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17
Process Costing
Many companies use mass-production techniques to produce
identical or similar units of a product or service:
Apple (smartphones), Coca-Cola (soft drinks), Chevron (gasoline), JPMorgan Chase
(processing of checks), and Novartis (pharmaceuticals). Managerial accountants at
companies like these use process costing because it helps them (1) determine how
many units of the product the firm has on hand at the end of an accounting reporting
period, (2) evaluate the units’ stages of completion, and (3) assign costs to units produced and in inventory. As you learned in your financial accounting class, there are
several methods for inventory valuation; the choice of method results in different operating income and affects the taxes a company pays and the performance evaluation
of managers. During times of sizable changes in price levels, as has been the case
recently with commodities, the impact of using a particular method of inventory
valuation can be substantial.
Haynes suffers as nickel Prices DroP1
In January 2016, commodity prices tumbled to a 25-year low. The price collapse,
Learning Objectives
1
Identify the situations in which
process-costing systems are
appropriate
2
Understand the basic concepts
of process costing and compute
average unit costs
3
Describe the five steps in process
costing and calculate equivalent
units
4
Use the weighted-average method
and the first-in, first-out (FIFO)
method of process costing
5
Apply process-costing methods to
situations with transferred-in costs
6
Understand the need for hybridcosting systems such as operation
costing
the worst in a generation, was driven in part by a sudden slowdown in demand
from China. It affected a wide range of commodities, including crude oil, copper,
iron ore, and nickel. For companies that extract and sell commodities, the impact
was dramatic. For example, BHP Billiton Ltd., the world’s
largest mining company, recorded a loss of $6.4 billion in
2015–2016, the first annual loss in its history.
Interestingly, the impact of this price reduction has also
been significant for companies that use commodities in
their production processes. Consider Haynes International,
a leading developer, manufacturer, and marketer of technologically advanced high-performance alloys. Haynes—which
operates in the aerospace, power generation, and chemical
processing industries—specializes in corrosion-resistant,
high-temperature alloys based on nickel and cobalt. The
steep decline in the market price of nickel over fiscal 2015
and the first quarter of fiscal 2016 had an adverse impact
on the company’s financial results. In May 2016, Haynes
reported that relative to the same quarter in 2015, its net
revenues dropped by 26.1%, while its gross margin as
1
Roberta Sherman/Pearson Education, Inc.
Source: “Haynes International, Inc. Reports Second Quarter Fiscal 2016 Financial Results,” https://globenewswire.com/
news-release/2016/05/05/837154/0/en/Haynes-International-Inc-Reports-Second-Quarter-Fiscal-2016-Financial-Results.
html; “BHP Suggests Worst Is Over After Posting Record Loss,” Bloomberg, August 16, 2016.
675
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a percentage of net revenue declined from 20.1% to 8.7%. As a result, Haynes recorded a loss
for the quarter, compared to a profit in 2015.
The reason, according to president and CEO Mark Comerford, was that the “mismatch
between market nickel price levels and nickel in cost of goods sold negatively impacted gross
margins.” In particular, “falling nickel prices create compression on gross margins due to pressure
on selling prices from lower nickel prices, combined with higher cost of sales as the company ships
the higher-cost inventory acquired in a prior period with higher nickel prices.” The company values
inventory utilizing the first-in, first-out (FIFO) inventory costing methodology. In a period of decreasing raw material costs, the FIFO inventory valuation method results in higher costs of sales as compared to other methods, such as weighted-average or last-in, first-out (LIFO).
Looking ahead, Haynes expects the mismatch between market price levels and the nickel in
cost of goods sold to persist for at least another quarter. Assuming nickel market prices stabilize,
the company anticipates that the compression would be alleviated by the fourth quarter of 2016.
Similar to Haynes and other organizations that are engaged in processing commodities, firms
such as Kellogg (cereals), and AB InBev (beer) produce many identical or similar units of a product using mass-production techniques. The focus of these companies on individual production
processes gives rise to process costing. This chapter describes how companies use processcosting methods to determine the costs of products or services and to value inventory and the cost
of goods sold.
Illustrating Process Costing
Learning
Objective
1
Identify the situations in
which process-costing
systems are appropriate
. . . when masses of
identical or similar units are
produced
Before examining process costing in more detail, let’s briefly review the distinction between
job costing and process costing explained in Chapter 4. Job-costing and process-costing systems are best viewed as ends of a continuum:
Job-costing system
Process-costing system
Distinct, identifiable units of a
product or service (for example,
custom-made machines and houses)
Masses of identical or similar units
of a product or service (for example,
food or chemicals)
In a process-costing system, the unit cost of a product or service is obtained by assigning total
costs to many identical or similar units of output. In other words, unit costs are calculated by
dividing total costs incurred by the number of units of output from the production process.
In a manufacturing process-costing setting, each unit receives the same or similar amounts
of direct material costs, direct manufacturing labor costs, and indirect manufacturing costs
(manufacturing overhead).
The main difference between process costing and job costing is the extent of averaging
used to compute the unit costs of products or services. In a job-costing system, individual
jobs use different quantities of resources, so it would be incorrect to cost each job at the
same average production cost. In contrast, when identical or similar units of products or services are mass-produced rather than processed as individual jobs, process costing is used to
calculate an average production cost for all units produced. Some processes such as clothes
manufacturing have aspects of both process costing (the cost per unit of each operation,
such as cutting or sewing, is identical) and job costing (different materials are used in different batches of clothing, say, wool versus cotton). The final section in this chapter describes
“hybrid” costing systems that combine elements of both job and process costing.
