Costing
System (1)
Dr/ Mostafa Ibrahim El-feky.
Lecturer of Accounting
Faculty of Commerce
Mansoura University
First Edition
2022/2023
Contents
Chapter (1)
Job Costing
Chapter (2)
Process Costing System
Chapter (3)
Spoilage, Scrap, and Rework
Chapter (4)
Cost-Volume-Profit (CVP) Relationships
References
2
3
58
97
145
174
Dr/Mostafa I. Elfeky
Chapter (1)
Job Costing
 The
building blocks are cost object, direct costs, indirect
costs, cost pools, and cost-allocation bases.
1. Cost object
It is anything for which a measurement of costs is desired (or
anything that we want to determine its cost, such as product,
service, customer, activity, project, and Department.
2. Direct Costs of a Cost Object
They are costs that are related to the particular cost object and
that can be traced to it in an economically and conveniently
feasible way.
▪ Direct cost categories include direct materials (DM) and
direct manufacturing labor (DML). Direct materials are
materials that go into the production of the product. Direct
labor is the wages paid to workers who spend time working on
the product.
3. Indirect Costs of a Cost Object
They are costs that are related to the particular cost object but
cannot be traced to it in an economically and conveniently
feasible way.
▪ Indirect cost must be allocated to the cost object using a cost
allocation method.
▪ These costs are frequently referred to as factory overhead,
manufacturing overhead (MOH), or some similar term.
These costs include supervisor salaries, supplies, or other
costs incurred in the factory that are not direct materials or
direct labor.
3
Dr/Mostafa I. Elfeky
4. Cost Assignment
It is a general term that includes both:- Tracing accumulated costs that have a direct relationship to a
cost object.
- Allocating accumulated costs that have an indirect
relationship to a cost object.
Cost tracing
Cost Allocation
Direct
Relationship
Indirect
Relationship
Cost object.
Cost object.
 Two new terms related to costing systems are introduced in
this chapter; they are cost pool, and cost-allocation base.
5. A cost pool is a grouping of individual indirect cost
items.
▪ A cost-allocation base is the driver or activity that is used
to allocate indirect costs from the cost pool to the cost
object.
For example,
(1) Direct Labor Hours.
(3) Machine Hours.
(2) Direct Material Cost.
(4) Direct Labor Cost.
Job Costing and Process
Costing Systems
 Management uses two basic types of costing systems to
assign costs to products or services.
1) A job-costing system, or a job-order system, is used by a
company that makes a distinct (different) product or service
4
Dr/Mostafa I. Elfeky
called a job. The product or service is often a single unit. The
job is frequently the cost object. Costs are accumulated
separately for each job or service.
2) A process-costing system is used by a company that makes a
large number of identical (similar) products. Costs are
accumulated by department and divided by the number of
units produced to determine the cost per unit. It is an average
cost of all units produced during the period. The cost object is
masses of similar units of a product.
General Approach to Job Costing
 A seven-step approach is used to assign costs to an
individual job.
 This approach is used by manufacturers, merchandisers,
and companies in the service sector.
1. Identify the Job that is the Chosen Cost Object.
2. Identify the Direct Costs of the Job.
3. Select the Cost-Allocation base(s) to use for allocating
Indirect Costs to the Job.
4. Match Indirect Costs to their respective Cost-Allocation
base(s).
5. Calculate an Overhead Allocation Rate:• Actual OH Costs ÷ Actual OH Allocation Base
6. Allocate Overhead Costs to the Job:• OH Allocation Rate x Actual Base Activity For the Job
7. Compute Total Job Costs by adding all direct and indirect
costs together.
5
Dr/Mostafa I. Elfeky
Step 1:Identify the Job That Is the Chosen Cost Object.
The source documents such as the job-cost sheet, the
material-requisition record, and the labor-time record
assist managers in gathering information about the
costs incurred on a job.
Step 2: Identify the Direct Costs of the Job.
Most manufacturing operations have two direct cost
categories—direct materials and direct manufacturing
labor.
Step 3: Select the Cost-Allocation Bases to Use for
Allocating Indirect Costs to the Job.
Since these costs cannot be traced to the job, they must
be allocated in a systematic manner.
Step 4: Identify the Indirect Costs Associated with Each
Cost-Allocation Base.
Hopefully, a cause-and-effect relationship can be
established between the costs incurred and the costallocation base (or cost driver).
Step 5: Compute the Rate per Unit of Each Cost-Allocation
Base Used to Allocate Indirect Costs to the Job.
Actual manufacturing overhead rate = Actual
manufacturing overhead costs ÷ Actual total quantity
of cost allocation base.
Step 6: Compute the Indirect Costs Allocated to the Job.
Multiply the actual quantity of each different allocation
base by the indirect cost rate for each allocation base.
Step 7: Compute the Total Cost of the Job by Adding All
Direct and Indirect Costs Assigned to the Job.
6
Dr/Mostafa I. Elfeky
Distinguish actual costing from
normal costing
❖
Actual costing is a costing system that traces direct costs
to a cost object by using actual direct-cost rates times the
actual quantities of the direct-cost inputs. It allocates
indirect costs based on the actual indirect-cost rate times
the actual quantities of the cost-allocation bases.
❖ Normal costing is a costing system that:- Traces direct costs to a cost object by using actual directcost rates times the actual quantities of the direct-cost
inputs, and
- Allocates indirect costs based on the budgeted indirectcost rates time the actual quantities of the cost-allocation
bases.
Note that
(1) Both systems (Actual & Normal) allocates – Direct Costs to a
cost object: - by using Actual direct – cost rates times Actual
quantities of the direct-cost inputs.
(2) Under Actual costing system:-
(3) Under Normal costing system:-
7
Dr/Mostafa I. Elfeky
For Example
Anderson Construction uses a job–costing system with two
direct–cost categories (direct materials and direct
manufacturing labor) and one manufacturing overhead cost
pool. Anderson Construction allocates manufacturing overhead
costs using direct manufacturing labor hours. Anderson
Construction provides the following information:-
Budgeted for
2023
Direct material costs
$1,500,000
Direct manufacturing labor costs 1,000,000
Direct manufacturing labor hours
100,000
Manufacturing overhead costs
1,750,000
Actual results
for 2023
$1,450,000
980,000
98,000
1,862,000
Required
1. Compute the actual and budgeted manufacturing overhead
rates for 2023.
2. During March, the Job–cost record for job 626 contained
the following information:Direct materials used
Direct manufacturing labor costs
Direct manufacturing labor hours
$ 40,000
$ 30,000
3,000 hr
Compute the cost of Job 626 using (a) actual costing
system, and (b) normal costing system.
8
Dr/Mostafa I. Elfeky
3. At the end of 2023, compute the under– or overallocted
manufacturing under normal costing. Why is there no
under– or overallocted manufacturing under actual costing?
Answer
1) Budgeted and actual MOH rate:▪ Budgeted MOH rate
= $1,750,000 ÷100,000
= $ 17.5 per DLH
▪ Actual MOH rate
= $1,862,000 ÷ 98,000
= $ 19 per DLH
2) Cost of job 626 under actual and normal costing system:-
Note →
MOH under Normal costing system is called Allocated OH
Note →
MOH under actual costing system called actual OH
Direct material
Direct manufacturing labor cost
MOH costs
Total cost of job # 626
Normal costing
$40,000
30,000
Actual costing
$ 40,000
30,000
AQ × BR
3000 × $17.5
52,500
$ 122,500
AQ × AR
3000 × $19
57,000
$ 127,000
3) Computing under or over allocated MOH under normal
costing:-
✓ IF Allocated MOH <Actual → Underallocated MOH
✓ If Allocated MOH >Actual → Overallocated MOH
9
Dr/Mostafa I. Elfeky
▪
Total MOH allocated under normal costing system
= AQ × BR
= 98,000 × 17.5
= $ 1,715,000
▪ Under allocated MOH
= 1,862,000 – 1,715,000
= $ 147,000
❖ There are three methods to calculate the difference
between Actual and allocated OH.
(1) Total Cost under Normal costing – Total Cost under
Actual costing.
(2) Overhead under Normal costing – Overhead under
Actual costing.
(3) (Actual Rate – Budgeted Rate) × Actual Quantity.
Or (∆R × AQ).
➢ Over or under allocated MOH for job 626
(1) T.C. Under N. – T.C. under A = (122,500 – 127,000)
= $4,500 under-allocated.
(2) O.H. under N. – O.H. under A= ( 52,500 – 57,000)
= $4,500 under-allocated.
(3) (A.R–B.R)×A.Q
= ($19 – $17.5) ×3,000
= $4,500 under-allocated.
▪ IF seven step were applied "Actual costing system"
1. Cost object = Job # 626
2. Direct costs = ( DM + DL ) → { 40,000 + 30,000} = $
70,000
3. Indirect costs = $ 1,862,000
4. Allocation base = "DMLHR" 98,000 hr
10
Dr/Mostafa I. Elfeky
5. Allocation rate = 1,862,000 / 98,000 = $ 19/DLHR
6. Indirect costs = AQ × AR
= 3,000 × 19 = $57,000
7. Total cost for job # 626 = 70,000 + 57,000 = $ 127,000
▪ IF seven step were applied "Normal costing system"
1) Cost object = Job # 626
2) Direct costs = ( DM + DL ) → { 40,000 + 30,000} = $
70,000
3) Indirect costs = $ 1,750,000
4) Allocation base = "DMLHR" 100,000 hr
5) Allocation rate = 1,750,000 / 100,000 = $ 17.5/DLHR
6) Indirect costs = AQ × BR
= 3,000 × 17.5 = $52,500
7) Total cost for job # 626 = 70,000 + 52,500 = $ 122,500
End of year adjustment
- This difference will be eliminated in the end-of-period
adjusting entry process, using one of three possible
methods
❖ The
three approach to adjust over (under)
allocated MOH:
1. Adjusted allocation rate approach.
2. Proration approach.
3. The write-off to cost of goods sold.
11
Dr/Mostafa I. Elfeky
- The choice of method should be based on such issues
as materiality, consistency and industry practice.
1. Adjusted allocation rate approach:
• All allocations are recalculated with the actual, rather
than budgeted cost rates.
• It's applied for individual job.
• The replacement of budgeted allocation rate by
actual allocation rate by using computerized
accounting system.
• Adjusted allocation rate = (Actual MOH – Allocated
MOH) ÷ Allocated MOH
2. Proration approach: Is the spreading of under
(over) allocated MOH among WIP, Finished
goods and cost of goods sold.
Under Proration we have two ways:
A. Proration based on MOH allocated end
balances of WIP, FG, COGS.
B. Proration based on the end balances of
WIP, FG, COGS.
3. Write off to cost of goods sold: In this case the
total under or over allocated overhead is included
in the cost of goods sold account.
12
Dr/Mostafa I. Elfeky
Ex
Assume that the MOH control balance is $1,215,000 and the
MOH allocated balance is $1,080,000.
Required
Use the three approaches to adjust over (under) allocated MOH.
Solution:
▪ Under (over) allocated OH = 1,215,000 – 1,080,000 =
$135,000 underallocated
(1)
Adjusted allocation rate approach:
Adjusted allocation rate = (1,215,000 – 1,080,000) / 1,080,000
= 12.5%
Assume that job 298 under normal costing has MOH allocated
is $3,520 so to adjust overhead allocated to be equal to actual
overhead. So to adjust allocated MOH to equal actual MOH;
increase MOH allocated by 12.5%.
Adjusted MOH for job 298 = 12.5% × 3,520 = $440. So; the
adjusted allocated MOH will equal to actual MOH
= 3,520 + 440 = $3,960
(2)
Proration approach:
Ex
In our previous example, end-of-year proration is made
to the ending balances in Work-in-Process Control, Finished
Goods Control, and Cost of Goods Sold. Assume the following
actual results for Robinson Company in 2022:
13
Dr/Mostafa I. Elfeky
WIP
FG
COGS
Total
Accounts Balance Allocated MOH
(Before Proration) (Before Proration)
$ 50,000
$ 16,200
75,000
31,320
2,375,000
1,032,480
$2,500,000
$ 1,080,000
How should the company prorate the underallocated
$135,000 of manufacturing overhead at the end of
2022?
A. Proration based on MOH allocated end balances.
Entry to record proration:
Work–In–Process (WIP)
Finished Goods (FG)
Cost Of Goods Sold (COGS)
Manufacturing Overhead control
14
2,025
3,915
129,060
135,000
Dr/Mostafa I. Elfeky
B. Proration based on the end balances of WIP, FG, &
COGS
Entry to record proration:
Work–In–Process (WIP)
Finished Goods (FG)
Cost Of Goods Sold (COGS)
Manufacturing Overhead control
2,700
4,050
128,250
135,000
(3) Write off to cost of goods sold:
Entry to record proration:
Cost Of Goods Sold (COGS)
Manufacturing Overhead control
135,000
135,000
Or
Cost Of Goods Sold (COGS)
Manufacturing Overhead allocated
Manufacturing Overhead control
135,000
1,080,000
1,215,000
▪ Ending Balance of COGS = 2,375,000 + 135,000 =
$ 2,510,000
15
Dr/Mostafa I. Elfeky
Accounting cycle
❖ The accounting cycle includes the following stages:
1. Purchase of materials and other manufacturing inputs.
"Materials control account".
2. Conversion into work in process inventory.
"Work in process control account".
3. Conversion into finished goods inventory.
"Finished goods control account".
4. Sale of finished goods.
"Cost of goods sold account".
Ex
1. Purchase of materials (direct and indirect), on credit $89,000.
2. Materials sent manufacturing plant floor: direct materials
$81,000 ($60,000 to job No 340 and $21,000 to job No. 341)
and indirect materials $4,000.
3. Total manufacturing payroll for Feb.: direct $39,000 ($30,000
to job no. 340 and $9,000 to job no. 341) and indirect
$15,000.
4. Payment of total manufacturing payroll for Feb. $54,000.
5. Additional manufacturing OH costs incurred during Feb.
$75,000. These costs consist of engineering and supervisory
salaries $44,000, Utilities and repairs $ 11,000, depreciation
$18,000 and insurance $2,000.
6. Allocation of manufacturing overhead to jobs $80,000.
7. Completion and transfer of individual jobs to finished goods,
$188,800.
8. Cost of goods sold $180,000.
9. Sales revenue on credit $270,000.
16
Dr/Mostafa I. Elfeky
Required
Prepare journal entries for the above transactions.
Answers
1
2
3
4
5
6
7
8
17
Material control
Accounts payable control
Work In Process Control
Job NO.340
Job NO.341
Manufacturing OH control
Material control
Work in process Control
Job no.340
Job no. 341
Manufacturing OH control
Wages payable control
Wages payable control
Cash control
Manufacturing OH control
Salaries payable control
Account payable control
Accumulated depreciation control
Prepaid insurance control
Work in process control
Manufacturing OH allocated
Finished goods
Work in process control
Cost of goods sold
Finished goods control
Dr.
89,000
Cr.
89,000
60,000
21,000
4,000
85,000
30,000
9,000
15,000
54,000
54,000
54,000
75,000
44,000
11,000
18,000
2,000
80,000
80,000
188,800
188,800
180,000
180,000
Dr/Mostafa I. Elfeky
9
Account receivable control
Revenues
End of year adjustment entry:
270,000
Manufacturing OH Allocated
Manufacturing OH underallocated
Manufacturing OH control
80,000
14,000
270,000
94,000
Material control
89,000
85,000
$ 4,000
Account payable
89,000
11,000
$100,000
Work In Process
81,000 188,800
39,000
80,000
$ 11,200
MOH control
4,000
15,000
75,000
$ 94,000
Wages Payable
54,000
54,000
Salaries Payable
44,000
$ 44,000
Prepaid insurance
2,000
18
Cash
54,000
$54,000
Accumulated depreciation
18,000
$ 18,000
MOH allocated
80,000
$ 80,000
Dr/Mostafa I. Elfeky
Finished goods
188,800 180,000
$8,800
Account Receivable
270,000
270,000
Cost of Goods sold
180,000
$180,000
Revenues
270,000
$ 270,000
Accounting for Overhead
Recall that two different overhead accounts were used in the
preceding journal entries: Manufacturing Overhead Control was debited for the actual
overhead costs incurred.
 Manufacturing Overhead Allocated was credited for
estimated (budgeted) overhead applied to production through
the Work-in-Process account.
Under-allocated & Over-allocated OH Costs
▪ Under-allocated indirect costs: Occurs when the allocated
(Budgeted) amount of the indirect costs in an accounting
period is less than the actual "incurred" amount in that period.
✓ Allocated MOH (<) Actual → Under-allocated MOH
19
Dr/Mostafa I. Elfeky
▪ Over-allocated indirect costs: Occurs when the allocated
(Budgeted) amount of the indirect costs in an accounting
period is higher than the actual "incurred" amount in that
period.
✓ If Allocated MOH (>) Actual → Over-allocated MOH
Actual MOH control – MOH allocated = Over (under)
allocated MOH
General Ledger Relationships
Ex
1. Purchase of materials (direct and indirect), on credit $89,000.
2. Materials sent manufacturing plant floor: direct materials
$81,000 ($60,000 to job No 340 and $21,000 to job No. 341)
and indirect materials $4,000.
3. Total manufacturing payroll for Feb.: direct $39,000 ($30,000
to job no. 340 and $9,000 to job no. 341) and indirect
$15,000.
4. Payment of total manufacturing payroll for Feb. $54,000.
5. Additional manufacturing OH costs incurred during Feb.
$75,000. These costs consist of engineering and supervisory
salaries $44,000, Utilities and repairs $ 11,000, depreciation
$18,000 and insurance $2,000.
6. Allocation of manufacturing overhead to jobs $80,000.
7. Completion and transfer of individual jobs to finished goods,
$188,800.
8. Cost of goods sold $180,000.
9. Sales revenue on credit $270,000.
20
Dr/Mostafa I. Elfeky
Required
Prepare journal entries for the above transactions.
Answers
1
2
3
4
5
6
7
8
9
21
Material control
Accounts payable control
Work In Process Control
Job NO.340
Job NO.341
Manufacturing OH control
Material control
Work in process Control
Job no.340
Job no. 341
Manufacturing OH control
Wages payable control
Wages payable control
Cash control
Manufacturing OH control
Salaries payable control
Account payable control
Accumulated depreciation control
Prepaid insurance control
Work in process control
Manufacturing OH allocated
Finished goods
Work in process control
Cost of goods sold
Finished goods control
Account receivable control
Revenues
Dr.
89,000
Cr.
89,000
60,000
21,000
4,000
85,000
30,000
9,000
15,000
54,000
54,000
54,000
75,000
44,000
11,000
18,000
2,000
80,000
80,000
188,800
188,800
180,000
180,000
270,000
270,000
Dr/Mostafa I. Elfeky
22
Dr/Mostafa I. Elfeky
MCQs
(1) Which of the following accounts would be debited in the journal
entry to record the requisition of direct materials?
A) Cost of Goods Sold
B) Work-in-Process Inventory
C) Finished Goods Inventory
D) Raw Materials Inventory
(2) The journal entry to record direct labor costs actually incurred
involves a debit to the:
A) Work-in-Process Inventory account.
B) Wages Payable account.
C) Manufacturing Overhead account.
D) Raw Materials Inventory account.
(3) The journal entry to record indirect labor costs incurred involves a
debit to the:
A) Manufacturing Overhead account.
B) Wages Payable account.
C) Finished Goods Inventory account.
D) Work-in-Process Inventory account.
(4) Manufacturing Overhead is a temporary account used to ________
indirect production costs during the accounting period.
A) Allocate
B) Assign
C) Accumulate
D) Approximate
(5) The journal entry to issue indirect materials to production should
include a debit to the:
A) Finished Goods Inventory account.
B) Raw Materials Inventory account.
C) Manufacturing Overhead account.
D) Work-in-Process Inventory account.
(6) The journal entry to issue $500 of direct materials and $30 of indirect
materials to production involves debit(s) to the:
A) Work-in-Process Inventory account for $500 and Finished Goods
Inventory account for $30.
B) Manufacturing Overhead account for $530.
23
Dr/Mostafa I. Elfeky
C) Work-in-Process Inventory account for $500 and Manufacturing
Overhead account for $30.
D) Work-in-Process Inventory account for $530.
(7) The journal entry to record $1,500 of direct labor and $200 of
indirect labor incurred will include debit(s) to the:
A) Manufacturing Overhead account for $1,700.
B) Work-in-Process Inventory account for $1,500 and Finished
Goods Inventory account for $200.
C) Finished Goods Inventory account for $1,700.
D) Work-in-Process Inventory account for $1,500 and Manufacturing
Overhead account for $200.
(8) Alexandra's Designs, a fashion boutique, incurred the following in
the month of September:
Salaries paid to designers
$140,000
Wages paid to tailors
30,000
Indirect wages
10,000
What is the journal entry to record the total labor charges incurred during
September?
A)
Work-in-Process Inventory (direct labor)
Manufacturing Overhead (indirect labor)
Wages payable
B)
Work-in-Process Inventory (direct labor)
Wages Payable
C)
Wages Payable
Finished Goods Inventory
Work-in-Process Inventory (direct labor)
D)
Manufacturing Overhead (indirect labor)
Wages Payable
170,000
10,000
180,000
180,000
180,000
180,000
150,000
30,000
180,000
180,000
(9) Adelphia Manufacturing issued $80,000 of direct materials and
$10,000 of indirect materials for production. Which of the following
journal entries would correctly record the transaction?
24
Dr/Mostafa I. Elfeky
A)
Raw Materials Inventory
Finished Goods Inventory
Work-in-Process Inventory (direct materials)
B)
Work-in-Process Inventory (direct & indirect materials)
Raw Materials Inventory
C)
Work-in-Process Inventory (direct materials)
Manufacturing Overhead (indirect materials)
Raw Materials Inventory
D)
Manufacturing Overhead (direct & indirect materials)
Raw Materials Inventory
90,000
80,000
10,000
90,000
90,000
80,000
10,000
90,000
90,000
90,000
(10) Uniq Works purchased raw materials amounting to $125,000 on
account and $15,000 for cash. The materials will be used to
manufacture upholstery for furniture manufacturers on a contract
basis. Which of the following journal entries correctly records this
transaction?
A)
Accounts Payable
125,000
Cash
15,000
Raw Materials Inventory
140,000
B)
Finished Goods Inventory
140,000
Accounts Payable
140,000
C)
Work-in-Process Inventory
140,000
Accounts Payable
140,000
D)
Raw Materials Inventory
140,000
Cash
15,000
Accounts Payable
125,000
25
Dr/Mostafa I. Elfeky
(11) The accounts of Delphinia Dreams Inc. showed the following
balances at the beginning of October:
Account
Debit
Raw Materials Inventory
$30,000
Work-in-Process Inventory
40,000
Finished Goods Inventory
50,000
Manufacturing Overhead
20,000
During the month, direct materials amounting to $20,000 and indirect
materials amounting to $5,000 was issued to production. What is the
ending balance in the Work-in-Process Inventory account for the
month of October?
A) $40,000
B) $60,000
C) $20,000
D) $25,000
(12) The accounts of Melissa Manufacturing showed the following
balances at the beginning of December:
Account
Debit
Raw Materials Inventory
$50,000
Work-in-Process Inventory
80,000
Finished Goods Inventory
30,000
Manufacturing Overhead
15,000
The following transactions took place during the month:
Dec. 2: Issued direct materials $25,000 and indirect materials $4,000
to production.
Dec.15: Paid $6,000 and $3,000 toward factory's direct labor cost and
indirect labor cost, respectively.
What should be the balance in the Work-in-Process Inventory account
at the end of December?
A) $111,000
B) $86,000
C) $105,000
D) $81,000
(13) On June 1, 2014, Dalton Productions had beginning balances as
shown in the T-accounts below.
