Financial and Managerial Accounting, Eighth Edition
Answers to Stop, Review, and Apply Questions
Chapter 17 Costing Systems: Job Order and Process Costing
1-1. When managers of manufacturing organizations plan, they use cost information to
budget costs, forecast product prices, and plan production volumes. Managers of
service organizations use cost information to develop budgets, establish prices, set
sales goals, and determine human resource needs. In both kinds of organizations,
managers use cost information to determine performance expectations.
1-2. Managers use cost information to make decisions about whether to drop a product
or service, add a production shift, outsource the manufacture of parts or tasks, bid
on a special order or service proposal, negotiate a selling price, or add staff.
1-3. When managers evaluate results, they watch for changes in cost or quality by
comparing actual and targeted total and unit costs as well as relevant price and
volume information. Managers analyze such information to evaluate the
organization's performance and adjust planning and decision-making strategies.
2-1. A product costing system is a set of procedures used to account for an
organization's product costs and provide timely and accurate unit cost information
for pricing, cost planning and control, inventory valuation, and financial statement
preparation.
2-2. The main similarity between a job order costing system and a process costing
system is that both provide information about product unit cost that managers can
use to price products, control costs, value inventory, and prepare financial
statements. The main difference is that a job order costing system traces product
costs to a specific job order or batch of products and uses a single Work in Process
Inventory account to summarize the costs of all jobs. This account is supported by
job order cost cards. A process costing system traces the production costs to
processes, departments, or work cells. A process costing system uses several Work
in Process Inventory accounts—one for each process, department, or work cell.
2-3. Most companies use hybrid systems that combine features of both job order costing
and process costing to meet the specific needs of the business.
3-1. The Work in Process Inventory account is used to record the manufacturing costs
incurred and allocated to partially completed units of product.
3-2. At year end, actual overhead costs for the period are reconciled with the estimated
overhead costs that were allocated so that when the financial statements are
prepared, the cost of goods sold will reflect the actual overhead costs incurred.
3-3. The main difference is that in a service organization, costs are not associated with a
physical product that can be assembled, stored, and valued. Services are rendered
and cannot be held in inventory. As a result, service organizations have few or no
costs for materials. The most important costs in a service organization are labor and
overhead. Any material costs are incidental and referred to as supplies.
4-1. Companies that produce large amounts of similar products or liquid products or that
have long, continuous production runs of identical products use a process costing
system. Companies that make unique or special-order products use a job order
costing system.
4-2. Unlike a job order costing system, a process costing system is not limited to one
Work in Process Inventory account. Process costing uses as many Work in Process
Inventory accounts as there are processes, departments, or work cells in the
production process. The product unit cost in a process costing system consists of
one set of costs from each process, department, or work cell through which a
product passes.
5-1. Equivalent production, a key factor in the computation of product unit costs in a
process costing system, is a measure of equivalent whole units produced during a
period of time. Partially completed units are restated in terms of equivalent whole
units. The number of equivalent units produced is equal to the sum of (a) total units
started and completed during the period and (b) an amount representing the work
done on partially completed units in both the beginning and the ending work in
process inventories. A percentage of completion factor is applied to partially
completed units to compute the number of equivalent whole units.
5-2. Actual unit data must be converted to equivalent unit data to compute true per unit
direct materials costs and conversion costs. Restating partially completed units in
terms of equivalent whole units allows the appropriate amount of direct materials
costs and conversion costs to be applied to all products worked on during a period.
5-3. Conversion costs are the combined total of direct labor and overhead costs incurred
by a production process, department, or work cell. The two costs are combined
because both are often incurred uniformly throughout the making of the product or
service.
6-1. a. Account for physical units.
b. Account for equivalent units.
c. Account for costs.
d. Compute cost per equivalent unit.
e. Assign costs to cost of goods manufactured and ending inventory.
6-2. The purpose of accounting for costs in a process report is to track and analyze costs
for a process, department, or work cell in a process costing system.
6-3. The two important dollar amounts are cost of goods manufactured and ending
inventory. The cost of manufacturing is part of the cost of goods sold on an income
statement, and ending inventory can be found on the balance sheet.
6-4. One process cost report is prepared each period for every Work in Process
Inventory account.
7-1. By analyzing the information from a job order or process costing system, managers
can compare budgeted and actual costs. They can also track units produced and
monitor labor costs to evaluate operating performance.
7-2. a. Tracking units produced per time period helps managers evaluate how efficiently
an organization is operating.
b. Monitoring labor cost per unit produced helps managers evaluate how well the
organization is utilizing its labor force.
c. Keeping track of customer needs can help managers determine if their efforts are
focused in the right areas and can significantly enhance customer relationships.