 30,000

Units completed and transferred

out during April.. 26,000 100% 26,000 26,000
Work in process, April 30.. 4,000 45% 4,000 1,800
Total units accounted for... 30,000
Total equivalent units.. 30,000 27,800

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-24 Solutions Manual
PROBLEM 4-32 (CONTINUED)

Direct
Material Conversion Total

Work in process, April 1 $ 230,000 $ 63,940 $ 293,940

Costs incurred during April. 1,390,000 575,460 1,965,460
Total costs to account for. $1,620,000 $639,400 $2,259,400
Equivalent units... 30,000 27,800
Cost per equivalent unit $54a $23b $77c

a$1,620,000 30,000 = $54

b$639,400 27,800 = $23
c$54 + $23 = $77

3. The cost of the ending work-in-process inventory is $257,400:

Direct material (4,000 x $54).. $216,000

Conversion cost (1,800 x $23).. 41,400
Total. $257,400

4. (a) No material would be added during May. All material is introduced at the start
of the manufacturing process, and these units were begun in April.

(b) Since the work-in-process inventory is 45% complete at the end of April, 55%
of the conversion would be done in May.

5. Given that the ending work-in-process inventory is at the 45% stage of completion,
these units would not have reached the 75% point in April where TH55 is added.
Therefore, there would be zero equivalent units with respect to part TH55 in the
ending work-in-process inventory.

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-25
PROBLEM 4-33 (50 MINUTES)

The missing amounts are shown below. A completed production report follows.

Work in process, October 1 (in units).................................................................... 10,000

Units completed and transferred out during October ......................................... 75,000
Total equivalent units: conversion ........................................................................ 78,500

Work in process, October 1: conversion .............................................................. $ 30,225

Costs incurred during October: direct material ................................................... 600,000
Cost per equivalent unit: conversion .................................................................... 11.85
Cost of goods completed and transferred out during October .......................... 1,556,250
Cost remaining in ending work-in-process inventory: direct material .............. 44,500

PRODUCTION REPORT: FANTASIA FLOUR MILLING COMPANY

Weighted-Average Method
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, October 1.......... 10,000 15%
Units started during October........ 70,000
Total units to account for ............. 80,000

Units completed and transferred

out during October ............. 75,000 100% 75,000 75,000
Work in process, October 31........ 5,000 70% 5,000 3,500
Total units accounted for.............. 80,000 _____ _____
Total equivalent units.................... 80,000 78,500

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-26 Solutions Manual
PROBLEM 4-33 (CONTINUED)

Direct
Material Conversion Total
Work in process, October 1.......... $112,000 $ 30,225 $ 142,225
Costs incurred during October .... 600,000 900,000 1,500,000
Total costs to account for............. $712,000 $930,225 $1,642,225
Equivalent units ............................. 80,000 78,500
Costs per equivalent unit.............. $8.90* $11.85 $20.75**

*$8.90 = $712,000 80,000

$11.85 = $930,225 78,500

**$20.75 = $8.90 + $11.85

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-27
PROBLEM 4-33 (CONTINUED)

Cost of goods completed and transferred out during October:

number of units total cost per

............................... 75,000 $20.75 $1,556,250
transferred out equivalent unit

Cost remaining in October 31 work-in-process inventory:

Direct material:

number of cost per

equivalent equivalent
units of unit of ................................. 5,000 $8.90 $44,500

direct material direct material

Conversion:

number of cost per

equivalent equivalent
units of unit of ............................................ 3,500 $11.85 41,475

conversion conversion

Total cost of October 31 work-in-process ......................................................... $85,975

Check: Cost of goods completed and transferred out ...... $1,556,250

Cost of October 31 work-in-process inventory .... 85,975
Total costs accounted for ....................................... $1,642,225

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-28 Solutions Manual
PROBLEM 4-34 (30 MINUTES)

1. The ending work-in-process inventory consisted of 400 units (200 + 800 600).

2. The cost of goods completed during June totaled $57,000 (600 units x $95):

Percentage
Of
Completion Equivalent Units
With __________________
Physical Respect to Direct
Units Conversion Material Conversion
________ __________ ______ __________
Work in process, June 1. 200 25%
Units started during June.. 800
Total units to account for... 1,000