26
Dr/Mostafa I. Elfeky
During June, the following transactions took place:
June 2: Issued $2,400 of direct materials and $200 of indirect
materials to production
Following this transaction, what was the balance in the Manufacturing
Overhead account?
A) $43,600
B) $43,400
C) $41,200
D) $41,000
(14) On June 1, 2014, Dalton Productions had beginning balances as
shown in the T-accounts below.
During June, the following transactions took place:
June 2: Issued $2,400 of direct materials and $200 of indirect
materials to production
June 13: Paid $7,500 of direct factory labor cost and $14,100 of
indirect factory labor cost
Following these transactions, what was the balance in the
Manufacturing Overhead account?
A) $50,900
B) $55,300
C) $44,200
D) $65,200
(15) Which of the following describes the allocation base for allocating
manufacturing overhead costs?
A) The primary cost driver of indirect manufacturing costs
B) Estimated base amount of manufacturing overhead costs in a year
C) The percentage used to allocate direct labor to Work in Process
D) The main element that causes direct costs
(16) Which of the following correctly describes the term cost driver?
A) The inflation rate that causes costs to rise
B) The average inventory costs incurred at any point of time
C) The primary factor that causes a cost to be incurred
D) The total material, labor, and overhead cost of a completed job
27
Dr/Mostafa I. Elfeky
(17) Which of the following will be categorized as a manufacturing
overhead cost?
A) Depreciation on factory plant and equipment
B) Salaries paid to assembly line workers
C) Administration charges of showroom
D) Cost of direct materials used
(18) Which of the following will be debited to the Manufacturing
Overhead account of a watch manufacturer?
A) Office telephone expenses
B) Salaries paid to accountants
C) Factory electricity expense
D) Cost of printing brochures
(19) The predetermined overhead allocation rate is the rate:
A) Used to assign direct material costs to jobs.
B) Used to allocate actual manufacturing overhead costs incurred
during a period.
C) Used to allocate estimated manufacturing overhead costs to jobs.
D) Used to trace manufacturing and non-manufacturing costs to jobs.
(20) The predetermined overhead allocation rate is calculated by dividing:
A) The total estimated overhead costs by total number of days in a
year.
B) The estimated amount of cost driver by actual total overhead
costs.
C) The actual overhead costs by actual amount of the cost driver or
allocation base.
D) The estimated overhead costs by total estimated quantity of the
overhead allocation base
(21) The predetermined overhead allocation rate for a given production
year is calculated:
A) At the end of the production year.
B) Before the production year begins.
C) After completion of each job.
D) After the preparation of financial statements for the year.
(22) Aaron Company estimates direct labor costs and manufacturing
overhead costs for the coming year to be $800,000 and $500,000,
28
Dr/Mostafa I. Elfeky
respectively. Aaron allocates overhead costs based on machine hours.
The estimated total labor hours and machine hours for the coming
year are 16,000 hours and 10,000 hours, respectively. What is the
predetermined overhead allocation rate?
A) $80.00 per machine hour
B) $31.25 per labor hour
C) $81.25 per labor hour
D) $50.00 per machine hour
(23) Zephyros Corporation had estimated manufacturing overhead costs
for the coming year to be $316,000. The total estimated direct labor
hours and machine hours for the coming year are 6,000 and 10,000,
respectively. Manufacturing overhead costs are allocated based on
direct labor hours. What is the predetermined overhead allocation
rate?
A) $31.60 per machine hour
B) $19.75 per direct labor hour
C) $52.67 per direct labor hour
D) $39.50 per machine hour
(24) Sybil Inc. uses a predetermined overhead allocation rate to allocate
manufacturing overhead costs to jobs. The company recently
completed Job 300X. This job used 12 machine hours and 3 direct
labor hours. The predetermined overhead allocation rate is calculated
to be $45 per machine hour. What is the amount of manufacturing
overhead allocated to Job 300X using machine hours as the allocation
base?
A) $540
B) $135
C) $675
D) $405
(25) Jeremy Corporation estimated manufacturing overhead costs for the
year to be $500,000. Jeremy also estimated 8,000 machine hours and
2,000 direct labor hours for the year. It bases the predetermined
overhead allocation rate on machine hours. On January 31, Job 25
was completed. It required 6 machine hours and 1 direct labor hour.
What is the amount of manufacturing overhead allocated to the
completed job? (Round your intermediate calculations to one decimal
place)
29
Dr/Mostafa I. Elfeky
A)
B)
C)
D)
$1,500.00
$437.50
$375.00
$350.00
(26) The journal entry to record allocation of manufacturing overhead to a
particular job includes a:
A) Debit to the Finished Goods Inventory account and credit to the
Manufacturing Overhead account.
B) Debit to the Work-in-Process Inventory account and credit to the
Cash account.
C) Debit to the Manufacturing Overhead account and credit to the
Finished Goods Inventory account.
D) Debit to the Work-in-Process Inventory account and credit to the
Manufacturing Overhead account.
(27) Iglesias Company completed Job 12 on November 30. The details of
Job 12 are given below:
Direct labor cost
$840
Direct materials cost
$1,100
Machine hours
7
Direct labor hours
22
Predetermined overhead allocation rate
$90 per machine hour
What is the total cost of Job 12?
A) $2,570
B) $1,940
C) $1,947
D) $3,920
(28) Gardner Machine Shop estimates manufacturing overhead costs for
the coming year at $316,000. The manufacturing overhead costs will
be allocated based on direct labor hours. Gardner estimates 5,000
direct labor hours for the coming year. In January, Gardener
completed Job A33, which used 60 machine hours and 15 direct labor
hours. What was the amount of manufacturing overhead allocated to
job A33?
A) $948
B) $4,740
C) $3,792
D) $990
30
Dr/Mostafa I. Elfeky
(29) Gia Machine Shop uses a predetermined overhead allocation rate of
$63.20 per direct labor hour. In January, Gia completed Job A23
which utilized 15 direct labor hours. Which of the following correctly
describes the journal entry to allocate overhead to the job?
A) Debit Finished Goods Inventory $948, credit Manufacturing
Overhead $948
B) Debit Manufacturing Overhead $63.20, credit Work-in-Process
Inventory $63.20
C) Debit Work-in-Process Inventory $948, credit Manufacturing
Overhead $948
D) Debit Cost of Goods Sold $63.20, credit Finished Goods Inventory
$63.20
(30) Halcyon Company completed Job 10B last month. The cost details of
Job 10B are shown below:
Direct labor cost
$2,040
Direct materials cost
$90
Machine hours used
5
Direct labor hours
75
Predetermined overhead allocation rate per direct labor
hour
$34
Calculate the total job cost for Job 10B.
A) $2,640
B) $4,680
C) $2,550
D) $4,590
(31) Hermione Company completed Job GH6 last month. The cost details
of GH6 are shown below:
Direct labor cost
$2,040
Direct materials cost
$90
Direct labor hours
75
Predetermined overhead allocation rate per direct labor hour
$34
Number of units of finished product
200
Calculate the cost per unit of finished product of Job GH6.
A) $26.40
B) $46.80
C) $25.50
D) $23.40
31
Dr/Mostafa I. Elfeky
(32) Jezebel Company completed Job 12 and several other jobs in the last
week. The cost details of Job 12 are shown below:
Direct labor cost
$840
Direct materials cost
$1,100
Machine hours
7 hours
Direct labor hours
22 hours
Predetermined overhead allocation rate per machine hour
$90
What is the cost per unit of finished product produced under Job 12?
A) $77.88
B) $102.80
C) $12.40
D) $156.80
(33) Arabica Manufacturing uses a predetermined overhead allocation rate
based on the number of machine hours. At the beginning of 2015,
they estimated total manufacturing overhead costs to be $1,050,000,
total number of direct labor hours to be 5,000, and total number of
machine hours to be 25,000 hours. What was the predetermined
overhead allocation rate?
A) $35 per machine hour
B) $210 per direct labor hour
C) $42 per machine hour
D) $35 per direct labor hour
(34) Olympia Manufacturing uses a predetermined overhead allocation
rate based on a percentage of direct labor cost. At the beginning of
2014, Olympia estimated total manufacturing overhead costs at
$1,050,000 and total direct labor costs at $840,000. In June, 2014,
Job 511 was completed. Job stats are as follows:
Direct materials cost
$27,500
Direct labor cost
$13,000
Direct labor hours
400 hours
Units of product produced
200
What is the amount of manufacturing overhead costs allocated to Job
511?
A) $16,250
B) $10,400
C) $5,000
D) $34,375
32
Dr/Mostafa I. Elfeky
(35) Arabica Manufacturing uses a predetermined overhead allocation rate
based on a percentage of direct labor cost. At the beginning of 2015,
Arabica estimated total manufacturing overhead costs at $1,050,000
and total direct labor costs at $840,000. In June, 2015, Arabica
completed Job 511. Job stats are as follows:
Direct materials cost
$27,500
Direct labor cost
$13,000
Direct labor hours
400 hours
Units of product produced
200
How much was the total job cost of Job 511?
A) $40,500
B) $56,750
C) $50,900
D) $74,875
(36) Irene Manufacturing uses a predetermined overhead allocation rate
based on percentage of direct labor cost. At the beginning of 2014,
Irene estimated total manufacturing overhead costs at $1,050,000 and
total direct labor costs at $840,000. In June, 2014, Job 711 was
completed. Job stats are as follows:
Direct materials cost
$27,500
Direct labor cost
$13,000
Direct labor hours
400 hours
Units of product produced
200
How much was the cost per unit of finished product?
A) $374.38
B) $202.50
C) $254.50
D) $283.75
(37) Venus Manufacturing uses a predetermined overhead allocation rate
based on percentage of direct labor cost. At the beginning of the year,
they fixed the manufacturing overhead rate at 20% of the direct labor
cost. In the month of June, Venus completed Job 13C the costs of
which are as follows:
Direct materials cost
$6,220
Direct labor cost
$900
Direct labor hours
32 hours
Units of product produced
250 units
What is the total cost incurred for Job 13C?
33
Dr/Mostafa I. Elfeky
A)
B)
C)
D)
$8,364
$6,400
$7,120
$7,300
(38) Venus Manufacturing uses a predetermined overhead allocation rate
based on percentage of direct labor cost. At the beginning of the year,
they fixed the manufacturing overhead rate at 20% times the direct
labor cost. In the month of June, Venus completed Job 13C the costs
of which are as follows:
Direct materials cost
$6,220
Direct labor cost
$900
Direct labor hours
32 hours
Units of product produced
250 units
What is the cost per unit of finished product of Job 13C?
A) $29.20
B) $33.46
C) $28.48
D) $36.70
(39) Happy Clicks Inc. uses a predetermined overhead allocation rate of
$4.75 per machine hour. Actual overhead costs incurred during the
year are as follows:
Indirect materials
$5,200
Indirect labor
$3,750
Plant depreciation
$4,800
Plant utilities and insurance
$9,530
Other plant overhead costs
$12,700
Total machine hours used during the year
7,520 hours
What is the amount of manufacturing overhead cost allocated to
Work-in-Process Inventory during the year?
A) $35,980
B) $8,950
C) $27,030
D) $35,720
(40) Doric Agricultural Products uses a predetermined overhead allocation
rate based on direct labor cost. The predetermined overhead allocated
during the year is $270,000. The details of production and costs
incurred during the year are as follows:
34
Dr/Mostafa I. Elfeky
Actual direct materials cost
$812,500
Actual direct labor cost
$180,000
Actual overhead costs incurred:
$264,000
Total direct labor hours
5,520 hours
What is the predetermined overhead allocation rate applied by Doric?
A) 50%
B) 67%
C) 150%
D) 33%
(41) Equinox Fabrication Plant suffered a fire incident in August due to
which most of the records for the year were destroyed. The following
accounting data for the year that were recovered:
Total manufacturing overhead estimated at the beginning
of the year
$105,840
Total direct labor costs estimated at the beginning of the
year
$186,000
Total direct labor hours estimated at the beginning of the
3,600 direct labor
year
hours
Actual manufacturing overhead costs for the year
$99,760
Actual direct labor costs for the year
$142,000
2,950 direct labor
Actual direct labor hours for the year
hours
The company bases its manufacturing overhead allocation on direct
labor hours. What was the predetermined overhead allocation rate for
the year?
A) $35.87
B) $33.82
C) $29.40
D) $27.71
(42) The Quadrangle Fabrication Plant suffered a fire incident at the
beginning of the year which resulted in loss of property including the
accounting records. Some data for the year were retrieved and
extracts from it are shown below:
Total manufacturing overhead estimated at the beginning of the
year
$105,840
Total direct labor costs estimated at the beginning of the year
$186,000
3,600 direct labor
Total direct labor hours estimated at the beginning of the year
hours
35
Dr/Mostafa I. Elfeky
Actual manufacturing overhead costs for the year
Actual direct labor costs for the year
$99,760
$142,000
2,950 direct labor
Actual direct labor hours for the year
hours
The company bases its manufacturing overhead allocation on direct
labor hours. How much manufacturing overhead was allocated to
production during the year?
A) $105,840
B) $86,730
C) $152,417
D) $186,000
(43) The Quadrangle Fabrication Plant suffered a fire incident at the
beginning of the year which resulted in loss of property including the
accounting records. Some data for the year were retrieved and
extracts from it are shown below:
Total manufacturing overhead estimated at the beginning of the
year
$105,840
Total direct labor costs estimated at the beginning of the year
$186,000
3,600 direct labor
Total direct labor hours estimated at the beginning of the year
hours
Total machine hours estimated at the beginning of the year
9,000 machine hours
Actual manufacturing overhead costs for the year
$99,760
Actual direct labor costs for the year
$142,000
2,950 direct labor
Actual direct labor hours for the year
hours
Actual machine hours for the year
10,000 machine hours
The company bases its manufacturing overhead allocation on number
of machine hours. What is the amount of manufacturing overhead cost
allocated to Work-in-Process Inventory during the year?
A) $86,730
B) $60,977
C) $152,417
D) $117,600
(44) Archangel Manufacturing calculated a predetermined overhead
allocation rate at the beginning of the year based on a percentage of
direct labor costs. The production details for the year are given
below:
36
Dr/Mostafa I. Elfeky
Total manufacturing overhead estimated at the beginning of the
year
Total direct labor costs estimated at the beginning of the year
$140,000
$350,000
12,000 direct labor
Total direct labor hours estimated at the beginning of the year
hours
Actual manufacturing overhead costs for the year
$159,000
Actual direct labor costs for the year
$362,000
12,400 direct labor
Actual direct labor hours for the year
hours
Calculate the allocation rate for the year based on the above data.
A) 40%
B) 44%
C) 250%
D) 228%
(45) Archangel Manufacturing uses a predetermined overhead allocation
rate based on a percentage of direct labor costs. The following are the
details of production during the year:
Total manufacturing overhead estimated at the beginning of the
year
$140,000
Total direct labor costs estimated at the beginning of the year
$350,000
12,000 direct labor
Total direct labor hours estimated at the beginning of the year
hours
Actual manufacturing overhead costs for the year
$159,000
Actual direct labor costs for the year
$362,000
12,400 direct labor
Actual direct labor hours for the year
hours
Calculate the amount of manufacturing overhead costs allocated to
production.
A) $140,000
B) $164,452
C) $144,800
D) $159,280
(46) Q-dot Manufacturing uses a predetermined overhead allocation rate
based on direct labor hours. It has provided the following information
for the year 2014:
Manufacturing overhead costs allocated to production
$189,000
Actual direct materials cost
$560,000
Actual direct labor cost
$250,000
37
Dr/Mostafa I. Elfeky
9,450 direct labor
Actual direct labor hours
hours
Estimated machine hours
180,000 machine hours
Based on the above information, calculate Q-dot's predetermined
overhead allocation rate.
A) $5.43 per machine hour
B) 76% of direct labor cost
C) 34% of direct materials cost
D) $20 per direct labor hour
(47) Felton Quality Productions uses a predetermined overhead allocation
rate based on machine hours. It has provided the following
information for the year 2014:
Actual manufacturing overhead costs incurred
$90,000
Manufacturing overhead costs allocated to
production
$42,500
Actual direct materials cost
$220,000
Actual direct labor cost
$46,000
Actual direct labor hours
2,000
Actual machine hours
30,000
Based on the above information, calculate the manufacturing
overhead rate applied by Felton.
A) $1.42 per machine hour
B) $1.53 per machine hour
C) $7.33 per machine hour
D) $3.00 per machine hour
(48) Davie Company used estimated direct labor hours of 250,000 and
estimated manufacturing overhead costs of $1,000,000 in establishing
its 2015 predetermined overhead allocation rate. Actual results
showed:
Actual manufacturing overhead
$900,000
Allocated manufacturing overhead
$875,000
What was the number of direct labor hours worked during 2015?
A) 225,000 hours
B) 243,056 hours
C) 250,000 hours
D) 218,750 hours
38
Dr/Mostafa I. Elfeky
(49) Forsyth Company uses estimated direct labor hours of 175,000 and
estimated manufacturing overhead costs of $350,000 in establishing
its 2014 predetermined overhead allocation rate. Actual results
showed:
Actual manufacturing overhead
$346,500
Allocated manufacturing overhead
$320,000
The number of direct labor hours worked during the period was:
A) 175,000 hours.
B) 160,000 hours.
C) 173,250 hours.
D) 191,406 hours.
(50) The records at Smith and Jones Company show that Job 110 is
charged with $11,000 of direct materials and $12,500 of direct labor.
Smith and Jones Company allocate manufacturing overhead at 85%
of direct labor cost. What is the total cost of Job No. 110?
A) $20,625
B) $34,125
C) $22,500
D) $21,625
(51) On January 1, 2015, Jackson Company's Work-in-Process Inventory
account showed a balance of $65,000. During 2015, materials
requisitioned for use in production amounted to $70,000 of which
$66,000 represented direct materials. Factory wages for the period
were $209,000 of which $186,400 were for direct labor.
Manufacturing overhead is allocated on the basis of 60% of direct
labor cost. Actual overhead was $116,440. Jobs costing $353,240
were completed during 2015. The December 31, 2015, balance in
Work-in-Process Inventory is:
A) $80,000.
B) $72,800.
C) $107,200.
D) $76,000.
(52) Caltran Company completed manufacturing Job 445. It included
$320 of direct materials cost, $1,240 of direct labor cost, and $560 of
allocated overhead. Which of the following is the correct journal
entry needed to record the completed job?
39
Dr/Mostafa I. Elfeky
A)
Work-in-Process Inventory
Finished Goods Inventory
B)
Finished Goods Inventory
Materials Inventory
C)
Work-in-Process Inventory
Cost of Goods Sold
D)
Finished Goods Inventory
Work-in-Process Inventory
2,120
2,120
2,120
2,120
40,000
40,000
2,120
2,120
(53) Altima Company finished Job A40 on the last working day of the
year. It utilized $400 of direct materials and $3,600 of direct labor.
Altima uses a predetermined overhead allocation rate based on
percentage of direct labor costs which has been fixed at 40%. The
entry to record the completion of the job should involve a:
A) Debit to Finished Goods Inventory $5,440 and a credit to
Materials Inventory $5,440.
B) Debit to Cost of Goods Sold $5,440 and a credit to Finished
Goods Inventory $5,440.
C) Debit to Finished Goods Inventory $5,440 and a credit to Workin-Process Inventory $5,440.
D) Debit to Work-in-Process Inventory $5,440 and a credit to
Finished Goods Inventory $5,440.
(54) On June 30, Caroline Company finished Job 750 with total job costs
of $4,600 and transferred the costs to Finished Goods Inventory. On
July 6, Caroline completed sale of the goods from Job 750 to a
customer for $5,100 cash. In order to record the sale, two entries are
necessary, one to record revenue, and one to record cost of goods
sold. Which of the following is the correct entry needed to record the
revenues?
A) Debit Finished Goods Inventory $4,600, credit Sales Revenue
$4,600
B) Debit Cash $5,100, credit Sales Revenue $5,100
C) Debit Sales Revenue $5,100, credit Cash $5,100
D) Debit Cost of Goods Sold $4,600, credit Sales Revenue $4,600
40
Dr/Mostafa I. Elfeky
(55) On June 30, Coral Company finished Job 750, with total job costs of
$4,600, and transferred the costs to Finished Goods Inventory. On
July 6, they completed the sale of the goods to a customer for $5,100
cash. In order to record the sale, two entries are necessary, one to
record revenue, and one to record cost of goods sold. Which of the
following is the correct journal entry to record the cost of goods sold?
A) Debit Finished Goods Inventory $4,600, credit Cost of Goods Sold
$4,600
B) Debit Cost of Goods Sold $4,600, credit Work-in-Process
Inventory $4,600
C) Debit Work-in-Process Inventory $4,600, credit Cost of Goods
Sold $4,600
D) Debit Cost of Goods Sold $4,600, credit Finished Goods Inventory
$4,600
(56) At the beginning of 2015, Conway Manufacturing had the following
account balances:
Following additional details are provided for the year:
Direct materials placed in production
$80,000
Direct labor incurred
190,000
Manufacturing overhead incurred
300,000
Manufacturing overhead allocated to production
295,000
Cost of jobs completed and transferred
500,000
The ending balance in the Work-in-Process Inventory account is a:
A) Credit of $67,000.
B) Debit of $65,000.
C) Credit of $65,000.
D) Debit of $67,000.
(57) At the beginning of 2015, Conway Manufacturing had the following
account balances:
41
Dr/Mostafa I. Elfeky
Following additional details are provided for the year:
Direct materials placed in production
$80,000
Direct labor incurred
190,000
Manufacturing overhead incurred
300,000
Manufacturing overhead allocated to production
295,000
Cost of jobs completed and transferred
500,000
The ending balance in the Finished Goods Inventory account is a:
A) Debit of $508,000.
B) Debit of $500,000.
C) Debit of $573,000.
D) Debit of $65,000.
(58) At the beginning of 2015, Conway Manufacturing had the following
account balances:
Following additional details are provided for the year:
Direct materials placed in production
$80,000
Direct labor incurred
190,000
Manufacturing overhead incurred
300,000
Manufacturing overhead allocated to production
295,000
Cost of jobs completed and transferred
500,000
The unadjusted balance in the Manufacturing Overhead account is a:
A) Credit of $295,000.
B) Credit of $5,000.
C) Debit of $5,000.
D) Debit of $13,000.
(59) When goods are transferred from the Work-in-Process Inventory
account to the Finished Goods Inventory account:
A) Total assets and total liabilities increase by the same amount.
B) Total assets of the company remain constant.
C) Total equity and total assets increase with the same amount.
D) Total liabilities increases and total equity decreases by the same
amount.
42
Dr/Mostafa I. Elfeky
(60) At January 1, 2015, Feldstein Manufacturing had a beginning balance
in Work-in-Process Inventory of $80,000 and a beginning balance in
Finished Goods Inventory of $20,000. During the year, Feldstein
incurred manufacturing costs of $350,000.
During the year, the following transactions occurred:
Job A-12 was completed for a total cost of $120,000 and was sold for
$125,000.
Job A-13 was completed for a total cost of $200,000 and was sold for
$210,000.
Job A-15 was completed for a total cost $60,000, but was not sold as
of year-end.
At the end of the year, what was the balance in Finished Goods
Inventory?
A) $60,000 debit balance
B) $40,000 credit balance
C) $80,000 debit balance
D) $30,000 debit balance
(61) Jorst Manufacturing began business on January
first year of operation, Jorst worked on five
reported the following information at year-end:
Job 1
Job 2
Job 3
Direct Materials
1,000
7,500
4,000
Direct Labor
12,000 20,000 13,000
Allocated Mfg.
Overhead
1,500
6,000
2,500
1, 2015. During its
industrial jobs and
Job 4
3,500
12,000
Job 5
1,500
800
7,500
200
Not
Job completed:
Jun 30
Sep 1
Oct 15
Nov 1
completed
Job sold:
Jul 10
Sep 12 Not sold Not sold
N/A
Revenues:
25,000 39,000
N/A
N/A
N/A
At year-end, what was the balance in Work-in-Process Inventory?
