Chapter 16
Process Costing and Analysis
QUESTIONS
1.
The main deciding factor in choosing between a job order costing system or a
process costing system is the type of product or service. Examples where a
process costing system is likely appropriate include chemicals, cleaning fluids,
mail processing, and oil refinement. Examples where a job order costing system is
likely appropriate include home building, tax return preparation, financial planning,
legal services, and consulting. (Hybrid systems are also common.)
2.
The main focus in process costing is the production department (process).
3.
Yes, services can be delivered by processes. For example, Federal Express delivers
parcels by (a) picking them up from the sender, (b) transporting them to Memphis,
(c) sorting them for rerouting, (d) transporting them to their destination cities, and
(e) delivering them to the recipient.
4.
The journal entries to match cost flows with product flows are primarily the same
for both process costing and job order costing. In process costing, the materials
flow into production and direct labor is applied to the product. Also, factory
overhead is measured and applied to each production department. This similarly
compares to each job in job order costing.
5.
A materials consumption report is an alternative control document.
6.
The computation of equivalent units of production focuses on converting partially
completed units to a measure in terms of completed units. We need to use EUP
because some units of the production process are partially completed at the end of
the accounting period (for example, mail that must still be processed into additional
categories) and we desire some measure of the stage of completion. The stage of
completed units is typically different for direct materials, direct labor, and factory
overhead. For example, toys must still be assembled once all the parts are
completed.
7.
The two main methods of process costing are the weighted-average and the first-in,
first-out (FIFO) methods. The weighted-average method considers “average flow”
of the beginning inventory costs along with the current activity for a period,
whereas the FIFO method considers the explicit flow of costs and activity for a
period.
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Solutions Manual, Chapter 16
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8.
A process cost accounting system treats labor that is used entirely within one
production department as direct labor. The labor may include the software
engineer to control the equipment and the maintenance by persons who work
entirely within that department. The key is that the cost object is the process and
not the job.
9.
Direct labor costs flow first from the Factory Payroll account to the Goods in
Process Inventory. Then the direct labor costs in the Goods in Process Inventory
account flows to the Finished Goods Inventory and then on to Cost of Goods Sold.
10.
After all labor costs have been allocated to Goods in Process Inventory accounts
and/or Factory Overhead, the Factory Payroll account should have a zero balance.
11.
Yes, it is possible to have either underapplied or overapplied overhead in a process
cost accounting system. Since the overhead allocation rate is based on predictions
of overhead and other variables such as direct labor, the predicted amounts are not
likely to be exactly equal to the actual amounts incurred.
12.
Equivalent units for direct materials differ from that for direct labor (and overhead)
if direct materials and direct labor (and overhead) are added at different stages in
the production process. Equivalent units are the same when direct materials, direct
labor, and factory overhead are added at the same stage of the production process.
(Also, equivalent units for both direct labor and overhead are the same when
overhead costs are applied based on direct labor.)
13.
The four steps in accounting for production activity (for process operations) are: 1)
determine the physical flow of units, 2) compute equivalent units of production, 3)
compute cost per equivalent unit, and 4) assign and reconcile costs.
14.
The process cost summary serves at least three purposes: (a) to help department
managers control their departments; (b) to help factory managers evaluate
department managers’ performances; and (c) to provide cost information for the
financial statements. To accomplish these objectives, a process cost summary
describes the costs charged to the department, the equivalent units of production
achieved by the department, and the costs assigned to the output.
15.
Yes. Polaris might use process costing to determine the cost of manufacturing a
snowmobile. Manufacturing a snowmobile might go through several departments
such as framing, assembly, painting, and finishing.
16.
Likely processing steps for the snowmobiles include making the frame, assembly,
painting, and finishing. Additional processing departments would include testing,
quality inspection, and preparing the snowmobiles for shipping.
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Financial & Managerial Accounting, 5th Edition
QUICK STUDIES
Quick Study 16-1 (5 minutes)
1. Job order operation
2. Process operation
3. Process operation
4. Job order operation
Quick Study 16-2 (10 minutes)
1.
Raw Materials Inventory................................................62,000
Cash ..........................................................................
62,000
Purchase of raw materials inventory.
2.
Goods in Process Inventory .........................................50,000
Raw Materials Inventory..........................................
50,000
Direct materials used in production.
Quick Study 16-3 (10 minutes)
1.
Factory Payroll ...............................................................
135,000
Cash ..........................................................................
135,000
To record factory payroll costs.
2.
Goods in Process Inventory .........................................
125,000
Factory payroll .........................................................
125,000
Direct labor used in production.
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Solutions Manual, Chapter 16
881
Quick Study 16-4 (15 minutes)
1.
Factory Overhead .......................................................... 9,000
Raw Materials Inventory..........................................
9,000
To record indirect materials used in production.
2.
Factory Overhead ..........................................................10,000
Factory Payroll .........................................................
10,000
To record indirect labor used in production.
3.
Factory Overhead ..........................................................
156,000
Other accounts .......................................................
156,000
To record other overhead costs.
4.
Goods in Process Inventory .........................................
175,000
Factory Overhead ...................................................
175,000
To record overhead applied ($125,000 x 140%).
Quick Study 16-5 (10 minutes)
Finished Goods Inventory.............................................
275,000
Goods in Process Inventory ...................................
275,000
Transfer of goods from production.
Quick Study 16-6 (10 minutes)
Equivalent units under the weighted-average method
Equivalent
EUP for Labor
Units
Units completed and transferred out (340,000 x 100%)...................... 340,000
Units of ending goods in process
Labor (120,000 x 25%)......................................................................... 30,000
Equivalent units of production ............................................................. 370,000
Quick Study 16-7 (5 minutes)
The cost of beginning inventory plus the costs added during the period
should equal the cost of units transferred out plus the cost of ending
inventory.
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882
Financial & Managerial Accounting, 5th Edition
Quick Study 16-8 (10 minutes)
The auto garage can use a process cost system for routine, repetitive
activities like oil changes. It can use a job order cost system for
specialized work on individual cars, including body repair and other repairs
that differ across cars. A total cost per car can be computed by combining
the outputs from the process and job order systems.
Quick Study 16-9 (15 minutes)
Equivalent units under the FIFO method
Equivalent
Units
EUP for Labor
Equivalent units to complete beginning work in process
30,000
(150,000 x 20%) ..........................................................................................
Equivalent units started and completed* ..................................................
190,000
Equivalent units in ending goods in process (120,000 x 25%) ................
30,000
Total equivalent units of production ..........................................................
250,000
* Units completed – Units in beginning work in process = Units started and completed
340,000 – 150,000 = 190,000
Quick Study 16-10 (5 minutes)
A. 1
B. 3
C. 2
D. 4
Quick Study 16-11 (5 minutes)
The process cost summary sections are Costs Charged to Production,
Equivalent Units of Production, and Cost Assignment and Reconciliation.
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Solutions Manual, Chapter 16
883
Quick Study 16-12 (5 minutes)
If the company is successful in reducing water usage, its raw materials cost
(water) should decline. Likewise, assuming water used in its cleaning and
cooling processes is considered overhead, factory overhead costs should
decline. These cost reductions would result in lower direct materials cost
per equivalent unit and lower factory overhead cost per equivalent unit.
Quick Study 16-13 (5 minutes)
1. T
2. F
3. F
4. T
Quick Study 16-14 (10 minutes)
Equivalent units under the weighted-average method
Equivalent
EUP for Labor
Units
Units completed and transferred out (680,000 x 100%)...................... 680,000
Units of ending goods in process
Direct labor (240,000 x 75%)............................................................... 180,000
Equivalent units of production ............................................................. 860,000
Quick Study 16-15 (15 minutes)
Equivalent units under the FIFO method
EUP for Labor
Equivalent
Units
Equivalent units to complete beginning work in process
240,000
(320,000 x 75%) ..........................................................................................
Equivalent units started and completed* ..................................................
360,000
Equivalent units in ending goods in process (240,000 x 75%) ................
180,000
Total equivalent units of production ..........................................................
780,000
* Units completed – Units in beginning work in process = Units started and completed
680,000 – 320,000 = 360,000
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884
Financial & Managerial Accounting, 5th Edition
EXERCISES
Exercise 16-1 (10 minutes)
1.
F
5.
G
2.
A
6.
B
3.
D
7.
E
4.
C
Exercise 16-2 (25 minutes)
1.
Raw Materials Inventory ...............................................
80,000
Accounts Payable ...................................................
80,000
Purchased materials on credit.
2.
Goods in Process Inventory..........................................
42,000
Raw Materials Inventory .........................................
42,000
Used direct materials in production.
3.
Factory Overhead ..........................................................
22,500
Raw Materials Inventory .........................................
22,500
Used indirect materials.
Exercise 16-3 (10 minutes)
1.
Factory Payroll ..............................................................
95,000
Cash .........................................................................
95,000
Incurred direct labor costs.
2.
Goods in Process Inventory..........................................
75,000
Factory Payroll ........................................................
75,000
Used direct labor in production.
3.
Factory Overhead ..........................................................
20,000
Factory Payroll ........................................................
20,000
Used indirect labor in production.
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Solutions Manual, Chapter 16
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Exercise 16-4 (5 minutes)
1.
Factory Overhead ..........................................................
38,750
Cash .........................................................................
38,750
Incurred overhead costs.
2.
Goods in Process Inventory..........................................
82,500
Factory Overhead ....................................................
82,500
Applied overhead: $75,000 x 110%
Exercise 16-5 (5 minutes)
1.
Finished Goods Inventory .............................................
135,600
Goods in Process Inventory....................................
135,600
Transfer goods from production to finished goods.
2.
Accounts Receivable .....................................................
315,000
Sales ..........................................................................
315,000
Sale of goods on credit.
Cost of Goods Sold ........................................................
175,000
Finished Goods Inventory .......................................
175,000
Record cost of goods sold.
Exercise 16-6 (25 minutes)
1.
Oct. 31
Goods in Process Inventory ..........................................
522,000
Raw Materials Inventory ..........................................
522,000
Direct materials used in production.
2.
Oct. 31
Goods in Process Inventory ..........................................
130,000
Factory Payroll .........................................................
130,000
Direct labor used in production.
3.
Oct. 31
Goods in Process Inventory ..........................................
227,500
Factory Overhead ....................................................
227,500
Overhead applied: $130,000 x 175%
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886
Financial & Managerial Accounting, 5th Edition
Exercise 16-6 (continued)
4.
Oct. 31
Finished Goods Inventory ............................................
595,000
Goods in Process Inventory ....................................
595,000
Transfer goods from production to finished
goods.
5.
Oct. 31
Accounts Receivable .....................................................
950,000
Sales .........................................................................
950,000
Sales on credit.
Oct. 31
Cost of Goods Sold .......................................................
540,000
Finished Goods Inventory ......................................
540,000
Record cost of sales.
Exercise 16-7 (25 minutes)
a. Purchased raw materials on credit at a cost of $52,000.
b. Used direct materials costing $42,000 in production.
c. Incurred total labor costs of $26,000, all of which is paid in cash.
d. Used direct labor costing $32,000 in production.
e. Incurred overhead costs of $10,000, which is paid in cash.
f.
Used indirect materials costing $10,000.
g. Used indirect labor costing $6,000.
h. Applied overhead to production at the rate of 105% ($33,600/$32,000) of
direct labor cost.
i.
Transferred completed products with a cost of $88,000 to the finished
goods inventory from production.
j.
Sold products on credit for $250,000. Their accumulated cost is
$100,000.
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Solutions Manual, Chapter 16
887
Exercise 16-8 (20 minutes)
1.
Units in beginning inventory ......................................... 60,000
Units started and completed ......................................... 240,000
Total units transferred to finished goods .................... 300,000
2.
Equivalent units of production – weighted average
Direct
Equivalent Units of Production
Materials
Units completed & transferred out (300,000 x 100%) ............
300,000
Units of ending goods in process
Direct materials, 82,000 x 80% .............................................65,600
Direct labor, 82,000 x 30% ....................................................
_______
Equivalent units of production................................................
365,600
Direct
Labor
300,000
24,600
324,600
Exercise 16-9 (25 minutes)
1.
Direct
Cost per equivalent unit – Weighted average
Materials
Costs of beginning goods in process ........................... $118,840
Costs incurred this period ..............................................
850,000
Total costs........................................................................ $968,840
Direct
Labor
$ 47,890
650,000
$697,890
÷ Equivalent units of production (from Ex. 16-8)..........
365,600
Cost per equivalent unit of production ......................... $2.65 per
EUP
324,600
$2.15 per
EUP
2. Cost Assignment and Reconciliation – weighted average
Costs of units transferred out
Direct materials (300,000 EUP x $2.65 per EUP) .......
Direct labor (300,000 EUP x $2.15 per EUP) ..............
Total costs transferred out ............................................
Costs of ending goods in process
Direct materials (65,600 EUP x $2.65 per EUP) .........
Direct labor (24,600 EUP x $2.15 per EUP) ................
Total costs of ending goods in process.......................
Total costs accounted for* ............................................