Consider the following example: Suppose that Pacific Electronics manufactures a variety
of cell phone models. These models are assembled in the assembly department. Upon completion, units are transferred to the testing department. We focus on the assembly department
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Case 1: ProCess Costing with no Beginning or ending work-in-ProCess inventory
677
process for one model, SG-40. All units of SG-40 are identical and must meet a set of demanding performance specifications. The process-costing system for SG-40 in the assembly
department has a single direct-cost category—direct materials—and a single indirect-cost
category—conversion costs. Conversion costs are all manufacturing costs other than direct
material costs, including manufacturing labor, energy, plant depreciation, and so on. As the
following figure shows, direct materials, such as a phone’s processor, image sensors, and
microphone, are added at the beginning of the assembly process. Conversion costs are added
evenly during assembly.
The following graphic represents these facts:
Conversion costs
added evenly
during process
Assembly
Department
Transfer
Testing
Department
Direct materials
added at beginning
of process
Process-costing systems separate costs into cost categories according to when costs are introduced
into the process. Often, as in our Pacific Electronics example, only two cost classifications—direct
materials and conversion costs—are necessary to assign costs to products. Why only two?
Because all direct materials are added to the process at one time and all conversion costs generally
are added to the process evenly through time. Sometimes the situation is different.
1. If two different direct materials—such as the processor and digital camera—are added to
the process at different times, two different direct materials categories would be needed to
assign these costs to products.
2. If manufacturing labor costs are added to the process at a different time compared to other
conversion costs, an additional cost category—direct manufacturing labor costs—would be
needed to assign these costs to products.
We illustrate process costing using three cases of increasing complexity:
■
■
■
Case 1—Process costing with zero beginning and zero ending work-in-process inventory
of SG-40. (That is, all units are started and fully completed within the accounting period.)
This case presents the most basic concepts of process costing and illustrates the averaging
of costs.
Case 2—Process costing with zero beginning work-in-process inventory and some ending work-in-process inventory of SG-40. (That is, some units of SG-40 started during the
accounting period are incomplete at the end of the period.) This case introduces the five
steps of process costing and the concept of equivalent units.
Case 3—Process costing with both some beginning and some ending work-in-process inventory of SG-40. This case adds more complexity and illustrates the effects the weightedaverage and first-in, first-out (FIFO) methods have on the cost of units completed and the
cost of work-in-process inventory.
DecisiOn
Point
Under what conditions is
a process-costing system
used?
Learning
Objective
Case 1: Process Costing with No Beginning
or Ending Work-in-Process Inventory
Understand the basic
concepts of process
costing and compute
average unit costs
On January 1, 2017, there was no beginning inventory of SG-40 units in the assembly department. During the month of January, Pacific Electronics started, completely assembled, and
transferred 400 units to the testing department.
. . . divide total costs by
total units in a given
accounting period
2
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ChaPter 17
ProCess Costing
Data for the assembly department for January 2017 are as follows:
Physical Units for January 2017
Work in process, beginning inventory (January 1)
Started during January
Completed and transferred out during January
Work in process, ending inventory (January 31)
0 units
400 units
400 units
0 units
Physical units refer to the number of output units, whether complete or incomplete. In
January 2017, all 400 physical units started were completed.
Total Costs for January 2017
Direct materials costs added during January
Conversion costs added during January
Total assembly department costs added during January
$32,000
24,000
$56,000
Pacific Electronics records direct materials costs and conversion costs in the assembly department as these costs are incurred. The cost per unit is then calculated by dividing the total costs
incurred in a given accounting period by the total units produced in that period. So, the assembly department cost of an SG-40 is $56,000 , 400 units = $140 per unit:
Direct materials cost per unit ($32,000 , 400 units)
Conversion costs per unit ($24,000 , 400 units)
Assembly department cost per unit
DecisiOn
Point
How are average unit
costs computed when no
inventories are present?
3
Learning
Objective
Describe the five steps in
process costing
. . . to assign total costs to
units completed and to
units in work in process
and calculate equivalent
units
. . . output units adjusted for
incomplete units
Case 1 applies whenever a company produces a homogeneous product or service but has no
incomplete units when each accounting period ends, which is a common situation in servicesector organizations. For example, a bank can adopt this process-costing approach to compute
the unit cost of processing 100,000 customer deposits made in a month because each deposit is
processed in the same way regardless of the amount of the deposit.
Case 2: Process Costing with Zero Beginning
and Some Ending Work-in-Process Inventory
In February 2017, Pacific Electronics places another 400 units of SG-40 into production.
Because all units placed into production in January were completely assembled, there
is no beginning inventory of partially completed units in the assembly department on
February 1. Some customers order late, so not all units started in February are completed
by the end of the month. Only 175 units are completed and transferred to the testing
department.
Data for the assembly department for February 2017 are as follows:
$
$ 80
60
$140
Work in process, beginning inventory (February 1)
Started during February
Completed and transferred out during February
Work in process, ending inventory (February 28)
Degree of completion of ending work in process
Total costs added during February
%
&
Physical Units
(SG-40s)
(1)
0
400
175
225
Direct
Materials
(2)
100%
$32,000
'
(
Conversion
Total
Costs
Costs
(3)
(4) 5 (2) 1 (3)
60%
$18,600
$50,600
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Case 2: ProCess Costing with Zero Beginning and some ending work-in-ProCess inventory
The 225 partially assembled units as of February 28, 2017, are fully processed for direct materials because all direct materials in the assembly department are added at the beginning of the
assembly process. Conversion costs, however, are added evenly during assembly. An assembly
department supervisor estimates that the partially assembled units are, on average, 60% complete with respect to conversion costs.
The accuracy of the completion estimate of conversion costs depends on the care,
skill, and experience of the estimator and the nature of the conversion process. Estimating
the degree of completion is usually easier for direct materials costs than for conversion
costs because the quantity of direct materials needed for a completed unit and the quantity of direct materials in a partially completed unit can be measured more accurately.
In contrast, the conversion sequence usually consists of a number of operations, each
for a specified period of time, at various steps in the production process.2 The degree of
completion for conversion costs depends on the proportion of the total conversion costs
needed to complete one unit (or a batch of production) that has already been incurred on
the units still in process.