A) $2,500
B) $25,500
C) $45,000
D) $15,500
(62) Jorst Manufacturing began business on January 1, 2015. During its
first year of operation, Jorst worked on five industrial jobs, and
reported the following information at year-end:
43
Dr/Mostafa I. Elfeky
Direct Materials
Direct Labor
Allocated Mfg.
Overhead
Job 1
1,000
12,000
Job 2
7,500
20,000
Job 3
4,000
13,000
Job 4
3,500
12,000
1,500
6,000
2,500
7,500
Job 5
1,500
800
200
Not
Job completed:
Jun 30
Sep 1
Oct 15
Nov 1
completed
Job sold:
Jul 10
Sep 12 Not sold Not sold
N/A
Revenues:
25,000 39,000
N/A
N/A
N/A
At year-end, what was the balance in Finished Goods Inventory?
A) $90,500
B) $19,500
C) $42,500
D) $45,000
(63) The journal entry for adjustment of overallocated manufacturing
overhead includes
A) Credit to Finished Goods Inventory.
B) Credit to Manufacturing Overhead.
C) Debit to Work-in-Process Inventory.
D) Credit to Cost of Goods Sold.
(64) The journal entry for adjustment of underallocated manufacturing
overhead includes
A) Credit to Finished Goods Inventory.
B) Credit to Manufacturing Overhead.
C) Debit to Work-in-Process Inventory.
D) Credit to Cost of Goods Sold.
(65) Underallocated overhead occurs when:
A) Allocated overhead costs are less than actual overhead costs.
B) Actual overhead costs are less than allocated overhead costs.
C) Estimated overhead costs are greater than budgeted overhead
costs.
D) Estimated overhead costs are greater than actual overhead costs.
(66) Neptune Fabrication Plant has provided you with the following
information.
Total manufacturing overhead estimated at the beginning of the
year
$250,000
44
Dr/Mostafa I. Elfeky
Total direct labor costs estimated at the beginning of the year
$125,000
5,000 direct labor
Total direct labor hours estimated at the beginning of the year
hours
Actual manufacturing overhead costs for the year
$240,000
Actual direct labor costs for the year
$135,000
4,500 direct labor
Actual direct labor hours for the year
hours
The company bases its manufacturing overhead allocation on direct
labor hours. What was the unadjusted ending balance in the
manufacturing overhead account?
A) $10,000 credit balance
B) $10,000 debit balance
C) $15,000 credit balance
D) $15,000 debit balance
(67) Lakeside Company estimated manufacturing overhead costs for 2014
at $378,000, based on 180,000 estimated direct labor hours. Actual
direct labor hours for 2014 totaled 195,000. The manufacturing
overhead account contains debit entries totaling $391,500. The
manufacturing overhead for 2014 was:
A) $31,500 underallocated.
B) $31,500 overallocated.
C) $18,000 underallocated.
D) $18,000 overallocated.
(68) At the end of the year, Beta Company has an unadjusted debit
balance in the Manufacturing Overhead account of $3,950. The
adjusting journal entry needed to clear the balance to zero will
include a:
A) Debit to Cost of Goods Sold $3,950 and credit to Manufacturing
Overhead $3,950.
B) Debit to Manufacturing Overhead $3,950 and credit to Cost of
Goods Sold.
C) Debit to Work-in-Process Inventory $3,950 and credit to
Manufacturing Overhead $3,950.
D) Debit to Gross Profit $3,950 and credit to Cost of Goods Sold
$3,950.
(69) At the beginning of 2015, Conway Manufacturing had the following
account balances:
45
Dr/Mostafa I. Elfeky
Following additional details are provided for the year:
Direct materials placed in production
$80,000
Direct labor incurred
190,000
Manufacturing overhead incurred
300,000
Manufacturing overhead allocated to production
295,000
Cost of jobs completed and transferred
500,000
Total revenue
750,000
Cost of goods sold
440,000
After adjusting the balance in Manufacturing Overhead, the ending
balance in the Finished Goods Inventory account is a:
A) Credit of $52,000.
B) Debit of $60,000.
C) Credit of $432,000.
D) Debit of $68,000.
(70) At the end of the year, Metro Company has an unadjusted credit
balance in the Manufacturing Overhead account of $950. Which of
the following is the year-end adjusting entry needed to clear the
balance to zero?
A) Debit Cost of Goods Sold $950, credit Finished Goods Inventory
$950
B) Debit Manufacturing Overhead $950, credit Finished Goods
Inventory $950
C) Debit Manufacturing Overhead $950, credit Cost of Goods Sold
$950
D) Debit Cost of Goods Sold $950, credit Manufacturing Overhead
$950
(71) At the beginning of 2015, Conway Manufacturing had the following
account balances:
Following additional details are provided for the year:
Direct materials placed in production
Direct labor incurred
46
$80,000
190,000
Dr/Mostafa I. Elfeky
Manufacturing overhead incurred
300,000
Manufacturing overhead allocated to production
295,000
Cost of jobs completed and transferred
500,000
Total revenue
750,000
Cost of goods sold
440,000
After recording all these transactions and adjusting for the
over/underallocated overhead, the ending balance in the Cost of
Goods Sold account is a:
A) debit of $435,000.
B) Debit of $445,000.
C) Credit of $445,000.
D) Debit of $440,000.
(72) At the beginning of 2015, Conway Manufacturing had the following
account balances:
Following additional details are provided for the year:
Direct materials placed in production
$80,000
Direct labor incurred
190,000
Manufacturing overhead incurred
300,000
Manufacturing overhead allocated to production
295,000
Cost of jobs completed and transferred
500,000
Total revenue
750,000
Cost of goods sold
440,000
Calculate the gross profit will Conway report for the year 2015.
A) $315,000
B) $305,000
C) $310,000
D) $345,000
(73) On January 1, 2014 Feldstein Manufacturing had a beginning balance
in Work-in-Process Inventory of $80,000 and a beginning balance in
Finished Goods Inventory of $20,000. During the year, Feldstein
incurred manufacturing costs of $350,000.
Additionally, the following transactions occurred during the year:
Job A-12 was completed for a total cost of $120,000 and was sold for
$125,000
47
Dr/Mostafa I. Elfeky
Job A-13 was completed for a total cost of $200,000 and was sold for
$210,000
Job A-15 was completed for a total cost $60,000 but was not sold as
of year-end
The Manufacturing Overhead account had an unadjusted credit balance of
$12,000, and was cleared to zero at year-end.
What was the final balance in the Cost of Goods Sold account?
A) $308,000 debit balance
B) $332,000 debit balance
C) $320,000 debit balance
D) $12,000 credit balance
(74) At January 1, 2015, Feldstein Manufacturing had a beginning balance
in Work-in-Process Inventory of $80,000 and a beginning balance in
Finished Goods Inventory of $20,000. During the year, Feldstein
incurred manufacturing costs of $350,000.
During the year, the following transactions occurred:
Job A-12, was completed for a total cost of $120,000, and was sold
for $125,000.
Job A-13, was completed for a total cost of $200,000, and was sold
for $210,000.
Job A-15, was completed for a total cost $60,000, but was not sold as
of year-end.
The Manufacturing Overhead account had an unadjusted credit
balance of $12,000, and was cleared to zero at year-end.
What was the amount of gross profit reported by Feldstein at the end
of the year?
A) $2,000
B) $27,000
C) $3,000
D) $15,000
(75) Archangel Manufacturing has finished production activities for the
year 2015. The company allocates manufacturing overhead based on
a percentage of direct labor costs. The company has provided the
following information:
Total manufacturing overhead estimated at the beginning of the
year
$140,000
Total direct labor costs estimated at the beginning of the year
$350,000
Total direct labor hours estimated at the beginning of the year 12,000 direct labor hours
48
Dr/Mostafa I. Elfeky
Actual manufacturing overhead costs for the year
Actual direct labor costs for the year
Actual direct labor hours for the year
$159,000
$362,000
12,400 direct labor hours
Based on the above data, calculate the unadjusted ending balance in
the Manufacturing Overhead account.
A) $19,000 credit balance
B) $19,000 debit balance
C) $14,200 credit balance
D) $14,200 debit balance
(76) On January 1, 2015, Frederic Manufacturing had a beginning balance
in Work-in-Process Inventory of $160,000 and a beginning balance
in Finished Goods Inventory of $20,000. During the year, Frederic
incurred manufacturing costs of $200,000.
During the year, the following transactions occurred:
Job C-62 was completed for a total cost of $140,000 and was sold for
$155,000.
Job C-63 was completed for a total cost of $180,000 and was sold for
$210,000.
Job C-64 was completed for a total cost $80,000 but was not sold as
of year-end.
The Manufacturing Overhead account had an unadjusted credit balance
of $24,000, and was cleared to zero at year-end.
What was the final balance in the Cost of Goods Sold account?
A) $296,000 debit balance
B) $341,000 debit balance
C) $341,000 credit balance
D) $296,000 credit balance
(77) On January 1, 2015, Frederic Manufacturing had a beginning balance
in Work-in-Process Inventory of $160,000 and a beginning balance
in Finished Goods Inventory of $20,000. During the year, Frederic
incurred manufacturing costs of $200,000.
During the year, the following transactions occurred:
Job C-62 was completed for a total cost of $140,000 and was sold for
$155,000.
Job C-63 was completed for a total cost of $180,000 and was sold for
$210,000.
Job C-64 was completed for a total cost $80,000 but was not sold as
of year-end.
49
Dr/Mostafa I. Elfeky
The Manufacturing Overhead account had an unadjusted credit balance
of $24,000, and was cleared to zero at year-end.
What was the amount of gross profit reported by Frederic at the end of
the year?
A) $21,000
B) $69,000
C) $201,000
D) $161,000
(78) Jorst Manufacturing began business on January 1, 2014. During its
first year of operation, Jorst worked on 5 industrial jobs, and reported
the following information at year-end:
Job 1
Job 2
Job 3
Job 4
Job 5
Direct Materials
1,000
7,500
4,000
3,500
1,500
Direct Labor
12,000 20,000 13,000 12,000
800
Allocated Mfg.
Overhead
1,500
6,000
2,500
7,500
200
Not
Job completed:
Jun 30
Sep 1 Oct 15
Nov 1
completed
Job sold:
Jul 10 Sep 12 Not sold Not sold
N/A
Revenues:
25,000 39,000
N/A
N/A
N/A
Jorst's allocation of overhead costs left a debit balance of $1,200 in
the Manufacturing Overhead account which was adjusted to zero at
year-end. What was the final balance in Cost of goods sold?
A) $48,000
B) $49,200
C) $46,800
D) $91,700
(79) Jorst Manufacturing began business on January 1, 2014. During its
first year of operation, Jorst worked on 5 industrial jobs, and reported
the following information at year-end:
Job 1
Job 2
Job 3
Job 4
Job 5
Direct Materials
1,000
7,500
4,000
3,500
1,500
Direct Labor
12,000 20,000 13,000 12,000
800
Allocated Mfg.
Overhead
1,500
6,000
2,500
7,500
200
Not
Job completed:
Jun 30
Sep 1 Oct 15
Nov 1
completed
Job sold:
Jul 10 Sep 12 Not sold Not sold
N/A
Revenues:
25,000 39,000
N/A
N/A
N/A
50
Dr/Mostafa I. Elfeky
Jorst's allocation of overhead costs left a debit balance of $1,200 in
the Manufacturing Overhead account which was adjusted to zero at
year-end. What was the amount of gross profit earned in 2014?
A) $14,800
B) $16,000
C) $17,200
D) $1,700
(80) The budgeted indirect-cost rate is calculated:
A) At the beginning of the year
B) During the year
C) At the end of each quarter
D) At the end of the year
(81) The difference between actual costing and normal costing is:
A) Normal costing uses actual quantities of direct-costs
B) Actual costing uses actual quantities of direct-costs
C) Normal costing uses budgeted indirect-costs
D) Actual costing uses actual quantities of cost-allocation bases
(82) Which of the following statements about normal costing is true?
A) Direct costs and indirect costs are traced using an actual rate.
B) Direct costs and indirect costs are traced using budgeted rates.
C) Direct costs are traced using a budgeted rate, and indirect costs are
allocated using an actual rate.
D) Direct costs are traced using an actual rate, and indirect costs are
allocated using a budgeted rate.
(83) When using a normal costing system, manufacturing overhead is
allocated using the ________ manufacturing overhead rate and the
________ quantity of the allocation base.
A) Budgeted; actual
B) Budgeted; budgeted
C) Actual; budgeted
D) Actual; actual
(84) Which of the following statements about actual costing and normal
costing is true?
A) Manufacturing costs of a job are available earlier under actual
costing.
B) Corrective actions can be implemented sooner under normal
costing.
51
Dr/Mostafa I. Elfeky
C) Manufacturing costs are available earlier under normal costing.
D) Both B and C are correct.
Answer the following questions using the information below:
For 2010, Jake's Dog Supply Manufacturing uses machine-hours as the
only overhead cost-allocation base. The accounting records contain the
following information:
Estimated
Actual
Manufacturing overhead costs
$200,000
$240,000
Machine-hours
40,000
50,000
(85) Using job costing, the 2010 budgeted manufacturing overhead rate is:
A) $4.00 per machine-hour
B) $4.80 per machine-hour
C) $5.00 per machine-hour
D) $6.00 per machine-hour
(86) Using normal costing, the amount of manufacturing overhead costs
allocated to jobs during 2010 is:
A) $300,000
B) $250,000
C) $240,000
D) $200,000
Answer the following questions using the information below:
Rhett Company has two departments, Machining and Assembly. The
following estimates are for the coming year:
Machining
Assembly
Direct manufacturing labor-hours
10,000
50,000
Machine-hours
40,000
20,000
Manufacturing overhead
$200,000
$400,000
(87) A single indirect-cost rate based on direct manufacturing labor-hours
for the entire plant is:
A) $ 8 per direct labor-hour
B) $10 per direct labor-hour
C) $20 per direct labor-hour
D) None of these answers is correct.
52
Dr/Mostafa I. Elfeky
(88) The budgeted indirect-cost driver rate for the Machining Department
based on the number of machine-hours in that department is:
A) $5 per machine-hour
B) $10 per machine-hour
C) $20 per machine-hour
D) None of these answers is correct.
Answer the following questions using the information below:
Joni's Kitty Supplies applies manufacturing overhead costs to products at
a budgeted indirect-cost rate of $60 per direct manufacturing labor-hour.
A retail outlet has requested a bid on a special order of the Toy Mouse
product. Estimates for this order include: Direct materials $40,000; 500
direct manufacturing labor-hours at $20 per hour; and a 20% markup rate
on total manufacturing costs.
(89) Manufacturing overhead cost estimates for this special order total:
A) $10,000
B) $30,000
C) $36,000
D) None of these answers is correct.
Answer the following questions using the information below:
Roiann and Dennett Law Office employs 12 full-time attorneys and 10
paraprofessionals. Direct and indirect costs are applied on a professional
labor-hour basis that includes both attorney and paraprofessional hours.
Following is information for 20X3:
Budget
Actual
Indirect costs
$270,000
$300,000
Annual salary of each attorney
$100,000
$110,000
Annual salary of each paraprofessional $ 29,000
$ 30,000
Total professional labor-hours
50,000
60,000
(90) What are the budgeted direct-cost rate and the budgeted indirect-cost
rate, respectively, per professional labor-hour?
A) $27.00; $4.17
B) $29.80; $5.40
C) $32.40; $5.00
D) $27.00; $5.00
53
Dr/Mostafa I. Elfeky
(91) How much should a client be billed in a normal costing system when
1,000 professional labor-hours are used?
A) $32,000
B) $29,800
C) $35,200
D) $27,000
(92) When a normal costing system is used, clients using proportionately
more attorney time than paraprofessional time will:
A) Be overbilled for actual resources used
B) Be underbilled for actual resources used
C) Be billed accurately for actual resources used
D) Result in an underallocation of direct costs
(93) When the allocated amount of indirect costs are less than the actual
amount, indirect costs have been:
A) Overabsorbed
B) Underapplied
C) Underallocated
D) Both underapplied and underallocated are correct.
(94) One reason indirect costs may be overapplied is because:
A) The actual allocation base quantity exceeds the budgeted quantity
B) Budgeted indirect costs exceed actual indirect costs
C) Requisitioned direct materials exceed budgeted material costs
D) Both A and B are correct.
(95) The ________ approach adjusts individual job-cost records to
account for underallocated or overallocated overhead.
A) Adjusted allocation-rate
B) Proration
C) Write-off to cost of goods sold
D) Both A and B are correct.
(96) The adjusted allocation approach yields the benefits of:
A) Timeliness and convenience of normal costing
B) Allocation of of actual manufacturing overhead costs at the end of
the year
C) Both a and b are correct.
D) Neither a nor b are correct.
54
Dr/Mostafa I. Elfeky
(97) The approach often used when dealing with small amounts of
underallocated or overallocated overhead is the ________ approach.
A) Adjusted allocation-rate
B) Proration
C) Write-off to cost of goods sold
D) Both A and B are correct.
(98) The ________ approach carries the underallocated or overallocated
amounts to overhead accounts in the following year.
A) Adjusted allocation-rate
B) Proration
C) Write-off to cost of goods sold
D) None of these answers are correct.
(99) A company would use multiple cost-allocation bases:
A) If managers believed the benefits exceeded the additional costs of
that costing system
B) Because there is more than one way to allocate overhead
C) Because this is a simpler approach than using one cost allocation
base
D) If managers believe that using multiple cost-allocation bases is the
only acceptable method
(100) A ________ is a grouping of individual indirect cost items.
A) Cost allocation base
B) Cost assignment
C) Cost pool
D) Job-costing system
55
Dr/Mostafa I. Elfeky
Problems
(1) Peterson's Plastic Products Company manufactures pipes and applies
manufacturing costs to production at a budgeted indirect-cost rate of
$8 per direct labor-hour. The following data are obtained from the
accounting records for June 2012:Direct materials
$400,000
Direct labor (8,000 hours @ $11/hour)
$ 88,000
Indirect labor
$ 10,000
Plant facility rent
$ 50,000
Depreciation on plant machinery and equipment $ 20,000
Sales commissions
$ 30,000
Administrative expenses
$ 40,000
Required
a. What actual amount of manufacturing overhead costs was
incurred?
b. What amount of manufacturing overhead was allocated to all
jobs?
c. Was manufacturing overhead under-allocated or over-allocated?
(2) The Dougherty Furniture Company manufactures tables. In March,
the two production departments had budgeted allocation bases of
4,000 machine-hours in Department 100 and 8,000 direct
manufacturing labor-hours in Department 200. The budgeted
manufacturing overheads for the month were $57,500 and $62,500,
respectively. For Job A, the actual costs incurred in the two
departments were as follows:
Department Department
100
200
Direct materials purchased on account $110,000
$177,500
Direct materials used
32,500
13,500
Direct manufacturing labor
52,500
53,500
Indirect manufacturing labor
11,000
9,000
Indirect materials used
7,500
4,750
Lease on equipment
16,250
3,750
Utilities
1,000
1,250
56
Dr/Mostafa I. Elfeky
Job A incurred 800 machine-hours in Department 100 and 300
manufacturing labor-hours in Department 200. The company uses a
budgeted overhead rate for applying overhead to production.
Required:
a. Determine the budgeted manufacturing OH rate for each
department.
b. Prepare the necessary journal entries for Department 100.
c. What is the total cost of Job A?
(3) Gammaro Company uses normal costing. It allocates manufacturing
overhead costs using a budgeted rate per machine-hour. The
following data are available for 2022:
Budgeted manufacturing overhead costs
$4,200,000
Budgeted machine-hours
175,000
Actual manufacturing overhead costs
$4,050,000
Actual machine-hours
170,000
Required
(1) Calculate the budgeted manufacturing overhead rate.
(2) Calculate the manufacturing overhead allocated during 2011.
(3) Calculate the amount of under- or overallocated manufacturing
overhead.
57
Dr/Mostafa I. Elfeky
Chapter (2)
Process Costing System
• Job costing system: In this system the cost object is an
individual unit or batch of distinct (different) product or
service which is called a job.
• Process costing system: In this system the cost object is
masses of identical or similar product or services.
Note that
✓ Each unit uses the same amount of resources
(DM+DL+MOH).
✓ Unit cost = total cost of producing units / number of unit.
✓ This per unit cost is called average unit cost.
✓ Prime cost
= DM + DL
✓ Conversion costs
= DL + MOH
✓ Total Cost = DM +DL+MOH or = Conversion Costs + DM
58
Dr/Mostafa I. Elfeky
Ex
Assume that the total cost of process $100,000 included
($60,000 DM & $40,000 conversion Cost), volume of
Production is 1,000 units.
(1) Calculate the average cost per unit?
Average cost per unit = $100,000 ÷ 1,000 = $100 @unit
(2) Calculate average cost for each item of total cost?
- Direct Material Rate
= $60,000 ÷ 1,000
= $60@unit.
- Conversion Cost Rate
= $40,000 ÷ 1,000
= $40@unit.
Suppose in our example that 1,000 units are divided as follows:
- 600 units get completed and 400 units are still in process and
only 50% of these units "400 units" are completed.
(3) Compute the cost of completely finished units?
Completed units are 600 units and 50% of 400 are completed.
Completed units (F.G.) = 600 + (50% × 400) = 800 units
Completed cost Rate = $100,000 ÷ 1,000 = $100@unit
- Cost for completely finished units
= $100 × 800
= $80,000
- Cost for incompletely finished
= $100 × 200
= $25,000
Note that
❖ Output of department A is Input for department B.
❖ Each department has two sides (Inputs & Outputs).
59
Dr/Mostafa I. Elfeky
❖ Total cost of inputs = Total cost of outputs.
❖ Quantity of inputs = Quantity of outputs.
Case 1—Process costing with zero beginning and
zero ending work-in-process inventory.
(That is, all units are started and fully completed
within the accounting period.)
Ex
Data for the assembly department for January 2012 are as
follows: -
Physical Units for January 2022
Work in process, beginning inventory
Started during January
Completed and transferred out during January
Work in process, ending inventory
60
0 units
400 units
400 units
0 units
Dr/Mostafa I. Elfeky
Physical units refer to the number of output units, whether
complete or incomplete. In January 2012, all 400 physical units
started were completed.
Total Costs for January 2022
Direct material costs added during January
$32,000
Conversion costs added during January
24,000
Total assembly department costs added during January $56,000
Pacific Electronics records direct material costs and conversion
costs in the assembly department as these costs are incurred.
By averaging, assembly cost is $56,000 ÷ 400 units = $140 per
unit, itemized as follows: Direct material cost per unit ($32,000 ÷ 400 units)
Conversion cost per unit ($24,000 ÷ 400 units)
Assembly department cost per unit
$ 80
60
$140
Case 2—Process costing with zero beginning
work-in-process inventory and some ending work-inprocess inventory.
(That is, some units started during the accounting
period are incomplete at the end of the period.)
61
Dr/Mostafa I. Elfeky
Ex1
Data for the assembly department for February
2012 are as follows: Physical
Direct Conversion
Units Materials
Costs
Work in process, beginning
inventory (Feb. 1)
Started during February
Completed and transferred
out during February
Work in process, ending
inventory (Feb.29)
Degree of completion of
ending WIP
Total costs added during
February

Total
Costs
0
400
175
225
100%
60%
$32,000
$18,600
$50,600
Five Steps in Process Costing
1. Summarize the flow of physical units of output.
2. Compute output in terms of equivalent units.
3. Compute cost per equivalent unit.
4. Summarize total costs to account for.
5. Assign total costs to units completed and to units in
ending Work-in-Process.