$795,000
645,000
$1,440,000
173,840
52,890
226,730
$1,666,730
*Equals costs to account for of $1,666,730 ($968,840 + $697,890)
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888
Financial & Managerial Accounting, 5th Edition
Exercise 16-10 (20 minutes)
Equivalent units of production—FIFO
Equivalent units of production
Direct
Materials
Direct
Labor
Units to complete beginning goods in process
Direct materials (60,000 x 40%) .................................
24,000
Direct labor (60,000 x 60%) ........................................
Units started and completed .......................................
36,000
240,000
240,000
Units in ending work in process
Direct materials (82,000 x 80%) .................................
65,600
Direct labor (82,000 x 30%) ........................................
_______
24,600
Equivalent units of production....................................
329,600
300,600
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Solutions Manual, Chapter 16
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Exercise 16-11 (25 minutes)
1. Cost per equivalent unit of direct materials and direct labor—FIFO
Direct
Materials
Direct
Labor
Costs incurred this period ...........................................
$850,000
$650,000
÷ Equivalent units of production (from Ex. 16-10).....
329,600
300,600
Cost per equivalent unit of production (rounded) ......
$2.58 per
EUP
$2.16 per
EUP
2. Assignment of costs to output of department—FIFO
Costs of goods transferred out
Cost of beginning goods in process inventory
Direct materials...........................................................
Direct labor..................................................................
$118,840
47,890 $ 166,730
Costs to complete beginning goods in process
Direct materials (24,000 EUP x $2.58 per EUP) ........
61,920
Direct labor (36,000 EUP x $2.16 per EUP) ...............
77,760
Total costs to complete .............................................
139,680
Cost of units started and completed this period
Direct materials (240,000 EUP x $2.58 per EUP) ......
619,200
Direct labor (240,000 EUP x $2.16 per EUP) .............
518,400
Total cost of units started and completed ...............
1,137,600
Total costs of goods transferred out ..........................
1,444,010
Cost of ending goods in process inventory
Direct materials (65,600 EUP x $2.58 per EUP) ........
169,248
Direct labor (24,600 EUP x $2.16 per EUP) ...............
53,136
Total costs of ending goods in process...................
222,384
Total costs accounted for ............................................
$1,666,394
*Equals costs to account for of $1,666,730 after a rounding difference of $336.
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890
Financial & Managerial Accounting, 5th Edition
Exercise 16-12 (30 minutes)
1. Beginning inventory is 100% complete with respect to materials.
Ending inventory is 100% complete with respect to materials.
EUP for Materials
Goods completed (80,000 EUP x 100%) .....................................
80,000
Ending goods in process (16,000 EUP x 100%) ........................
16,000
Total EUP ......................................................................................
96,000
2. Beginning inventory is 50% complete with respect to materials.
Ending inventory is 75% complete with respect to materials.
EUP for Materials
Units of
Product
Goods completed (80,000 EUP x 100%) .....................................
80,000
Ending goods in process (16,000 EUP x 75%) ..........................
12,000
Total EUP ......................................................................................
92,000
3. Beginning inventory is 50% complete with respect to materials.
Ending inventory is 50% complete with respect to materials.
EUP for Materials
Units of
Product
Goods completed (80,000 EUP x 100%) .....................................
80,000
Ending goods in process (16,000 EUP x 50%) ..........................
8,000
Total EUP ......................................................................................
88,000
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Solutions Manual, Chapter 16
891
Exercise 16-13 (30 minutes)
1. Beginning inventory is 100% complete with respect to materials.
Ending inventory is 100% complete with respect to materials.
EUP for Materials
To complete beginning work in process (24,000 EUP x 0%) .........
0
Units started and completed (56,000 EUP x 100%) .........................
56,000
Ending goods in process (16,000 EUP x 100%) ..............................
16,000
Total EUP ............................................................................................
72,000
2. Beginning inventory is 50% complete with respect to materials.
Ending inventory is 75% complete with respect to materials.
Units of
Product
EUP for Materials
To complete beginning work in process (24,000 EUP x 50%) .......
12,000
Units started and completed (56,000 EUP x 100%) .........................
56,000
Ending goods in process (16,000 EUP x 75%) ................................
12,000
Total EUP ............................................................................................
80,000
3. Beginning inventory is 50% complete with respect to materials.
Ending inventory is 50% complete with respect to materials.
Units of
Product
EUP for Materials
To complete beginning work in process (24,000 EUP x 50%) .......
12,000
Units started and completed (56,000 EUP x 100%) .........................
56,000
Ending goods in process (16,000 EUP x 50%) ................................
8,000
Total EUP ............................................................................................
76,000
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892
Financial & Managerial Accounting, 5th Edition
Exercise 16-14 (20 minutes)
Production
Beginning Goods
in Process
$17,250
Direct
Materials
Direct
Labor
$47,250
(1) $126,600
Total costs in process in
production department
(2) $242,400
Factory
Overhead
$51,300
Ending Goods in
Process
$6,000
Costs transferred
to Finished Goods
(3) $236,400
Warehouse
Beginning Finished
Goods Inventory
$18,000
Cost of Goods Available
For Sale
(4) $254,400
Ending Finished
Goods Inventory
$22,500
Cost of Goods
Sold
$231,900
Key to solution of flowchart
To solve this problem, the missing items must be solved in reverse order: 4,3,2,1
(4) Cost of goods available for sale
$
?
Ending finished goods inventory
- 22,500
Cost of goods sold
$231,900
[Cost of goods available for sale] - $22,500 = $231,900
Therefore, cost of goods available for sale = $254,400
(3) Beginning finished goods inventory
Plus cost of goods transferred to finished goods
Cost of goods available for sale
$ 18,000
+
?
$254,400
$18,000 + [Goods transferred to finished goods] = $254,400
Therefore, Goods transferred to finished goods = $236,400
(2) Total costs in process in production
Less ending goods in process
Costs transferred to finished goods
$
?
- 6,000
$236,400
[Total costs in process] - $6,000 = $236,400
Therefore, Total costs in process = $242,400
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Solutions Manual, Chapter 16
893
Exercise 16-14 (Concluded)
(1) Beginning goods in process
$ 17,250
Direct materials
$
?
Direct labor
47,250
Factory overhead
51,300
Total costs added
?
Total costs in process
$242,400
$17,250 + [Total costs added] = $242,400
Therefore, Total costs added = $225,150
$225,150 = Direct materials + $47,250 + $51,300
Therefore, Direct materials = $126,600
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894
Financial & Managerial Accounting, 5th Edition
Exercise 16-15 (30 minutes)
ASHAD COMPANY
Process Cost Summary – Weighted Average Method
For Month Ended July 31
Costs Charged to Production
Costs of beginning goods in process ($18,550 + $760 + $1,520).............
$ 20,830
Costs incurred this period ($357,500 + $62,890 + $125,780) ....................
546,170
Total costs to account for............................................................................
$567,000
Unit Cost Information
Units to Account For
Units Accounted For
Beginning goods in process .................
2,000
Units started this period ........................
32,500
Total units to account for ......................
34,500
Completed & transferred out ...........................................
32,000
Ending goods in process ...............................................
2,500
Total units accounted for ...............................................
34,500
Direct
Equivalent Units of Production (EUP)
Materials
Units completed and transferred out.........
32,000
Units of ending goods in process..............
2,500
Equivalent units of production...................
34,500
Direct
Labor
32,000
1,500
33,500
Factory
Overhead
32,000
1,500
33,500
Direct
Cost per EUP
Materials
Costs of beginning goods in process ....... $ 18,550
Costs incurred this period .......................... 357,500
Total costs.................................................... $376,050
÷ Equivalent units of production................
34,500
Cost per equivalent unit of production .......$10.90 per
EUP
Direct
Labor
$ 760
62,890
$63,650
33,500
$1.90 per
EUP
Factory
Overhead
$ 1,520
125,780
$127,300
33,500
$3.80 per
EUP
Cost Assignment and Reconciliation
Costs transferred out
Direct materials (32,000 x $10.90) ......................................
$348,800
Direct labor (32,000 x $1.90) ...............................................
60,800
Factory overhead (32,000 x $3.80) .....................................
121,600
Total transferred out
$531,200
Cost of ending goods in process
Direct materials (2,500 x $10.90) ........................................
27,250
Direct labor (1,500 x $1.90) .................................................2,850
Factory overhead (1,500 x $3.80) .......................................5,700
Total ending goods in process ..........................................
Total costs accounted for ........................................................
35,800
$567,000
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Solutions Manual, Chapter 16
895
Exercise 16-16 (40 minutes)
ASHAD COMPANY
Process Cost Summary – FIFO Method
For Month Ended July 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials ................................................................. $ 18,550
Direct labor ........................................................................
760
Factory overhead ..............................................................
1,520
Costs incurred this period
Direct materials ................................................................. 357,500
Direct labor ........................................................................ 62,890
Factory overhead .............................................................. 125,780
Total costs to account for ..................................................
$ 20,830
546,170
$567,000
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ...................................
2,000 Completed & transferred out ...........
32,000
Units started this period ..........................................
32,500 Ending goods in process ................
2,500
Total units to account for ........................................
34,500 Total units accounted for ................
34,500
Direct
Materials
Direct
Labor
Equivalent units of production
Units to complete beginning goods in process
Direct materials (2,000 x 0%) ............................. 0 EUP
1,600 EUP
Direct labor (2,000 x 80%) ..................................
Factory overhead (2,000 x 80%) ........................
30,000 EUP 30,000 EUP
Units started and completed ...............................
Factory
Overhead
1,600 EUP
30,000 EUP
Units of ending goods in process
2,500 EUP
Direct materials ..................................................
1,500 EUP
Direct labor .........................................................
_________ _________
Factory overhead ...............................................
32,500 EUP 33,100 EUP
Equivalent units of production ...........................
1,500 EUP
33,100 EUP
[Continued on next page]
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896
Financial & Managerial Accounting, 5th Edition
Exercise 16-16 (Concluded)
Cost per EUP
Direct
Materials
Direct
Labor
Factory
Overhead
Costs incurred this period ..................
$ 357,500
$ 62,890
$125,780
EUP (from prior page) .........................
÷
32,500
÷ 33,100
÷ 33,100
Cost per EUP........................................
$11.00 per
EUP
$1.90 per
EUP
$3.80 per
EUP
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process .........................
$20,830
Cost to complete beginning goods in process
Direct materials (0 EUP x $11.00 per EUP) ..............
$
0
Direct labor (1,600 EUP x $1.90 per EUP) ................
3,040
Factory overhead (1,600 EUP x $3.80 per EUP) ......
6,080
9,120
Costs of units started and completed this period
Direct materials (30,000 EUP x $11.00 per EUP) .....
330,000
Direct labor (30,000 EUP x $1.90 per EUP) ..............
57,000
Factory overhead (30,000 EUP x $3.80 per EUP) ....
114,000
Total cost of goods finished this period ..................
501,000
530,950
Costs of ending goods in process
Direct materials (2,500 EUP x $11.00 per EUP) .......
27,500
Direct labor (1,500 EUP x $1.90 per EUP) ................
2,850
Factory overhead (1,500 EUP x $3.80 per EUP) ......
5,700
Total costs accounted for ...........................................
36,050
$567,000
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Solutions Manual, Chapter 16
897
Exercise 16-17 (10 minutes)
1.
Process operation.
7.
Job order operation.
2.
Process operation.
8.
Process operation.
3.
Process operation.
9.
Job order operation.
4.
Process operation.
10.
Job order operation.
5.
Job order operation.
11.
Job order operation.
6.
Process operation.
12.
Process operation.
Note:
Reasonable arguments can be made to classify #7 and #11 as being made
in a process operation, and #8 in a job order operation, in some cases.
Exercise 16-18 (10 minutes)
a.
Job order operation.
e.
Job order operation.
b.
Job order operation.
f.
Job order operation.
c.
Job order operation.
g.
Process operation.
d.
Process operation.
h.
Process operation.
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898
Financial & Managerial Accounting, 5th Edition
Exercise 16-19 (10 minutes)
A hybrid costing system contains features of both process costing and job
order costing. A hybrid system of processes requires a hybrid costing
system to properly cost products or services.
Products or services that might well fit a hybrid costing system would be
those that resemble process operations but that also include varying
degrees of customization. Product examples: cars with custom add-ons;
shirts with custom names on back; high-end courier services; inoculation
programs; and so forth.
Exercise 16-20 (20 minutes)
1. Beginning inventory is 100% complete with respect to materials.
Ending inventory is 100% complete with respect to materials.
EUP for Materials
Goods completed (191,500 EUP x 100%) ...................................
Ending goods in process* (29,500 EUP x 100%) .......................
Total EUP ......................................................................................
191,500
29,500
221,000
2. Beginning inventory is 50% complete with respect to materials.
Ending inventory is 50% complete with respect to materials.
EUP for Materials
Goods completed (191,500 EUP x 100%) ...................................
Ending goods in process (29,500* EUP x 50%) .........................
Total EUP ......................................................................................
Units of
Product
191,500
14,750
206,250
*Ending goods in process = Beginning goods in process + Goods started – Goods completed.
= 31,500 + 189,500 - 191,500
= 29,500
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Solutions Manual, Chapter 16
899
Exercise 16-21 (20 minutes)
1. Beginning inventory is 100% complete with respect to materials.
Ending inventory is 100% complete with respect to materials.