Units completed and transferred

during June.. 600 100% 600 600
Work in process, June 30... 400 75% 400 300
Total units accounted for 1,000
Total equivalent units.. 1,000 900

Direct
Material Conversion Total
_______ __________ ______
Work in process, June 1 $12,000 $ 6,000 $18,000
Costs incurred during June. 43,000 30,000 73,000
Total costs to account for. $55,000 $36,000 $91,000
Equivalent units... 1,000 900
Cost per equivalent unit. $55 a $40b $95c

a$55,000 1,000 = $55

b$36,000 900 = $40
c$55 + $40 = $95

Finished-Goods Inventory 57,000

Work-in-Process Inventory. 57,000

3. The cost of the June 30 work-in-process inventory is $34,000:

Direct material (400 x $55)... $22,000

Conversion cost (300 x $40).. 12,000
Total $34,000

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-29
PROBLEM 4-34 (CONTINUED)

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 1,000 physical units in process that are 30% 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 (1,000 x 30%).

Equivalent units are needed to state manufacturing activity on a common

measurement scale. One cannot add completed units to units in process. 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.

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-30 Solutions Manual
PROBLEM 4-35 (30 MINUTES)

1. a. Equivalent units:
Percentage
of
Completion
with Respect
Tax to
Returns Conversion
(physical (labor and Equivalent Units
units) overhead) Labor Overhead
Returns in process, February 1 .... 300 20%
Returns started in February .......... 900
Total returns to account for .......... 1,200

Returns completed
during February........................ 800 100% 800 800
Returns in process, February 28 .. 400 75% 300 300
Total returns accounted for .......... 1,200 ____ ____
Total equivalent units of activity .. 1,100 1,100

b. Costs per equivalent unit:

Labor Overhead Total
Returns in process, February 1 ................... 3,500 4,000 7,500
Costs incurred during February .................. 90,000 51,000 141,000
Total costs to account for ............................ 93,500 55,000 148,500
Equivalent units............................................. 1,100 1,100
Costs per equivalent unit ............................. 85.00 50.00 135.00

2. Cost of returns in process on February 28:

Labor: equivalent units cost per equivalent unit

300 85.00........................................................ 25,500
Overhead: equivalent units cost per equivalent unit
300 50.00........................................................ 15,000
Total cost of returns in process on February 28.......................................... 40,500

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-31
PROBLEM 4-36 (50 MINUTES)

The missing amounts are shown below. A completed production report follows.

Units started during January.................................................................................. 55,000

Units completed and transferred out during January ......................................... 60,000
Total equivalent units: conversion ........................................................................ 66,000

Work in process, January 1: conversion .............................................................. $ 110,600

Costs incurred during January: direct material ................................................... 400,000
Cost per equivalent unit: conversion .................................................................... 14.10
Cost of goods completed and transferred out during January .......................... 1,320,000
Cost remaining in ending work-in-process inventory: direct material .............. 158,000

PRODUCTION REPORT: CANANDAIGUA CARPET COMPANY

Weighted-Average Method
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, January 1............. 25,000 25%
Units started during January........... 55,000
Total units to account for ................ 80,000

Units completed and transferred

out during January ...................... 60,000 100% 60,000 60,000
Work in process, January 31........... 20,000 30% 20,000 6,000
Total units accounted for................. 80,000 _____ _____
Total equivalent units....................... 80,000 66,000

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-32 Solutions Manual
PROBLEM 4-36 (CONTINUED)

Direct
Material Conversion Total
Work in process, January 1............................... $232,000 $110,600 $ 342,600
Costs incurred during January ......................... 400,000 820,000 1,220,000
Total costs to account for.................................. $632,000 $930,600 $1,562,600
Equivalent units .................................................. 80,000 66,000
Costs per equivalent unit................................... $7.90 $14.10 $22.00