Department supervisors and line managers are most familiar with the conversion
process, so they most often estimate completion rates for conversion costs. However,
in some industries, such as semiconductor manufacturing, no exact estimate is possible
because manufacturing occurs inside sealed environments that can be opened only when
the process is complete. In other settings, such as the textile industry, vast quantities of
unfinished products such as shirts and pants make the task of estimation too costly. In
these cases, to calculate the conversion costs, managers assume that all work in process
in a department is complete to some preset degree (for example, one-third, one-half, or
two-thirds).
Because some units are fully assembled and some are only partially assembled, a common
metric is needed to compare the work that’s been done on them and, more importantly, obtain a total measure of the work done. The concept we will use in this regard is that of equivalent units. We will explain this concept in greater detail next as part of the set of five steps
required to calculate (1) the cost of fully assembled units in February 2017 and (2) the cost of
partially assembled units still in process at the end of that month, for Pacific Electronics. The
five steps of process costing are as follows:
Step 1: Summarize the flow of physical units of output.
Step 2: Compute output in terms of equivalent units.
Step 3: Summarize the total costs to account for.
Step 4: Compute the cost per equivalent unit.
Step 5: Assign the total costs to the units completed and to the units in ending work-in-process
inventory.
Summarizing the Physical Units and Equivalent Units
(Steps 1 and 2)
In Step 1, managers track the physical units of output. Recall that physical units are the number
of output units, whether complete or incomplete. The physical-units column of Exhibit 17-1
tracks where the physical units came from (400 units started) and where they went (175 units
completed and transferred out and 225 units in ending inventory). Remember that when there is
no beginning inventory, the number of units started must equal the sum of units transferred out
and ending inventory.
Because not all 400 physical units are fully completed, in Step 2, managers compute the
output in equivalent units, not in physical units. Equivalent units are a derived measure of
output calculated by (1) taking the quantity of each input (factor of production) in units
2
For example, consider the conventional tanning process for converting hide to leather. Obtaining 250–300 kg of leather requires putting one metric ton of raw hide through as many as 15 steps: from soaking, liming, and pickling to tanning, dyeing, and fatliquoring,
the step in which oils are introduced into the skin before the leather is dried.
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ChaPter 17
ProCess Costing
exHibit 17-1
Summarize the Flow
of Physical Units and
Compute Output in
Equivalent Units for the
Assembly Department for
February 2017
$
%
(Step 1)
Flow of Production
Work in process, beginning
Started during current period
To account for
Completed and transferred out during current period
Work in process, ending a
(225 3 100%; 225 3 60%)
Accounted for
Equivalent units of work done in current period
a
Physical
Units
0
400
400
175
225
400
&
'
(Step 2)
Equivalent Units
Direct
Conversion
Materials
Costs
175
175
225
135
400
310
Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
completed and in incomplete units of work in process and (2) converting the quantity of input
into the amount of completed output units that could be produced with that quantity of input.
To see what is meant by equivalent units, suppose that during a month, 50 physical units were
started but not completed. Managers estimate that the 50 units in ending inventory are 70%
complete for conversion costs. Now, suppose all the conversion costs represented in these
units were used to make fully completed units instead. How many completed units would that
have resulted in? The answer is 35 units. Why? Because the conversion costs incurred to produce 50 units that are each 70% complete could have instead generated 35 (0.70 * 50) units
that are 100% complete. The 35 units are referred to as equivalent units of output. That is, in
terms of the work done on them, the 50 partially completed units are considered equivalent to
35 completed units.
Note that equivalent units are calculated separately for each input (such as direct materials and conversion costs). Moreover, every completed unit, by definition, is composed of one
equivalent unit of each input required to make it. This chapter focuses on equivalent-unit
calculations in manufacturing settings, but the calculations can be used in nonmanufacturing
settings as well. For example, universities convert their part-time student enrollments into
“full-time student equivalents” to get a better measure of faculty–student ratios over time.
Without this adjustment, an increase in part-time students would lead to a lower faculty–
student ratio. This would erroneously suggest a decline in the quality of instruction when,
in fact, part-time students take fewer academic courses and do not need the same number of
instructors as full-time students do.
When calculating the equivalent units in Step 2, focus on quantities. Disregard dollar
amounts until after the equivalent units are computed. In the Pacific Electronics example, all
400 physical units—the 175 fully assembled units and the 225 partially assembled units—are
100% complete with respect to direct materials because all direct materials are added in the
assembly department at the start of the process. Therefore, Exhibit 17-1 shows that the output is 400 equivalent units for direct materials: 175 equivalent units for the 175 physical units
assembled and transferred out and 225 equivalent units for the 225 physical units in ending
work-in-process inventory.
The 175 fully assembled units have also incurred all of their conversion costs. The
225 partially assembled units in ending work in process are 60% complete (on average).
Therefore, their conversion costs are equivalent to the conversion costs incurred by 135 fully
assembled units (225 * 60% = 135). Hence, Exhibit 17-1 shows that the output is a total of
310 equivalent units for the conversion costs: 175 equivalent units for the 175 physical units
assembled and transferred out and 135 equivalent units for the 225 physical units in ending
work-in-process inventory.
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Case 2: ProCess Costing with Zero Beginning and some ending work-in-ProCess inventory
681
Calculating Product Costs (Steps 3, 4, and 5)
Exhibit 17-2 shows Steps 3, 4, and 5. Together, they are called the production cost worksheet.
In Step 3, managers summarize the total costs to account for. Because the beginning balance of work-in-process inventory is zero on February 1, the total costs to account for (that is,
the total charges or debits to the Work in Process—Assembly account) consist only of costs
added during February: $32,000 in direct materials and $18,600 in conversion costs, for a total
of $50,600.