EUP for Materials
To complete beginning work in process (31,500 EUP x 0%) .........
0
Units started and completed* (160,000 EUP x 100%) .....................
160,000
Ending goods in process** (29,500 EUP x 100%) ............................
29,500
Total EUP ............................................................................................
189,500
2. Beginning inventory is 50% complete with respect to materials.
Ending inventory is 50% complete with respect to materials.
Units of
Product
EUP for Materials
To complete beginning work in process (31,500 EUP x 50%) .......
15,750
Units started and completed* (160,000 EUP x 100%) .....................
160,000
Ending goods in process** (29,500 EUP x 50%) ..............................
14,750
Total EUP ............................................................................................
190,500
*Units started and completed = Units completed – Beginning goods in process
= 191,500 – 31,500
= 160,000
**
Ending goods in process = Beginning goods in process + Goods started – Goods completed
= 31,500 + 189,500 - 191,500
= 29,500
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900
Financial & Managerial Accounting, 5th Edition
Exercise 16-22 (30 minutes)
HI-TEST COMPANY
Process Cost Summary (Weighted-Average Method)
For Month Ended September 30
Costs Charged to Production
Costs of beginning work in process
Direct materials .......................................................................
$ 45,000
Direct labor ..............................................................................
25,600
Factory overhead ....................................................................
30,720
$101,320
Costs incurred this period
Direct materials .......................................................................
375,000
Direct labor ..............................................................................
155,000
Factory overhead ($155,000 x 120%) ......................................
(a) 186,000
(b) 716,000
Total costs to account for ...........................................................
(c)$817,320
Unit Cost Information
Units to Account For
Units Accounted For
Beginning goods in process .................
2,000
Units started this period ........................
28,000
Total units to account for ......................
(e)30,000
Completed & transferred out ........................................
23,000
Ending goods in process ............................................
(d) 7,000
Total units accounted for ............................................
(f) 30,000
Direct
Direct
Equivalent Units of Production (EUP)
Materials
Labor
(g)23,000EUP (h)23,000EUP
Units completed and transferred out..................
Units of ending goods in process.......................
(k) 7,000EUP
Direct materials [(j)7,000 x 100%] .......................
(m) 2,800EUP
Direct labor [(l)7,000 x 40%] ................................
.
.
Factory overhead [(n)7,000 x 40%] .......................
(p)30,000EUP (q)25,800EUP
Equivalent units of production................................
Direct
Materials
Cost per EUP
Costs of beginning goods in process ....... $ 45,000
375,000
Costs incurred this period ..........................
Total costs.................................................... $420,000
÷ EUP ............................................................ (u) 30,000
Cost per equivalent unit of production ....... (x) $14.00
per EUP
Direct
Labor
Factory
Overhead
(i)23,000EUP
(o) 2,800EUP
(r)25,800EUP
Factory
Overhead
$ 25,600
$ 30,720
155,000
(s) 186,000
$180,600
(t) $216,720
(v) 25,800
(y)
$7.00
per EUP
(w)
(z)
25,800
$8.40
per EUP
[Continued on next page]
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Solutions Manual, Chapter 16
901
Exercise 16-22 (concluded)
Cost Assignment and Reconciliation
Costs transferred out
Direct materials [(aa)$14.00 x (bb)23,000] ....................... (cc)$322,000
Direct labor [(dd)$ 7.00 x (ee)23,000] ............................... (ff) 161,000
Factory overhead [(gg)$ 8.40 x (hh)23,000] ..................... (ii) 193,200
Total transferred out .......................................................
(jj) $676,200
Cost of ending goods in process
Direct materials [(kk)$14.00 x (ll)7,000] ........................... (mm) 98,000
Direct labor [(nn)$ 7.00 x (oo)2,800] ................................. (pp) 19,600
Factory overhead [(qq)$ 8.40 x (rr)2,800]......................... (ss) 23,520
Total ending goods in process.........................................
(tt) 141,120
Total costs accounted for ..............................................
(uu)$817,320
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902
Financial & Managerial Accounting, 5th Edition
PROBLEM SET A
Problem 16-1A (45 minutes)
Part 1: Cost of goods transferred and cost of goods sold
Beginning goods in process inventory.................................. $ 435,000
Direct materials used in production.......................................
157,500
Direct labor used in production..............................................
780,000
Overhead applied (115% of direct labor cost) .......................
897,000
Total production costs ..........................................................
2,269,500
Less ending goods in process inventory ............................
(515,000)
Transferred to finished goods inventory (a).......................... $1,754,500
Beginning finished goods inventory ..................................... $ 633,000
Plus goods transferred from production ..............................
1,754,500
Goods available for sale .........................................................
2,387,500
Less ending finished goods inventory ..................................
(605,000)
Cost of goods sold (b) ............................................................ $1,782,500
Part 2: Summary journal entries
a.
May 31 Raw Materials Inventory ...............................................
250,000
Accounts Payable ...................................................
250,000
Purchased raw materials.
b.
May 31 Goods in Process Inventory .........................................
157,500
Raw Materials Inventory ..........................................
157,500
Used direct materials.
c.
May 31 Factory Overhead ..........................................................
60,000
Raw Materials Inventory .........................................
60,000
Used indirect materials.
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Solutions Manual, Chapter 16
903
Problem 16-1A (Continued)
d.
May 31 Factory Payroll ..............................................................
1,530,000
Cash .........................................................................
1,530,000
Incurred payroll cost.
e.
May 31 Goods in Process Inventory .........................................
780,000
Factory Payroll ........................................................
780,000
Used direct labor.
f.
May 31 Factory Overhead ..........................................................
750,000
Factory Payroll ........................................................
750,000
Used indirect labor.
g.
May 31 Factory Overhead ..........................................................
87,000
Other Accounts .......................................................
87,000
Incurred other overhead costs.
h.
May 31 Goods in Process Inventory .........................................
897,000
Factory Overhead.....................................................
897,000
Applied overhead at 115% of direct labor
cost.
i.
May 31 Finished Goods Inventory .............................................
1,754,500
Goods in Process Inventory ...................................
1,754,500
Transferred completed products from
production to finished goods inventory.
j.
May 31 Accounts Receivable ....................................................
2,500,000
Sales .........................................................................
2,500,000
Sold finished goods.
May 31 Cost of Goods Sold ......................................................
1,782,500
Finished Goods Inventory ......................................
1,782,500
To record cost of goods sold for May.
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904
Financial & Managerial Accounting, 5th Edition
Problem 16-2A (50 minutes)
Part 1
(a) and (b) Equivalent units with respect to direct materials and direct labor
Equivalent units of production (EUP)
Units completed and transferred out ...................
Units of ending goods in process ........................
Direct materials (180,000 x 100%)...................
Direct labor (180,000 x 30%)............................
Total equivalent units of production ....................
Direct
Materials
Direct
Labor
700,000
700,000
180,000
_______
880,000
54,000
754,000
Part 2
Direct
Cost per equivalent unit of production
Materials
Costs of beginning goods in process..........................
$ 420,000
Costs incurred this period ............................................
2,220,000
Total costs ......................................................................
$2,640,000
Direct
Labor
$ 139,000
3,254,000
$3,393,000
÷ Equivalent units of production ..................................
880,000 EUP 754,000 EUP
$3.00 per EUP $4.50 per EUP
Cost per equivalent unit of production ........................
Part 3
Assigning product costs to units
Costs transferred out
Direct materials (700,000 EUP x $3.00 per EUP) .......
$2,100,000
Direct labor (700,000 EUP x $4.50 per EUP) ..............3,150,000
Total costs transferred out .........................................
$5,250,000
Costs of ending goods in process
Direct materials (180,000 EUP x $3.00 per EUP) ....... 540,000
Direct labor (54,000 EUP x $4.50 per EUP) ................ 243,000
Total costs of ending goods in process ....................
783,000
Total costs accounted for* ............................................
$6,033,000
*This equals the sum of the total direct materials cost and the
total direct labor costs ($2,640,000 + $3,393,000 = $6,033,000).
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Solutions Manual, Chapter 16
905
Problem 16-2A (Concluded)
Part 4
MEMORANDUM
TO:
FROM:
DATE:
RE:
Percentage of Completion Error Analysis
If the units in ending inventory are 60% complete instead of 30% with
respect to labor, the number of equivalent units in ending inventory with
respect to labor is understated, and the total equivalent units produced for
the period is also understated. If the correct percentage of completion with
respect to labor is used, the direct labor cost per equivalent unit will be
smaller. However, the cost of direct labor in ending goods in process is
larger because the percentage of equivalent units remaining in ending
inventory is greater.
Regarding financial statements, this error causes an overstatement of cost
of goods sold and an understatement of net income on the income
statement for November. On the November 30 balance sheet, the goods in
process inventory and retained earnings are understated; therefore total
assets and equity are also understated.
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906
Financial & Managerial Accounting, 5th Edition
Problem 16-3A (60 minutes)
Part 1
a.
Mar. 31 Raw Materials Inventory ................................................
250,000
Accounts Payable ....................................................
250,000
Raw materials purchased.
b.
Mar. 31 Goods in Process Inventory .........................................
168,000
Raw Materials Inventory ..........................................
168,000
Direct materials used in production.
c.
Mar. 31 Factory Overhead...........................................................
70,000
Raw Materials Inventory ..........................................
70,000
Indirect materials used.
d.
Mar. 31 Factory Payroll ...............................................................
244,850
Cash ..........................................................................
244,850
Factory payroll costs.
e.
Mar. 31 Goods in Process Inventory .........................................
199,850
Factory Payroll .........................................................
199,850
Direct labor used in production.
f.
Mar. 31 Factory Overhead...........................................................
45,000
Factory Payroll .........................................................
45,000
Indirect labor used.
g.
Mar. 31 Factory Overhead...........................................................
164,790
Other Accounts ........................................................
164,790
Other overhead costs.
h.
Mar. 31 Goods in Process Inventory .........................................
279,790
Factory Overhead.....................................................
279,790
Application of overhead at 140%
of direct labor cost.
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Solutions Manual, Chapter 16
907
Problem 16-3A (Continued)
i.
Mar. 31 Finished Goods Inventory .............................................
572,390
Goods in Process Inventory ...................................
572,390
Transfer goods to finished goods.
j.
Mar. 31 Cash ................................................................................
1,200,000
Sales..........................................................................
1,200,000
Sales of finished goods. (10,000 x $120)
Mar. 31 Cost of Goods Sold .......................................................
592,390
Finished Goods ........................................................
592,390
Cost of goods sold.
Part 2
ELLIOTT COMPANY
Process Cost Summary – Weighted Average Method
For Month Ended March 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials.................................................................. $ 2,500
Direct labor.........................................................................
2,650
Factory overhead ...............................................................
3,710
Costs incurred this period
Direct materials..................................................................
Direct labor.........................................................................
Factory overhead ...............................................................
Total costs to account for...................................................
168,000
199,850
279,790
$
8,860
647,640
$656,500
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ..................................
2,000 Completed & transferred out .............
17,000
Units started this period .........................................
20,000 Ending goods in process ................
5,000
Total units to account for .......................................
22,000 Total units accounted for ................
22,000
[Continued on next page]
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908
Financial & Managerial Accounting, 5th Edition
Problem 16-3A (Concluded)
Direct
Direct
Equivalent units of production
Materials
Labor
Units completed & transferred out .... 17,000 EUP 17,000 EUP
Units of ending goods in process
Direct materials (5,000 x 100%) ........ 5,000 EUP
Direct labor (5,000 x 35%) .................
1,750 EUP
Factory overhead (5,000 x 35%) ....... __________ __________
Equivalent units of production........... 22,000 EUP 18,750 EUP
Factory
Overhead
17,000 EUP
Direct
Direct
Materials
Labor
$ 2,500
$ 2,650
168,000
199,850
$170,500
$202,500
22,000 EUP 18,750 EUP
$7.75 per $10.80 per
EUP
EUP
Factory
Overhead
$ 3,710
279,790
$283,500
18,750 EUP
$15.12 per
EUP
Cost per EUP
Cost of beginning goods in process .
Costs incurred this period ..................
Total costs............................................
÷ EUP ....................................................
Cost per EUP........................................
Cost assignment and reconciliation
Costs transferred out
Direct materials (17,000 EUP x $7.75 per EUP) .......
Direct labor (17,000 EUP x $10.80 per EUP) ............
Factory overhead (17,000 x $15.12 per EUP) ..........
Costs of ending goods in process
Direct materials (5,000 EUP x $7.75 per EUP) .........
Direct labor (1,750 EUP x $10.80 per EUP) ..............
Factory overhead (1,750 EUP x $15.12 per EUP) ....
Total costs accounted for ...........................................
$131,750
183,600
257,040
38,750
18,900
26,460
1,750 EUP
18,750 EUP
$572,390
84,110
$656,500
Part 3
If equivalent units of production for the production department's ending
inventory for March are understated, then total equivalent units of production
is also understated. This means the cost per equivalent unit is overstated and
the production manager would be paid a smaller bonus in March than should
be the case. This has no effect on April bonuses.