*$7.90 = $632,000 80,000

$14.10 = $930,600 66,000

**$22.00 = $7.90 + $14.10

Cost of goods completed and transferred out during January:

number of units total cost per

........................... 60,000 $22.00 $1,320,000
transferred out equivalent unit

Cost remaining in January 31 work-in-process inventory:

Direct material:

number of cost per

equivalent equivalent
units of unit of .............................. 20,000 $7.90 $ 158,000

direct material direct material

Conversion:

number of cost per

equivalent equivalent
units of unit of ......................................... 6,000 $14.10 84,600

conversion conversion

Total cost of January 31 work in process................................................ $242,600

Check: Cost of goods completed and transferred out... $1,320,000

Cost of January 31 work-in-process inventory.. 242,600
Total costs accounted for .................................... $1,562,600

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-33
PROBLEM 4-37 (45 MINUTES)

1. PRODUCTION REPORT: MIXING DEPARTMENT

(Weighted-Average Method)
November 20x5
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, November 1 ...... 5,000 70%
Units started during November.... 17,000
Total units to account for ............. 22,000

Units completed and transferred

out during November.......... 16,000 100% 16,000 16,000
Work in process, November 30 6,000 30% 6,000 1,800
Total units accounted for.............. 22,000 ____ _ _ ____
Total equivalent units.................... 22,000 17,800

Direct
Material Conversion Total
Work in process, November 1 ...... $ 31,600 $ 55,220 $ 86,820
Costs incurred during November 85,000* 210,000 295,000
Total costs to account for............. $116,600 $265,220 $381,820
Equivalent units ............................. 22,000 17,800
Costs per equivalent unit.............. $5.30 $14.90 $20.20

*$85,000 = $16,000 + $44,000 + (5,000 12,000)($60,000)

$210,000 = $70,000 + (1.50)($70,000) + $35,000

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-34 Solutions Manual
PROBLEM 4-37 (CONTINUED)

Cost of goods completed and transferred out during November:

number of units total cost per
.............................. 16,000 $20.20 $323,200
transferred out equivalent unit
Cost remaining in November 30 work-in-process inventory

Direct material:
number of cost per

equivalent equivalent
units of unit of .................................. 6,000 $5.30 $31,800

direct material direct material
Conversion
number of cost per

equivalent equivalent
units of unit of ............................................ 1,800 $14.90 26,820

conversion conversion
Total cost of November 30 work in process ..................................................... $58,620

Check: Cost of goods completed and transferred out ........ $323,200

Cost of November 30 work-in-process inventory ... 58,620
Total costs accounted for.......................................... $381,820

2. a. Work-in-Process Inventory: Mixing Department............. 85,000

Raw-Material Inventory ............................................ 85,000

b. Work-in-Process Inventory: Mixing Department............. 70,000

Wages Payable ......................................................... 70,000

c. Work-in-Process Inventory: Mixing Department............. 140,000*

Manufacturing Overhead ......................................... 140,000

*$140,000 = (1.50)($70,000) + ($35,000)

d. Work-in-Process Inventory: Finishing Department ........ 323,200

Work-in-Process Inventory: Mixing Department... 323,200

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-35
PROBLEM 4-38 (35 MINUTES)

1. Conversion cost per unit in department I:

direct labor + manufacturing overhead

=
units produced*
$76,000 + $460,000
=
5,500 + 2,000 + 2,500
= $53.60 per uni t

*Note that all of the products sold after processing in departments I, II, or III were
produced orginally in department I.

2. Conversion cost per unit in department II:

direct labor + manufacturing overhead
=
units produced*
$44,000 + $136,000
=
2,000 + 2,500
= $40.00 per unit

*Note that all of the products sold after processing in departments II and III were
colored in department II.