In Step 4, managers calculate the cost per equivalent unit separately for the direct materials costs and conversion costs. This is done by dividing the direct material costs and conversion costs added during February by their related quantities of equivalent units of work done
in February (as calculated in Exhibit 17-1).
To see why it is important to understand equivalent units in unit-cost calculations, compare the conversion costs for January and February 2017. The $18,600 in total conversion
costs for the 400 units worked on during February are lower than the $24,000 in total conversion costs for the 400 units worked on in January. However, the conversion costs to fully
assemble a unit are the same: $60 per unit in both January and February. Total conversion
costs are lower in February because fewer equivalent units of conversion-costs work were
completed in that month than in January (310 in February versus 400 in January). Note that
using physical units instead of equivalent units would have resulted in a conversion cost per
unit of just $46.50 ($18,600 , 400 units) for February, which is down from $60 in January.
This incorrect costing would lead the firm’s managers to believe that the assembly department achieved efficiencies that lowered the conversion costs of the SG-40 when in fact the
costs had stayed the same.
Once the cost per equivalent unit is calculated for both the direct materials and conversion costs, managers can move to Step 5: assigning the total direct materials and conversion
costs to the units completed and transferred out and to the units still in process at the end of
February 2017. As Exhibit 17-2 shows, this is done by multiplying the equivalent output units
for each input by the cost per equivalent unit. For example, the total costs (direct materials
exHibit 17-2
Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed and Units in Ending Work-in-Process Inventory for the
Assembly Department for February 2017
$
%
(Step 3)
Costs added during February
Total costs to account for
(Step 4)
Costs added in current period
Divide by equivalent units of work done in current period (Exhibit 17-1)
Cost per equivalent unit
(Step 5)
Assignment of costs:
&
'
Total
Production
Costs
$50,600
$50,600
Direct
Materials
$32,000
$32,000
(
)
Conversion
Costs
1
$18,600
$18,600
1
$32,000
4 400
$
80
$18,600
4 310
$
60
Completed and transferred out (175 units)
Work in process, ending (225 units)
Total costs accounted for
a
Equivalent units completed and transferred out from Exhibit 17-1, step 2.
b
Equivalent units in ending work in process from Exhibit 17-1, step 2.
$24,500
26,100
$50,600
(175a 3 $80)
b
(225 3 $80)
$32,000
a
1 (175 3 $60)
1 (135b 3 $60)
1
$18,600
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ChaPter 17
ProCess Costing
and conversion costs assigned to the 225 physical units in ending work-in-process inventory)
are as follows:
Direct material costs of 225 equivalent units (calculated in Step 2) *
$80 cost per equivalent unit of direct materials (calculated in Step 4)
Conversion costs of 135 equivalent units (calculated in Step 2) *
$60 cost per equivalent unit of conversion costs (calculated in Step 4)
Total cost of ending work-in-process inventory
$18,000
8,100
$26,100
Note that the total costs to account for in Step 3 ($50,600) equal the total costs accounted for
in Step 5.
Journal Entries
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, when process costing
is used, there is one Work in Process account for each process. In our example, there are accounts
for (1) Work in Process—Assembly and (2) Work in Process—Testing. Pacific Electronics purchases
direct materials as needed. These materials are delivered directly to the assembly department. Using
the amounts from Exhibit 17-2, the summary journal entries for February are as follows:
1.
2.
3.
Work in Process—Assembly
Accounts Payable Control
To record the direct materials purchased and used in production
during February.
Work in Process—Assembly
Various accounts such as Wages Payable Control and Accumulated
Depreciation
To record the conversion costs for February; examples include energy,
manufacturing supplies, all manufacturing labor, and plant depreciation.
Work in Process—Testing
Work in Process—Assembly
To record the cost of goods completed and transferred from assembly to
testing during February.
32,000
32,000
18,600
18,600
24,500
24,500
Exhibit 17-3 shows a general framework for the flow of costs through T-accounts. Notice
how entry 3 for $24,500 follows the physical transfer of goods from the assembly to the
Flow of Costs in a Process-Costing System for the Assembly Department
for February 2017
exHibit 17-3
Accounts Payable Control
32,000
Various Accounts
18,600
Work in Process—Assembly
32,000
18,600
24,500
Work in Process—Testing
Bal. xx
24,500
Transferred
Out to
Finished
Goods
xx
Bal. 26,100
Finished Goods
xx
Cost of
Goods Sold xx
Cost of Goods Sold
xx
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Case 2: ProCess Costing with Zero Beginning and some ending work-in-ProCess inventory
683
testing department. The T-account Work in Process—Assembly shows February 2017’s
ending balance of $26,100, which is the beginning balance of Work in Process—Assembly
in March 2017. It is important to ensure that all costs have been accounted for and that
the ending inventory of the current month is the beginning inventory of the following
month.
Earlier, we discussed the importance of accurately estimating the completion percentages for conversion costs. We can now calculate the effect of incorrect estimates of the
degree of completion of units in ending work in process. Suppose, for example, that Pacific
Electronics’ managers overestimate the degree of completion for conversion costs at 80%
instead of 60%. The computations would change as follows:
■
■
■
Exhibit 17-1, Step 2
Equivalent units of conversion costs in ending Work in Process—Assembly =
80% * 225 = 180
Equivalent units of conversion costs for work done in the current period =
175 + 180 = 355
Exhibit 17-2, Step 4
Cost per equivalent unit of conversion costs = $18,600 , 355 = $52.39
Cost per equivalent unit of direct materials is unchanged, $80
Exhibit 17-2, Step 5
Cost of 175 units of goods completed and transferred out = 175 * $80 +
175 * $52.39 = $23,168.25
This amount is lower than the $24,500 of costs assigned to goods completed and transferred
out calculated in Exhibit 17-2. Overestimating the degree of completion decreases the costs
assigned to goods transferred out and eventually to cost of goods sold and increases operating
income.