Units transferred to finished goods are, of course, 100% complete with
respect to production. Since managers are only responsible for production in
their own department, the error has no impact on the bonus paid to any other
manager.
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Solutions Manual, Chapter 16
909
Problem 16-4A (75 minutes)
Part 1
FAST CO.
Process Cost Summary – Weighted Average Method
For the month ended October 31
Costs charged to Production
Costs of beginning goods in process
Direct materials ................................................................. $ 59,450
Direct labor ........................................................................ 172,800
Factory overhead .............................................................. 103,680
$ 335,930
Costs incurred this period
Direct materials ................................................................. 102,050
Direct labor ........................................................................ 408,200
Factory overhead .............................................................. 244,920
Total costs to account for ..................................................
755,170
$1,091,100
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ...................................
30,000 Completed & transferred out ..............
150,000
Units started this period ..........................................
140,000 Ending goods in process.................
20,000
Total units to account for ........................................
170,000 Total units accounted for.................
170,000
Direct
Equivalent units of production
Materials
Units completed & transferred out ..... 150,000 EUP
Units of ending goods in process
Direct materials (20,000 x 100%) ....... 20,000 EUP
Direct labor (20,000 x 80%) ................
Factory overhead (20,000 x 80%) ...... __________
170,000 EUP
Equivalent units of production
Direct
Materials
Direct
Labor
Factory
Overhead
150,000 EUP
150,000 EUP
16,000 EUP
__________
166,000 EUP
16,000 EUP
166,000 EUP
Direct
Labor
Factory
Overhead
Cost per EUP
$ 59,450
$172,800
$103,680
Cost of beginning goods in process ...
102,050
408,200
244,920
Costs incurred this period ..................
$161,500
$581,000
$348,600
Total costs ............................................
÷ EUP ..................................................... 170,000 EUP 166,000 EUP 166,000 EUP
Cost per EUP ........................................$0.95 per EUP $3.50 per EUP $2.10 per EUP
[Continued on next page]
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910
Financial & Managerial Accounting, 5th Edition
Problem 16-4A (Concluded)
Cost assignment and reconciliation
Costs transferred out
Direct materials (150,000 EUP x $0.95 per EUP) .....
$142,500
Direct labor (150,000 EUP x $3.50 per EUP) ............
525,000
Factory overhead (150,000 x $2.10 per EUP) ..........
315,000
$ 982,500
Costs of ending goods in process
Direct materials (20,000 EUP x $0.95 per EUP) .......
19,000
Direct labor (16,000 EUP x $3.50 per EUP) ..............
56,000
Factory overhead (16,000 EUP x $2.10 per EUP) ....
33,600
Total costs accounted for ...........................................
108,600
$1,091,100
Part 2
Oct. 31 Finished Goods Inventory .............................................
982,500
Goods in Process Inventory ...................................
982,500
Transfer of goods to finished goods inventory.
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Solutions Manual, Chapter 16
911
Problem 16-5A (80 minutes)
Part 1
TAMAR CO.
Process Cost Summary – Weighted Average Method
For Month Ended May 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials ................................................................. $ 19,800
Direct labor ........................................................................ 123,300
Factory overhead .............................................................. 98,640
$ 241,740
Costs incurred this period
Direct materials ................................................................. 496,800
Direct labor ........................................................................ 1,203,300
Factory overhead .............................................................. 962,640
Total costs to account for ..................................................
2,662,740
$2,904,480
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ...................................
3,000 Completed & transferred out ...........
22,200
Units started this period ..........................................
21,600 Ending goods in process ................
2,400
Total units to account for ........................................
24,600 Total units accounted for ................
24,600
Direct
Equivalent units of production
Materials
Units completed & transferred out ....... 22,200 EUP
Units of ending goods in process ........
Direct materials (2,400 x 100%) ......... 2,400 EUP
Direct labor (2,400 x 80%) ..................
Factory overhead (2,400 x 80%) ........ __________
Equivalent units of production ........... 24,600 EUP
Cost per EUP
Cost of beginning goods in process ....
Costs incurred this period ..................
Total costs ............................................
÷ EUP .....................................................
Cost per EUP ........................................
Direct
Labor
22,200 EUP
Factory
Overhead
22,200 EUP
1,920 EUP
__________
24,120 EUP
1,920 EUP
24,120 EUP
Direct
Direct
Factory
Materials
Labor
Overhead
$ 19,800
$ 123,300
$ 98,640
496,800
1,203,300
962,640
$516,600
$1,326,600
$1,061,280
24,600 EUP 24,120 EUP 24,120 EUP
$21 per EUP $55 per EUP $44 per EUP
[Continued on next page]
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912
Financial & Managerial Accounting, 5th Edition
Problem 16-5A (Concluded)
Cost assignment and reconciliation
Costs transferred out
Direct materials (22,200 EUP x $21.00 per EUP) ..................
$ 466,200
Direct labor (22,200 EUP x $55.00 per EUP) .........................
1,221,000
Factory overhead (22,200 x $44.00 per EUP) .......................
976,800
$2,664,000
Costs of ending goods in process
Direct materials (2,400 EUP x $21.00 per EUP) ....................
50,400
Direct labor (1,920 EUP x $55.00 per EUP) ...........................
105,600
Factory overhead (1,920 EUP x $44.00 per EUP) .................
84,480
Total costs accounted for ........................................................
240,480
$2,904,480
Part 2
May 31 Finished Goods Inventory .............................................
2,664,000
Goods in Process Inventory ...................................
2,664,000
Transfer of goods to finished inventory.
Part 3
3a. Two major estimates are the: i) overhead allocation rate, and ii)
percentage of completion for materials, labor, and overhead.
3b. Management might want an overhead allocation rate that assigns the
least amount of overhead applied to their respective production
process, and we might anticipate underestimation of the percentage of
completion. If materials are added at the beginning of the process, then
this number is difficult to “manage.” More typically, management might
try to underestimate the percentage complete because this reduces the
equivalent units for labor and overhead. This results in lowering the
dollar value assigned to these components of ending inventory.
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Solutions Manual, Chapter 16
913
Problem 16-6A (80 minutes)
Part 1
TAMAR CO.
Process Cost Summary – FIFO Method
For Month Ended May 31
Costs charged to Production
Costs of beginning goods in process
Direct materials .................................................................$ 19,800
Direct labor ........................................................................ 123,300
Factory overhead .............................................................. 98,640
Costs incurred this period
Direct materials ................................................................. 496,800
Direct labor ........................................................................1,203,300
Factory overhead .............................................................. 962,640
Total costs to account for ..................................................
$ 241,740
2,662,740
$2,904,480
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ...................................
3,000 Completed & transferred out...........
22,200
Units started this period ..........................................
21,600 Ending goods in process ...............
2,400
Total units to account for ........................................
24,600 Total units accounted for ...............
24,600
Direct
Materials
Direct
Labor
Factory
Overhead
Equivalent units of production
Units to complete beginning goods in process
Direct materials (3,000 x 0%) ............................. 0 EUP
1,800 EUP
Direct labor (3,000 x 60%) ..................................
1,800 EUP
Factory overhead (3,000 x 60%) ........................
19,200 EUP 19,200 EUP 19,200 EUP
Units started and completed ...............................
Units of ending goods in process
2,400 EUP
Direct materials (2,400 x 100%) .........................
Direct labor (2,400 x 80%) ..................................
_________
Factory overhead (2,400 x 80%) ........................
1,920 EUP
_________
1,920 EUP
21,600 EUP 22,920 EUP 22,920 EUP
Equivalent units of production ...........................
[Continued on next page]
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914
Financial & Managerial Accounting, 5th Edition
Problem 16-6A (Concluded)
Cost per EUP
Costs incurred this period ..................
÷ EUP ....................................................
Cost per EUP........................................
Direct
Materials
$ 496,800
÷ 21,600
$23.00 per
EUP
Direct
Labor
$1,203,300
÷
22,920
$52.50 per
EUP
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process .........................
Cost to complete beginning goods in process
Direct materials (0 EUP x $23.00 per EUP) ..............
Direct labor (1,800 EUP x $52.50 per EUP) ..............
Factory overhead (1,800 EUP x $42.00 per EUP) ....
Costs of units started and completed this period
Direct materials (19,200 EUP x $23.00 per EUP) .....
Direct labor (19,200 EUP x $52.50 per EUP) ............
Factory overhead (19,200 EUP x $42.00 per EUP) ..
$ 241,740
$
0
94,500
75,600
170,100
441,600
1,008,000
806,400
2,256,000
Total cost of goods finished this period ...................
Costs of ending goods in process
Direct materials (2,400 EUP x $23.00 per EUP) .......
Direct labor (1,920 EUP x $52.50 per EUP) ..............
Factory overhead (1,920 EUP x $42.00 per EUP) ....
Factory
Overhead
$ 962,640
÷ 22,920
$42.00 per
EUP
2,667,840
55,200
100,800
80,640
Total costs accounted for ...........................................
236,640
$2,904,480
Part 2
May 31 Finished Goods Inventory .............................................
2,667,840
Goods in Process Inventory ...................................
2,667,840
Transfer of goods to finished inventory.
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Solutions Manual, Chapter 16
915
Problem 16-7A (45 minutes)
1.
Units in beginning inventory ......................................... 37,500
Units started and completed ......................................... 150,000
Total units transferred to finished goods .................... 187,500
2. Equivalent units of production—FIFO
Direct
Materials
Equivalent units of production
Direct
Labor
Units to complete beginning goods in process
Direct materials (37,500 x 40%) .................................
15,000
Direct labor (37,500 x 60%) ........................................
Units started and completed .......................................
22,500
150,000
150,000
Units in ending work in process
Direct materials (51,250 x 60%) .................................
30,750
Direct labor (51,250 x 20%) ........................................
_______
10,250
Equivalent units of production....................................
195,750
182,750
3. Cost per equivalent unit of direct materials and direct labor—FIFO
Direct
Materials
Direct
Labor
Costs incurred this period ...........................................
$ 505,035
$ 396,568
÷ Equivalent units of production (from part 2) ..........
195,750
182,750
Cost per equivalent unit of production ......................
$2.58 per
EUP
$2.17 per
EUP
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916
Financial & Managerial Accounting, 5th Edition
Problem 16-7A (Concluded)
4. Assignment of costs to output of department—FIFO
Costs of goods transferred out
Cost of beginning goods in process inventory .........
Direct materials...........................................................$74,075.00
Direct labor.................................................................. 28,493.00
$ 102,568.00
Costs to complete beginning goods in process
Direct materials (15,000 EUP x $2.58 per EUP) ........ 38,700.00
Direct labor (22,500 EUP x $2.17 per EUP) ............... 48,825.00
Total costs to complete .............................................
87,525.00
Cost of units started and completed this period
Direct materials (150,000 EUP x $2.58 per EUP) ......387,000.00
Direct labor (150,000 EUP x $2.17 per EUP) .............325,500.00
Total cost of units started and completed ...............
712,500.00
Total costs of goods transferred out ..........................
902,593.00
Cost of ending goods in process inventory
Direct materials (30,750 EUP x $2.58 per EUP) ........ 79,335.00
Direct labor (10,250 EUP x $2.17 per EUP) ............... 22,242.50
Total costs of ending goods in process...................
101,577.50
Total costs accounted for ............................................
$1,004,170.50
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Solutions Manual, Chapter 16
917
Problem 16-8A (50 minutes)
Part 1 Equivalent units with respect to direct materials and direct labor
Direct
Materials
Equivalent units of production (EUP)
Units to complete beginning goods in process
Direct materials (60,000 x 0%).............................
Direct labor (60,000 x 20%)..................................
Units started and completed.................................
Units in ending work in process
Direct materials (180,000 x 100%).......................
Direct labor (180,000 x 30%)................................
Total equivalent units of production ....................
Direct
Labor
0
640,000
12,000
640,000
180,000
_______
820,000
54,000
706,000
Part 2
Direct
Cost per equivalent unit of production
Materials
Costs incurred this period ............................................
$ 2,220,000
Direct
Labor
$ 3,254,000
÷ Equivalent units of production ..................................
820,000 EUP 706,000 EUP
$2.71 per EUP $4.61 per EUP
Cost per equivalent unit of production* ......................
Part 3
Assigning product costs to units
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process .........................
Cost to complete beginning goods in process
Direct materials (0 EUP x $2.71 per EUP) ................
Direct labor (12,000 EUP x $4.61 per EUP) ..............
Costs of units started and completed this period
Direct materials (640,000 EUP x $2.71 per EUP) .....
Direct labor (640,000 EUP x $4.61 per EUP) ............
Total cost of goods finished this period ...................
Costs of ending goods in process
Direct materials (180,000 EUP x $2.71 per EUP) .....
Direct labor (54,000 EUP x $4.61 per EUP) ..............
Total costs accounted for** ........................................
$ 559,000
$
0
55,320
55,320
1,734,400
2,950,400
4,684,800
487,800
248,940
736,740
$6,035,860
*Rounded to two decimal places. **This differs from the sum of the total direct materials cost
and the total direct labor costs ($2,640,000 + $3,393,000 = $6,033,000) due to rounding.