3. Cost of a clear glass sheet:

direct material per conversion cost per
= unit in department I + unit in department I

$900,000
= + $53.60
10,000
= $143.60 per sheet

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-36 Solutions Manual
PROBLEM 4-38 (CONTINUED)

4. Cost of an unetched, colored glass sheet:

cost per clear direct material conversion cost per
= glass sheet + per unit in department II + unit in department II

$144,000
= $143.60 + + $40.00
4,500
= $215.60 per sheet

5. Cost of an etched, colored glass sheet:

cost per unetched conversion cost per
= colored glass sheet + unit in department III

$76,000 + $147,500
= $215.60 +
2,500
= $305.00 per sheet

PROBLEM 4-39 (40 MINUTES)

1. The unit costs and total costs for each of the products manufactured by Plattsburg
Plastics Corporation during the month of March 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 labor and manufacturing overhead.

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-37
PROBLEM 4-39 (CONTINUED)

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
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:

Total
Product Product Costs
Plastic sheets $ 273,750
Standard model 472,500
Deluxe model 311,850
Executive model 288,900
Total $1,347,000

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

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-38 Solutions Manual
PROBLEM 4-39 (CONTINUED)

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

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-39
PROBLEM 4-40 (45 MINUTES)

1. Conversion costs:

Rolling Molding Punching Dipping

Direct labor ................................... $ 600,000 $224,000 $256,000 $ 90,000
Manufacturing overhead .............. 900,000 336,000 384,000 135,000
Total conversion cost ................... $1,500,000 $560,000 $640,000 $225,000

Total units produced:

Rolling only ............................ 10,000
Rolling, molding, punching 4,000 4,000
Rolling, molding, punching,
and dipping 1,500
Conversion cost per unit.............. $150 $140 $160 $150

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-40 Solutions Manual
PROBLEM 4-40 (CONTINUED)

2. Product costs:

Ceralam
Sheets Non
Sold reflective Relective
after Ceralam Ceralam Total
Rolling Housings Housings Costs
Direct material:
Ceralam sheets ................. $ 960,000 $ 400,000 $ 240,000 $1,600,000
Chemical dip...................... 60,000 60,000

Conversion costs:
Rolling................................ 900,000a 375,000a 225,000a 1,500,000
Molding .............................. 350,000b 210,000b 560,000
Punching ........................... 400,000c 240,000c 640,000
Dipping .............................. _______ ________ 225,000d 225,000
Total cost .................................. $1,860,000 $1,525,000 $1,200,000 $4,585,000
Units manufactured ................. 6,000 2,500 1,500
Unit cost.................................... $310 $610 $800

aNumber of units rolling cost per unit ($150)

bNumber of units molding cost per unit ($140)
cNumber of units punching cost per unit ($160)
dNumber of units dipping cost per unit ($150)

3. Journal entries:

Work-in-Process Inventory: Rolling .................................... 3,100,000

Raw-Material Inventory............................................... 1,600,000*
Applied Conversion Costs ......................................... 1,500,000

*$1,600,000 = direct-material cost for ceralam sheets

$1,500,000 = conversion cost in rolling operation

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-41
PROBLEM 4-40 (CONTINUED)

Finished-Goods Inventory .................................................... 1,860,000*

Work-in-Process Inventory: Rolling.......................... 1,860,000

*$1,860,000 = 6,000 ceralam sheets sold after

rolling $310 per unit

Cost of Goods Sold ............................................................... 1,860,000*

Finished-Goods Inventory.......................................... 1,860,000

*$1,860,000 = cost of ceralam sheets sold after

rolling

Work-in-Process Inventory: Molding................................... 1,240,000*

Work-in-Process Inventory: Rolling.......................... 1,240,000

*$1,240,000 = cost remaining in Work-in-

Process Inventory: Rolling
= $3,100,000 $1,860,000

Work-in-Process Inventory: Molding................................... 560,000*

Applied Conversion Costs ......................................... 560,000

*$560,000 = conversion cost in molding operation

Work-in-Process Inventory: Punching ................................ 1,800,000*

Work-in-Process Inventory: Molding ........................ 1,800,000

*$1,800,000 = cost remaining in Work-in-

Process Inventory: Molding
= $1,240,000 + $560,000

Work-in-Process Inventory: Punching ................................ 640,000*

Applied Conversion Costs ......................................... 640,000

*$640,000 = conversion cost in punching operation

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-42 Solutions Manual
PROBLEM 4-40 (CONTINUED)