62
Dr/Mostafa I. Elfeky
Step 1
Step 2 "Equivalent Units"
Flow of Production
Physical
Direct
Conversion
Units Materials
Costs
Work in process, beginning
0
Started during February
400
To account for
400
Completed and transferred out
175
175
175
during February
Work in process, ending
225
225
135
(225×100%; 225×60%)
Accounted for
400
Equivalent units of work done
400
310
in current period
Total
Costs
(Step 3)
(Step 4)
(Step 5)
63
Costs
added
during
February
Total costs to account for
Costs added in current
period
Divide by equivalent units
done in period
Cost per equivalent unit
Assignment of costs:
Completed and transferred
out (175 units)
Work in process, ending
(225 units):
Total costs accounted for
Direct Conversion
Materials
Costs
$50,600
$32,000
$18,600
$50,600
$50,600
$32,000
$32,000
$18,600
$18,600
÷ 400
÷ 310
$24,500
$ 80
$32,000
(175× $80)
$ 60
$18,600
(175× $60)
26,100
(225× $80)
(135× $60)
$50,600
$32,000
$18,600
Dr/Mostafa I. Elfeky
Journal entries in process-costing systems are similar to the
entries made in job-costing systems with respect to direct
materials and conversion costs. The main difference is that, in
process costing, there is one Work in Process account for
each process. In our example, there are accounts for Work in
Process—Assembly and Work in Process—Testing.
Work in Process—Assembly
Accounts Payable Control
Work in Process—Assembly
Various accounts "such as Wages Payable
Control and Accumulated Depreciation"
Work in Process—Testing
Work in Process—Assembly
64
32,000
32,000
18,600
18,600
24,500
Dr/Mostafa I. Elfeky
24,500
Ex2 Data for the assembly department for February 2022
are: Physical
Direct Conversion
Units Materials
Costs
Work
in
process,
beginning inventory (Feb.
1)
Started during February
Completed and transferred
out in February
Work in process, ending
inventory (Feb.29)
Degree of completion of
ending WIP
Total costs added during
February
Total
Costs
0
35,000
30,000
5,000
100%
20%
$84,050
$62,000
$146,050
Step 1
Step 2 "Equivalent Units"
Flow of Production
Physical
Direct
Conversion
Units Materials
Costs
Work in process, beginning
0
Started during February
35,000
To account for
352,000
Completed and transferred out 30,000
30,000
30,000
during February
Work in process, ending
5,000
5,000
1,000
(5,000×100%; 20%)
Accounted for
35,000
Equivalent units of work done
35,000
31,000
in current period
65
Dr/Mostafa I. Elfeky
(Step 3)
(Step 4)
(Step 5)
Costs added during
February
Total costs to account
for
Costs added in current
period
Divide by equivalent
units done in period
Cost per equivalent
unit
Assignment of costs:
Completed
and
transferred out (30,000
units)
Work in process,
ending (5,000 units):
Total costs accounted
for
Total
Costs
$146,050
Direct
Conversion
Materials
Costs
$84,050
$62,000
$146,050
$84,050
$62,000
$146,050
$84,050
$62,000
÷ 35,000
÷ 31,000
$ 2.4014
$ 2.00
$84,050
(30,000×
$2.4014)
$62,000
(30,000×
$2.00)
(5,000×
$2.4014)
$84,050
(5,000×
$2.00)
$62,000
$132,043
14,007
$146,050
Using weighted-average method of process
costing
The weighted-average process-costing method
calculates cost per equivalent unit of all work done to
date (regardless of the accounting period in which it
was done) and assigns this cost to equivalent units
completed and transferred out of the process and to
equivalent units in ending work-in-process inventory.
66
Dr/Mostafa I. Elfeky
Ex
Data for the assembly department for February
2022 are: Step #1
Physical units
Work in process, beginning:
100% Material
60% conversion costs
Units started in process
Units transferred out:
Units in ending inventory:
100% material
20% Conversion Costs
1,000
35,000
31,000
36,000
5,000
36,000
Beginning inventory
Current costs
Total
Materials
$ 2,350
84,050
$86,400
Conversion
$ 5,200
62,000
$67,200
Step #2 Equivalent Units
Completed and transferred
Ending inventory (100%, 20%)
Equivalent units
Materials
31,000
5,000
36,000
Conversion
31,000
1,000
32,000
Step #3 Equivalent Units Cost
Beginning inventory
Current costs
Total
Equivalent units
Cost per unit
Materials
$ 2,350
84,050
$86,400
36,000
$2.40
Conversion
$ 5,200
62,000
$67,200
32,000
$2.10
(Total cost ÷ Equivalent Units)
67
Dr/Mostafa I. Elfeky
Summarize and Assign Total Costs
Work in process beginning inventory
Materials
$ 2,350
Conversion
5,200
Total beginning inventory
$ 7,550
Step #4 &5
Current costs in Assembly Department
Materials
$ 84,050
Conversion
62,000
Costs to account for
$153,600
Costs transferred out
31,000 × ($2.40 + $2.10)
$139,500
Costs in ending inventory
Materials
5,000 × $2.40
Conversion
1,000 × $2.10
Total costs accounted for
$ 12,000
2,100
$153,600
- Costs to units transferred out:
31,000 units × $4.50 = $139,500
- Costs to units in ending work in process inventory:
$12,000 + $2,100 = $14,100
68
Dr/Mostafa I. Elfeky
Ex
Data for the assembly department for February
2022 are: Flow of Production
Physical
Units
Work in process, beginning
225
Started during current period
275
To account for
500
Completed and transferred out
400
during period
Work in process, ending
100
(Direct Material 100%, Conversion
Costs 50%)
Accounted for
500
Equivalent units of work done to
date
(Step 3) Work in process, beginning
Costs added in current period
Total costs to account for
(Step 4) Costs incurred to date
Divide by equivalent units of work done to
date
Cost per equivalent unit of work done to
date
69
Equivalent Units
Direct
Conversion
Materials
Costs
400
400
100
50
500
450
Total
Direct
Conversion
Costs Materials
Costs
$26,100
$18,000
$ 8,100
36,180
19,800
16,380
$62,280 $37,800
$24,480
$37,800
÷ 500
$24,480
÷ 450
$ 75.60
$ 54.40
Dr/Mostafa I. Elfeky
(Step 5) Assignment of costs: Completed and transferred out (400 units)
Work in process, ending (100 units):
Total costs accounted for
$52,000
10,280
$62,280
$30,240
7,560
$37,800
Use the first-in, first-out (FIFO) method of process
costing
The first-in, first-out (FIFO) process-costing method (1)
assigns the cost of the previous accounting period’s equivalent
units in beginning work-in-process inventory to the first units
completed and transferred out of the process, and (2) assigns
the cost of equivalent units worked on during the current
period first to complete beginning inventory, next to start and
complete new units, and finally to units in ending work-inprocess inventory. The FIFO method assumes that the earliest
equivalent units in work in process are completed first.
A distinctive feature of the FIFO process-costing method is
that work done on beginning inventory before the current
period is kept separate from work done in the current period.
Costs incurred and units produced in the current period are
used to calculate cost per equivalent unit of work done in the
current period. In contrast, equivalent-unit and cost perequivalent-unit calculations under the weighted-average
method merge units and costs in beginning inventory with units
and costs of work done in the current period.
70
Dr/Mostafa I. Elfeky
$21,760
2,720
$24,480
Ex
Data for the assembly department for February
2022 are: Physical
Direct
Conversion
Units
Materials
Costs
process,
1,000
100%
60%
Step #1
Physical units
Work in
beginning:
Units
started
in
process
Units transferred out:
Units
in
ending
inventory:
Total costs
35,000
31,000
5,000
100%
20%
$84,050
$62,000 $146,050
Step #2 Equivalent Units
Completed and transferred
Ending inventory (100%, 20%)
Less; Beginning inventory (100%,
60%)
Equivalent units
Step #3 Equivalent Units Cost
Current costs
Equivalent units
Cost per unit (Total cost ÷ Equivalent
Units)
71
Total
Costs
$7,550
Materials
31,000
5,000
36,000
(1,000)
Conversion
31,000
1,000
32,000
(600)
35,000
31,400
Materials
84,050
35,000
$2.40
Conversion
62,000
31,400
$1.975
Dr/Mostafa I. Elfeky
Summarize and Assign Total Costs (Steps 4 and 5)
Costs transferred out:
From beginning inventory
$ 7,550
Conversion costs added (1,000 × 40% × $1.975)
790
From current production
$ 72,000
Direct Material Cost (30,000 × $2.4)
$ 59,250
Conversion Cost (30,000 × $1.975)
Total Costs
Work in process ending inventory:
Direct Materials Costs (5,000 × $2.4)
Conversion Cost (5,000 × 20% × $1.975)
Total Costs
Costs of units completed and
transferred out
Work in process, ending
Total costs accounted for
$
8,340
$ 131,250
$139,590
$ 12,000
$ 1,975
$ 13,975
Weighted
Average
$ 139,500
FIFO
$139,625
Difference
+$125
14,100
$ 153,600
13,975
$153,600
–$125
$ 0
Ex\
Physical
Direct
Conversion Total
Units
Materials
Costs
Costs
Work in process, beginning
225
100%
60%
$26,100
Started during current
275
period
Completed and transferred
400
out during period
Work in process, ending
100
100%
50%
Total costs
$19,800
$16,380
$36,180
Flow of Production
72
Dr/Mostafa I. Elfeky
Cost statement Report
Total
cost
Inputs
. WIP, beginning
. Started
Cost per
Eq. u
Eq. unit
$26,100
Phy. unit
225
275
costs add during current period
DM
CC
To account for
Out puts
$19,800
16,380
$62,280
$ 72
52
$124
275
315
1. Completed & Trans out
▪ B. WIP
DM
CC
added currently
$
26.100
0
4,680
▪ Started & completed
Total costs of units completed
225
72
52
0
90
124
175
21,700
$52,480
2. WIP, Ending
DM
CC
Accounted for
73
175
100
$7,200
$2,600
$62,280
72
52
100
50
$124
Dr/Mostafa I. Elfeky
Standard-Costing Method of ProcessCosting
Process-costing systems using standard costs usually
accumulate actual costs incurred separately from the
inventory accounts.
•
•
Actual cost < standard Cost … Favorable …. Gain…
Credit.
Actual cost > standard Cost … Unfavorable …. Loss…
Debit.
Ex1
Assume that an actual material cost is $84,050 and
standard materials cost is $84,250.
What are the
Department?
journal
entries
in
the
Assembly
To record direct materials purchased and used in production
during the period and variances
Direct Materials Control
84,050
Accounts Payable Control
84,050
Work in Process Control
84,250
Direct Material Variances
200
Direct Materials Control
84,050
Ex2
Assume that an actual material cost is $75,500 and
standard materials cost is $75,000.
What are the
Department?
journal
Direct Materials Control
Accounts Payable Control
Work in Process Control
Direct Material Variances
Direct Materials Control
74
entries
in
the
Assembly
75,500
75,500
75,000
500
75,500
Dr/Mostafa I. Elfeky
Transferred-in Costs
Many process-costing systems have two or more
departments in the production cycle. As units move from
department to department, Transferred-in costs (also
called previous-department costs) are costs incurred in
previous departments that are carried forward as the
product’s cost when it moves to a subsequent process in
the production cycle.
As the assembly process is completed, the assembly
department transfers units to the testing department.
Conversion costs are added evenly during the testing
department’s process. At the end of the process in testing,
units receive additional direct materials. As units are
completed in testing, they are immediately transferred to
Finished Goods. Computation of testing department costs
consists of transferred-in costs, as well as direct materials
and conversion costs that are added in testing.
The following diagram represents these facts:
75
Dr/Mostafa I. Elfeky
Ex Transferred–in by using Weighted–Average method
Physical TransferredUnits
In Costs
Work
in
beginning
(March 1)
process,
inventory
240
$
Direct
Materials
33,600
$
Conversion
Costs
0 $ 18,000
100%
0%
62.5%
100%
0%
80%
Degree of completion of
beginning work in process
Transferred in during
March
Completed and transferred
out during March
Work in process, ending
inventory (March 31)
400
440
200
Degree of completion of
ending work in process
Total costs added during
March
Direct materials and
conversion costs
Transferred in
$
$
13,200
$
48,600
52,000
Required:
Compute costs of units completed & transferred out
and WIP ending by using Weighted Average method?
Step 1
Summarize the flow of physical units of output
WIP, Beginning
Add; Started during the period
To account for (inputs)
Completed & transferred out during march.
Add; WIP, ending
Accounted for (out puts)
76
240 units
400 units
640 units
440 units
200 units
640 units
Dr/Mostafa I. Elfeky
Step #2
Equivalent Transferred-In
Units
Completed
and
440
transferred out
WIP, Ending Balance
200
(100%, 0%, 80%)
Equivalent units
640
Materials Conversion
440
440
0
160
440
600
Step #3
Equivalent Transferred-In Materials Conversion
Units Cost
Work
in
process,
$33,600
$
0
$18,000
beginning
Costs added in current
52,000
13,200
48,600
period
Total costs
$85,600
$13,200
$66,600
Equivalent units
÷
640
÷ 440
÷ 600
Cost per equivalent unit
$133.75
$30
$111
of work done to date
Summarize and Assign Total Costs (Steps 4 and 5)
Total
Transferred-In Materials Conversion
Cost
Completed $120,890
$58,850
$13,200
$48,840
and
(440 ×
(440 ×
(440 ×
transferred
$133.75)
$30)
$111)
out
Work
in $44,510
$26,750
$0
$17,760
process
(200
×
(0
× (160
×
ending
$133.75)
$30)
$111)
Total Costs $165,400
$85,600
$13,200
$66,600
77
Dr/Mostafa I. Elfeky
To record cost of goods completed & transferred out from
testing to FG
Finished goods control
WIP Testing
120,890
120,890
WIP Testing
Beginning Balance
Transferred–in
Direct Materials
Conversion Costs
Ending Balance
$51,600 Transferred–out
52,000
13,200
48,600
$44,510
120,890
Transferred–in by using FIFO Method
Ex
Physical TransferredUnits
In Costs
Work in process, beginning
inventory (March 1)
Degree of completion
beginning work in process
240
$
Direct
Materials
33,600
$
Conversion
Costs
0 $ 18,000
100%
0%
62.5%
100%
0%
80%
of
Transferred in during March
Completed and transferred out
during March
Work in process, ending
inventory (March 31)
400
440
200
Degree of completion of ending
work in process
Total costs
March
added
during
Direct materials & conversion
costs Transferred in
$
$
13,200
$
52,480
Required:
Compute costs of units completed & transferred out
and WIP ending by using FIFO method?
78
Dr/Mostafa I. Elfeky
48,600
Answer
Step 1
Summarize the flow of physical units of output
WIP, Beginning
Add; Started during the period
To account for (inputs)
Completed & transferred out during march.
Add; WIP, ending
Accounted for (out puts)
Step #2 Equivalent Units Transferred-In
Completed and transferred
440
out
WIP, Ending Balance
200
240 units
400 units
640 units
440 units
200 units
640 units
Materials Conversion
440
440
0
160
(240)
0
(150)
400
440
450
(100%, 0%, 80%)
Less; WIP, Beginning
Balance
(100%,
0%,
62.5%)
Equivalent units
Or
Step #2
Equivalent Transferred-In
Units
Completed and
transferred out
WIP, Beginning Balance
0
Materials Conversion
240
90
200
200
200
200
0
160
400
440
450
(0%, 100%, 37.5%)
Started and completed
during period (440 – 240)
WIP, Ending Balance
(100%, 0%, 80%)
Equivalent units
79
Dr/Mostafa I. Elfeky
Step #3 Equivalent Units Transferred-In Materials Conversion
Cost
Costs added in current period
52,480
13,200
48,600
Equivalent units
÷
400
÷ 440
÷ 450
Cost per equivalent unit of
$131.2
$30
$108
work done to date
Summarize and Assign Total Costs (Steps 4 and 5)
Total Cost
TransferredIn
Materials
Conversion
Transferred out
(440 units)
WIP, beginning
$
51,600
$
33,600 $
0 $
18,000
$
16,920
$
0 $
7,200 $
9,720
(240 units)
Costs added to
beginning WIP in
current period
Total
from
beginning
inventory
Started and
completed (200
units)
Total costs of
units
transferred out
(0 × $131.2)
(240 × $30)
(90 × $108)
$ 68,520
$
33,600 $
7,200 $
27,720
$ 53,840
$
26,240 $
6,000 $
21,600
(200 × $131.2)
$ 122,360
$
(200 × $30)
59,600 $
(200 × $108)
13,200 $
49,320
Work in process,
$ 43,520 $
26,240 $
0 $
17,280
(200 × $131.2)
(0 × $30)
(160 × $108)
Ending (200
units)
Total
costs $ 165,880
accounted for
80
Dr/Mostafa I. Elfeky
To record cost of goods completed & transferred out from
testing to FG
Finished goods control
WIP Testing
122,360
122,360
WIP Testing
Beginning Balance
Transferred–in
Direct Materials
Conversion Costs
Ending Balance
81
$51,600 Transferred–out
52,480
13,200
48,600
$43,520
122,360
Dr/Mostafa I. Elfeky
MCQs
1) Costing systems that are used for the costing of like or
similar units of products in mass production are called:
a)
b)
c)
d)
Inventory-costing systems
Job-costing systems
Process-costing systems
Weighted-average costing systems
2) Process costing should be used to assign costs to products
when the:
a)
b)
c)
d)
Units produced are similar
Units produced are dissimilar
Calculation of unit costs requires the averaging of unit costs
over all units produced
Either A or C are correct.
3) Which one of the following statements is true?
a)
b)
c)
d)
In a job-costing system, individual jobs use different
quantities of production resources.
In a process-costing system each unit uses approximately
the same amount of resources.
An averaging process is used to calculate unit costs in a
job-costing system.
Both A and B are correct.
4) Conversion costs:
a)
b)
c)
d)
Include all the factors of production
Include direct materials
In process costing are usually considered to be added
evenly throughout the production process
Both B and C are correct .
5) In a process-costing system, the calculation of equivalent
units is used for calculating:
a)
b)
c)
d)
82
The dollar amount of ending inventory
The dollar amount of the cost of goods sold for the
accounting period
The dollar cost of a particular job
Both A and B are correct.
Dr/Mostafa I. Elfeky
6) If there was no beginning work in process and no ending
work in process under the weighted-average process costing
method, the number of equivalent units for direct materials,
if direct materials were added at the start of the process,
would be:
a)
b)
c)
d)
Equal to the units started or transferred in
Equal to the units completed
Less than the units completed
Both A and B are correct.
7) The weighted-average process-costing method calculates
the equivalent units by:
a)
b)
c)
d)
Considering only the work done during the current period
The units started during the current period minus the units in
ending inventory
The units started during the current period plus the units in
ending inventory
The equivalent units completed during the current period
plus the equivalent units in ending inventory
8) In the computation of the cost per equivalent unit, the
weighted-average method of process costing considers all
the costs:
a)
b)
c)
d)
83
Entering work in process from the units in beginning
inventory plus the costs for the work completed during the
current accounting period
Costs that have entered work in process from the units
started or transferred in during the current accounting period
That have entered work in process during the current
accounting period from the units started or transferred in
minus the costs associated with ending inventory
That have entered work in process during the current
accounting period from the units started or transferred in
plus the costs associated with ending inventory
Dr/Mostafa I. Elfeky
Answer the following questions using the information below
The Swiss Clock Shop manufactures clocks on a highly
automated assembly line. Each product must pass through the
Assembly Department and the Testing Department. Direct
materials are added at the beginning of the production process.
Conversion costs are allocated evenly throughout production.
Swiss Clock Shop uses weighted-average costing.
Data for the Assembly Department for June 20X5 are:
Work in process, beginning inventory
Direct materials (100% complete)
Conversion costs (50% complete)
Units started during June
Work in process, ending inventory:
Direct materials (100% complete)
Conversion costs (75% complete)
250 units
800 units
150 units
Costs for June 20X5:
Work in process, beginning inventory:
Direct materials
Conversion costs
Direct materials costs added during June
Conversion costs added during June
$180,000
$270,000
$1,000,000
$1,000,000
9) What are the equivalent units for direct materials and
conversion costs, respectively, for June?
a)
b)
c)
d)
1,200.5units; 1,160.64units.
1,050units; 1,012.5units.
1,050units; 1,050units.
962units; 990units.
10) What is the total amount debited to the Work-in-Process
account during the month of June?
a)
b)
c)
d)
84
$ 450,000.
$2,000,000.
$2,270,000.
$2,450,000.
Dr/Mostafa I. Elfeky
11) What is the direct materials cost per equivalent unit during
June?
a)
b)
c)
d)
$1,123.81
$1,730.20
$1,579.00
$1,890.35
12) What is the conversion cost per equivalent unit in June?
a)
b)
c)
d)
$1,254.32
$1,579.14
$1.730.20
$1,890.35
13) What amount of direct materials costs is assigned to the
ending Work-in-Process account for June?
a)
b)
c)
d)
$168,571.50
$283,552.50
$259,530.00
$236,850.00
14) What amount of conversion costs are assigned to the ending
Work-in-Process account for June?
a)
b)
c)
d)
$101,956.64
$141,111.00
$126,450.50
$188,148.00
15) On occasion, the FIFO and the weighted-average methods
of process costing will result in the same dollar amount of
costs being transferred to the next department. Which of the
following scenarios would have that result?
a)
b)
c)
d)
85
When the beginning and ending inventories are equal in
terms of unit numbers.
When the beginning and ending inventories are equal in
terms of the percentage of completion for both direct
materials, and conversion costs.
When there is no ending inventory.
When there is no beginning inventory.
Dr/Mostafa I. Elfeky
16) An assumption of the FIFO process-costing method is that:
a)
b)
c)
d)
The units in beginning inventory are not necessarily
assumed to be completed by the end of the period.
The units in beginning inventory are assumed to be
completed first.
Ending inventory will always be completed in the next
accounting period.
No calculation of conversion costs is possible.
Answer the following questions using the information below
The Townsend Tractor Company manufactures small
garden tractors on a highly automated assembly line. Each
tractor must pass through the Assembly Department and the
Testing Department. Direct materials are added at the
beginning of the production process. Conversion costs are
allocated evenly throughout production. Townsend Tractor
uses weighted-average costing.
Data for the Assembly Department for April 2008 are:
Work in process, beginning inventory
Direct materials (100% complete)
Conversion costs (40% complete)
Units started during April
Work in process, ending inventory:
Direct materials (100% complete)
Conversion costs (80% complete)
400 units
1,200 units
250 units
Costs for April 2022:
Work in process, beginning inventory:
Direct materials
Conversion costs
Direct materials costs added during June
Conversion costs added during June
$ 230,000
$ 220,000
$ 700,000
$1,175,000
17) What are the equivalent units for direct materials and
conversion costs, respectively, for April?
a)
b)
c)
d)
86
1,350units; 1,350units.
1,850units; 1,690units.
1,600units; 1,550units.
250units; 250units.
Dr/Mostafa I. Elfeky
18) What is the direct materials cost per equivalent unit during
April?
a)
b)
c)
d)
$1,250.00.
$1,241.94.
$ 575.00.
$ 581.25.
19) What is the conversion cost per equivalent unit in April?
a)
b)
c)
d)
$1,250.00.
$ 900.00.
$ 575.00.
$ 581.25.
20) What amount of direct materials costs are assigned to the
ending Work-in-Process account for April?
a)
b)
c)
d)
$248,387.10.
$250,000.00.
$143,750.00.
$145,312.50.
21) What amount of conversion costs are assigned to the ending
Work-in-Process account for April?
a)
b)
c)
d)
$143,750.00.
$145,312.50.
$180,000.00.
$250,000.00.
Answer the following questions using the information below
The Rest-a-Lot Chair Company manufacturers a
standard recliner. During February, the firm's Assembly
Department started production of 75,000 chairs. During the
month, the firm completed 85,000 chairs and transferred
them to the Finishing Department. The firm ended the
month with 10,000 chairs in ending inventory. All direct
materials costs are added at the beginning of the production
cycle. Weighted-average costing is used by Rest-a-Lot.