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918
Financial & Managerial Accounting, 5th Edition
Problem 16-8A (Concluded)
Part 4
MEMORANDUM
TO:
FROM:
DATE:
RE:
Percentage of Completion Error Analysis
If the units in ending inventory are 60% complete instead of 30% with
respect to labor, the number of equivalent units in ending inventory with
respect to labor is understated, and the total equivalent units produced for
the period is also understated. If the correct percentage of completion with
respect to labor is used, the direct labor cost per equivalent unit will be
smaller. However, the cost of direct labor in ending goods in process is
larger because the percentage of equivalent units remaining in ending
inventory is greater.
Regarding financial statements, this error causes an overstatement of cost
of goods sold and an understatement of net income on the income
statement for November. On the November 30 balance sheet, the goods in
process inventory and retained earnings are understated; therefore total
assets and equity are also understated.
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Solutions Manual, Chapter 16
919
Problem 16-9A (80 minutes)
Part 1
DENGO CO.
Process Cost Summary – FIFO Method
For Month Ended October 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials ................................................................. $ 9,900
Direct labor ........................................................................ 61,650
Factory overhead .............................................................. 49,320
$ 120,870
Costs incurred this period
Direct materials ................................................................. 248,400
Direct labor ........................................................................ 601,650
Factory overhead .............................................................. 481,320
1,331,370
Total costs to account for ..................................................
$1,452,240
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ...................................
3,000 Completed & transferred out ...........
22,200
Units started this period ..........................................
21,600 Ending goods in process ................
2,400
Total units to account for ........................................
24,600 Total units accounted for ................
24,600
Equivalent units of production
Direct
Materials
Units to complete beginning goods in process
Direct materials (3,000 x 0%) ............................. 0 EUP
Direct labor (3,000 x 60%) ..................................
Factory overhead (3,000 x 60%) ........................
Direct
Labor
Factory
Overhead
1,800 EUP
19,200 EUP 19,200 EUP
Units started and completed ...............................
Units of ending goods in process
2,400 EUP
Direct materials (2,400 x 100%) .........................
1,920 EUP
Direct labor (2,400 x 80%) ..................................
_________ _________
Factory overhead (2,400 x 80%) ........................
21,600 EUP 22,920 EUP
Equivalent units of production ...........................
1,800 EUP
19,200 EUP
1,920 EUP
22,920 EUP
[Continued on next page]
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920
Financial & Managerial Accounting, 5th Edition
Problem 16-9A (Continued)
Cost per EUP
Costs incurred this period ..................
÷ EUP ....................................................
Cost per EUP........................................
Direct
Materials
$ 248,400
÷ 21,600
$11.50 per
EUP
Direct
Labor
$ 601,650
÷ 22,920
$26.25 per
EUP
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process .........................
Cost to complete beginning goods in process
Direct materials (0 EUP x $11.50 per EUP) ..............
Direct labor (1,800 EUP x $26.25 per EUP) ..............
Factory overhead (1,800 EUP x $21.00 per EUP) ....
Factory
Overhead
$ 481,320
÷ 22,920
$21.00 per
EUP
$ 120,870
$
0
47,250
37,800
Costs of units started and completed this period
Direct materials (19,200 EUP x $11.50 per EUP) .....
Direct labor (19,200 EUP x $26.25 per EUP) ............
Factory overhead (19,200 EUP x $21.00 per EUP) ..
Total cost of goods finished this period ...................
220,800
504,000
403,200
Costs of ending goods in process
Direct materials (2,400 EUP x $11.50 per EUP) .......
Direct labor (1,920 EUP x $26.25 per EUP) ..............
Factory overhead (1,920 EUP x $21.00 per EUP) ....
Total costs accounted for ...........................................
27,600
50,400
40,320
85,050
1,128,000
1,333,920
118,320
$1,452,240
Part 2
Oct. 31
Finished Goods Inventory .............................................
1,333,920
Goods in Process Inventory ...................................
1,333,920
Transfer of goods to finished goods
inventory.
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Solutions Manual, Chapter 16
921
Problem 16-9A (Concluded)
Part 3
If equivalent units of production for the production department's ending
inventory for October are understated, then total equivalent units of
production is also understated. This means the cost per equivalent unit for
October is overstated and the production manager would be paid a smaller
bonus in October than should be the case. However, since October ending
work in progress inventory is understated, beginning work in progress
inventory for November is also understated. Then, the cost per equivalent
unit for November will be understated, and the production manager would
be paid a larger bonus in November than should be the case. However,
since managers are only responsible for production in their own
department, the error has no impact on the bonus paid to any other
manager.
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922
Financial & Managerial Accounting, 5th Edition
PROBLEM SET B
Problem 16-1B (45 minutes)
Part 1: Cost of goods transferred and cost of goods sold
Beginning goods in process inventory............................................ $156,000
Direct materials used in production................................................. 120,000
Direct labor used in production........................................................ 350,000
Overhead applied (75% of direct labor cost) ................................... 262,500
Total production costs ...................................................................... 888,500
Less ending goods in process inventory ........................................ (250,000)
Transferred to finished goods inventory (a).................................... $638,500
Beginning finished goods inventory ............................................... $160,000
Plus goods transferred from production ........................................ 638,500
Goods available for sale ................................................................... 798,500
Less ending finished goods inventory ............................................ (198,000)
Cost of goods sold (b) ...................................................................... $600,500
Part 2: Summary journal entries
a.
June 30 Raw Materials Inventory ...............................................
200,000
Accounts Payable ...................................................
200,000
Purchased raw materials.
b.
June 30 Goods in Process Inventory .........................................
120,000
Raw Materials Inventory ..........................................
120,000
Used direct materials.
c.
June 30 Factory Overhead ..........................................................
42,000
Raw Materials Inventory .........................................
42,000
Used indirect materials.
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Solutions Manual, Chapter 16
923
Problem 16-1B (Continued)
d.
June 30 Factory Payroll ..............................................................
400,000
Cash .........................................................................
400,000
Incurred payroll cost.
e.
June 30 Goods in Process Inventory .........................................
350,000
Factory Payroll ........................................................
350,000
Used direct labor.
f.
June 30 Factory Overhead ..........................................................
50,000
Factory Payroll ........................................................
50,000
Used indirect labor.
g.
June 30 Factory Overhead ..........................................................
170,500
Other Accounts .......................................................
170,500
Incurred other overhead costs.
h.
June 30 Goods in Process Inventory .........................................
262,500
Factory Overhead.....................................................
262,500
Applied overhead at 75% of direct labor cost.
i.
June 30 Finished Goods Inventory .............................................
638,500
Goods in Process Inventory ...................................
638,500
Transferred completed products from
production to finished goods inventory.
j.
June 30 Accounts Receivable ....................................................
1,000,000
Sales .........................................................................
1,000,000
Sold finished goods.
June 30 Cost of Goods Sold ......................................................
600,500
Finished Goods Inventory ......................................
600,500
To record cost of goods sold for June.
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924
Financial & Managerial Accounting, 5th Edition
Problem 16-2B (50 minutes)
Part 1
(a) and (b) Equivalent units with respect to direct materials and direct labor
Equivalent units of production
Direct
Materials
Units completed & transferred out .......................
Units of ending goods in process ........................
Direct materials (8,000 x 100%).......................
Direct labor (8,000 x 25%)................................
Equivalent units of production .............................
80,000
Direct
Labor
80,000
8,000
______
88,000
2,000
82,000
Part 2
Direct
Direct
Cost per equivalent unit of production
Materials
Labor
Costs of beginning goods in process................ $ 58,000
$ 86,400
Costs incurred this period ..................................
712,000
1,980,000
Total costs ............................................................ $770,000
$2,066,400
÷ Equivalent units of production ........................ 88,000 EUP
82,000 EUP
Cost per equivalent unit of production ..............$8.75 per EUP $25.2 per EUP
Part 3: Assigning product costs to units
Costs transferred out
Direct materials (80,000 EUP x $8.75 per EUP) .........
$ 700,000
Direct labor (80,000 EUP x $25.20 per EUP) ..............2,016,000
Total costs transferred out .........................................
$2,716,000
Cost of ending goods in process
Direct materials (8,000 EUP x $8.75 per EUP) ........... 70,000
Direct labor (2,000 EUP x $25.20 per EUP) ................ 50,400
Total costs of ending goods in process ....................
120,400
Total costs accounted for* ............................................
$2,836,400
*This equals the sum of the total direct materials cost and the
total direct labor costs ($770,000 + $2,066,400 = $2,836,400).
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 16
925
Problem 16-2B (Concluded)
Part 4
MEMORANDUM
TO:
FROM:
DATE:
RE:
Percentage of Completion Error Analysis
If the units in ending inventory are 75% complete instead of 25% with respect
to labor, the number of equivalent units in ending inventory with respect to
labor is understated, and the total equivalent units produced for the period is
also understated. If the correct percentage of completion with respect to labor
is used, the direct labor cost per equivalent unit will be smaller. However, the
cost of direct labor in ending goods in process is larger because the
percentage of equivalent units remaining in ending inventory is greater.
Regarding financial statements, this error causes an overstatement of cost of
goods sold and an understatement of net income on the income statement for
September.
On the September 30 balance sheet, the goods in process
inventory and retained earnings are understated; therefore total assets and
equity are also understated.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
926
Financial & Managerial Accounting, 5th Edition
Problem 16-3B (60 minutes)
Part 1
a.
May 31 Raw Materials Inventory ................................................
221,120
Accounts Payable ....................................................
221,120
Raw materials purchased.
b.
May 31 Goods in Process Inventory .........................................
197,120
Raw Materials Inventory ..........................................
197,120
Direct materials used in production.
c.
May 31 Factory Overhead...........................................................
40,560
Raw Materials Inventory ..........................................
40,560
Indirect materials used.
d.
May 31 Factory Payroll ...............................................................
160,000
Cash ..........................................................................
160,000
Factory payroll costs.
e.
May 31 Goods in Process Inventory .........................................
123,680
Factory Payroll .........................................................
123,680
Direct labor used in production.
f.
May 31 Factory Overhead...........................................................
36,320
Factory Payroll .........................................................
36,320
Indirect labor used.
g.
May 31 Factory Overhead...........................................................
34,432
Other Accounts ........................................................
34,432
Other overhead costs.
h.
May 31 Goods in Process Inventory .........................................
111,312
Factory Overhead.....................................................
111,312
Application of overhead at 90% of
direct labor cost.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 16
927
Problem 16-3B (Continued)
i.
May 31 Finished Goods Inventory .............................................
389,740
Goods in Process Inventory ...................................
389,740
Transfer goods to finished goods.
j.
May 31 Cash ................................................................................
1,200,000
Sales..........................................................................
1,200,000
Sales of finished goods. (10,000 x $120)
May 31 Cost of Goods Sold .......................................................
474,540
Finished Goods ........................................................
474,540
Cost of goods sold.
Part 2
OSLO COMPANY
Process Cost Summary – Weighted Average Method
For Month Ended May 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials.................................................................. $ 2,880
Direct labor.........................................................................
2,820
Factory overhead ...............................................................
2,538
Costs incurred this period
Direct materials..................................................................
Direct labor.........................................................................
Factory overhead ...............................................................
197,120
123,680
111,312
Total costs to account for...................................................
Unit cost information
Units to account for
$
8,238
432,112
$440,350
Units accounted for
Beginning goods in process ...........
4,000 Completed & transferred out .................................
13,000
Units started this period ..................
12,000 Ending goods in process......................................
3,000
Total units to account for ................
16,000 Total units accounted for......................................
16,000
[Continued on next page]
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
928
Financial & Managerial Accounting, 5th Edition
Problem 16-3B (Concluded)
Direct
Direct
Equivalent units of production
Materials
Labor
Units completed & transferred out ...........
13,000 EUP 13,000 EUP
Units of ending goods in process
Direct materials (3,000 x 100%) ...............3,000 EUP
Direct labor (3,000 x 25%) ........................
750 EUP
__________ __________
Factory overhead (3,000 x 25%) ..............
Equivalent units of production..................
16,000 EUP 13,750 EUP
Factory
Overhead
13,000 EUP
Direct
Direct
Cost per EUP
Materials
Labor
Cost of beginning goods in process ........ $ 2,880
$ 2,820
Costs incurred this period ......................... 197,120
123,680
Total costs................................................... $200,000
$126,500
÷ EUP ...........................................................
16,000 EUP 13,750 EUP
Cost per EUP...............................................
$12.50 per
$9.20 per
EUP
EUP
Factory
Overhead
$ 2,538
111,312
$113,850
13,750 EUP
$8.28 per
EUP
Cost assignment and reconciliation
Costs transferred out
Direct materials (13,000 EUP x $12.50 per EUP) .....
Direct labor (13,000 EUP x $9.20 per EUP) ..............
Factory overhead (13,000 x $8.28 per EUP) ............
Costs of ending goods in process
Direct materials (3,000 EUP x $12.50 per EUP) .......
Direct labor (750 EUP x $9.20 per EUP) ...................
Factory overhead (750 EUP x $8.28 per EUP) .........
Total costs accounted for ...........................................