Finished-Goods Inventory .................................................... 1,525,000*

Work-in-Process Inventory: Punching...................... 1,525,000

*$1,525,000 = 2,500 nonreflective ceralam

housings sold after punching $610
per unit

Cost of Goods Sold ............................................................... 1,525,000*

Finished-Goods Inventory.......................................... 1,525,000

*$1,525,000 = cost of nonreflective ceralam

housings sold after punching

Work-in-Process Inventory: Dipping ................................... 915,000*

Work-in-Process Inventory: Punching...................... 915,000

*$915,000 = cost remaining in Work-in-Process

Inventory: Punching
= $1,800,000 + $640,000 $1,525,000

Work-in-Process Inventory: Dipping ................................... 285,000

Raw-Material Inventory............................................... 60,000*
Applied Conversion Costs ......................................... 225,000

*$60,000 = direct-material cost for chemical dip

$225,000 = conversion cost in dipping operation

Finished-Goods Inventory .................................................... 1,200,000*

Work-in-Process Inventory: Dipping......................... 1,200,000

*$1,200,000 = 1,500 reflective ceralam housings

sold after dipping $800 per unit

Cost of Goods Sold ............................................................... 1,200,000

Finished-Goods Inventory.......................................... 1,200,000

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-43
PROBLEM 4-41 (30 MINUTES)

1. a. Cost of units completed and transferred to finished-goods inventory during

February:

Units completed and transferred out .............................................. 5,950

Total cost per equivalent unit .......................................................... $16.00
Cost of units completed and transferred out ................................. $95,200

b. To compute the cost of the Finishing Department's work-in-process inventory

on February 28, first determine the number of units in ending work-in-
process inventory, as follows:

Work-in-process inventory, February 1 (in units).......................... 700

Add: Units transferred in .................................................................. 7,000
Units to account for........................................................................... 7,700
Less: Units transferred to finished goods...................................... 5,950
Work-in-process inventory, February 28 (in units)........................ 1,750

Then compute the transferred-in, direct-material, and conversion costs in the

February 28 work-in-process inventory:

Cost per
Equivalent Equivalent
Input Units Unit Cost
Transferred-in ........................ 1,750 $6.00 = $10,500
Direct material........................ 1,750 $3.00 = 5,250
Conversion............................. 1,750 30% $7.00 = 3,675
Total cost of February 28 work-in-process inventory .................. $19,425

2. Equivalent units of transferred-in costs ................................................... 7,700

Transferred-in cost per equivalent unit..................................................... $6.00
Total transferred-in cost ............................................................................. $46,200
Deduct: Transferred-in cost in February 1 work-in-process inventory . 14,500
Total cost transferred in from the Assembly Department....................... $31,700

Journal entry to record transfer:

Work-in-Process Inventory: Finishing Department ............. 31,700

Work-in-Process Inventory: Assembly Department..... 31,700

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-44 Solutions Manual
SOLUTIONS TO CASES
CASE 4-42 (60 MINUTES)

PRODUCTION REPORT: AGRITECH, INC. - MIXING DEPARTMENT

Weighted-Average Method
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, September 1 ........ -0-
Units started during September...... 38,000
Total units to account for ................ 38,000

Units completed and transferred

out during September ................. 38,000 100% 38,000 38,000
Work in process, September 30 ...... -0- -0- -0-
Total units accounted for................. 38,000 _____ _____
Total equivalent units....................... 38,000 38,000

Direct
Material Conversion Total
Work in process, September 1 ........................... -0- -0- -0-
Costs incurred during September ..................... $304,000 $95,000 $399,000
Total costs to account for................................... $304,000 $95,000 $399,000
Equivalent units ................................................... 38,000 38,000
Costs per equivalent unit.................................... $8.00 $2.50 $10.50

Cost of goods completed and transferred out of the Mixing Department

during September:

number of units total cost per

........................... 38,000 $10.50 $399,000
transferred out equivalent unit

Cost remaining in September 30 work-in-process inventory in the

Mixing Department ......................................................................................... -0-