Managers must ensure that department supervisors avoid introducing personal biases
into estimates of degrees of completion. To show better performance, for example, a department supervisor might report a higher degree of completion resulting in overstated operating income. If performance for the period is very good, the department supervisor may be
tempted to report a lower degree of completion, reducing income in the current period. This
has the effect of reducing the costs carried in ending inventory and the costs carried to the following period in beginning inventory. In other words, estimates of degree of completion can
help to smooth earnings from one period to the next.
To guard against the possibility of bias, managers should ask supervisors specific questions about the process they followed to prepare estimates. Top management should always
emphasize obtaining the correct answer, regardless of how it affects reported performance.
This emphasis drives ethical actions throughout the organization.
Big Band Corporation produces a semiconductor chip used in communications. The
direct materials are added at the start of the production process, while conversion
17-1
costs are added uniformly throughout the production process. Big Band had no
inventory at the start of June. During the month, it incurred direct materials costs
of $935,750 and conversion costs of $4,554,000. Big Band started 475,000 chips and
completed 425,000 of them in June. Ending inventory was 50% complete as to conversion costs.
Compute (a) the equivalent units of work done in June, and (b) the total manufacturing
cost per chip. Allocate the total costs between the completed chips and those in ending
inventory.
DecisiOn
Point
What are the five steps in
a process-costing system,
and how are equivalent
units calculated?
try it!
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ChaPter 17
ProCess Costing
Case 3: Process Costing with Some Beginning
and Some Ending Work-in-Process Inventory
At the beginning of March 2017, Pacific Electronics had 225 partially assembled SG-40 units
in the assembly department. It started production of another 275 units in March. The data for
the assembly department for March are as follows:
$
Work in process, beginning inventory (March 1)
%
Physical Units
(SG-40s)
(1)
225
&
Direct
Materials
(2)
a
$18,000
100%
Degree of completion of beginning work in process
275
Started during March
400
Completed and transferred out during March
100
Work in process, ending inventory (March 31)
Degree of completion of ending work in process
100%
$19,800
Total costs added during March
a
Work in process, beginning inventory (equals work in process, ending inventory for February)
Direct materials: 225 physical units 3 100% completed 3 $80 per unit 5 $18,000
Conversion costs: 225 physical units 3 60% completed 3 $60 per unit 5 $8,100
Learning
Objective
4
Use the weighted-average
method
. . . assign costs based on
total costs and equivalent
units completed to date
and the first-in, first-out
(FIFO) method
. . . assign costs based on
costs and equivalent units
of work done in the current
period
of process costing
'
Conversion
Costs
(3)
a
$8,100
60%
50%
$16,380
(
Total
Costs
(4) 5 (2) 1 (3)
$26,100
$36,180
Pacific Electronics has incomplete units in both beginning work-in-process inventory and
ending work-in-process inventory for March 2017. We can still use the five steps described
earlier to calculate (1) the cost of units completed and transferred out and (2) the cost of
ending work-in-process inventory. To assign costs to each of these categories, however, we
first need to choose an inventory-valuation method. We next describe the five-step approach
for two key methods—the weighted-average method and the first-in, first-out method.
These different valuation methods produce different costs for the units completed and for
the ending work-in-process inventory when the unit cost of inputs changes from one period
to the next.
Weighted-Average Method
The weighted-average process-costing method calculates the 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. The weighted-average cost is the total of all costs entering
the Work in Process account (whether the costs are from beginning work in process or from
work started during the current period) divided by total equivalent units of work done to date.
We now describe the weighted-average method using the five-step procedure introduced on
page 679.
Step 1: Summarize the Flow of Physical Units of Output. The physical-units column in
Exhibit 17-4 shows where the units came from—225 units from beginning inventory and 275
units started during the current period—and where the units went—400 units completed and
transferred out and 100 units in ending inventory.
Step 2: Compute the Output in Terms of Equivalent Units. We use the relationship shown
in the following equation:
Equivalent units
Equivalent units
Equivalent units
Equivalent units
in beginning work + of work done in = completed and transferred + in ending work
in process
current period
out in current period
in process
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Case 3: ProCess Costing with some Beginning and some ending work-in-ProCess inventory
685
exHibit 17-4
$
%
(Step 1)
Flow of Production
Work in process, beginning (given, p. 684)
Started during current period (given, p. 684)
To account for
Completed and transferred out during current period
Work in process, ending a (given, p. 684)
(1 0 0 3 1 0 0 % ; 1 0 0 3 5 0 % )
Accounted for
Equivalent units of work done to date
a
Physical
Units
225
275
500
400
100
500
&
'
(Step 2)
Equivalent Units
Direct
Conversion
Materials
Costs
400
400
100
50
500
450
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
Although we are interested in calculating the left side of the preceding equation, it is easier
to calculate this sum using the equation’s right side: (1) the equivalent units completed and
transferred out in the current period plus (2) the equivalent units in ending work in process.
Note that the stage of completion of the current-period beginning work in process is not used
in this computation.
The equivalent-units columns in Exhibit 17-4 show the equivalent units of work done to
date: 500 equivalent units of direct materials and 450 equivalent units of conversion costs.
All completed and transferred-out units are 100% complete with regard to both their direct
materials and conversion costs. Partially completed units in ending work in process are 100%
complete with regard to their direct materials costs (because the direct materials are introduced
at the beginning of the process) and 50% complete with regard to their conversion costs, based
on estimates from the assembly department manager.