$162,500
119,600
107,640
37,500
6,900
6,210
750 EUP
13,750 EUP
$389,740
50,610
$440,350
Part 3
If equivalent units of production for the production department's ending
inventory for May are overstated, then total equivalent units of production
is also overstated. This means the cost per equivalent unit is understated
and the production manager would be paid a larger bonus in May than
should be the case. This has no effect on June bonuses.
Units transferred to finished goods are, of course, 100% complete with
respect to production. Since managers are only responsible for production
in their own department, the error has no impact on the bonus paid to any
other manager.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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Solutions Manual, Chapter 16
929
Problem 16-4B (75 minutes)
Part 1
BRAUN COMPANY
Process Cost Summary – Weighted Average Method
For Month Ended November 30
Costs Charged to Production
Costs of beginning goods in process
Direct materials................................................................. $ 6,800
Direct labor........................................................................
5,800
Factory overhead ..............................................................
8,700
Costs incurred this period
$ 21,300
Direct materials................................................................. 116,400
Direct labor........................................................................ 426,800
Factory overhead .............................................................. 640,200
1,183,400
Total costs to account for..................................................
$1,204,700
Unit cost information
Units to account for
Beginning goods in process ..........
7,500
Units started this period .................
104,500
Total units to account for ...............
112,000
Units accounted for
Completed & transferred out .................................
100,000
Ending goods in process......................................
12,000
Total units accounted for......................................
112,000
Direct
Direct
Equivalent units of production
Materials
Labor
Units completed & transferred out ................
100,000 EUP 100,000 EUP
Units of ending goods in process
Direct materials (12,000 x 100%) ..................12,000 EUP
Direct labor (12,000 x 25%) ...........................
3,000 EUP
Factory overhead (12,000 x 25%) .................
___________ ___________
Equivalent units of production.......................
112,000 EUP 103,000 EUP
Direct
Cost per EUP
Materials
Cost of beginning goods in process ............. $ 6,800
Costs incurred this period..............................
116,400
Total costs ....................................................... $123,200
Factory
Overhead
100,000 EUP
3,000 EUP
103,000 EUP
Direct
Labor
$ 5,800
426,800
$432,600
Factory
Overhead
$ 8,700
640,200
$648,900
÷ EUP ................................................................
112,000 EUP 103,000 EUP
103,000 EUP
Cost per EUP ................................................... $1.10 per
EUP
$4.20 per
EUP
$6.30 per
EUP
[Continued on next page]
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930
Financial & Managerial Accounting, 5th Edition
Problem 16-4B (Concluded)
Cost assignment and reconciliation
Costs transferred out
Direct materials (100,000 EUP x $1.10 per EUP) .....
$110,000
Direct labor (100,000 EUP x $4.20 per EUP) ............
420,000
Factory overhead (100,000 x $6.30 per EUP) ..........
630,000
$1,160,000
Costs of ending goods in process
Direct materials (12,000 EUP x $1.10 per EUP) .......
13,200
Direct labor (3,000 EUP x $4.20 per EUP) ................
12,600
Factory overhead (3,000 EUP x $6.30 per EUP) ......
18,900
Total costs accounted for ...........................................
44,700
$1,204,700
Part 2
Nov. 30 Finished Goods Inventory .............................................
1,160,000
Goods in Process Inventory ...................................
1,160,000
Transfer of goods to finished goods
inventory.
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Solutions Manual, Chapter 16
931
Problem 16-5B (80 minutes)
Part 1
SWITCH CO.
Process Cost Summary – Weighted Average Method
For Month Ended January 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials................................................................. $ 7,500
Direct labor........................................................................
14,240
Factory overhead ..............................................................
35,600
Costs incurred this period
Direct materials................................................................. 112,500
Direct labor........................................................................ 176,000
Factory overhead .............................................................. 440,000
Total costs to account for..................................................
Unit cost information
Units to account for
Beginning goods in process ..........10,000
Units started this period .................
250,000
Total units to account for ...............
260,000
$ 57,340
728,500
$785,840
Units accounted for
Completed & transferred out ....220,000
Ending goods in process ...... 40,000
Total units accounted for ......260,000
Direct
Direct
Factory
Equivalent units of production
Materials
Labor
Overhead
Units completed & transferred out .........................
220,000 EUP 220,000 EUP 220,000 EUP
Units of ending goods in process
Direct materials (40,000 x 50%) .............................
20,000 EUP
Direct labor (40,000 x 30%) ....................................
12,000 EUP
Factory overhead (40,000 x 30%) ..........................
___________ ___________ 12,000 EUP
Equivalent units of production
240,000 EUP 232,000 EUP 232,000 EUP
Direct
Direct
Factory
Cost per EUP
Materials
Labor
Overhead
Cost of beginning goods in process ......................
$ 7,500
$ 14,240
$ 35,600
Costs incurred this period.......................................
112,500
176,000
440,000
Total costs ................................................................
$120,000
$190,240
$475,600
÷ EUP .........................................................................
240,000 EUP 232,000 EUP 232,000 EUP
Cost per EUP ............................................................
$0.50 per
$0.82 per
$2.05 per
EUP
EUP
EUP
[Continued on next page]
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932
Financial & Managerial Accounting, 5th Edition
Problem 16-5B (Concluded)
Cost assignment and reconciliation
Costs transferred out
Direct materials (220,000 EUP x $0.50 per EUP) ..................
$110,000
Direct labor (220,000 EUP x $0.82 per EUP) .........................
180,400
Factory overhead (220,000 x $2.05 per EUP) .......................
451,000
$741,400
Costs of ending goods in process
Direct materials (20,000 EUP x $0.50 per EUP) ....................10,000
Direct labor (12,000 EUP x $0.82 per EUP) ........................... 9,840
Factory overhead (12,000 EUP x $2.05 per EUP) .................24,600
Total costs accounted for ........................................................
44,440
$785,840
Part 2
Jan. 31 Finished Goods Inventory .............................................
741,400
Goods in Process Inventory ...................................
741,400
Transfer of goods to finished inventory.
Part 3
3a. Two major estimates are the: i) overhead allocation rate, and ii)
percentage of completion for materials, labor, and overhead.
3b. Management might want an overhead allocation rate that assigns the
least amount of overhead to their respective production process, and
we might anticipate underestimation of the percentage of completion. If
materials are added at the beginning of the process, then this number is
difficult to “manage.”
More typically, management might try to
underestimate the percentage complete because this reduces the
equivalent units for labor and overhead. This results in lowering the
dollar value assigned to these components of ending inventory.
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Solutions Manual, Chapter 16
933
Problem 16-6B (80 minutes)
Part 1
SWITCH COMPANY
Process Cost Summary – FIFO Method
For Month Ended January 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials................................................................. $ 7,500
Direct labor........................................................................
14,240
Factory overhead ..............................................................
35,600
Costs incurred this period
Direct materials.................................................................
Direct labor........................................................................
Factory overhead ..............................................................
$ 57,340
112,500
176,000
440,000
728,500
Total costs to account for..................................................
$785,840
Unit cost information
Units to account for
Beginning goods in process ............
10,000
Units started this period .................
250,000
Total units to account for ...............
260,000
220,000
40,000
260,000
Equivalent units of production
Units accounted for
Completed & transferred out .......
Ending goods in process.........
Total units accounted for.........
Direct
Materials
Units to complete beginning goods in process
Direct materials (10,000 x 25%) .............
2,500 EUP
Direct labor (10,000 x 40%) ....................
Factory overhead (10,000 x 40%) ..........
Units started and completed ...................
Units of ending goods in process
Direct materials (40,000 x 50%) .............
Direct labor (40,000 x 30%) ....................
Factory overhead (40,000 x 30%) ..........
Equivalent units of production................
210,000 EUP
Direct
Labor
Factory
Overhead
4,000 EUP
4,000 EUP
210,000 EUP
210,000 EUP
12,000 EUP
__________ ___________
12,000 EUP
20,000 EUP
232,500 EUP
226,000 EUP
226,000 EUP
[Continued on next page]
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934
Financial & Managerial Accounting, 5th Edition
Problem 16-6B (Concluded)
Direct
Direct Labor
Cost per EUP
Materials
Costs incurred this period .................. $ 112,500
$ 176,000
÷ EUP .................................................... ÷ 232,500
÷ 226,000
Cost per EUP (rounded) ........................ $0.484 per
$0.779 per
EUP
EUP
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process ......................................
Factory
Overhead
$ 440,000
÷ 226,000
$1.947 per
EUP
$ 57,340
Cost to complete beginning goods in process
Direct materials (2,500 EUP x $0.484 per EUP) ....................
$ 1,210
Direct labor (4,000 EUP x $0.779 per EUP) ...........................3,116
Factory overhead (4,000 EUP x $1.947 per EUP) .................7,788
12,114
Costs of units started and completed this period
Direct materials (210,000 EUP x $0.484 per EUP) ................
101,640
Direct labor (210,000 EUP x $0.779 per EUP) .......................
163,590
Factory overhead (210,000 EUP x $1.947 per EUP) .............
408,870
674,100
Total cost of goods finished this period ................................
743,554
Costs of ending goods in process
Direct materials (20,000 EUP x $0.484 per EUP) ..................9,680
Direct labor (12,000 EUP x $0.779 per EUP) .........................9,348
Factory overhead (12,000 EUP x $1.947 per EUP) ...............
23,364
Total costs accounted for* ......................................................
42,392
$785,946
* $106 difference from total costs to account for due to rounding
Part 2
Jan. 31 Finished Goods Inventory .............................................
743,554
Goods in Process Inventory ...................................
743,554
Transfer of goods to finished inventory.
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Solutions Manual, Chapter 16
935
Problem 16-7B (45 minutes)
1.
Units in beginning inventory ......................................... 62,500
Units started and completed ......................................... 175,000
Total units transferred to finished goods .................... 237,500
2. Equivalent units of production—FIFO
Direct
Materials
Equivalent units of production
Direct
Labor
Units to complete beginning goods in process
Direct materials (62,500 x 60%) ................................. 37,500
Direct labor (62,500 x 20%) ........................................
Units started and completed ....................................... 175,000
12,500
175,000
Units in ending work in process
Direct materials (76,250 x 80%) ................................. 61,000
Direct labor (76,250 x 20%) ........................................ _______
15,250
Equivalent units of production.................................... 273,500
202,750
3. Cost per equivalent unit of direct materials and direct labor—FIFO
Direct
Materials
Direct
Labor
Costs incurred this period ........................................... 683,750
446,050
÷ Equivalent units of production (from part 2) .......... 273,500
202,750
Cost per equivalent unit of production ......................$2.50 per
EUP
$2.20 per
EUP
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936
Financial & Managerial Accounting, 5th Edition
Problem 16-7B (Concluded)
4. Assignment of costs to output of department—FIFO
Costs of goods transferred out
Cost of beginning goods in process inventory .........
Direct materials...........................................................
$ 99,075
Direct labor..................................................................
53,493
$ 152,568
Costs to complete beginning goods in process
Direct materials (37,500 EUP x $2.50 per EUP) ........
93,750
Direct labor (12,500 EUP x $2.20 per EUP) ...............
27,500
Total costs to complete .............................................
121,250
Cost of units started and completed this period
Direct materials (175,000 EUP x $2.50 per EUP) ......
437,500
Direct labor (175,000 EUP x $2.20 per EUP) .............
385,000
Total cost of units started and completed ...............
822,500
Total costs of goods transferred out ..........................
1,096,318
Cost of ending goods in process inventory
Direct materials (61,000 EUP x $2.50 per EUP) ........
152,500
Direct labor (15,250 EUP x $2.20 per EUP) ...............
33,550
Total costs of ending goods in process...................
186,050
Total costs accounted for ............................................
$1,282,368
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Solutions Manual, Chapter 16
937
Problem 16-8B (50 minutes)
Part 1
Equivalent units with respect to direct materials and direct labor
Direct
Materials
Equivalent units of production (EUP)
Units to complete beginning goods in process
Direct materials (2,000 x 0%)...............................
Direct labor (2,000 x 15%)....................................
Units started and completed.................................
Units in ending work in process
Direct materials (8,000 x 100%)...........................
Direct labor (8,000 x 25%)....................................
Total equivalent units of production ....................
Direct
Labor
0
78,000
1,300
78,000
8,000
_____
86,000
2,000
80,300
Part 2
Direct
Cost per equivalent unit of production
Materials
Costs incurred this period ............................................
$
712,000 $
Direct
Labor
1,980,000
÷ Equivalent units of production ..................................
86,000 EUP 80,300 EUP
$8.28 per EUP $24.66 per EUP
Cost per equivalent unit of production* ......................
Part 3
Assigning product costs to units
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process .........................
Cost to complete beginning goods in process
Direct materials (0 EUP x $8.28 per EUP) ................
$
Direct labor (300 EUP x $24.66 per EUP) .................
$ 144,400
0
7,398
Costs of units started & completed this period
Direct materials (78,000 EUP x $8.28 per EUP) ....... 645,840
Direct labor (78,000 EUP x $24.66 per EUP) ............1,923,480
Total cost of goods finished this period ...................
Costs of ending goods in process
Direct materials (8,000 EUP x $8.28 per EUP) ......... 66,240
Direct labor (2,000 EUP x $24.66 per EUP) .............. 49,320
Total costs accounted for** ........................................