Check: Cost of goods completed and transferred out ............. $399,000

Cost of September 30 work-in-process inventory........ -0-
Total costs accounted for ............................................... $399,000

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-45
CASE 4-42 (CONTINUED)

PRODUCTION REPORT: AGRITECH, INC. - SATURATING DEPARTMENT

Weighted-Average Method
Percentage
of
Completion
with Equivalent Units
Physical Respect to Transferred
Units Conversion in Conversion
Work in process, September 1 ................. 2,000 40%
Units transferred in during September.... 38,000
Total units to account for ......................... 40,000

Units completed and transferred

out during September .......................... 37,000* 100% 37,000 37,000
Work in process, September 30 ............... 3,000 40% 3,000 1,200
Total units accounted for.......................... 40,000 _____ _____
Total equivalent units................................ 40,000 38,200
*37,000 = 40,000 3,000

Transferred
In Conversion Total
Work in process, September 1 ........................... $ 41,000 $ 24,600 $ 65,600
Costs incurred during September ..................... 399,000* 90,000 489,000
Total costs to account for................................... $440,000 $114,600 $554,600
Equivalent units ................................................... 40,000 38,200
Costs per equivalent unit.................................... $11.00 $3.00 $14.00

*Cost of goods completed and transferred out of Mixing Department during September,
under the weighted-average method.

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4-46 Solutions Manual
CASE 4-42 (CONTINUED)

Cost of goods completed and transferred out of the Saturating

Department during September:

number of units total cost per

........................ 37,000 $14.00 $518,000
transferred out equivalent unit

Cost remaining in September 30 work-in-process inventory in the

Saturating Department:

Transferred-in costs:

number of transferred-in

equivalent cost per
units of equivalent ...................... 3,000 $11.00 $33,000

transferred-in cost unit

Direct material:

None

Conversion:

number of conversion

equivalent cost per
units of equivalent ....................................... 1,200 $3.00 3,600

conversion unit

Total cost of September 30 work in process .......................................... $36,600

Check: Cost of goods completed and transferred out ............. $518,000

Cost of September 30 work-in-process inventory........ 36,600
Total costs accounted for ............................................... $554,600

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-47
CASE 4-43 (45 MINUTES)

1. Equivalent units of material........................................................................... 8,500

Equivalent units of conversion ..................................................................... 8,260

2. Cost per equivalent unit of material ............................................................. $6.00

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

3. October 31 work-in-process inventory......................................................... $3,520

Cost of goods completed and transferred out ............................................ $105,300

4. 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: LYCOMING LEATHER CO. - HARRISBURG PLANT

Weighted-Average Method
Percentage
of
Completion
with Equivalent Units
Physical Respect to Direct
Units Conversion Material Conversion
Work in process, October 1............. 500 30%
Units started during October........... 8,000
Total units to account for ................ 8,500

Units completed and transferred

out during October ......................... 8,100 100% 8,100 8,100
Work in process, October 31........... 400 40% 400 160
Total units accounted for................. 8,500
Total equivalent units....................... 8,500 8,260

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4-48 Solutions Manual
CASE 4-43 (CONTINUED)

CALCULATION OF COSTS PER EQUIVALENT UNIT: HARRISBURG PLANT

Weighted-Average Method
Direct
Material Conversion Total
Work in process, October 1................................ $ 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: HARRISBURG PLANT

Weighted-Average Method

Cost of goods completed and transferred out during October:

number of units total cost per

........................... 8,100 $13.00 $105,300
transferred out equivalent unit

Cost remaining in October 31 work-in-process inventory:

Direct material:

number of cost per

equivalent equivalent
units of unit of .............................. 400 $6.00 $2,400

direct material direct material

Conversion:

number of cost per

equivalent equivalent
units of unit of ......................................... 160 $7.00 1,120

conversion conversion

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

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-49
CASE 4-43 (CONTINUED)

Check: Cost of goods completed and transferred out ... $105,300

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

5. If the units were 50 percent complete as of October 31, there would be 8,300
equivalent units with respect to conversion. (To see this, just change the 160 in the
right-hand column of the equivalent-units part of the table in the solution to
requirement (4) to 200. This changes the last number in the right-hand column
from 8,260 to 8,300.)