Step 3: Summarize the Total Costs to Account For. Exhibit 17-5 presents Step 3. The total
costs to account for in March 2017 are described in the example data on page 684:
Beginning work in process
(direct materials, $18,000 + conversion costs, $8,100)
Costs added during March
(direct materials, $19,800 + conversion costs, $16,380)
Total costs to account for in March
$26,100
36,180
$62,280
Step 4: Compute the Cost per Equivalent Unit. Exhibit 17-5, Step 4, shows how the
weighted-average cost per equivalent unit for direct materials and conversion costs is computed. The weighted-average cost per equivalent unit is obtained by dividing the sum of the
costs for beginning work in process plus the costs for work done in the current period by the
total equivalent units of work done to date. For example, we calculate the weighted-average
conversion cost per equivalent unit in Exhibit 17-5 as follows:
Total conversion costs (beginning work in process,
$8,100 + work done in current period, $16,380)
Divided by the total equivalent units of work done to date (equivalent units
of conversion costs in beginning work in process and in work done in current period)
Weighted-average cost per equivalent unit
$24,480
450
$ 54.40
Step 5: Assign Costs to the Units Completed and to Units in Ending Work-in-Process Inventory. Step 5 in Exhibit 17-5 takes the equivalent units completed and transferred out and the
equivalent units in ending work in process (calculated in Exhibit 17-4, Step 2) and assigns dollar
Summarize the Flow
of Physical Units and
Compute Output in
Equivalent Units Using
the Weighted-Average
Method for the Assembly
Department for March
2017
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ChaPter 17
ProCess Costing
exHibit 17-5
$
Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign
Costs to the Units Completed and Units in Ending Work-in-Process Inventory Using the
Weighted-Average Method for the Assembly Department for March 2017
%
(Step 3)
Work in process, beginning (given, p. 684)
Costs added in current period (given, p. 684)
Total costs to account for
(Step 4)
Costs incurred to date
Divide by equivalent units of work done to date (Exhibit 17-4)
Cost per equivalent unit of work done to date
(Step 5)
Assignment of costs:
Completed and transferred out (400 units)
Work in process, ending (100 units)
Total costs accounted for
&
'
Total
Production
Costs
Direct
Materials
$26,100
36,180
$62,280
$18,000
19,800
$37,800
$37,800
4 500
$ 75.60
$52,000
10,280
$62,280
a
(
)
Conversion
Costs
1
1
1
$ 8,100
16,380
$24,480
$24,480
4 450
$ 54.40
a
(400 3 $75.60) 1 (400 3 $54.40)
b
b
(100 3 $75.60) 1 (50 3 $54.40)
$24,480
1
$37,800
a
Equivalent units completed and transferred out from Exhibit 17-4, Step 2.
b
Equivalent units in ending work in process from Exhibit 17-4, Step 2.
amounts to them using the weighted-average cost per equivalent unit for the direct materials and
conversion costs calculated in Step 4. For example, the total costs of the 100 physical units in ending work in process are as follows:
Direct materials:
100 equivalent units * weighted@average cost per equivalent unit of $75.60
Conversion costs:
50 equivalent units * weighted@average cost per equivalent unit of $54.40
Total costs of ending work in process
$ 7,560
2,720
$10,280
The following table summarizes total costs to account for ($62,280) and how they are accounted for in Exhibit 17-5. The arrows indicate that the costs of units completed and transferred out and units in ending work in process are calculated using weighted-average total
costs obtained after merging costs of beginning work in process and costs added in the current
period.
Costs to Account For
Beginning work in process
Costs added in current period
Total costs to account for
$26,100
36,180
$62,280
Costs Accounted for Calculated on a
Weighted-Average Basis
Completed and transferred out
$52,000
Ending work in process
10,280
Total costs accounted for
$62,280
Before proceeding, review Exhibits 17-4 and 17-5 to check your understanding of the weightedaverage method. Note: Exhibit 17-4 deals with only physical and equivalent units, not costs.
Exhibit 17-5 shows the cost amounts.
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Case 3: ProCess Costing with some Beginning and some ending work-in-ProCess inventory
687
Using amounts from Exhibit 17-5, the summary journal entries under the weightedaverage method for March 2017 are as follows:
1. Work in Process—Assembly
Accounts Payable Control
To record the direct materials purchased and used in production during
March.
2. Work in Process—Assembly
Various accounts such as Wages Payable Control and Accumulated
Depreciation
To record the conversion costs for March; examples include energy,
manufacturing supplies, all manufacturing labor, and plant depreciation.
3. Work in Process—Testing
Work in Process—Assembly
To record the cost of goods completed and transferred from assembly
to testing during March.
19,800
19,800
16,380
16,380
52,000
52,000
The T-account Work in Process—Assembly, under the weighted-average method, is as follows:
Beginning inventory, March 1
① Direct materials
② Conversion costs
Work in Process—Assembly
26,100 ③ Completed and transferred
19,800
out to Work in Process—
16,380
Testing
Ending inventory, March 31
52,000
10,280
The Stanton Processing Company had work in process at the beginning and end of
March 2017 in its Painting Department as follows:
March 1
March 31
(3,000 units)
(2,000 units)
17-2
Percentage of Completion
Direct Materials
Conversion Costs
40%
10%
80%
40%
The company completed 30,000 units during March. Manufacturing costs incurred during March were direct materials costs of $ 176,320 and conversion costs of $ 312,625.
Inventory at March 1 was carried at a cost of $ 16,155 (direct materials, $5,380 and
conversion costs, $10,775).
Assuming Stanton uses weighted-average costing, determine the equivalent units of work
done in March, and calculate the cost of units completed and the cost of units in ending
inventory.
First-In, First-Out Method
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 the beginning inventory, next to start
and complete new units, and finally to units in ending work-in-process 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 the beginning inventory before the current period is kept separate from work done in the current
period. The costs incurred and units produced in the current period are used to calculate the
cost per equivalent unit of work done in the current period. In contrast, the equivalent-unit
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ChaPter 17
ProCess Costing
and cost-per-equivalent-unit calculations under the weighted-average method merge the units
and costs in beginning inventory with the units and costs of work done in the current period.
We now describe the FIFO method using the five-step procedure introduced on page 679.
Step 1: Summarize the Flow of Physical Units of Output. Exhibit 17-6, Step 1, traces the
flow of the physical units of production and explains how they are calculated under the FIFO
method.