7,398
2,569,320
115,560
$2,836,678
*Rounded to two decimal places. **This differs from the sum of the total direct materials cost
and the total direct labor costs ($770,000 + $2,066,400 = $2,836,400) due to rounding.
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938
Financial & Managerial Accounting, 5th Edition
Problem 16-8B (Concluded)
Part 4
MEMORANDUM
TO:
FROM:
DATE:
RE:
Percentage of Completion Error Analysis
If the units in ending inventory are 75% complete instead of 25% with respect
to labor, the number of equivalent units in ending inventory with respect to
labor is understated, and the total equivalent units produced for the period is
also understated. If the correct percentage of completion with respect to labor
is used, the direct labor cost per equivalent unit will be smaller. However, the
cost of direct labor in ending goods in process is larger because the
percentage of equivalent units remaining in ending inventory is greater.
Regarding financial statements, this error causes an overstatement of cost of
goods sold and an understatement of net income on the income statement for
September.
On the September 30 balance sheet, the goods in process
inventory and retained earnings are understated; therefore total assets and
equity are also understated.
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Solutions Manual, Chapter 16
939
Problem 16-9B (80 minutes)
Part 1
BELDA CO.
Process Cost Summary – FIFO Method
For Month Ended March 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials................................................................. $ 16,800
Direct labor........................................................................
27,920
Factory overhead ..............................................................
69,800
Costs incurred this period
Direct materials.................................................................
Direct labor........................................................................
Factory overhead ..............................................................
223,200
352,560
881,400
Total costs to account for..................................................
Unit cost information
Units to account for
Beginning goods in process ..........
10,000
Units started this period .................
250,000
Total units to account for ...............
260,000
Equivalent units of production
$ 114,520
1,457,160
$1,571,680
Units accounted for
Completed & transferred out ......220,000
Ending goods in process ......... 40,000
Total units accounted for .........260,000
Direct
Materials
Direct
Labor
Factory
Overhead
Units to complete beginning goods in process
Direct materials (10,000 x 25%) .............
2,500 EUP
Direct labor (10,000 x 40%) ....................
4,000 EUP
Factory overhead (10,000 x 40%) ..........
4,000 EUP
Units started and completed ................... 210,000 EUP
210,000 EUP 210,000 EUP
Units of ending goods in process
Direct materials (40,000 x 50%) .............
20,000 EUP
Direct labor (40,000 x 30%) ....................
12,000 EUP
Factory overhead (40,000 x 30%) .......... __________
Equivalent units of production................ 232,500 EUP
___________
12,000 EUP
226,000 EUP 226,000 EUP
[Continued on next page]
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940
Financial & Managerial Accounting, 5th Edition
Problem 16-9B (Continued)
Direct
Direct Labor
Cost per EUP
Materials
Costs incurred this period .................. $ 223,200
$ 352,560
÷ EUP .................................................... ÷ 232,500
÷ 226,000
Cost per EUP........................................ $ 0.96 per
$ 1.56 per
EUP
EUP
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process ......................................
Factory
Overhead
$ 881,400
÷ 226,000
$ 3.90 per
EUP
$ 114,520
Cost to complete beginning goods in process
Direct materials (2,500 EUP x $0.96 per EUP) ......................
$ 2,400
Direct labor (4,000 EUP x $1.56 per EUP) .............................6,240
Factory overhead (4,000 EUP x $3.90 per EUP) ...................
15,600
24,240
Costs of units started and completed this period
Direct materials (210,000 EUP x $0.96 per EUP) ..................
201,600
Direct labor (210,000 EUP x $1.56 per EUP) .........................
327,600
Factory overhead (210,000 EUP x $3.90 per EUP) ...............
819,000
Total cost of goods finished this period ................................
1,348,200
1,486,960
Costs of ending goods in process
Direct materials (20,000 EUP x $0.96 per EUP) ....................
19,200
Direct labor (12,000 EUP x $1.56 per EUP) ...........................
18,720
Factory overhead (12,000 EUP x $3.90 per EUP) .................
46,800
84,720
Total costs accounted for ........................................................
$1,571,680
Part 2
Mar. 31 Finished Goods Inventory .............................................
1,486,960
Goods in Process Inventory ...................................
1,486,960
Transfer of goods to finished inventory.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 16
941
Problem 16-9B (Concluded)
If equivalent units of production for the production department's ending
inventory for March are overstated, then total equivalent units of production
is also overstated. This means the cost per equivalent unit for March is
understated and the production manager would be paid a larger bonus in
March than should be the case. However, since March ending work in
progress inventory is overstated, beginning work in progress inventory for
April is also overstated. Then, the cost per equivalent unit for April will be
overstated, and the production manager would be paid a smaller bonus in
April than should be the case. However, since managers are only
responsible for production in their own department, the error has no impact
on the bonus paid to any other manager.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
942
Financial & Managerial Accounting, 5th Edition
SERIAL PROBLEM — SP 16
1.
2.
Features of job order and process costing follow.
Job order costing
Process costing
 Custom orders
 Repetitive operations
 Heterogeneous products
 Homogeneous products
 Low production volume
 High production volume
 High product flexibility
 Low product flexibility
 Low to medium standardization
 High standardization
Given the size of her company, and the types of products she sells,
Adria should probably stay with job order costing. The furniture she
makes would be made in small batches, probably to customer order.
She is able to provide high product flexibility in order to meet her
customers’
needs,
and
her
production
probably
has
low
standardization. All in all, job order costing will probably be the best
for her for now.
If her company grows, and she begins to mass
produce the furniture, she might reconsider her decision and switch to
process costing.
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Solutions Manual, Chapter 16
943
COMPREHENSIVE PROBLEM
Comprehensive Problem, Major League Bat Company (110 minutes)
[Instructor note: General Ledger accounts are shown in Part 4.]
Part 1 (Using either weighted-average or FIFO)
July Journal Entries
a.
Raw Materials Inventory ...............................................
125,000
Cash ..........................................................................
125,000
Purchased raw materials for cash.
b.
Goods in Process Inventory..........................................
52,440
Factory Overhead ..........................................................
10,000
Raw Materials Inventory ..........................................
62,440
To record use of raw materials.
c.
Factory Payroll ..............................................................
227,250
Cash .........................................................................
227,250
Paid factory payroll with cash.
d.
Goods in Process Inventory..........................................
202,250
Factory Overhead ..........................................................
25,000
Factory Payroll ........................................................
227,250
To record direct and indirect labor.
e.
Factory Overhead ..........................................................
80,000
Cash .........................................................................
80,000
Paid other overhead with cash.
f.
Goods in Process Inventory..........................................
101,125
Factory Overhead ....................................................
101,125
Allocated overhead at 50% of direct labor.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
944
Financial & Managerial Accounting, 5th Edition
Comprehensive Problem (Continued)
Part 2 (Using weighted-average)
MAJOR LEAGUE BAT CO.
Process Cost Summary (Weighted Average)
For Month Ended July 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials................................................................. $ 2,660
Direct labor........................................................................
3,650
Factory overhead ..............................................................
1,825
Costs incurred this period
Direct materials.................................................................
52,440
Direct labor........................................................................ 202,250
Factory overhead .............................................................. 101,125
Total costs to account for..................................................
$
8,135
355,815
$363,950
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ..................................
5,000 Complete & transferred out ............
11,000
Units started this period .........................................
14,000 Ending goods in process ................
8,000
Total units to account for .......................................
19,000 Total units accounted for ................
19,000
Equivalent units of production
Direct
Materials
Units completed & transferred out ................11,000 EUP
Units of ending goods in process
Direct materials (8,000 x 100%) .................... 8,000 EUP
Direct labor (8,000 x 40%) .............................
Factory overhead (8,000 x 40%) ...................__________
Equivalent units of production
19,000 EUP
Cost per EUP
Direct
Materials
Cost of beginning goods in process .............
$ 2,660
Costs incurred this period..............................
52,440
Total costs .......................................................
$55,100
÷ EUP ................................................................19,000 EUP
Cost per EUP ................................................... $2.90 per
EUP
Direct
Labor
Factory
Overhead
11,000 EUP
11,000 EUP
3,200 EUP
__________
14,200 EUP
3,200 EUP
14,200 EUP
Direct
Labor
$
3,650
202,250
$205,900
14,200 EUP
$14.50 per
EUP
Factory
Overhead
$
1,825
101,125
$102,950
14,200 EUP
$7.25 per
EUP
[Continued on next page]
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Solutions Manual, Chapter 16
945
Comprehensive Problem (Continued)
(Using weighted-average)
Cost assignment and reconciliation
Costs transferred out
Direct materials (11,000 EUP x $2.90 per EUP) ....................
$ 31,900
Direct labor (11,000 EUP x $14.50 per EUP) .........................
159,500
Factory overhead (11,000 EUP x $7.25 per EUP) .................79,750
$271,150
Costs of ending goods in process
Direct materials (8,000 EUP x $2.90 per EUP) ......................23,200
Direct labor (3,200 EUP x $14.50 per EUP) ...........................46,400
Factory overhead (3,200 EUP x $7.25 per EUP) ...................23,200
92,800
Total costs accounted for ........................................................
$363,950
Part 3 — Journal entries (Using weighted-average)
g.
Finished Goods Inventory ............................................
271,150
Goods in Process Inventory....................................
271,150
Transferred goods to Finished Goods.
h.
Cash ................................................................................
625,000
Sales ..........................................................................
625,000
Sold finished goods for cash.
Cost of Goods Sold .......................................................
265,700
Finished Goods Inventory .......................................
265,700
Transferred cost from finished goods
to cost of goods sold.
©2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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946
Financial & Managerial Accounting, 5th Edition
Comprehensive Problem (Continued)
Part 4 (Using weighted-average)
General ledger accounts
Date
June 30
(a)
(b)
Raw Materials Inventory
Explanation
Debit
Balance
Purchases
125,000
Usage
Acct. No. 132
Credit
Balance
25,000
150,000
62,440
87,560
Date
June 30
(b)
(d)
(f)
(g)
Goods in Process Inventory
Explanation
Debit
Balance
Direct materials
52,440
Direct labor
202,250
Overhead allocation
101,125
Transfer to Fin. Goods
Acct. No. 133
Credit
Balance
8,135
60,575
262,825
363,950
271,150
92,800
Date
June 30
(g)
(h)
Finished Goods Inventory
Acct. No. 135
Explanation
Debit
Credit
Balance
Balance
110,000
Transfer in from prod.
271,150
381,150
July sales
265,700
115,450
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Solutions Manual, Chapter 16
947
Comprehensive Problem (Concluded)
Part 4 (Using weighted-average)
Sales
Debit
Acct. No. 413
Credit
Balance
625,000
625,000
Date
(h)
Explanation
July sales
Date
(h)
Cost of Goods Sold
Explanation
Debit
July sales
265,700
Credit
Date
(c)
(d)
Factory Payroll
Explanation
Debit
July costs
227,250
Allocation
Acct. No. 530
Credit
Balance
227,250
227,250
0
Date
(b)
(d)
(e)
(f)
Factory Overhead
Explanation
Debit
Indirect materials
10,000
Indirect labor
25,000
Other overhead costs
80,000
Overhead application
Acct. No. 540
Credit
Balance
10,000
35,000
115,000
101,125
13,875
Acct. No. 502
Balance
265,700
Part 5 (Using weighted-average)
Computation of gross profit for July
Sales....................................................................................................$ 625,000
Cost of goods sold* ........................................................................... (279,575)
Gross profit ........................................................................................$ 345,425
* $279,575 = $265,700 + $13,875 (underapplied overhead)
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948
Financial & Managerial Accounting, 5th Edition
Comprehensive Problem (Continued)
Part 2 (Using FIFO)
MAJOR LEAGUE BAT CO.
Process Cost Summary (FIFO)
For Month Ended July 31
Costs Charged to Production
Costs of beginning goods in process
Direct materials................................................................. $
Direct labor........................................................................
Factory overhead ..............................................................
2,660
3,650
1,825
Costs incurred this period
Direct materials.................................................................
52,440
Direct labor........................................................................ 202,250
Factory overhead .............................................................. 101,125
Total costs to account for ..................................................
$
8,135
355,815
$363,950
Unit cost information
Units to account for
Units accounted for
Beginning goods in process ..................................
5,000 Complete & transferred out ............
11,000
Units started this period .........................................
14,000 Ending goods in process ................
8,000
Total units to account for .......................................
19,000 Total units accounted for ................
19,000
Equivalent units of production
Direct
Materials
Direct
Labor
Factory
Overhead
Units to complete beginning goods in process
Direct materials (5,000 x 25%) ...............
0 EUP
Direct labor (5,000 x 25%) ......................
1,250 EUP
Factory overhead (5,000 x 25%) ............
Units started and completed ...................
1,250 EUP
6,000 EUP
6,000 EUP
6,000 EUP
Units of ending goods in process
Direct materials (8,000 x 100%) .............
8,000 EUP
Direct labor (8,000 x 40%) ......................
3,200 EUP
Factory overhead (8,000 x 40%) ............
_________
_________
3,200 EUP
Equivalent units of production................