87
Dr/Mostafa I. Elfeky
22) How many chairs were in inventory at the beginning of the
month? Conversion costs are incurred uniformly over the
production cycle.
a)
b)
c)
d)
10,000chairs.
20,000chairs.
15,000chairs.
25,000chairs.
23) What were the equivalent units for materials for February?
a)
b)
c)
d)
95,000chairs.
85,000chairs.
80,000chairs.
75,000chairs.
24) What were the equivalent units for conversion costs for
February if the beginning inventory was 70% complete as to
conversion costs and the ending inventory was 40%
complete as to conversion costs?
a)
b)
c)
d)
89,000
75,000
85,000
95,000
25) Of the 75,000 units Rest-a-Lot started during February, how
many were finished during the month?
a)
b)
c)
d)
75,000.
85,000.
65,000.
95,000.
Weighty Steel processes a single type of steel. For the
current period the following information is given :
Units
Beginning Inventory
Started During the Current Period
Ending Inventory
88
3,000
20,000
2,500
Material Conversion
Costs
Costs
$4,500
32,000
$5,400
78,200
Dr/Mostafa I. Elfeky
All materials are added at the beginning of the production process.
The beginning inventory was 40% complete as to conversion, while
the ending inventory was 30% completed for conversion purposes .
Weighty uses the weighted-average costing method.
26) What is the total cost assigned to the units completed and
transferred this period?
a)
b)
c)
d)
$107,010
$109,440
$113,160
$120,100
27) The FIFO method provides a major advantage over the
weighted-average method in that:
a)
b)
c)
d)
The calculation of equivalent units is less complex under the
FIFO method.
The FIFO method treats units in the beginning inventory as
if they were started and completed during the current period.
The FIFO method provides measurements of work done
during the current period.
The weighted-average method ignores units in the
beginning and ending work in process inventories.
28) The weighted-average method of process costing differs
from the FIFO method of process costing in that the
weighted-average method:
a)
b)
c)
d)
Can be used under any cost flow assumption.
Does not require the use of predetermined overhead rates.
Keeps costs in the beginning inventory separate from
current period costs.
Does not consider the degree of completion of units in the
beginning work in process inventory when computing
equivalent units of production.
29) When the weighted-average method of process costing is
used, a department's equivalent units are computed by:
a)
89
Subtracting the equivalent units in beginning inventory from
the equivalent units in ending inventory.
Dr/Mostafa I. Elfeky
b)
c)
d)
Subtracting the equivalent units in beginning inventory from
the equivalent units for work performed during the period.
Adding the units transferred out to the equivalent units in
ending inventory.
Subtracting the equivalent units in beginning inventory from
the sum of the units transferred out and the equivalent units
in ending inventory.
30) Equivalent units for a process costing system using the
FIFO method would be equal to:
a)
b)
c)
d)
Units completed during the period plus equivalent units in
the ending work in process inventory.
Units started and completed during the period plus
equivalent units in the ending work in process inventory.
Units completed during the period and transferred out.
Units started and completed during the period plus
equivalent units in the ending work in process inventory plus
work needed to complete units in the beginning work in
process inventory.
Answer the following questions using the information below
The Rest-a-Lot chair company manufacturers a standard
recliner. During February, the firm's Assembly Department
started production of 75,000 chairs. During the month, the
firm completed 80,000 chairs, and transferred them to the
Finishing Department. The firm ended the month with
10,000 chairs in ending inventory. There were 15,000 chairs
in beginning inventory. The FIFO method of process
costing is used by Rest-a-Lot. Beginning work in process
was 30% complete as to conversion costs, while ending
work in process was 80% complete as to conversion costs.
Beginning inventory:
Direct materials
$ 24,000
Conversion costs
$ 35,000
Manufacturing costs added during the accounting period:
Direct materials
$168,000
Conversion costs
$278,000
90
Dr/Mostafa I. Elfeky
31) How many of the units that were started during February
were completed during February?
a)
b)
c)
d)
85,000
80,000
75,000
65,000
32) What were the equivalent units for conversion costs during
February?
a)
b)
c)
d)
83,500
85,000
75,000
79,500
33) What is the amount of materials cost assigned to ending
WIP Feb.?
a)
b)
c)
d)
$19,200
$22,400
$25,600
$22,500
34) What is the cost of the goods transferred out during
February?
a)
b)
c)
d)
$417,750
$456,015
$476,750
$505,000
Answer the following questions using the information below
The Morgan Models company manufacturer's replica
plastic airplane and motorized vehicle models. During
October, the firm's Assembly Department started production
of 60,000 models. During the month, the firm completed
66,000 models, and transferred them to the Finishing
Department. The firm ended the month with 22,000 models
in ending inventory. There were 28,000 models in
beginning inventory. All direct materials costs are added at
the beginning of the production cycle and conversion costs
91
Dr/Mostafa I. Elfeky
are added uniformly throughout the production process. The
FIFO method of process costing is used by Morgan.
Beginning work in process was 25% complete as to
conversion costs, while ending work in process was 50%
complete as to conversion costs.
Beginning inventory:
Direct materials costs
$ 39,200
Conversion costs
$ 30,800
Manufacturing costs added during the accounting period:
Direct materials costs
$ 90,000
Conversion costs
$280,000
35) How many of the units that were started during October
were completed during October?
a)
b)
c)
d)
30,000
38,000
32,000
60,000
36) What were the equivalent units for conversion costs during
October?
a)
b)
c)
d)
21,000
62,000
70,000
87,000
37) What is the amount of direct materials cost assigned to
ending work-in-process inventory at the end of October?
a)
b)
c)
d)
$22,000
$44,000
$39,200
$33,000
38) What is the cost of the goods transferred out during
October?
a)
b)
c)
92
$363,000
$330,000
$340,000
Dr/Mostafa I. Elfeky
d)
$375,000
Use the following information for questions
Top That manufactures baseball-style hats. Material is
introduced at the beginning of the process in the Cutting
Department. Conversion costs are incurred (and allocated)
uniformly throughout the process. As the cutting of material is
completed, the pieces are immediately transferred to the Sewing
Department. Data for the Cutting Department for the month of
February 2009 follow:
Physical Direct
Conversion
Units
Materials Costs
Work in process, January 31a
50,000
$70,500
$34,050
Started During February 2022
225,000
Completed during February 2022
200,000
b
Work in process February 28
75,000
Total costs added during February 2022
$342,000
$352,950
a
Degree of completion: direct materials, 100%; conversion costs, 40%.
b
Degree of completion: direct materials, 100%; conversion costs, 20%.
39) Assuming Top That uses the weighted-average method to
account for inventories, the equivalent units of work for the
month of February are
a.
b.
c.
d.
Direct Materials
225,000
200,000
275,000
225,000
Conversion Costs
225,000
200,000
215,000
200,000
40) Assuming Top That used the weighted-average method to
account for inventories, the cost per equivalent whole unit
produced during February is
a. $3.30
b. $3.55
c. $3.77
d. $4.00
93
Dr/Mostafa I. Elfeky
41) Assuming Top That uses the weighted-average method to
account for inventories, the assignment of costs to work in
process at the end of February is
a. $300,000.
b. $266,250.
c. $166,525.
d. $139,500.
42) If Top That uses (FIFO) method to account for inventories,
the equivalent units of work for the month of February are
Direct Materials
a. 225,.000
b. 225,000
c. 275,000
d. 200,000
Conversion Costs
225,000
195,000
200,000
195,000
43) If Top That uses the FIFO method to account for
inventories, the costs per equivalent unit for February are
Direct Materials
a. $1.50
b. $1.83
c. $1.71
d. $1.52
Conversion Costs
$1.76
$1.72
$1.81
$1.81
44) Assuming Top That uses (FIFO) method to account for
inventories, the assignment of costs to units completed and
transferred to the Sewing Department during February is
a. $658,350
b. $636,450
c. $666,000
d. $652,000
45) Operating income can differ materially between the results
for the weighted-average and FIFO methods when:
a)
b)
c)
d)
94
Direct materials or conversion costs per unit vary
significantly from period to period
The physical inventory levels of work in process are large
relative to the total number of units transferred out
Neither of these answers is correct.
Both of these answers is correct.
Dr/Mostafa I. Elfeky
Problems
(1) Larsen Company manufactures car seats in its San Antonio
plant. Each car seat passes through the assembly department and
the testing department. This problem focuses on the assembly
department. The process-costing system at Larsen Company has
a single direct-cost category (direct materials) and a single
indirect-cost category (conversion costs). Direct materials are
added at the beginning of the process. Conversion costs are
added evenly during the process. When the assembly department
finishes work on each car seat, it is immediately transferred to
testing. Larsen Company uses the weighted-average method of
process costing. Data for the assembly department for October
2012 are as follows:
Required
Assign total costs to units completed and transferred out
and to units in ending work in process.
(2) Consider the following data for the assembly division of Fenton
Watches, Inc.
Beginning work in process, (May 1)a
Units started in process
Completed during May
Ending work in process (May 31)b
95
Physical
Units
Direct
Materials
Conversion
Costs
80
500
460
120
$ 493,360
$ 91,040
Dr/Mostafa I. Elfeky
Total costs added during May 2022
$3,220,000 $1,392,000
a
Degree of completion: direct materials, 90%; conversion costs, 40%.
b
Degree of completion: direct materials, 60%; conversion costs, 30%.
Required
Assume the assembly division uses the weighted-average
method and FIFO method of process costing.
a) Compute equivalent units for direct materials and
conversion costs. Show physical units in the first column of
your schedule.
b) Calculate cost per equivalent unit for direct materials and
conversion costs.
c) Assign total costs to units completed (and transferred out)
and to units in ending work in process.
(3) Given the following information about March
Physical TransferredUnits
In Costs
Work in process, beginning
inventory (March 1)
Degree
of
completion
beginning work in process
4,000
$
Direct
Materials
30,200 $
Conversion
Costs
9,400 $
8,000
100%
60%
25%
100%
100%
40%
of
Transferred in during March
Completed and transferred
out during March
Work in process, ending
inventory (March 31)
31,000
33,000
2,000
Degree of completion of ending
work in process
Total costs added during
March
Direct
materials
conversion
Transferred in
&
costs
$
$
9,780
$
139,618
Required:Compute costs of units completed & transferred
out and WIP ending by using FIFO method?
96
Dr/Mostafa I. Elfeky
42,640
Chapter (3)
Spoilage, Scrap, and Rework
Spoilage:- Units of production, either fully or partially
completed, that do not meet the specifications required by
customers for good units or that are discarded or sold for
reduced prices.
Ex
The Company sells 100 units for $10/units and there are 20
units for $2/unit as spoilage. So; total Revenue is $1,000
(100 × $10) less Spoilage $40 (20 × $2). Therefore; net
revenue will $1,040 (1,000 + 40).
Rework:- Units of production that do not meet the
specifications required by customers but which are
subsequently repaired and sold as good finished goods.
Ex
Total Cost = Direct Material + Conversion Costs + Rework Cost.
Scrap:- Residual material that results from manufacturing
a product. Scrap cannot be sold, has no value. It has low
total sales value compared with the total sales value of the
product.
Ex
"short lengths from woodworking, edges from plastic molding
operations, and frayed cloth and end cuts from suit making".
97
Dr/Mostafa I. Elfeky
Types of Spoilage
- Normal Spoilage:- is spoilage inherent in a
particular production process that arises under
efficient operating conditions, normal spoilage is
inherent because of the nature of production.
- Normal spoilage rates should be computed using
total good units completed as the base, not total
actual units started in production.
▪ Costs of normal spoilage are typically included as a
component of the costs of good units manufactured
because good units cannot be made without also making
some units that are spoiled.
▪ It cannot be controlled.
- Abnormal Spoilage: - is spoilage that is not inherent in a
particular production process and would not arise under
normal operating conditions.
▪
Abnormal spoilage is considered avoidable and
controllable.
▪ It can be controlled.
• Accounting for normal spoilage:
– Divide units of normal spoilage by total good units
completed, not total actual units started in production.
• Accounting for abnormal spoilage:
– Count and record debit separately in a "loss from
abnormal spoilage account".
98
Dr/Mostafa I. Elfeky
Ex
Big Mountain, Inc., manufactures skiing accessories. All
direct materials are added at the beginning of the
production process. In October, $95,200 in direct materials
was introduced into production. Assume that 35,000 units
were started, 30,000 good units were completed, and 1,000
units were spoiled (all normal spoilage). Ending work in
process was 4,000 units (each 100% complete as to direct
material costs). Spoilage is detected upon completion of
the process. Spoilage is typically assumed to occur at the
stage of completion where inspection takes place.
 Units of Normal Spoilage can be counted (Approach A) or not
counted (Approach B) when computing output units (physical
or equivalent) in a process costing system.
 Counting all spoilage is considered preferable
Approach A
Recognizes spoiled units when computing output
in equivalent units.
Costs to account for
Divide by equivalent units
Cost per equivalent unit
$95,200
35,000
$ 2.72
Good units completed
"good units": 30,000 × $2.72
Add; normal spoilage: 1,000 × $2.72
Costs of good units transferred out
(+)Work in process: 4,000 × $2.72
Costs accounted for
99
$81,600
2,720
$84,320
10,880
$95,200
Dr/Mostafa I. Elfeky
Approach B
Does not count spoiled units when computing
output in equivalent units.
(+)
Costs to account for
Divide by equivalent units
Cost per equivalent unit
$95,200
34,000
$ 2.80
Good units completed
"good units": 30,000 × $2.80
Costs of good units transferred out
Work in process, ending: 4,000 × $2.80
Costs accounted for
$84,000
$84,000
11,200
$95,200
Ex
Chipmakers, Inc manufactures computers chips for television
set, all direct material are added at the beginning of production
process, assume no beginning inventory and following data are
available for 2022.
WIP, beginning inventory
Started during may
Good units completed and transferred
out
Units spoiled (all normal)
WIP, ending May 31
Degree of completion of ending WIP
Physical
units
0
10,000
5,000
1,000
4,000
Direct
materials
100%
$270,000
Direct material costs added during may
100
Dr/Mostafa I. Elfeky
Use Approach A and Approach B
A
Costs to account for
÷ Equivalent units in outputs
= cost per equivalent units
B
$270,000 $270,000
10,000
9,000
$27
$30
Assignment of costs
Good units completed (5,000 x $27;$30)
Add normal spoilage (1,000 x $27)
Total cost of good units completed & transferred out
$135,000 $150,000
27,000
0
$162,000 $150,000
WIP, ending (4,000 x $27;$30)
Costs accounted for
108,000 120,000
$270,000 $270,000
Account for spoilage in process costing using the
weighted-average method.
 Inspection Point: - the stage of the production process at which
products is examined to determine whether they are acceptable
or unacceptable units.
 Spoilage:- is typically assumed to occur at the stage of
completion where inspection takes place
The following example is for the month of November and
relates to Big Mountain, Inc. Direct materials are introduced
at the beginning of the production cycle. Conversion costs are
added evenly during the cycle. Normally the spoiled units are
2% of the output. Assume that Big Mountain, Inc.,
101
Dr/Mostafa I. Elfeky
Physical
Units
Work in process,
inventory (Nov. 1)
beginning
1,000
Direct
Materials
$
Conversion
Costs
9,700 $ 10,000
100%
60%
100%
20%
Degree of completion of beginning work
in process
Started during November
Good units Completed during Nov.
Work in process, ending inventory
(Nov. 30)
35,000
31,000
4,000
Degree of completion of ending work in
process
Total costs added during March
Direct materials & conversion costs
$
87,500
$
72,000
Required
What are the costs assigned to the units completed,
spoiled, and in ending work in process inventory?
Solution
Step 1
Summarize the flow of physical units of output
WIP, Beginning
1,000 units
Add; Started during the period
35,000 units
To account for (inputs)
36,000 units
Completed & transferred out during march. 31,000 units
Add; WIP, ending
4,000 units
Accounted for (out puts)
35,000 units
- What is the number of spoiled units?
(36,000 – 35,000 = 1,000 Units).
- What is the normal spoilage?
(31,000 × 2%
= 620).
- What is the abnormal spoilage?
(1,000 – 620
= 380).
102
Dr/Mostafa I. Elfeky
Step #2 Equivalent Units
Completed and transferred out
Normal spoilage
Abnormal spoilage
WIP, Ending Balance (100%, 20%)
Equivalent units
Materials Conversion
31,000
620
380
4,000
36,000
31,000
620
380
800
32,800
Step #3 Equivalent Units Cost
Materials Conversion
Work in process, beginning
Costs added in current period
Total costs
Equivalent units
$
Cost per equivalent unit of work done to date
9,700 $
87,500
$ 97,200 $
÷ 36,000 ÷
$ 2.70
$
10,000
72,000
82,000
32,800
2.50
Summarize and Assign Total Costs (Steps 4 and 5)
Total Cost
Materials
Conversion
Good units completed $ 161,200
$83,700
$77,500
(31,000 × $2.7) (31,000 × $2.5)
and transferred out
Normal spoilage
$
3,224
$1,674
$1,550
Costs
of
units
completed & transferred
out (including normal
spoilage)
$ 164,424
Abnormal spoilage
$
Work in process ending $
1,976
12,800
(620 × $2.7)
(620 × $2.5)
$1,026
$950
(380 × $2.7)
(380 × $2.5)
$10,800
$2,000
(4,000 × $2.7)
Total Costs
(800 × $2.5)
$179,200
The $1,976 cost of abnormal spoilage is assigned to the Loss from
Abnormal Spoilage account.
103
Dr/Mostafa I. Elfeky
Account for spoilage in process
costing using the FIFO method.
Ex (1)
The following example is for the month of November and
relates to Big Mountain, Inc. Direct materials are introduced
at the beginning of the production cycle. Conversion costs are
added evenly during the cycle. Normally the spoiled units are
2% of the output. Assume that Big Mountain, Inc.,
Physical
Units
Work in process,
inventory (Nov. 1)
beginning
1,000
Direct
Materials
$
Conversion
Costs
9,700 $ 10,000
100%
60%
100%
20%
Degree of completion of beginning work in
process
Started during November
Good units Completed during Nov.
Work in process, ending inventory
(Nov. 30)
35,000
31,000
4,000
Degree of completion of ending work in
process
Total costs added during March
Direct materials & conversion costs
$
87,500
$
72,000
Required
What are the costs assigned to the units completed, spoiled,
and in ending work in process inventory?
104
Dr/Mostafa I. Elfeky
Solution
Step 1
Summarize the flow of physical units of output
WIP, Beginning
Add; Started during the period
To account for (inputs)
Completed & transferred out during march.
Add; WIP, ending
Accounted for (out puts)
1,000 units
35,000 units
36,000 units
31,000 units
4,000 units
35,000 units
- What is the number of spoiled units?
(36,000 – 35,000 = 1,000 Units).
- What is the normal spoilage?
(31,000 × 2%
= 620).
- What is the abnormal spoilage?
(1,000 – 620
= 380).
Step #2 Equivalent Units
Materials Conversion
Completed and transferred out
WIP, Beginning Balance (0%, 40%)
0
400
Started and completed during period
30,000
30,000
(31,000 – 1,000)
Normal spoilage
Abnormal spoilage
WIP, Ending Balance (100%, 20%)
Equivalent units
Step #3 Equivalent Units Cost
Costs added in current period
Equivalent units
Cost per equivalent unit of work done to date
105
620
380
4,000
35,000
620
380
800
32,200
Materials Conversion
$87,500
$72,000
÷35,000
÷ 32,200
$2.50
$2.236
Dr/Mostafa I. Elfeky
Summarize and Assign Total Costs (Steps 4 and 5)
Total Cost
Materials
Conversion
- Transferred out
(31,000 units)
WIP, beginning (1,000
$
19,700 $
9,700 $
10,000
$
894.4 $
0 $
894.4
units)
Costs
added
to
beginning
WIP
in
current period
Total
from
beginning inventory
Started and completed
(30,000 units)
Normal spoilage
(0 × $2.50)
$
20,594.4 $
$
142,080
$
9,700 $
10,894.4
75,000 $
67,080
(30,000 × $2.5)
$
2,936.32 $
(400 × $2.236)
(30,000 × $2.236)
1,550 $
(620 × $2.5)
1,386.32
(620 × $2.236)
Total Costs of units $165,610.72
completed
Abnormal spoilage
$
1,799.68 $
950
(380 × $2.5)
Work in process,
Ending (4,000 units)
Total
accounted for
costs $
$
11,789 $
10,000
(4,000 × $2.5)
$
849.68
(380 × $2.236)
$
1,789
(800 × $2.236)
179,200
Ex (2)
Assume that ANZ Company manufactures a recycling container in its
forming department. Direct material added at the beginning of the
production process. Conversion Costs added evenly during the
production. Some units are spoiled as a result of defects, which are
detectable only upon inspection of finished units. Normally spoiled
units are 10% of the finished output of good units. Given the
following information:106
Dr/Mostafa I. Elfeky
WIP, beginning (July1) (DM 100% & CC 60%)
Started during July
Good units completed and transferred out during July
WIP, ending (July 31) (DM 100% & CC 50%)
1,500 units
8,500 units
7,000 units
2,000 units
Total costs
WIP, beginning
DM= $12,000 & CC = $9,000
Direct material added during current period
CC added during current period
$ 21,000
76,500
$ 89,100
Degree of completion of normal spoilage (DM 100% & CC 100%)
Degree of completion of abnormal spoilage (DM 100% & CC 100%)
Required:
Compute cost of units completed and transferred outs & units
in WIP ending and cost of normal and abnormal spoilage.
Using FIFO Method.
Answer
Step 1
Summarize the flow of physical units of output
WIP, Beginning
1,500 units
Add; Started during the period
8,500 units
To account for (inputs)
10,000 units
Completed & transferred out during march. 7,000 units
Add; WIP, ending
2,000 units
Accounted for (out puts)
9,000 units
- What is the number of spoiled units?
(10,000 – 9,000 = 1,000 Units).
- What is the normal spoilage?
(7,000 × 10%
= 700).
- What is the abnormal spoilage?
(1,000 – 700
= 300).
107
Dr/Mostafa I. Elfeky
Step #2 Equivalent Units
Completed and transferred out
Normal spoilage
Abnormal spoilage
WIP, Ending Balance (100%, 50%)
Equivalent units
Step #3 Equivalent Units Cost
Work in process, beginning
Costs added in current period
Total costs
Equivalent units
Cost per equivalent unit of work done to date
Materials Conversion
7,000
7,000
700
700
300
300
2,000
1,000
10,000
9,000
Materials Conversion
$ 12,000 $
9,000
76,500
89,100
$ 88,500 $
98,100
÷ 10,000 ÷
9,000
$ 8.85
$ 10.9
Summarize and Assign Total Costs (Steps 4 and 5)
Total Cost
Materials
Conversion
Good units completed and $ 138,250
$61,950
$76,300
(7,000 × $8.85) (7,000 × $10.9)
transferred out
Normal spoilage
$
13,825
Costs of units completed
and
transferred
out
(including
normal
spoilage)
$ 152,075
Abnormal spoilage
$
Work in process ending
Total Costs
108
$
5,925
28,600
$6,195
$7,630
(700 × $8.85)
(700 × $10.9)
$2,655
$3,270
(300 × $8.85)
(300 × $10.9)
$17,700
$10,900
(2,000 × $8.85)
(1,000 × $10.9)
$186,600
Dr/Mostafa I. Elfeky
Ex (3)
Consider the following data for November 2012 from Gray
Manufacturing Company, which makes silk pennants and uses a
process-costing system. All direct materials are added at the
beginning of the process, and conversion costs are added evenly
during the process. Spoilage is detected upon inspection at the
completion of the process. Spoiled units are disposed of at zero net
disposal value. Gray Manufacturing Company uses the FIFO method
of process costing.