Now the unit cost of conversion drops from $7.00, as currently computed,
to $6.97 (rounded, $57,820 8,300). Thus, the unit cost drops from $13.00 to $12.97
(rounded).

As controller, Jeff Daley has an ethical obligation to refuse his friend's

request to alter the estimate of the percentage of completion. What Daley can do is
to help Murray think of some legitimate ways to bring about real cost reductions.
Several ethical standards for management accountants (listed in Chapter 1) apply
in this situation. Among the relevant standards are the following:

Competence:

Prepare complete and clear reports and recommendations after appropriate

analyses of relevant and reliable information.

Objectivity:

Communicate information fairly and objectively.

Disclose fully all relevant information that could reasonably be expected to

influence an intended user's understanding of the reports, comments, and
recommendations presented.

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

4-50 Solutions Manual
CURRENT ISSUES IN MANAGERIAL ACCOUNTING
ISSUE 4-44

DUPONT TRIES TO UNCLOG A PIPELINE: CAN IT MOVE NEW PRODUCTS OUT OF THE
LAB FASTER? BUSINESS WEEK, JANUARY 27, 2003, P. 103, 104, AMY BARRETT.

DuPont is likely to employ a process costing system, calculating costs by department.

Such systems are widely used in repetitive production environments (as found in the
chemicals industry) where large volumes of identical or very similar products are
manufactured in a continuous flow.

R&D is a long-term investment; it is aimed at developing new products to maintain the

companys competitive advantages. For external reporting purposes, under financial
accounting standards, R & D costs are expensed as period costs. For internal reporting
purposes (managerial accounting), R&D costs should be allocated to the various
processes that are being supported by the R & D effort. One way of doing this would be
to incorporate R&D costs into the process costing system as a form of applied
overhead.

ISSUE 4-45

INTERNATINAL PAPER SHUTTING PLANTS TO CUT SUPPLY, THE WALL STREET

JOURNAL, OCTOBER 19, 2000, ALLANNA SULLIVAN.

Process costing would be appropriate for International Paper. Process costing is used
in repetitive production environments (such as the paper industry), where large
numbers of identical or very similar products are manufactured in a continuous flow.
Shutting down inefficient or underused factories should help International Paper reduce
its product costs.

ISSUE 4-46

BOTTLED UP: PROFIT ARENT FLOWING LIKE THEY USED TO AT PACKAGED-GOODS

COMPANIES, GREEN KETCHUP AND TUNA IN A POUCH SAVE HEINZ? FORTUNE,
SEPETMBER 18,2000, JULIE CRESWELL.

Heinz is a food processor and manufactures large quantities of relatively homogeneous

products. Thus, process costing would be an appropriate product costing system for
Heintz.

Heinz has recently begun to compete for more noticeable and attractive shelve space,
and, after years of neglect, the company has begun to market and package to reflect the

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc.

Managerial Accounting, 6/e 4-51
 growing demographic changes in America. By bringing on the StarKist Tuna in a Pouch
it has recognized that eating habits have changed in America. The green ketchup in an
EZ Squirt bottle is an attempt to gain a young audience because eating habits begin
early. Fruit and Vegetable Wash is a new product offering.

ISSUE 4-47

THERES A NEW ECONOMY OUT THERE, AND IT LOOKS NOTHING LIKE THE OLD ONE,
THE WALL STREET JOURNAL, JANURARY 1, 2000, THOMAS PETZINGER, JR.

Managerial accounting information would serve the same five objectives described in
Chapter 1 in the new business world discussed in the article. There would, however, be
less integration across those functions if companies are broken up into smaller, more
independent businesses.

Managerial accounting information would be just as valuable to companies under the

suggested future for the structure of business.

Product costing systems would serve the same role in the new economy, but probably
would concentrate more on the outsourcing and supply chain management functions.

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4-52 Solutions Manual