■
■
■
■
The first physical units assumed to be completed and transferred out during the period
are 225 units from beginning work-in-process inventory.
The March data on page 684 indicate that 400 physical units were completed during
March. The FIFO method assumes that of these 400 units, 175 units (400 units - 225 units
from beginning work-in-process inventory) must have been started and completed during
March.
The ending work-in-process inventory consists of 100 physical units—the 275 physical
units started minus the 175 units that were started and completed.
The physical units “to account for” equal the physical units “accounted for” (500 units).
Step 2: Compute the Output in Terms of Equivalent Units. Exhibit 17-6 also presents the
computations for Step 2 under the FIFO method. The equivalent-unit calculations for each cost
category focus on equivalent units of work done in the current period (March) only.
Under the FIFO method, the equivalent units of work done in March on the beginning
work-in-process inventory equal 225 physical units times the percentage of work remaining to
be done in March to complete these units: 0% for direct materials, because the beginning work
in process is 100% complete for direct materials, and 40% for conversion costs, because the
beginning work in process is 60% complete for conversion costs. The results are 0 (0% * 225)
equivalent units of work for direct materials and 90 (40% * 225) equivalent units of work for
conversion costs.
The equivalent units of work done on the 175 physical units started and completed equals
175 units times 100% for both direct materials and conversion costs because all work on these
units is done in the current period.
exHibit 17-6
Summarize the Flow
of Physical Units and
Compute Output in
Equivalent Units Using
the FIFO Method for the
Assembly Department
for March 2017
$
%
(Step 1)
Flow of Production
Work in process, beginning (given, p. 684)
Started during current period (given, p. 684)
To account for
Completed and transferred out during current period:
From beginning work in process a
[225 3 (100% ] 100%); 225 3 (100% ] 60%)]
Started and completed
(1 7 5 3 1 0 0 % ; 1 7 5 3 1 0 0 % )
Work in process, ending c (given, p. 684)
(1 0 0 3 1 0 0 % ; 1 0 0 3 5 0 % )
Accounted for
Equivalent units of work done in current period
a
Physical
Units
225
275
500
225
175b
100
500
&
0
90
175
175
100
50
275
315
Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
400 physical units completed and transferred out minus 225 physical units completed and
transferred out from beginning work-in-process inventory.
c
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
b
'
(Step 2)
Equivalent Units
Direct
Conversion
Materials
Costs
(work done before
current period)
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Case 3: ProCess Costing with some Beginning and some ending work-in-ProCess inventory
The equivalent units of work done on the 100 units of ending work in process equal 100
physical units times 100% for direct materials (because all direct materials for these units are
added in the current period) and 50% for conversion costs (because 50% of the conversioncosts work on these units is done in the current period).
Step 3: Summarize the Total Costs to Account For. Exhibit 17-7 presents Step 3 and summarizes the $62,280 in total costs to account for in March 2017 (the costs of the beginning work
in process, $26,100, and the costs added in the current period, $36,180).
Step 4: Compute the Cost per Equivalent Unit. Exhibit 17-7 shows the Step 4 computation
of the cost per equivalent unit of work done in the current period only for the direct materials
and conversion costs. For example, the conversion cost per equivalent unit of $52 is obtained by
dividing the current-period conversion costs of $16,380 by the current-period conversion-costs
equivalent units of 315.
Step 5: Assign Costs to the Units Completed and Units in Ending Work-in-Process
Inventory. Exhibit 17-7 shows the assignment of costs under the FIFO method. The costs of
work done in the current period are assigned (1) first to the additional work done to complete
the beginning work-in-process inventory, then (2) to work done on units started and completed
during the current period, and finally (3) to ending work-in-process inventory. Step 5 takes each
quantity of equivalent units calculated in Exhibit 17-6, Step 2, and assigns dollar amounts to
them (using the cost-per-equivalent-unit calculations in Step 4). The goal is to use the cost
of work done in the current period to determine the total costs of all units completed from
exHibit 17-7
Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign
Costs to the Units Completed and Units in Ending Work-in-Process Inventory Using the FIFO
Method for the Assembly Department for March 2017
$
%
(Step 3) Work in process, beginning (given, p. 684)
Costs added in current period (given, p. 684)
Total costs to account for
&
'
Total
Production
Costs
$26,100
36,180
$62,280
Direct
Materials
$18,000
19,800
$37,800
(
)
1
Conversion
Costs
$ 8,100
16,380
$24,480
1
1
$19,800
4 275
$
72
(Step 4) Costs added in current period
Divide by equivalent units of work done in current period (Exhibit 17-6)
Cost per equivalent unit of work done in current period
$16,380
4 315
$
52
(Step 5) Assignment of costs:
Completed and transferred out (400 units):
Work in process, beginning (225 units)
Costs added to beginning work in process in current period
Total from beginning inventory
Started and completed (175 units)
Total costs of units completed and transferred out
Work in process, ending (100 units)
Total costs accounted for
$26,100
$18,000
a
1
$8,100
a
4,680
30,780
(0 3 $72)
1
(90 3 $52)
21,700
52,480
(175b 3 $72)
1
(175b 3 $52)
9,800
$62,280
(100c 3 $72)
$37,800
1
1
(50c 3 $52)
$24,480
a
Equivalent units used to complete beginning work in process from Exhibit 17-6, Step 2.
b
Equivalent units started and completed from Exhibit 17-6, Step 2.
c
Equivalent units in ending work in process from Exhibit 17-6, Step 2.
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ChaPter 17
ProCess Costing
beginning inventory and from work started and completed in the current period and the costs
of ending work-in-process inventory.
Of the 400 completed units, 225 units are from beginning inventory and 175 units are
started and completed during March. The FIFO method starts by assigning the costs of the beginning work-in-process inventory of $26,100 to the first units completed and transferred out.