Compute equivalent units for direct materials and conversion
costs. Show physical units in the first column of your
schedule.
Answers
Equivalent Units
Completed and transferred out
Normal spoilage
Abnormal spoilage
WIP, Ending Balance (100%, 30%)
Equivalent units
109
Materials Conversion
9,000
100
50
2,000
11,150
9,000
100
50
600
9,750
Dr/Mostafa I. Elfeky
Ex (4)
Chipcity is a fast-growing manufacturer of computer chips. Direct
materials are added at the start of the production process. Conversion
costs are added evenly during the process. Some units of this product
are spoiled as a result of defects not detectable before inspection of
finished goods. Spoiled units are disposed of at zero net disposal
value.
Physical
Units
Work in process, beginning
inventory (Sep. 1)
Degree
of
completion
beginning work in process
$
Conversion
Costs
96,000 $ 15,300
100%
30%
100%
40%
$ 567,000
$ 230,400
of
Started during September
Good units Completed during
Sep.
Work in process, ending
inventory (Sep. 30)
Normal spoilage as a percentage
of good units
Total costs added during
September
Direct
materials
conversion costs
600
Direct
Materials
2,550
2,100
450
15%
and
Required:
By using Weighted – average and FIFO method.
(1) For each cost category, compute equivalent units.
Show physical units in the first column of your
schedule.
(2) Summarize total costs to account for; calculate cost per
equivalent unit for each cost category; and assign total
costs to units completed and transferred out (including
normal spoilage), to abnormal spoilage, and to units in
ending work in process.
110
Dr/Mostafa I. Elfeky
Answer
Step 1
Summarize the flow of physical units of output
WIP, Beginning
Add; Started during the period
To account for (inputs)
Completed & transferred out during march.
Add; WIP, ending
Accounted for (out puts)
1,500 units
8,500 units
10,000 units
7,000 units
2,000 units
9,000 units
- What is the number of spoiled units?
(10,000 – 9,000 = 1,000 Units).
- What is the normal spoilage?
(7,000 × 10%
= 700).
- What is the abnormal spoilage?
(1,000 – 700
= 300).
Step #2 Equivalent Units
Materials Conversion
Completed and transferred out
WIP, Beginning Balance (0%, 40%)
0
600
Started and completed during period
5,500
5,500
(7,000 – 1,500)
Normal spoilage
Abnormal spoilage
WIP, Ending Balance (100%, 50%)
Equivalent units
Step #3 Equivalent Units Cost
Costs added in current period
Equivalent units
Cost per equivalent unit of work done to date
111
700
300
2,000
8,500
700
300
1,000
8,100
Materials Conversion
$76,500
$89,100
÷ 8,500
÷ 8,100
$9
$11
Dr/Mostafa I. Elfeky
Summarize and Assign Total Costs (Steps 4 and 5)
Total Cost
Materials
Conversion
- Transferred out
(31,000 units)
WIP, beginning
$
21,000 $
12,000 $
9,000
(1,000 units)
Costs added to $
6,600 $
0
(0 × $9)
beginning
WIP
in
current period
Total
from
$ 27,600 $
12,000
beginning inventory
- Started and
$ 110,000 $
49,500
(5,500 × $9)
completed (30,000
units)
Normal spoilage
$
14,000 $
6,300
$
(600 × $11)
$
15,600
$
60,500
(5,500 × $11)
$
(700 × $9)
Total Costs of units $
completed
Abnormal spoilage
$
112
7,700
(700 × $11)
151,600
6,000 $
2,700 $
(300 × $9)
Work in process,
$
Ending (4,000 units)
Total
costs $
accounted for
6,600
29,000 $
18,000
(2,000 × $9)
3,300
(300 × $11)
$
11,000
(1,000 × $11)
186,600
Dr/Mostafa I. Elfeky
Special Example
Consider three different cases: Inspection occurs at (1) the
20%, (2) the 55%, or (3) the 100% completion stage. Assume
that normal spoilage is 10% of the good units passing
inspection. A total of 1,000 units are spoiled in all three cases.
The following data are for July 2012. Note how the number of
units of normal and abnormal spoilage changes, depending on
when inspection occurs.
Work in process, beginning (100%, 60%)
Started during July
To account for
Good units completed and transferred out
Normal spoilage
Abnormal spoilage
Work in process, ending (100%, 50%)
Accounted for
Physical Units: Stage of Completion
at Which Inspection Occurs
20%
55%
100%
1,500
1,500
1,500
8,500
8,500
8,500
10,000
10,000
10,000
7,000
7,000
7,000
750
550
700
250
450
300
2,000
2,000
2,000
10,000
10,000
10,000
The following diagram shows the flow of physical units for
July and illustrates the normal spoilage numbers in the table.
Note that 7,000 good units are completed and transferred out—
1,500 from beginning work in process and 5,500 started and
completed during the period—while 2,000 units are in ending
work in process. Account for spoilage in process costing using
the standard-costing method.
113
Dr/Mostafa I. Elfeky
(1) At 20% inspection Normal Spoilage = 750 units
10% × (8,500 units started – 1,000 units spoiled), because
only the units started passed the 20% completion inspection
point in the current period. Beginning work in process is
excluded from this calculation because, being 60%
complete at the start of the period, and it passed the
inspection point in the previous period.
(2) At 55% inspection Normal Spoilage = 550 units
10% × (8,500 units started – 1,000 units spoiled – 2,000
units in ending work in process).
(3) At 100% inspection Normal Spoilage = 700 units
10% × 7,000, because 7,000 units are fully completed.
Account for spoilage in process costing
using the standard-costing method.
The standard-costing method makes calculating equivalent
unit costs unnecessary and so simplifies process costing.
Under standard cost, the cost per equivalent unit =
standard cost.
•
Actual cost < standard Cost … Favorable …. Gain…
Credit.
•
Actual cost > standard Cost … Unfavorable …. Loss…
Debit.
Actual cost = standard Cost ……… No Variance.
Finished Goods Control
XX
Work in process Control
Loss from abnormal spoilage
XX
Work in process Control
•
114
XX
XX
Dr/Mostafa I. Elfeky
Account for spoilage in job costing.
▪ Normal spoilage in job costing is considered
inventoriable costs (treated as a component of the cost
of good units completed).
▪ Abnormal spoilage costs are not considered as
inventoriable costs and are written off as loss from
abnormal spoilage of the period in which detection
occurs.
In job costing we should distinguish between
 Normal Spoilage Attributable to a Specific Job: When
normal spoilage occurs because of the specifications of
a particular job, that job bears the cost of the spoilage
minus the disposal value of the spoilage.
 Normal Spoilage Common to all Jobs: in some cases,
spoilage may be considered a normal characteristic of
the production process, it will occurs when any specific
job is being worked. The spoilage is costed as
manufacturing overhead because it is common to all jobs.
Spoilage
Abnormal
Normal
Attributable to
Specific jobs
WIP Control
115
Common to
All jobs
Loss from abnormal spoilage
MOH Control
Dr/Mostafa I. Elfeky
Ex
Assume that 5 parts out of 40 parts of Whitefish Machine
Shop’s Job #10 are spoiled (normal). Costs assigned prior to
the inspection point are $1,000 per part. The current disposal
price of the spoiled parts is $200 per part. When the spoilage is
detected, the spoiled goods are inventoried at $200 per part.
1. Normal spoilage attributable to a specific job:
When normal spoilage occurs because of the
specifications of a particular job, that job bears the cost of
the spoilage reduced by the current disposal value of that
spoilage.
Materials Control "5 × $200"
Work in process Control (job #10)
1,000
1,000
Work In Process (job #10)
Parts (40 × $1,000)
Ending Balance
$ 40,000 Parts (5 × $200)
$ 39,000
1,000
What is the total cost of the 35 good units?
(35 × $1,000) + (5 × $800) = $39,000
2. Normal spoilage common to all jobs:
In some cases, spoilage may be considered a normal
characteristic of a given production cycle. The spoilage is
not charged to a specific job.
Materials Control "5 × $200" (spoiled goods at current disposal value)
Manufacturing Overhead Control "5 × $800" (normal spoilage)
Work in process Control (job #10) "5 × $1,000"
116
1,000
4,000
Dr/Mostafa I. Elfeky
5,000
3. Abnormal spoilage:
If the spoilage is abnormal, the net loss is highlighted and
always charged to an abnormal loss account.
Assume that the 5 parts of Whitefish Machine
Shop’s Job #10 are considered abnormal spoilage.
Materials Control "5 × $200" (spoiled goods at current disposal value)
Loss from abnormal spoilage "5 × $800" (normal spoilage)
Work in process Control (job #10) "5 × $1,000"
1,000
4,000
Job Costing and Rework
Rework is units of production that are inspected, determined to
be unacceptable, repaired, and sold as acceptable finished
goods. We again distinguish (1) normal rework attributable to a
specific job, (2) normal rework common to all jobs, and (3)
abnormal rework.
Ex
In the Hull Machine Shop, 5 aircraft parts out of a job lot of 50
aircraft parts are spoiled. Costs assigned prior to the inspection
point are $2,000 per part. When the spoilage is detected, the
spoiled goods are inventoried at $600 per part, the net disposal
value. Assume the five spoiled parts are reworked. The journal
entry for the $10,000 of total costs (the details of these costs
are assumed) assigned to the five spoiled units before
considering rework costs is as follows:
Work-in-Process Control (specific job)
10,000
Materials Control
4,000
Wages Payable Control
4,000
Manufacturing Overhead Allocated
2,000
Assume the rework costs equal $3,800 (comprising $800 direct
materials, $2,000 direct manufacturing labor, and $1,000
manufacturing overhead).
117
Dr/Mostafa I. Elfeky
5,000
▪ Normal Rework Attributable to a Specific Job
If the rework is normal but occurs because of the
requirements of a specific job, the rework costs are charged
to that job. The journal entry is as follows:
Work-in-Process Control (specific job)
Materials Control
Wages Payable Control
Manufacturing Overhead Allocated
3,800
800
2,000
1,000
▪ Normal Rework Common to All Jobs
When rework is normal and not attributable to a specific
job, the costs of rework are charged to manufacturing
overhead and are spread, through overhead allocation, over
all jobs.
Manufacturing Overhead Control (rework costs)
Materials Control
Wages Payable Control
Manufacturing Overhead Allocated
3,800
800
2,000
1,000
▪ Abnormal Rework
If the rework is abnormal, it is recorded by charging
abnormal rework to a loss account.
Loss from Abnormal rework
Materials Control
Wages Payable Control
Manufacturing Overhead Allocated
3,800
800
2,000
1,000
Accounting for rework in a process-costing system also
requires abnormal rework to be distinguished from normal
rework. Process costing accounts for abnormal rework in the
same way as job costing. Accounting for normal rework
follows the accounting described for normal rework common
118
Dr/Mostafa I. Elfeky
to all jobs (units) because masses of identical or similar units
are being manufactured.
Costing rework focuses managers’ attention on the resources
wasted on activities that would not have to be undertaken if the
product had been made correctly. The cost of rework prompts
managers to seek ways to reduce rework, for example, by
designing new products or processes, training workers, or
investing in new machines. To eliminate rework and to
simplify the accounting, some companies set a standard of zero
rework. All rework is then treated as abnormal and is written
off as a cost of the current period.
Accounting for Scrap
Scrap is residual material that results from manufacturing a
product; it has low total sales value compared with the total
sales value of the product. No distinction is made between
normal and abnormal scrap because no cost is assigned to
scrap. The only distinction made is between scrap attributable
to a specific job and scrap common to all jobs.
There are two aspects of accounting for scrap:
1. Planning and control, including physical tracking
2. Inventory costing, including when and how scrap affects
operating income
Initial entries to scrap records are commonly expressed in
physical terms. In various industries, companies quantify items
such as stamped-out metal sheets or edges of molded plastic
parts by weighing, counting, or some other measure. Scrap
records not only help measure efficiency, but also help keep
track of scrap, and so reduce the chances of theft. Companies
use scrap records to prepare periodic summaries of the amounts
of actual scrap compared with budgeted or standard amounts.
119
Dr/Mostafa I. Elfeky
Scrap is either sold or disposed of quickly or it is stored for
later sale, disposal, or reuse.
Ex
we extend our Hull example. Assume the manufacture of
aircraft parts generates scrap and that the scrap from a job has a
net sales value of $900.
▪ Recognizing Scrap at the Time of Its Sale
When the dollar amount of scrap is immaterial, the simplest
accounting is to record the physical quantity of scrap returned
to the storeroom and to regard scrap sales as a separate line
item in the income statement. In this case, the only journal
entry is as follows:
Sale of scrap:
Cash or Accounts Receivable
Scrap Revenues
900
900
When the dollar amount of scrap is material and the scrap is sold
quickly after it is produced, the accounting depends on whether the
scrap is attributable to a specific job or is common to all jobs.
▪ Scrap Attributable to a Specific Job
Scrap returned to storeroom:
No journal entry.
[Notation of quantity received and related job entered in the
inventory record]
Sale of scrap:
Cash or Accounts Receivable
900
Work-in-Process Control
900
Unlike spoilage and rework, there is no cost assigned to the scrap,
so no distinction is made between normal and abnormal scrap. All
scrap revenues, whatever the amount, are credited to the specific
job. Scrap revenues reduce the costs of the job.
120
Dr/Mostafa I. Elfeky
▪ Scrap common to all jobs
Scrap returned to storeroom:
No journal entry.
[Notation of quantity received and related job entered in the
inventory record]
Sale of scrap:
Cash or Accounts Receivable
900
Manufacturing Overhead Control
900
Scrap is not linked with any particular job or product. Instead,
all products bear production costs without any credit for scrap
revenues except in an indirect manner: Expected scrap
revenues are considered when setting the budgeted
manufacturing overhead rate. Thus, the budgeted overhead rate
is lower than it would be if the overhead budget had not been
reduced by expected scrap revenues. This method of
accounting for scrap is also used in process costing when the
dollar amount of scrap is immaterial, because the scrap in
process costing is common to the manufacture of all the
identical or similar units produced (and cannot be identified
with specific units).
▪ Recognizing Scrap at the Time of Its Production
Our preceding illustrations assume that scrap returned to the
storeroom is sold quickly, so it is not assigned an inventory cost
figure. Sometimes, as in the case with edges of molded plastic parts,
the value of scrap is not immaterial, and the time between storing it
and selling or reusing it can be long and unpredictable. In these
situations, the company assigns an inventory cost to scrap at a
conservative estimate of its net realizable value so that production
costs and related scrap revenues are recognized in the same
accounting period. Some companies tend to delay sales of scrap
121
Dr/Mostafa I. Elfeky
until its market price is considered attractive. Volatile price
fluctuations are typical for scrap metal. In these cases, it’s not easy
to determine some "reasonable inventory value".
▪ Scrap Attributable to a Specific Job
Scrap returned to storeroom:
Materials Control
Work-in-Process Control
900
900
▪ Scrap Common to All Jobs
Scrap returned to storeroom:
Materials Control
Manufacturing Overhead Control
900
900
Observe that the Materials Control account is debited in place of
Cash or Accounts Receivable. When the scrap is sold, the journal
entry is as follows:
Sale of scrap:
Cash or Accounts Receivable
Materials Control
900
900
Scrap is sometimes reused as direct material rather than sold as
scrap. In this case, Materials Control is debited at its estimated net
realizable value and then credited when the scrap is reused. For
example, the entries when the scrap is common to all jobs are as
follows:
Scrap returned to storeroom:
Materials Control
Manufacturing Overhead Control
900
Reuse of scrap:
Work-in-Process Control
Materials Control
900
122
900
900
Dr/Mostafa I. Elfeky
MCQs
(1) Transferred-in costs are treated as if they are:a) Conversion costs added at the beginning of the process
b) Costs of beginning inventory added at the beginning of
the process
c) Direct labor costs added at the beginning of the
process
d) A separate direct material added at the beginning of the
process
(2) Ampco Disk Company operates a computer disk
manufacturing plant. Direct materials are added at the end
of the process. The following data were for June 20X5:
Work in process, beginning inventory
50,000 units
Transferred-in costs (100% complete)
Direct materials (0% complete)
Conversion costs (90% complete)
Transferred in during current period
Completed and transferred out
Work in process, ending inventory
150,000 units
175,000 units
? units
Transferred-in costs (100% complete)
Direct materials (0% complete)
Conversion costs (65% complete)
How many units must be accounted for during the period?
a)
b)
c)
d)
225,000 Units
200,000 Units
179,500 Units
150,000 Units
(3) Ampco Disk Company operates a computer disk
manufacturing plant. Direct materials are added at the end
of the process. The following data were for August 20X5:
Work in process, beginning inventory
123
100,000 units
Transferred-in costs (100% complete)
Direct materials (0% complete)
Conversion costs (90% complete)
Dr/Mostafa I. Elfeky
Transferred in during current period
Completed and transferred out
Work in process, ending inventory
300,000 units
250,000 units
50,000 units
Transferred-in costs (100% complete)
Direct materials (0% complete)
Conversion costs (65% complete)
Calculate equivalent units for conversion costs using the
FIFO method.
a)
b)
c)
d)
401,500 Units.
350,000 Units.
300,000 Units.
292,500 Units.
(4) In the Sewing Department, additional direct materials are
added to the product at the end of production. Assume that
200,000 units were transferred from the Cutting Department
and that the weighted-average method is used. Data for
February follow:
Work in process, Jan. 31—70,000 units (30% complete as to
conversion)
Units completed during February—240,000 units
Work in process, Feb. 28—30,000 units (80% complete as to
conversion)
For the Sewing Department, the equivalent units of work
done in February is
a)
b)
c)
d)
Transferred In
Direct Materials
Conversion Costs
200,000
200,000
240,000
270,000
200,000
170,000
240,000
240,000
200,000
194,000
245,000
264,000
(5) Managers often cite reductions in the costs of spoilage as:a) major justification for implementing a just-in-time
production system
b) measurement of improved output quality
c) immaterial item that is not to be tracked
d) indication of improvement in the accounting system
124
Dr/Mostafa I. Elfeky
(6) Unacceptable units of production that are discarded or sold
for reduced prices are referred to as:
a)
b)
c)
d)
Reworked units
Spoilage
Scrap
Defective units
(7) Unacceptable units of production that are subsequently
repaired and sold as acceptable finished goods are:
a)
b)
c)
d)
Reworked units
Spoilage
Scrap
Defective units
(8) Costs of poor quality production include the:
a)
b)
c)
d)
Opportunity cost of the plant and workers
Effect on current customers
Effect on potential customers
All of these answers are correct.
(9) Material left over when making a product is referred to as:
a)
b)
c)
d)
Reworked units
Spoilage
Scrap
Defective units
(10) A production process which involves spoilage and rework
occurs in:
a)
b)
c)
d)
The manufacture of high precision tools
Semiconductor units
The manufacture of clothing
All of these answers are correct
(11) Spoilage that is an inherent result of the particular
production process and arises under efficient operating
conditions is referred to as:
125
Dr/Mostafa I. Elfeky
a)
b)
c)
d)
Ordinary spoilage
Normal spoilage
Abnormal spoilage
None of these answers is correct
(12) Spoilage that should not arise under efficient operating
conditions is referred to as:
a)
b)
c)
d)
Ordinary spoilage
Normal spoilage
Abnormal spoilage
None of these answers is correct
(13) Costs of normal spoilage are usually accounted for as:
a)
b)
c)
d)
Part of the cost of goods sold
Part of the cost of goods manufactured
A separate line item in the income statement
An asset in the balance sheet
(14) Costs of abnormal spoilage are usually accounted for as:
a)
b)
c)
d)
Part of the cost of goods sold
Part of the cost of goods manufactured
A separate line item in the income statement
An asset in the balance sheet
(15) The loss from abnormal spoilage account would not appear:
a) On the balance sheet
b) As a detailed item in the retained earnings schedule of
the balance sheet
c) As a detailed item on the income statement
d) Either A or B is correct
(16) Normal spoilage should be computed using as the base the:
a)
b)
c)
d)
126
Total units completed
Total good units completed
Total actual units started into production
None of these answers is correct
Dr/Mostafa I. Elfeky
(17) Companies that attempt to achieve zero defects in the
manufacturing process treat spoilage as:
a)
b)
c)
d)
Scrap
Reworked units
Abnormal spoilage
Normal spoilage
(18) Which one of the following conditions usually exists when
comparing normal and abnormal spoilage to controllability?
a)
b)
c)
d)
Normal Spoilage
Controllable
Controllable
Uncontrollable
Uncontrollable
Abnormal Spoilage
Controllable
Uncontrollable
Uncontrollable
Controllable
(19) Not counting spoiled units in the equivalent-unit calculation
results in:
a)
b)
c)
d)
Lower cost per good unit .
Higher cost per good unit
Better management information
Both A and C are correct
(20) Recognition of spoiled units when computing output units:
a)
b)
c)
d)
Highlights the costs of normal spoilage to management
Distorts the accounting data
Focuses management's attention on reducing spoilage
Both A and C are correct
Answer the following questions using the information below
Astoria Computer Systems, Inc., manufactures printer circuit
cards. All direct materials are added at the inception of the
production process. During January, the accounting department
noted that there was no beginning inventory. Direct materials
purchases totaled $100,000 during the month. Work-in-process
records revealed that 4,000 card units were started in January, 2,000
127
Dr/Mostafa I. Elfeky
card units were complete, and 1,500 card units were spoiled as
expected. Ending work-in-process card units are complete in respect
to direct materials costs. Spoilage is not detected until the process is
complete.
(21) What are the respective direct material costs per equivalent
unit, assuming spoiled units are recognized or ignored?
a)
b)
c)
d)
$20.00; $35.00
$25.00; $40.00
$30.00; $45.00
$35.00; $50.00
(22) What is the direct material cost assigned to good units
completed when spoilage units are recognized?
a)
b)
c)
d)
$ 50,000.
$100,000.
$ 80,000.
$ 87,500.
(23) What is the cost transferred out assuming spoilage units are
ignored?
a)
b)
c)
d)
$87,500.
$80,000.
$50,000.
$77,500.
(24) What are the amounts allocated to the work-in-process
ending inventory assuming spoilage units are recognized
and ignored, respectively?
a)
b)
c)
d)
$20,000; $24,500.
$30,000; $34,250.
$12,500; $20,000.
$37,500; $40,000.
(25) Spoilage costs allocated to ending work in process are
larger by which method and by how much?
128
Dr/Mostafa I. Elfeky
a)
b)
c)
d)
When spoiled units are recognized, by $2,500
When spoiled units are recognized, by $4,250
When spoiled units are ignored, by $7,500
When spoiled units are recognized, by $7,500
Answer the following questions using the information below:
Craft Concept manufactures small tables in its Processing
Department. Direct materials are added at the initiation of the
production cycle and must be bundled in single kits for each unit.
Conversion costs are incurred evenly throughout the production
cycle. Before inspection, some units are spoiled due to nondetectible materials defects. Inspection occurs when units are 50%
converted. Spoiled units generally constitute 5% of the good units.