14,000 EUP
10,450 EUP
10,450 EUP
[Continued on next page]
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Solutions Manual, Chapter 16
949
Comprehensive Problem (Continued)
(Using FIFO)
Direct
Cost per EUP
Materials
Direct Labor
Costs incurred this period .................. $ 52,440
$ 202,250
÷ EUP .................................................... ÷ 14,000
÷ 10,450
Cost per EUP (rounded) ...................... $3.75 per
$19.35 per
EUP
EUP
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process ......................................
Factory
Overhead
$ 101,125
÷ 10,450
$ 9.68 per
EUP
$
8,135
Cost to complete beginning goods in process
Direct materials (0 EUP x $3.75 per EUP) .............................
$
0
Direct labor (1,250 EUP x $19.35 per EUP) ...........................
24,188
Factory overhead (1,250 EUP x $9.68 per EUP) ...................
12,100
36,288
Costs of units started and completed this period
Direct materials (6,000 EUP x $3.75 per EUP) ......................
22,500
Direct labor (6,000 EUP x $19.35 per EUP) ...........................
116,100
Factory overhead (6,000 EUP x $9.68 per EUP) ...................
58,080
Total cost of goods finished this period ................................
196,680
241,103
Costs of ending goods in process
Direct materials (8,000 EUP x $3.75 per EUP) ......................
30,000
Direct labor (3,200 EUP x $19.35 per EUP) ...........................
61,920
Factory overhead (3,200 EUP x $9.68 per EUP) ...................
30,976
122,896
Total costs accounted for ........................................................
$363,999*
*Equals $363,950 costs to account for with $49 rounding difference
Part 3 — Journal entries (Using FIFO)
g.
Finished Goods Inventory ...................................................
241,103
Goods in Process Inventory ..........................................
241,103
Transferred goods to Finished Goods.
h.
Cash .......................................................................................
625,000
Sales ................................................................................
625,000
Sold finished goods for cash.
Cost of Goods Sold .............................................................
265,700
Finished Goods Inventory ..............................................
265,700
Transferred costs to COGS.
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950
Financial & Managerial Accounting, 5th Edition
Comprehensive Problem (Continued)
Part 4 (Using FIFO)
General ledger accounts
Date
June 30
(a)
(b)
Raw Materials Inventory
Explanation
Debit
Balance
Purchases
125,000
Usage
Acct. No. 132
Credit
Balance
25,000
150,000
62,440
87,560
Date
June 30
(b)
(d)
(f)
(g)
Goods in Process Inventory
Explanation
Debit
Balance
Direct materials
52,440
Direct labor
202,250
Overhead allocation
101,125
Transfer to Fin. Goods
Acct. No. 133
Credit
Balance
8,135
60,575
262,825
363,950
241,103
122,847*
*Agrees with $122,896 from process cost summary with $49 rounding difference
Date
June 30
(g)
(h)
Finished Goods Inventory
Acct. No. 135
Explanation
Debit
Credit
Balance
Balance
110,000
Transfer in from prod.
241,103
351,103
July sales
265,700
85,403
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Solutions Manual, Chapter 16
951
Comprehensive Problem (Concluded)
Part 4—concluded
Sales
Debit
Acct. No. 413
Credit
Balance
625,000
625,000
Date
(h)
Explanation
July sales
Date
(h)
Cost of Goods Sold
Explanation
Debit
July sales
265,700
Credit
Date
(c)
(d)
Factory Payroll
Explanation
Debit
July costs
227,250
Allocation
Acct. No. 530
Credit
Balance
227,250
227,250
0
Date
(b)
(d)
(e)
(f)
Factory Overhead
Explanation
Debit
Indirect materials
10,000
Indirect labor
25,000
Other overhead costs
80,000
Overhead application
Acct. No. 540
Credit
Balance
10,000
35,000
115,000
101,125
13,875
Acct. No. 502
Balance
265,700
Part 5 (Using weighted-average)
Computation of gross profit for July
Sales....................................................................................................$ 625,000
Cost of goods sold* ........................................................................... (279,575)
Gross profit ........................................................................................$ 345,425
* $279,575 = $265,700 + $13,875 (underapplied overhead)
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952
Financial & Managerial Accounting, 5th Edition
Reporting in Action
— BTN 16-1
1.
These costs are part of getting the products that Polaris sells to its
customers, costs to fulfill warranties to its customers, and depreciation
of machinery used to produce their products. Polaris considers these
costs to be as much a cost of its products as the actual cost to make
the items themselves.
2.
These costs would either be expensed as cost of sales or as selling
and administrative expenses. Thus, net income will not be affected.
However, including these costs as part of cost of sales will reduce the
gross profit and the gross profit ratio. That might have an impact on
investors’ analysis of Polaris’s performance.
Comparative Analysis
— BTN 16-2
1.
Polaris
($ thousands)
Current Year
Arctic Cat
Prior Year
Current Year
Prior Year
Expenses
Cost of goods sold ...... $1,916,366
Operating expenses ....
414,751
Total expenses ............. $2,331,117
$1,460,926
326,348
$1,787,274
$363,142
83,374
$446,516
$367,492
81,900
$449,392
COGS
.
Total expenses
$1,916,366
$2,331,117
$1,460,926
$1,787,274
$363,142
$446,516
$367,492
$449,392
= 82.2%
= 81.7%
= 81.3%
= 81.8%
2. Polaris and Arctic Cat have similar ratios for both years. Polaris has a
higher ratio in the current year and Arctic Cat has a higher ratio in the
prior year, but they are not materially different in either year. Both
companies show little change from the prior year although Polaris had a
slight increase in the ratio while Arctic Cat had a decrease.
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Solutions Manual, Chapter 16
953
Ethics Challenge
— BTN 16-3
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Instructor note: The student’s solution will vary depending on the industry, product, and process
chosen. It will also depend on the sources obtained.
The memorandum should initially identify an industry (say, steel), a product
(say, cans), and a process (say, forming).
Generally, there are at least three approaches to maintaining and expanding
one’s knowledge about a particular industry, product, and process—
students are likely to have additional insights.
(1) First, the professional should read a quality trade journal in the selected
industry. Another useful part of this first step is to access companies
and other related Websites for further introductory information.
(2) The second step is to join an industry organization, such as a local
society of steel equipment engineers. This would involve active
participation including meetings, committees, and so forth.
(3) The third step is to learn as much as one can from the management and
employees producing the product once one is engaged on a project.
This would include spending time on the shop floor and become
involved as a team member of, for example, product development.
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954
Financial & Managerial Accounting, 5th Edition
Communicating in Practice
— BTN 16-4
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
The main focus of this memorandum should be to explain the difference
between determining direct and indirect costs in a job order versus a
process cost accounting system since this appears to be the primary
source of confusion. In addition to the memorandum’s content, the
instructor should look for a student’s ability to be diplomatic in the
communication.
Points the memorandum should make include:
1. The reason for the assistant’s confusion. Given the assistant’s
experience in a job order system, it is likely s/he views the process from
that perspective. From a job order perspective, the costs s/he identified
would have been classified as indirect product costs.
2. Since your company does not limit production to specific batches of
product but rather continuously produces homogeneous products, you
need to point out that you use a different system (process costing).
3. It is important to recognize that the cost object is the process, not the
job. If costs are traceable to the cost object, they are direct costs.
4. In job order cost accounting, materials and labor used exclusively on
specific jobs are charged to the jobs as direct costs. Materials and
labor that contribute to manufacturing but are not directly associated
with specific jobs are indirect costs and are allocated to jobs as
manufacturing overhead.
5. A process cost accounting system uses the concepts of direct and
indirect manufacturing costs. Materials and labor that are directly
associated with specific manufacturing processes are assigned to
those processes as direct costs.
6. Some costs classified as manufacturing overhead in a job order system
can be classified as direct costs in process cost accounting. For
example, depreciation of a machine used exclusively by one process is
a direct cost of that process.
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Solutions Manual, Chapter 16
955
Taking It to the Net
— BTN 16-5
There are several ways that such software is helpful to a business.
 This software allows companies to create process maps so they can
analyze and communicate processes and workflows.
 It allows easy access to documents, reports, and analyses via web
browsers.
 It allows the companies to measure and improve the performance of
their processes.
 It allows companies to identify, visualize and quantify problems and
improvement potentials in the processes to eliminate wasted time and
money.
 It provides a calculation of cost per process and activity.
Teamwork in Action
— BTN 16-6
Each member of the team should participate in the activity to improve and
reinforce his/her understanding of the entries that correspond to Exhibit
16.4. (Note: The entries below are pro forma entries since information for
amounts are not provided in this activity.)
1.
Raw Materials Inventory ................................................ #
Accounts Payable ....................................................
#
Purchased materials on credit.
2.
Goods in Process Inventory.......................................... #
Raw Materials Inventory ..........................................
#
To assign costs of direct materials
used in production departments.
3.
Factory Overhead ........................................................... #
Raw Materials Inventory ..........................................
#
To record indirect materials used.
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956
Financial & Managerial Accounting, 5th Edition
Teamwork in Action (concluded)
4.
Factory Payroll .............................................................. #
Cash .........................................................................
#
To record factory wages incurred.
5.
Goods in Process Inventory.......................................... #
Factory Payroll .........................................................
#
To assign costs of direct labor used
in production.
6.
Factory Overhead ........................................................... #
Factory Payroll .........................................................
#
To record indirect labor as overhead.
7.
Factory Overhead .......................................................... #
Prepaid Insurance ...................................................
Accrued Utilities Payable .......................................
Cash ..........................................................................
Accum. Depreciation—Factory Equip ....................
#
#
#
#
To record manufacturing overhead incurred.
8.
Goods in Process Inventory.......................................... #
Factory Overhead .....................................................
#
Allocated factory overhead costs
to production.
9.
Finished Goods Inventory ............................................. #
Goods in Process Inventory....................................
#
To record the transfer of completed
goods from production to finished
goods inventory.
10.
Accounts Receivable ..................................................... #
Sales ..........................................................................
#
To record sale.
Cost of Goods Sold ........................................................ #
Finished Goods Inventory .......................................
#
To record cost of goods sold.
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Solutions Manual, Chapter 16
957
Entrepreneurial Decision
— BTN 16-7
1.
Neal’s new manufacturing facility enables him to make his own mix for
less than $7 per gallon. Overall, his cost per equivalent unit will be
lower with his new manufacturing facility. In addition, his cost of raw
materials per equivalent unit will be lower. However, his direct labor
and overhead per equivalent unit will likely increase as his company
does more of the production activities than it did previously.
2.
If a business unnecessarily holds materials, it will be less profitable
than a company that maintains appropriate raw materials inventory
levels. First, the inventory requires costs for storage space. Second,
when inventory is perishable, additional costs must be incurred to keep
it fresh. Third, perishable items can spoil or lose their quality over
time. Fourth, higher inventory levels increase the risk of inventory theft
by customers or employees.
Even if inventory items are not immediately used in production, they
can impact profits. The company will have spent cash on items sitting
in storage, and may not have enough cash to acquire necessary
materials, labor, and overhead to produce their product. Although
materials remain in inventory and do not directly affect profits,
companies that acquire and hold unnecessary inventory levels will
become less profitable in the long run.
3.
A hybrid system combines features of both process and job order
operations. Three Twins Ice Cream resembles a process operation in
that each flavor of ice cream goes through the same processing steps.
On the other hand, allowing customers to make their own unique
flavors would be similar to a job order operation. A hybrid costing
system can help the company better monitor and control the costs of
meeting individual customers’ needs.
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958
Financial & Managerial Accounting, 5th Edition
Hitting The Road
— BTN 16-8
Instructor note: This assignment is designed to help students identify
specific costs in a service process costing system. The answers are likely
to be unique for each student. Below are a few suggestions. This problem
is also a review of cost classifications.
Cost
Description
Direct
Material
Manual
sorting
Direct
Labor
X
Heating and
cooling
Manually
moving mail
– within
department
Overhead
Variable
Cost
Fixed
Cost
X
X
X
X
X
X
If hired on Full time
a temp. labor under
contract.
basis
Manually
moving mail
– between
departments
X
X
X
Sorting
equipment
X
X
Rentals
X
X
If hired on Full time
a temp. labor under
contract
basis
Overhead allocation suggestions:
Not all components should be allocated the same. Some examples:
Heating cost can be allocated on square footage.
Rent cost on the value of floor space occupied.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 16
959
Global Decision
— BTN 16-9
1. Ratio of Cost of Goods Sold to Total Expenses
(€ millions)
Piaggio ..........................
(From BTN 16-2)
($ thousands)
Polaris ...........................
($ thousands)
Arctic Cat ......................
Current Year
€1,061.9 / €1,411=
75.3%
Prior Year
€1,023.1 / €1,374.3=
74.4%
Current Year
$1,916,366/
$2,331,117
= 82.2%
Prior Year
$1,460,926/
$1,787,274
= 81.7%
Current Year
$363,142/
$446,516
= 81.3%
Prior Year
$367,492/
$449,392
= 81.8%
2. As a percentage of total expenses, Piaggio spends more on selling and
administrative expenses (and less on cost of goods sold) than does
either Polaris or Arctic Cat. Like Polaris, the ratio for Piaggio increased
over the current year.
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
960
Financial & Managerial Accounting, 5th Edition