Data for December 20X5 are as follows:
WIP, beginning inventory 12/1/20X5
Direct materials (100% complete)
Conversion costs (75% complete)
Started during December
Completed and transferred out 12/31/20X5
WIP, ending inventory 12/31/20X5
Direct materials (100% complete)
Conversion costs (65% complete)
Costs for December:
WIP, beginning Inventory:
Direct materials
$50,000
Conversion costs
30,000
Direct materials added
100,000
Conversion costs added
140,000
10,000 units
40,000 units
38,400 units
8,000 units
(26) What is the number of total spoiled units?
a)
b)
c)
d)
129
1,600 units
2,000 units
2,700 units
3,600 units
Dr/Mostafa I. Elfeky
(27) Normal spoilage totals:
a)
b)
c)
d)
1,600 units
2,000 units
1,920 units
2,700 units
(28) Abnormal spoilage totals:
a)
b)
c)
d)
1,600 units
2,000 units
1,680 units
1,920 units
(29) What is the total cost per equivalent unit using the
weighted-average method of process costing?
a)
b)
c)
d)
$3.00
$3.60
$6.60
$4.60
(30) What cost is allocated to abnormal spoilage using the
weighted-average process-costing method?
a)
b)
c)
d)
$0
$7,360
$11,088
$16,400
(31) What are the amounts of direct materials and conversion
costs assigned to ending work in process using the
weighted-average process-costing method?
a)
b)
c)
d)
$18,720; $24,000
$22,900; $19,820
$24,000; $18,720
$28,560; $14,160
Answer the following questions using the information below
Fish Fillet Incorporated obtains fish and then processes them
into frozen fillets and then prepares the frozen fish fillets for
130
Dr/Mostafa I. Elfeky
distribution to its retail sales department. Direct materials are added
at the initiation of the cycle. Conversion costs are incurred evenly
throughout the production cycle. Before inspection, some fillets are
spoiled due to non-detectible defects. Inspection occurs when units
are 50% converted. Spoiled fillets generally constitute 3.5% of the
good fillets. Data for April 2008 are as follows:
WIP, beginning inventory 4/1/2008
Direct materials (100% complete)
Conversion costs (50% complete)
Started during April
Completed and transferred out 4/31/2008
WIP, ending inventory 4/31/2008
Direct materials (100% complete)
Conversion costs (20% complete)
Costs for April:
WIP, beginning Inventory:
Direct materials
Conversion costs
Direct materials added
Conversion costs added
40,000 fillets
75,000 fillets
100,000 fillets
8,000 fillets
$55,000
40,000
145,100
188,065
(32) What is the number of total spoiled units?
a)
b)
c)
d)
8,000 units
5,000 units
25,0000 units
7,000 units
(33) Normal spoilage totals:
a) 3,500 units
b)
0 units
c) 8,000 units
d) 7,000 units
(34) Abnormal spoilage totals:
a) 3,500 units
b)
0 units
c) 8,000 units
d) 7,000 units
131
Dr/Mostafa I. Elfeky
(35) What is the total cost per equivalent unit using the
weighted-average method of process costing?
a)
b)
c)
d)
$4.00
$1.74
$2.10
$3.84
(36) What cost is allocated to abnormal spoilage using the
weighted-average process-costing method?
a)
b)
c)
d)
$0
$13,440
$26,880
$14,500
(37) What are the amounts of direct materials and conversion
costs assigned to ending work in process using the
weighted-average process-costing method?
a)
b)
c)
d)
$3,360; $13,920
$13,920; $3,360
$13,920; $16,800
$16,800; $13,920
Samantha's Office Supplies manufactures desk organizers in its
Processing Department. Direct materials are included at the
inception of the production cycle and must be bundled in single
kits for each unit. Conversion costs are incurred evenly
throughout the production cycle. Inspection takes place as units
are placed into production. Spoiled units generally constitute
4% of the good units. Data provided for February 2008 are as
follows:
WIP, beginning inventory 2/1/2008
25,000units
Direct materials (100% complete)
Conversion costs (50% complete)
Started during February
Completed and transferred out
WIP, ending inventory 2/29/2008
132
82,000units
81,000units
15,000units
Dr/Mostafa I. Elfeky
Direct materials (100% complete)
Conversion costs (25% complete)
Costs: WIP, beginning inventory:
Direct materials
Conversion costs
Direct materials added
Conversion costs added
$150,000
44,000
209,916
109,893
(38) What are the normal and abnormal spoilage units,
respectively, for February when using FIFO?
a)
b)
c)
d)
1,400 units; 1,480 units
3,280 units; 1,640 units
3,240 units; 7,760 units
3,240 units; 11,000 units
(39) What costs would be associated with normal and abnormal
spoilage, respectively, using the FIFO method of process
costing?
a)
b)
c)
d)
$12,571; $30,108
$30,108; $12,571
$1,257; $3,010
$8,000; $4,000
(40) What costs are allocated to the ending work-in-process
inventory for direct materials and conversion costs,
respectively, using the FIFO method of process costing?
a)
b)
c)
d)
$38,250; $4,850
$40,000; $23,100
$38,400; $4,950
$49,500; $38,400
(41) What are the direct material and conversion costs of all the
units that were initially in the beginning work-in-process
inventory and were subsequently shipped? Use the FIFO
method of process costing.
a) $38,250; $24,850
b) $0; $16,500
133
Dr/Mostafa I. Elfeky
c) $40,000; $21,590
d) $49,500; $13,600
(42) What are the total costs of all the units that were initially in
the beginning work-in-process inventory and were
subsequently shipped? Use the FIFO method of process
costing.
a)
b)
c)
d)
$194,000
$16,500
$210,500
$97,000
(43) What are the total costs of all the units that were started
during February and subsequently shipped before the end of
the period?
a)
b)
c)
d)
$314,280
$217,280
$318,160
$153,500
(44) Which of the following journal entries correctly represents
the transfer of completed goods begun during February
using the FIFO method of process costing?
a) Finished Goods
Work in Process
b) Loss from Spoilage
Finished Goods
c) Finished Goods
Work in Process
d) Finished Goods
Work in Process
470,456.73
470,456.73
12,571.04
12,571.04
217,280
217,280
314,280
314,280
(45) The standard-costing method:
a) Adds a layer of complexity to the calculation of
equivalent-unit costs in a process-costing environment
b) Makes calculating equivalent-unit costs unnecessary
c) Requires an analysis of the spoilage costs in beginning
inventory
134
Dr/Mostafa I. Elfeky
d) Requires an analysis of the spoilage costs in ending
inventory
(46) The inspection point is the:
a) Stage of the production cycle where products are
checked to determine whether they are acceptable or
unacceptable units
b) Point at which costs are allocated between normal and
abnormal spoilage
c) Point at which the calculation of equivalent units is
made
d) None of these answers is correct.
(47) When spoiled goods have a disposal value, the net cost of
the spoilage is computed by:
a) Deducting disposal value from the costs of the spoiled
goods accumulated to the inspection point
b) Adding the costs to complete a salable product to the
costs accumulated to the inspection point
c) Calculating the costs incurred to the inspection point
d) None of these answers is correct.
(48) The costs of normal spoilage are allocated to the units in
ending work-in-process inventory, in addition to completed
units if the units:
a) In ending inventory have not passed the inspection
point
b) In ending work-in-process inventory have passed the
inspection point
c) In ending work in process inventory are more than 50%
complete
d) In ending work-in-process inventory are less than 50%
complete
(49) A difference between job costing and process costing is
that:
135
Dr/Mostafa I. Elfeky
a) Job-costing systems usually do not distinguish between
normal spoilage attributable to all jobs and normal
spoilage attributable to a specific job
b) Job-costing systems usually distinguish between
normal spoilage attributable to a specific job and
spoilage common to all jobs
c) Process costing normally does not distinguish between
normal spoilage attributable to a specific job and
spoilage common to all jobs
d) Both B and C are correct.
Typically, 10 pieces out of a job lot of 1,000 parts are spoiled.
Costs are assigned at the inspection point, $50 per unit. Spoiled
pieces may be disposed at $10 per unit. The spoiled goods must
be inventoried appropriately when the normal spoilage is
detected. The current job requires the production of 2,500 good
parts .
(50) Which of the following journal entries properly reflects the
recording of spoiled goods?
a) Materials Control
Manufacturing Overhead Control
Work-in-Process Control
b) Materials Control
Manufacturing Overhead Control
Work-in-Process Control
c) Work-in-Process Control
Materials Control
Manufacturing Overhead Control
d) Manufacturing Overhead Control
Materials Control
Work-in-Process Control
200
800
1,000
250
1,000
1,250
1,250
250
1,000
1,000
200
800
The Harleysville Manufacturing Shop produces motorcycle
parts. Typically, 10 pieces out of a job lot of 1,000 parts are
spoiled. Costs are assigned at the inspection point, $50 per unit.
Spoiled pieces may be disposed at $10 per unit. The spoiled
136
Dr/Mostafa I. Elfeky
goods must be inventoried appropriately when the normal
spoilage is detected. Job # 101 requires the production of 2,500
good parts .
(51) Which of the following journal entries would be correct if
the spoilage occurred due to specifications required for Job#
101?
a) Work-in-Process Control
Materials Control
b) Materials Control
Work-in-Process Control
c) Materials Control
Work-in-Process Control
d) Work-in-Process Control
Materials Control
100
100
100
100
250
250
250
250
(52) Which of the following entries reflects the original cost
assignment before production items are reworked?
a) Work-in-Process Control
Materials Control
Wages Payable Control
Manufacturing Overhead Allocated
XXX
b) Finished Goods Control
Work-in-Process Control
XXX
c) Manufacturing Overhead Allocated
Materials Control
Wages Payable Control
Work-in-Process Control
XXX
d) Materials Control
Wages Payable Control
Work-in-Process Control
Manufacturing Overhead Allocated
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(53) Accounting for rework in a process-costing system:
137
Dr/Mostafa I. Elfeky
a) Accounts for normal rework in the same way as a jobcosting system
b) Requires abnormal rework to be distinguished from
normal rework
c) If the rework is normal, then rework is accounted for in
the same manner as accounting for normal rework
common to all jobs
d) All of these answers are correct.
(54) In accounting for scrap, which one of the following
statements is FALSE?
a) Normal scrap is accounted for separately from
abnormal scrap
b) In accounting for scrap, there is no distinction between
the scrap attributable to a specific job and scrap
common to all jobs
c) Initial entries to scrap accounting records are most
often made in dollar terms
d) All of these answers are correct.
(55) When the amount of scrap is immaterial, the easiest
accounting entry when recording scrap sold for cash is:
a) Sales of Scrap
Cash
b) Cash
Manufacturing Overhead Control
c) Cash
Other Revenue
d) Accounts Receivable
Sales of scrap
(56) Assume the amount of scrap is material and the scrap is sold
immediately after it is produced. If the scrap attributable to
a specific job is sold on account, the journal entry is:
a) Work-in-Process Control
Cash
138
Dr/Mostafa I. Elfeky
b) Work-in-Process Control
Accounts Receivable
c) Accounts Receivable
Work-in-Process Control
d) Work-in-Process Control
Accounts Payable
(57) If scrap, common to all jobs, is returned to the storeroom
and the time between the scrap being inventoried and its
disposal is quite lengthy, the journal entry is:
a) Work-in-Process Control
Materials Control
b) Materials Control
Work-in-Process Control
c) Manufacturing Overhead Control
Materials Control
d) Materials Control
Manufacturing Overhead Control
(58) The accounting for scrap under process costing is similar to
the accounting under:
a)
b)
c)
d)
Job costing when scrap is different for each job
Job costing when scrap is common to all jobs
Process costing when scrap is different for each job
Process costing when scrap is a common to all jobs
(59) Which of the following is NOT a major consideration when
accounting for scrap?
a) Keeping detailed records of physical quantities of scrap
at all stages of the production process
b) Inventory costing including when and how scrap affects
operating income
c) Planning and control including physical tracking
d) Decisions as to whether to group scrap with reworked
units
139
Dr/Mostafa I. Elfeky
(60) Normal spoilage is computed on the basis of the number of:
a) Good units that pass inspection during the current
period
b) Units that pass the inspection point during the current
period
c) Units that are 100% complete as to materials
d) None of these answers is correct.
(61) In manufacturing its products for the month of September
2008, El Dorado Corporation incurred normal spoilage of
$7,000 and abnormal spoilage of $3,000. How much
spoilage cost should El Dorado charge as inventoriable for
the month of September 2005?
a)
b)
c)
d)
$0
$3,000
$7,000
$10,000
(62) Spoilage from a manufacturing process was discovered
during an inspection of work in process. In a processcosting system, the cost of the spoilage would be added to
the cost of the good units produced if the spoilage is
Normal
Abnormal
a)
b)
c)
d)
Yes
Yes
No
No
Yes
No
No
Yes
The following data apply to the following questions
Watkins Company had the following production for the month of
June:
Units
Work in process, June 1
6,000
Started during June
24,000
Completed and transferred to finished goods
18,000
Abnormal spoilage incurred
3,000
Work in process, June 30
9,000
140
Dr/Mostafa I. Elfeky
Materials are added at the beginning of the process. As to
conversion cost, work in process was 20% complete at the
beginning and 70% complete at the end of the month. Spoilage is
detected at the end of the process.
(63) Using the weighted-average method, the equivalent units for
June, with respect to conversion cost, were
a)
b)
c)
d)
30,000.
24,300.
23,700.
27,300.
(64) Assume the manufacturing cost of the spoiled goods is
$6,000. The journal entry to record the spoilage is
a.
b.
c.
d.
Manufacturing Overhead Control
Work in Process
Materials Control
Work in Process
Loss from Abnormal Spoilage
Work in Process
Finished Goods
Work in Process
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
(65) Using the first-in, first out (FIFO) method, the equivalent
units for June, with respect to conversion cost, were
a)
b)
c)
d)
26,100.
23,100.
22,500.
19,500.
(66) Under process costing and job costing, the accounting
treatment for the normal spoilage (assume related to normal
factory operations) is
a.
b.
c.
d.
141
Process costing
Job costing
Loss account is charged.
Loss account is charged.
Upon transfer, spoilage costs
Loss account is charged.
are transferred along with other costs.
Upon transfer, spoilage costs are Manufacturing overhead
transferred along with other costs. control is charged.
Manufacturing overhead control No entry.
is charged.
Dr/Mostafa I. Elfeky
(67) During August 2008, Stirtz Company incurred the following
costs on Job 924 for the manufacture of 600 scoreboard
clocks:
Original cost accumulation:
Direct materials
Direct manufacturing labor
Manufacturing overhead (150% of direct manufacturing labor)
Direct costs of reworked 15 units:
Direct materials
Direct manufacturing labor
$2,250
1,800
2,700
$6,750
$150
240
$390
The rework costs were attributable to exacting
specifications of Job 924, and the full rework costs were
charged to the specific job. The cost per finished unit of
Job 924 was
a)
b)
c)
d)
$12.50.
$11.25.
$11.61.
$11.90.
The following data apply to the following questions
MedTech, Inc. manufactures surgical instruments to the exacting
specifications of various customers. During April 2005, Job 911 for the
production of 4,500 instruments was completed at the following costs per
unit:
Direct materials
Direct manufacturing labor
Allocated manufacturing overhead
$ 60
20
80
$160
Final inspection of Job 911 disclosed 100 defective units and 50 spoiled
units. The defective instruments were reworked at a total cost of $12,000,
and the spoiled instruments were sold to a jobber for $3,000.
(68) What would be the unit cost of the good units produced on
Job 911?
a)
b)
c)
d)
142
$160
$162
$164
$168
Dr/Mostafa I. Elfeky
(69) If the costs associated with spoilage and reworked units are
considered as normal to manufacturing operations, the unit
cost of the good units produced on Job 911 is
a)
b)
c)
d)
$165.
$164.
$162.
$160.
(70) The sale of scrap from a manufacturing process usually
would be recorded as a(n)
a)
b)
c)
d)
Increase in manufacturing overhead control.
Decrease in manufacturing overhead control.
Increase in finished goods control.
Decrease in finished goods control.
Problems
1) Assume that ANZ Company manufactures a recycling
container in its forming department. Direct material added
at the beginning of the production process. Conversion
Costs added evenly during the production. Some units are
spoiled as a result of defects, which are detectable only
upon inspection of finished units. Normally spoiled units
are 10% of the finished output of good units. Given the
following information:WIP, beginning (July1) (DM 100% & CC 60%)
1,500 units
Started during July
8,500 units
Good units completed and transferred out during July
7,000 units
WIP, ending (July 31) (DM 100% & CC 50%)
2,000 units
Total costs
WIP, beginning
DM= $12,000 & CC = $9,000
$ 21,000
Direct material added during current period
76,500
CC added during current period
$ 89,100
Degree of completion of normal spoilage (DM 100% & CC 100%)
Degree of completion of abnormal spoilage (DM 100% & CC 100%)
143
Dr/Mostafa I. Elfeky
Required:
Compute cost of units completed and transferred outs & units in
WIP ending and cost of normal and abnormal spoilage. Using WA
and FIFO method.
2) Weather Instruments assembles products from component
parts. It has two departments that process all products.
During January, the beginning work in process in the
assembly department was half complete as to conversion
and complete as to direct materials. The beginning
inventory included $12,000 for materials and $4,000 for
conversion costs. Overhead is applied at the rate of 50% of
direct manufacturing labor costs. Ending work-in-process
inventory in the assembly department was 40% complete.
All spoilage is considered normal and is detected at the end
of the process .
Beginning work in process in the finishing department was
75% complete as to conversion and ending work in process
was 25% converted. Direct materials are added at the end of
the process. Beginning inventories included $16,000 for
transferred-in costs and $10,000 for direct manufacturing
labor costs. Overhead in this department is equal to direct
manufacturing labor costs. Additional information about the
two departments follows:
Assembly
Beginning work-in-process units
Units started this period
Units transferred this period
Ending work-in-process units
Material costs added
Direct manufacturing labor
20,000
40,000
50,000
8,000
$44,000
$16,000
Finishing
24,000
?
54,000
20,000
$28,000
$24,000
Required:
Prepare a production cost worksheet using weighted-average for
the assembly department and FIFO for the finishing department.
144
Dr/Mostafa I. Elfeky
Chapter (4)
Cost-Volume-Profit (CVP)
Relationships
▪ Manufacturing costs: are direct material costs and direct
manufacturing labor costs and manufacturing overhead
costs. Is also called (product costs)."DM + DL + MOH
▪ Manufacturing (production) overhead: Is all indirect
manufacturing costs. It includes indirect material and other
indirect labor and any indirect cost.
➢ Prime costs:
▪ All direct manufacturing costs
▪ (Direct material + Direct manufacturing labor costs)
➢ Conversion costs:
▪ All manufacturing costs other than direct material costs.
▪ It represents all manufacturing costs incurred to convert
direct material in to finished goods.
▪ (Direct manufacturing labor + manufacturing overhead
costs)
Manufacturing costs
▪ Direct material costs (DM)
▪ Direct labor costs (DL)
▪ Variable manufacturing overhead
▪ Fixed manufacturing overhead
145
Non manufacturing costs
▪ Marketing costs
▪ Distribution costs
▪ Selling & administrative expenses
▪ Fright out
Dr/Mostafa I. Elfeky
Prime costs = Direct material + Direct manufacturing labor
costs
Conversion costs = Direct manufacturing labor +
manufacturing overhead costs
Total manufacturing costs = Prime costs + MOH
Total manufacturing costs = Conversion costs + Direct material
• We have two approach when prepare income statement
1) Absorption (Full costing): Cost includes only
manufacturing costs either fixed or variable costs. "Is used
for external reporting according to GGAP"
2) Variable costing (Managerial) system: Cost includes only
variable costs either manufacturing or non manufacturing.
"Is used for internal report"
Income statement under Absorption approach
Sales Revenues
- Cost of goods sold "manufacturing costs"
= Gross Margin
- Operating costs "Non manufacturing costs"
Operating Income
XX
(XX)
XX
(XX)
XX
Income Statement Under Variable costing system
Sales Revenues
- Variable cost
= Contribution Margin
- Fixed costs
Operating Income
146
XX
(XX)
XX
(XX)
XX
Dr/Mostafa I. Elfeky
Ex: Assume manufacturing costs (Fixed costs = 1000 and
variable costs 3,000) and non manufacturing costs (Fixed = 500
and variable = 500) and revenues $10,000.
Income statement under Absorption approach
Sales Revenues
- Cost of goods sold "manufacturing costs"
= Gross Margin
- Operating costs "Non manufacturing costs"
Operating Income
10,000
(4,000)
6,000
(1,000)
$5,000
Income Statement Under Variable costing system
Sales Revenues
- Variable cost
= Contribution Margin
- Fixed costs
Operating Income
10,000
(3,500)
6,500
(1,500)
$5,000
▪ Total fixed costs don’t change in total within the relevant
range.
▪ Fixed cost per unit change inversely with level of
production.
▪ Variable costs change as volume change.
▪ Variable cost per unit is fixed.
Cost-volume-profit (CVP) analysis:- helps managers
understand the interrelationships among cost, volume, and
profit by focusing their attention on the interactions among the
following factors:1. Selling price
2. sales volume
3. Unit variable cost
4. Total fixed costs
5. Mix of products sold
147
Dr/Mostafa I. Elfeky
It is a vital tool used in many business decisions such as
deciding what products to manufacture or sell, what pricing
policy to follow, what marketing strategy to employ, and what
type of productive facilities to acquire.
What is the relationship between cost and volume?
- If the volume of production increase, and Total cost
increase by the same percentage; this means that this cost
is Total Variable Cost.
- Any increasing or decreasing in volume without change
in the cost; this means that this cost is Total Fixed Cost.
When
This means that
-
-
Profit = Zero
Total Revenues = Total Costs
Total Revenues = Total Variable Costs + Total Fixed Costs
(Selling Price/Unit × Quantity Sold) = [(Variable Cost/Unit
× Quantity Sold) + Total Fixed Costs]
(Q×P/u) = [(Q×V/u) + T.F.C.]
(Q×P/u) – (Q×V/u) = T.F.C.
Total Fixed Cost
P/u - V/u
Total Fixed Cost
- QBEP =
C.M/U
-
QBEP =
C.M/u = (Price/u – V/u)
Q refers to Units Sold & Produced
Total Fixed Cost
Break – Even Point in Quantity is BEPQ=
C.M/U
Break – Even Point in Dollar is
BEP$= BEPQ × Selling Price
148
Dr/Mostafa I. Elfeky
Or
Break – Even Point in Dollar is
Total Fixed Cost
C.M%
C.M/U
C.M% =
Selling Price/U
BEP$=
Basic of CVP analysis
▪ Contribution Margin (CM) is the amount remaining from
sales revenue after variable expenses have been deducted.
Or the amount available to cover fixed costs and then
provides profit for the period.
▪ The contribution income statement is helpful to managers
in judging the impact on profits of changes in selling price,
cost, or volume.
▪ Under CM approach we cannot sell product lower than its
VC.
▪ CM in other words is used to cover fixed costs and the
remaining is considered operating income.
Sales Revenues
XXX
- Variable cost
(XXX)
= Contribution Margin
XXX
- Fixed costs
(XX)
Operating Income
XXX
Ex
Assume that RBC Company sell bicycles with selling
price $500 per unit and Variable costs $300/unit and total fixed
costs $80,000.
Required
Compute CM & operating income if
149
Dr/Mostafa I. Elfeky
company sells
(1) 1 Unit.
(2) 400 Units.
(3) 401 Units
(4) 500 Units.
Solution
1 Unit
400
401
500
Units
Units
Units
Sales Revenues
$ 500
$200,000 $200,500 $250,000
Less; Variable Costs
(300)
(120,000) (120,300) (150,000)
Contribution Margin
200
80,000
80,200
100,000
Less; Fixed Costs
(80,000) (80,000) (80,000) (80,000)
Net Income
($79,800)
$ 0
$200
$ 20,000
Note the following
➢ Each month Racing Bicycle must generate at least $80,000
in total contribution margin to break-even (which is the
level of sales at which profit is zero). If Racing sells 400
150
Dr/Mostafa I. Elfeky
units a month, it will be operating at the break-even point.
If Racing sells one more bike (401 bikes), net operating
income will increase by $200.
➢ This means that each unit will achieve Income or profit =
$200.
➢ Net Income = ∆ Q × C.M/U.
Ex
Assume that selling price= $500/unit, Variable cost=
$300/unit, Total Fixed Cost=$80,000, and BEPQ is 400 units.
Required
Calculate Net Income for the current year if:(1) Actual sale is 500 units.
(2) Actual sale is 300 units.
(3) Actual sale is 700 units.
(1)
Net Income = ∆ Q × C.M/U.
Net Income = (500 – 400) × ($500 – $300).
Net Income = $20,000.
(2)
Net Income = ∆ Q × C.M/U.
Net Income = (300 – 400) × ($500 – $300).
Net Loss = ($20,000).
(3)
Net Income = ∆ Q × C.M/U.
Net Income = (700 – 400) × ($500 – $300).
Net Income = $60,000.
Break Even Point: is a point where operating income equal zero.
2 Methods to Compute BEP "BEP
Computation"
1) Equation method.
2) Contribution margin approach.
151
Dr/Mostafa I. Elfeky
1) Equation method:Ex: Selling price/unit = $250, VC/unit = $150 & Total fixed
costs $35,000.
- (Selling Price/Unit × Quantity Sold) = [(Variable Cost/Unit
× Quantity Sold) + Total Fixed Costs].
- $250 Q = $150 Q + $350,000.
- $100 Q = $350,000.
- BEPQ = 350,000 / 100 = 350 unit
- BEP$ = 350 × $250 = $87,500
2) The contribution margin method "Formula
method":
- BEPQ=
$35,000
Total Fixed Cost
=
C.M.
($250 - $150)
= 350 Units
$35,000
Total Fixed Cost
=
($250 - $150)/$250
C.M%
- BEP$=
=$87,500
Target Profit Analysis
CVP formulas can be used to determine the sales volume
needed to achieve a target profit.
Profit = CM/U × Q – Total Fixed Cost
152
Dr/Mostafa I. Elfeky
Ex:
Assume that selling price= $500/unit, Variable cost=
$300/unit, Total Fixed Cost=$80,000, suppose company’s
management wants to know how many units must be sold to
earn a target profit of $100,000.
Profit = CM/U × Q – Total Fixed Cost
$100,000 = ($500 – $300) ×Q – $80,000
$200Q = ($100,000 + $80,000)
$200Q = $180,000.
Q = $180,000/$200 = 900
Units
Break-even in Dollar Sales: Equation
Method
Suppose Racing Bicycle wants to compute the sales dollars
required to break-even (earn a target profit of $0). Let’s use the
equation method to solve this problem.
Ex:
Assume that selling price= $500/unit, Variable cost=
$300/unit, Total Fixed Cost=$80,000, suppose company’s
management wants to know what is sales must be done to get
BEP.
Profit = CM% × Sales – Total Fixed Cost
$0 = [($500 – $300)/500] × Sales – $80,000
$0 = 40% × Sales – $80,000
40% × Sales = $80,000.
Q = $80,000/40% = $200,000
Break-even in Dollar Sales: Formula
Method
Now, let’s use the formula method to calculate the dollar sales
at the break-even point.
153
Dr/Mostafa I. Elfeky
Note the following
Total Fixed Cost Total Fixed Cost
BEPQ=
=
C.M/U
P/u - V/u
(1) There are direct relationship between any change in
variable cost per unit and Break–Even–Point.
(2) There are direct relationship between any change in total
fixed cost per unit and Break–Even–Point.
(3) There are indirect relationship between any change in
selling price per unit and Break–Even–Point.
(4) So; All Items of costs have direct relationships with
Break–Even–Point.
Ex:
Assume that selling price= $500/unit, Variable cost=
$300/unit, Total Fixed Cost=$80,000, BEPQ is 400 units, and
BEP$ is $200,000.
1) Assume that variable cost /unit increase to be $400 instead
of $300.
Total Fixed Cost
BEPQ=
=
P/u - V/u
$80,000
500 - 400
= 800 units
BEP$= BEPQ × Selling Price
BEP$= 800 ×$500 = $400,000
There are direct relationship between any change in variable
cost per unit and Break–Even–Point.
154
Dr/Mostafa I. Elfeky
2) Assume that total fixed cost increase to be $100,000 instead
of $80,000.
BEPQ=
$100,000
Total Fixed Cost
=
500 - 300
P/u - V/u
= 500 units
BEP$= BEPQ × Selling Price
BEP$= 500 ×$500 = $250,000
There are direct relationship between any change in total fixed
cost per unit and Break–Even–Point.
3) Assume that selling price /unit increase to be $600 instead
of $500.
BEPQ=
Total Fixed Cost
$80,000
=
600 - 300
P/u - V/u
= 266.67 units
BEP$= BEPQ × Selling Price
BEP$= 266.67 ×$600 = $160,000
There are indirect relationship between any change in selling
price per unit and Break–Even–Point.
Ex: ABC Company manufactures three types of products, you
are given these variable information.
Items
A
B
C
155
Sales units
800
1,000
1,000
Selling
price/unit
5
6
10
Dr/Mostafa I. Elfeky
- Variable cost rate for each product is 25%, 30%, & 40%,
respectively. The planned fixed cost is $33,000.
Total revenues
Mix sales Percentage
CM ratio
Weighted CM
A
$4,000
20%
75%
15%
B
$6,000
30%
70%
21%
C
$10,000
50%
60%
30%
Total
$20,000
100%
‫ــــــــــ‬
66%
Weighted CM = Percentage of CM × Percentage of mix
sales.
BEP$=
Total Fixed Cost = 33,000= $50,000
66%
C.M%
We can calculate CM for each product as follows:A
B
C
Total revenues
$4,000
$6,000
$10,000
Less; Variable costs
(1,000)
(1,800)
(4,000)
CM
$3,000
$4,200
$6,000
If the BEP$ for all Products is $50,000. So; we can
calculate BEP$ for each product as follows:-
Mix Sales Percentage
BEP$ for each
BEP$ = $50,000
A
B
20%
30%
$10,000
$15,000
C
50%
$25,000
Can we calculate BEPQ for each product?
Where
Sales Revenue = selling price × quantity sold
156
Dr/Mostafa I. Elfeky
QA = $10,000/$5= 2,000 units
BEPQ
QB = $15,000/$6= 2,500 units
BEPQ
QC = $25,000/$10= 2,500 units
BEPQ
We can verify that, through income statement as follows:Sales revenues(at BEP)
Less; Variable costs
CM
Less; Fixed Costs
Net Income
157
A
$10,000
(2,500)
$7,500
‫ــــــــ‬
B
$15,000
(4,500)
$10,500
‫ـــــــــــ‬
C
$25,000
(10,000)
$15,000
‫ـــــــــــ‬
Total
$50,000
(17,000)
$33,000
(33,000)
0
Dr/Mostafa I. Elfeky
MCQs
(1) The difference between total sales in dollars and total variable
expenses is called:
a. Net operating income.
b. Net profit.
c. The gross margin.
d. The contribution margin.
(2) With regard to the CVP graph, which of the following statements is
not correct?
a. The CVP graph assumes that volume is the only factor affecting
total cost.
b. The CVP graph assumes that selling prices do not change.
c. The CVP graph assumes that variable costs go down as volume
goes up.
d. The CVP graph assumes that fixed expenses are constant in total
within the relevant range.
(3) Which of the following formulas is used to calculate the contribution
margin ratio?
a. (Sales - Fixed expenses)  Sales
b. (Sales - Cost of goods sold)  Sales
c. (Sales - Variable expenses)  Sales
d. (Sales - Total expenses)  Sales
(4) The break-even point in unit sales is found by dividing total fixed
expenses by:
a. The contribution margin ratio.
b. The variable expenses per unit.
c. The sales price per unit.
d. The contribution margin per unit.
(5) Break-even analysis assumes that:
a. Total costs are constant.
b. The average fixed expense per unit is constant.
c. The average variable expense per unit is constant.
d. Variable expenses are nonlinear.
158
Dr/Mostafa I. Elfeky
(6) If Q equals the level of output, P is the selling price per unit, V is the
variable expense per unit, and F is the fixed expense, then the breakeven point in units is:
a. Q  (P-V).
b. F  (P-V).
c. V  (P-V).
d. F  [Q(P-V)].
(7) The break-even point in unit sales increases when variable expenses:
a. Increase and the selling price remains unchanged.
b. Decrease and the selling price remains unchanged.
c. Decrease and the selling price increases.
d. Remain unchanged and the selling price increases.
(8) The margin of safety percentage is computed as:
a. Break-even sales  Total sales.
b. Total sales - Break-even sales.
c. (Total sales - Break-even sales)  Break-even sales.
d. (Total sales - Break-even sales)  Total sales.
(9)
The amount by which a company's sales can decline before losses
are incurred is called the:
a. Contribution margin.
b. Degree of operating leverage.
c. Margin of safety.
d. Contribution margin ratio.
(10) A company has provided the following data:
If the sales volume decreases by 25%, the variable cost per unit increases
by 15%, and all other factors remain the same, net operating income will:
a. Decrease by $31,875.
b. Decrease by $15,000.
c. Increase by $20,625.
d. Decrease by $3,125.
159
Dr/Mostafa I. Elfeky
(11) Menlove Company had the following income statement for the most
recent year:
Given this data, the unit contribution margin was:
a. $2 per unit
b. $15 per unit
c. $6 per unit
d. $4 per unit
(12) The following information relates to Clyde Corporation which
produced and sold 50,000 units last month.
There were no beginning or ending inventories. Production and sales next
month are expected to be 40,000 units. The company's unit contribution
margin next month should be:
a. $16.63
b. $3.10
c. $7.98
d. $13.30
(13) The contribution margin ratio is 25% for Grain Company and the
break-even point in sales is $200,000. To obtain a target net
operating income of $60,000, sales would have to be:
a. $260,000
b. $440,000
c. $280,000
d. $240,000
160
Dr/Mostafa I. Elfeky
(14) The contribution margin ratio is 30% for the Honeyville Company
and the break-even point in sales is $150,000. If the company's
target net operating income is $60,000, sales would have to be:
a. $200,000
b. $350,000
c. $250,000
d. $210,000
(15) Butteco Corporation has provided the following cost data for last
year when 100,000 units were produced and sold:
All costs are variable except for $100,000 of manufacturing overhead and
$100,000 of selling and administrative expense. There are no beginning
or ending inventories. If the selling price is $10 per unit, the net operating
income from producing and selling 110,000 units would be:
a. $450,000
b. $385,000
c. $405,000
d. $560,000
(16) Mancuso Corporation has provided its contribution format income
statement for January. The company produces and sells a single
product.
If the company sells 3,100 units, its total contribution margin should be
closest to:
a. $27,045
b. $181,000
c. $162,400
d. $173,600
161
Dr/Mostafa I. Elfeky
(17) Dimitrov Corporation, a company that produces and sells a single
product, has provided its contribution format income statement for
July.
If the company sells 6,900 units, its net operating income should be
closest to:
a. $35,979
b. $34,500
c. $36,500
d. $32,000
(18) Sensabaugh Inc., a company that produces and sells a single
product, has provided its contribution format income statement for
January.
If the company sells 1,600 units, its total contribution margin should be
closest to:
a. $22,200
b. $28,800
c. $4,800
d. $32,400
162
Dr/Mostafa I. Elfeky
(19) Gaudy Inc. produces and sells a single product. The company has
provided its contribution format income statement for May.
If the company sells 4,300 units, its net operating income should be
closest to:
a. $7,700
b. $25,513
c. $26,700
d. $19,500
(20) Rothe Company manufactures and sells a single product that it sells
for $90 per unit and has a contribution margin ratio of 35%. The
company's fixed expenses are $46,800. If Rothe desires a monthly
target net operating income equal to 15% of sales, the amount of
sales in units will have to be (rounded):
a. 1,486 units
b. 3,467 units
c. 1,040 units
d. 2,600 units
(21) The Herald Company manufactures and sells a single product which
sells for $50 per unit and has a contribution margin ratio of 30%.
The company's monthly fixed expenses are $25,000. If Herald
desires a monthly target net operating income equal to 20% of sales
dollars, sales in units will have to be (rounded):
a. 2,500 units
b. 5,000 units
c. 1,666 units
d. 1,000 units
163
Dr/Mostafa I. Elfeky
(22) Street Company's fixed expenses total $150,000, its variable
expense ratio is 60% and its variable expenses are $4.50 per unit.
Based on this information, the break-even point in units is:
a. 50,000 units
b. 37,500 units
c. 33,333 units
d. 100,000 units
(23) South Company sells a single product for $20 per unit. If variable
expenses are 60% of sales and fixed expenses total $9,600, the
break-even point will be:
a. $24,000
b. $14,400
c. $9,600
d. $16,000
(24) Turner Company's contribution margin ratio is 15%. If the degree of
operating leverage is 12 at the $150,000 sales level, net operating
income at the $150,000 sales level must equal:
a. $1,500
b. $2,700
c. $2,160
d. $1,875
(25) Cindy, Inc. sells a product for $10 per unit. The variable expenses
are $6 per unit, and the fixed expenses total $35,000 per period. By
how much will net operating income change if sales are expected to
increase by $40,000?
a. $16,000 increase
b. $5,000 increase
c. $24,000 increase
d. $11,000 decrease
164
Dr/Mostafa I. Elfeky
(26) Darth Company sells three products. Sales and contribution margin
ratios for the three products follow:
Given these data, the contribution margin ratio for the company as a
whole would be:
a. 25%
b. 75%
c. 33.3%
d. It is impossible to determine from the data given.
(27) Knoke Corporation's contribution margin ratio is 29% and its fixed
monthly expenses are $17,000. If the company's sales for a month
are $98,000, what is the best estimate of the company's net
operating income? Assume that the fixed monthly expenses do not
change.
a. $81,000
b. $11,420
c. $52,580
d. $28,420
(28) Danneman Corporation's fixed monthly expenses are $13,000 and
its contribution margin ratio is 56%. Assuming that the fixed
monthly expenses do not change, what is the best estimate of the
company's net operating income in a month when sales are
$41,000?
a. $9,960
b. $5,040
c. $22,960
d. $28,000
165
Dr/Mostafa I. Elfeky
(29) Balonek Inc.'s contribution margin ratio is 57% and its fixed
monthly expenses are $41,000. Assuming that the fixed monthly
expenses do not change, what is the best estimate of the company's
net operating income in a month when sales are $112,000?
a. $63,840
b. $7,160
c. $71,000
d. $22,840
(30) Sinclair Company's single product has a selling price of $25 per
unit. Last year the company reported a profit of $20,000 and
variable expenses totaling $180,000. The product has a 40%
contribution margin ratio. Because of competition, Sinclair
Company will be forced in the current year to reduce its selling
price by $2 per unit. How many units must be sold in the current
year to earn the same profit as was earned last year?
a. 15,000 units
b. 12,000 units
c. 16,500 units
d. 12,960 units
(31) Pool Company's variable expenses are 36% of sales. Pool is
contemplating an advertising campaign that will cost $20,000. If
sales increase by $80,000, the company's net operating income
should increase by:
a. $28,800
b. $64,000
c. $8,800
d. $31,200
(32) Loren Company's single product has a selling price of $15 per unit.
Last year the company reported total variable expenses of $180,000,
fixed expenses of $90,000, and a net operating income of $30,000.
A study by the sales manager discloses that a 15% increase in the
selling price would reduce unit sales by 10%. If her proposal is
adopted, net operating income would:
a. Increase by $45,000
b. Increase by $37,500
c. Increase by $7,500
d. Increase by $28,500
166
Dr/Mostafa I. Elfeky
(33) Data concerning Runnells Corporation's single product appear
below:
The company is currently selling 6,000 units per month. Fixed
expenses are $424,000 per month. The marketing manager believes
that a $7,000 increase in the monthly advertising budget would result
in a 100 unit increase in monthly sales. What should be the overall
effect on the company's monthly net operating income of this
change?
a. Increase of $8,000
b. Increase of $1,000
c. Decrease of $7,000
d. Decrease of $1,000
(34) Weinreich Corporation produces and sells a single product. Data
concerning that product appear below:
The company is currently selling 2,000 units per month. Fixed
expenses are $131,000 per month. The marketing manager believes
that an $18,000 increase in the monthly advertising budget would
result in a 170 unit increase in monthly sales. What should be the
overall effect on the company's monthly net operating income of
this change?
a. Increase of $2,700
b. Increase of $15,300
c. Decrease of $18,000
d. Decrease of $2,700
167
Dr/Mostafa I. Elfeky
(35) Data concerning Lancaster Corporation's single product appear
below:
Fixed expenses are $105,000 per month. The company is currently selling
1,000 units per month. Management is considering using a new
component that would increase the unit variable cost by $44. Since the
new component would increase the features of the company's product, the
marketing manager predicts that monthly sales would increase by 400
units. What should be the overall effect on the company's monthly net
operating income of this change?
a. Decrease of $38,400
b. Decrease of $5,600
c. Increase of $5,600
d. Increase of $38,400
(36) Ribb Corporation produces and sells a single product. Data
concerning that product appear below:
Fixed expenses are $913,000 per month. The company is currently selling
9,000 units per month. Management is considering using a new
component that would increase the unit variable cost by $6. Since the new
component would increase the features of the company's product, the
marketing manager predicts that monthly sales would increase by 400
units. What should be the overall effect on the company's monthly net
operating income of this change?
a. Decrease of $3,200
b. Increase of $50,800
c. Decrease of $50,800
d. Increase of $3,200
168
Dr/Mostafa I. Elfeky
(37) Hirt Corporation sells its product for $12 per unit. Next year, fixed
expenses are expected to be $400,000 and variable expenses are
expected to be $8 per unit. How many units must the company sell
to generate net operating income of $80,000?
a. 50,000 units
b. 120,000 units
c. 60,000 units
d. 100,000 units
(38) A total of 30,000 units were sold last year. The contribution margin
per unit was $2, and fixed expenses totaled $20,000 for the year.
This year fixed expenses are expected to increase to $26,000, but
the contribution margin per unit will remain unchanged at $2. How
many units must be sold this year to earn the same profit as was
earned last year?
a. 23,000 units
b. 33,000 units
c. 30,000 units
d. 13,000 units
(39) A product sells for $20 per unit and has a contribution margin ratio
of 40 percent. Fixed expenses total $240,000 annually. How many
units of the product must be sold to yield a profit of $60,000?
a. 37,500 units
b. 40,000 units
c. 65,000 units
d. 30,000 units
(40) Last year, Flynn Company reported a profit of $70,000 when sales
totaled $520,000 and the contribution margin ratio was 40%. If
fixed expenses increase by $10,000 next year, what amount of sales
will be necessary in order for the company to earn a profit of
$80,000?
a. $600,000
b. $570,000
c. $562,500
d. $625,000
169
Dr/Mostafa I. Elfeky
Problems
(1) Baker Company has a product that sells for $20 per unit.
The variable expenses are $12 per unit, and fixed expenses
total $30,000 per year.
Required:
a) What is the total contribution margin at the break-even point?
b) What is the contribution margin ratio for the product?
c) If total sales increase by $20,000 and fixed expenses remain
unchanged, by how much would net operating income be
expected to increase?
d) The marketing manager wants to increase advertising by $6,000
per year. How many additional units would have to be sold to
increase overall net operating income by $2,000?
(2) Candice Corporation has decided to introduce a new product.
The product can be manufactured using either a capital-intensive
or labor-intensive method. The manufacturing method will not
affect the quality or sales of the product. The estimated
manufacturing costs of the two methods are as follows:
Capital
-intensive
Variable manufacturing cost per unit $14.00
Fixed manufacturing cost per year $2,440,000
Labor
-intensive
$17.60
$1,320,000
The company's market research department has recommended an
introductory selling price of $30 per unit for the new product. The
annual fixed selling and administrative expenses of the new product
are $500,000. The variable selling and administrative expenses are
$2 per unit regardless of how the new product is manufactured.
Required:
a) Calculate the break-even point in units if Candice Corporation
uses the:
1. Capital-intensive manufacturing method.
2. Labor-intensive manufacturing method.
170
Dr/Mostafa I. Elfeky
b) Determine the unit sales volume at which the net operating
income is the same for the two manufacturing methods.
c) Assuming sales of 250,000 units, what is the Net Operating
income if the company uses the:
1. Capital-intensive manufacturing method.
2. Labor-intensive manufacturing method.
d) What is your recommendation to management concerning which
manufacturing method should be used?
(3) Delphi Company has developed a new product that will be
marketed for the first time during the next fiscal year.
Although the Marketing Department estimates that 35,000
units could be sold at $36 per unit, Delphi's management
has allocated only enough manufacturing capacity to
produce a maximum of 25,000 units of the new product
annually. The fixed expenses associated with the new
product are budgeted at $450,000 for the year. The variable
expenses of the new product are $16 per unit.
Required:
a) How many units of the new product must Delphi sell during the
next fiscal year in order to break even on the product?
b) What is the profit Delphi would earn on the new product if all of
the manufacturing capacity allocated by management is used and
the product is sold for $36 per unit?
c) The Marketing Department would like more manufacturing
capacity to be devoted to the new product. What would be the
percentage increase in net operating income for the new product
if its unit sales could be expanded by 10% without any increase
in fixed expenses and without any change in the unit selling
price and unit variable expense?
d) Delphi's management has stipulated that the new product must
earn a profit of at least $125,000 in the next fiscal year. What
unit selling price would achieve this target profit if all of the
manufacturing capacity allocated by management is used and all
of the output can be sold at that selling price?
171
Dr/Mostafa I. Elfeky
(4) Parkins Company produces and sells a single product. The
company's income statement for the most recent month is
given below:
There are no beginning or ending inventories.
Required:
a) Prepare Income Statement in Contribution Margin Format and
Compute the company's monthly break-even point in units of
product.
b) What would the company's monthly net operating income be if
sales increased by 25% and there is no change in total fixed
expenses?
c) What dollar sales must the company achieve in order to earn a
net operating income of $50,000 per month?
d) The company has decided to automate a portion of its
operations. The change will reduce direct labor costs per unit by
40 percent, but it will double the costs for fixed factory
overhead. Compute the new break-even point in units.
(5) Penury Company offers two products. At present, the following
represents the usual results of a month's operations:
Product K
Product L
Per
Per
Combined
Amount Unit
Amount Unit
Amount
Sales revenue $120,000 $1.20 $80,000 $0.80
$200,000
Variable expenses 60,000
0.60
60,000 0.60
120,000
Contribution margin$ 60,000 $0.60 $20,000 $0.20
80,000
Fixed expenses
50,000
Net operating income
$ 30,000
172
Dr/Mostafa I. Elfeky
Required:
a) Find the break-even point in terms of dollars.
b) The company is considering decreasing product K's unit sales to
80,000 and increasing product L's unit sales to 180,000, leaving
unchanged the selling price per unit, variable expense per unit,
and total fixed expenses. Would you advise adopting this plan?
c) Refer to (b) above. Under the new plan, find the break-even
point in terms of dollars.
(6) Assume that At Milano coffee, the average selling price of a
cup of coffee is $1.49
- The average variable expense per cup is $0.36
- The average fixed expense per month is $1,300.
- 2,100 cups are sold each month on average.
- Target profit is $2,500.
- Target loss is (1,000).
Required:
1) C.M/unit & total C.M
2) CM ratio
3) BEP in units and in sales dollar
4) Units and sales dollar to meet target profit
5) Units and sales dollar to meet target loss
173
Dr/Mostafa I. Elfeky
References
(1) Barfield, J. T., Raiborn, C. A., Kinney, M. R., (2002). Cost
Accounting: Traditions and Innovations (5th ed.). Cengage
Learning.
(2) Blocher, E., Stout, D., Juras, P., and Smith, S., (2019). Cost
Management: A Strategic Emphasis (8th ed.). London: McGrawHill.
(3) Datar, S. M., and Rajan, M. V., (2017). Horngren’s Cost
Accounting: A managerial Emphasis (16th ed.). New York: Pearson
Hill.
(4) Horngren, C. T., Datar, S. M., and Rajan, M. V., (2015). Cost
Accounting: A managerial Emphasis (15th ed.). New York: Pearson
Hill.
174
Dr/Mostafa I. Elfeky