As we saw in Step 2, an additional 90 equivalent units of conversion costs are needed to complete these units in the current period. The current-period conversion cost per equivalent unit is
$52, so $4,680 (90 equivalent units * $52 per equivalent unit) of additional costs are incurred
to complete the beginning inventory. The total production costs for units in beginning inventory
are therefore $26,100 + $4,680 = $30,780. The 175 units started and completed in the current
period consist of 175 equivalent units of direct materials and 175 equivalent units of conversion
costs. These units are costed at the cost per equivalent unit in the current period (direct materials, $72, and conversion costs, $52) for a total production cost of $21,700 [175 * ($72 + $52)].
Under FIFO, the ending work-in-process inventory comes from units that were started
but not fully completed during the current period. The total costs of the 100 partially assembled physical units in ending work in process are as follows:
Direct materials:
100 equivalent units * $72 cost per equivalent unit in March
Conversion costs:
50 equivalent units * $52 cost per equivalent unit in March
Total cost of work in process on March 31
$7,200
2,600
$9,800
The following table summarizes the total costs to account for and the costs accounted for under FIFO, which are $62,280 in Exhibit 17-7. Notice how the FIFO method keeps separate the
layers of the beginning work-in-process costs and the costs added in the current period. The
arrows indicate where the costs in each layer go—that is, to units completed and transferred
out or to ending work in process. Be sure to include the costs of the beginning work-in-process
inventory ($26,100) when calculating the costs of units completed.
Costs Accounted for Calculated
on a FIFO Basis
Completed and transferred out:
Costs to Account for
Beginning work in process
Costs added in current period
$26,100
36,180
Beginning work in process
Used to complete beginning
work in process
Started and completed
Completed and transferred out
Total costs to account for
$62,280
Ending work in process
Total costs accounted for
$26,100
4,680
21,700
52,480
9,800
$62,280
Before proceeding, review Exhibits 17-6 and 17-7 to check your understanding of the FIFO
method. Note: Exhibit 17-6 deals with only physical and equivalent units, not costs. Exhibit 17-7
shows the cost amounts.
The journal entries under the FIFO method are identical to the journal entries under the
weighted-average method except for one difference. The entry to record the cost of goods
completed and transferred out would be $52,480 under the FIFO method instead of $52,000
under the weighted-average method.
Keep in mind that FIFO is applied within each department to compile the cost of units
transferred out. As a practical matter, however, units transferred in during a given period
usually are carried at a single average unit cost. For example, in the preceding example,
the assembly department uses FIFO to distinguish between monthly batches of production.
The resulting average cost of each SG-40 unit transferred out of the assembly department is
$52,480 , 400 units = $131.20. The testing department, however, costs these units (which
consist of costs incurred in both February and March) at one average unit cost ($131.20 in
this example). If this averaging were not done, the attempt to track costs on a pure FIFO basis
throughout a series of processes would be cumbersome. As a result, the FIFO method should
really be called a modified or department FIFO method.
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Case 3: ProCess Costing with some Beginning and some ending work-in-ProCess inventory
Consider Stanton Processing Company again. With the same information for 2017
as provided in Try It! 17-2, redo the problem assuming Stanton uses FIFO costing
instead.
17-3
Comparing the Weighted-Average and FIFO Methods
Consider the summary of the costs assigned to units completed and to units still in process under the weighted-average and FIFO process-costing methods in our example for March 2017:
Cost of units completed and transferred out
Work in process, ending
Total costs accounted for
Weighted Average
(from Exhibit 17-5)
$52,000
10,280
$62,280
FIFO (from
Exhibit 17-7)
$52,480
9,800
$62,280
Difference
+ $480
- $480
The weighted-average ending inventory is higher than the FIFO ending inventory by $480, or
4.9% ($480 , $9,800 = 0.049, or 4.9%). This would be a significant difference when aggregated over the many thousands of products Pacific Electronics makes. When completed units
are sold, the weighted-average method in our example leads to a lower cost of goods sold and,
therefore, higher operating income than the FIFO method does. To see why, recall the data on
page 684. For the beginning work-in-process inventory, the direct materials cost per equivalent
unit is $80 and the conversion cost per equivalent unit is $60. These costs are greater, respectively, than the $72 direct materials cost and the $52 conversion cost per equivalent unit of
work done during the current period. The current-period costs could be lower due to a decline
in the prices of direct materials and conversion-cost inputs or as a result of Pacific Electronics
becoming more efficient in its processes by using smaller quantities of inputs per unit of output or both.
FIFO assumes that (1) all the higher-cost units from the previous period in beginning
work in process are the first to be completed and transferred out of the process and (2) the
ending work in process consists of only the lower-cost current-period units. The weightedaverage method, however, smooths out the cost per equivalent unit by assuming that (1) more
of the lower-cost units are completed and transferred out and (2) some of the higher-cost units
are placed in ending work in process. The decline in the current-period cost per equivalent
unit results in a lower cost of units completed and transferred out and a higher ending workin-process inventory under the weighted-average method relative to FIFO.
Managers use information from process-costing systems to make pricing and productmix decisions and understand how well a firm’s processes are performing. FIFO provides
managers with information about changes in the costs per unit from one period to the next.
Managers can use this data to adjust selling prices based on current conditions (for example,
based on the $72 direct materials cost and $52 conversion cost in March). Managers can also
more easily evaluate the firm’s cost performance relative to either a budget or the previous
period (for example, both unit direct materials and conversion costs have declined relative to
the prior period). By focusing on the work done and the costs of work done during the current period, the FIFO method provides valuable information for these planning and control
purposes.
The weighted-average method merges unit costs from different accounting periods, obscuring period-to-period comparisons. For example, the weighted-average method would lead
managers at Pacific Electronics to make decisions based on the $75.60 direct materials and
$54.40 conversion costs, rather than the costs of $72 and $52 prevailing in the current period.
However, costs are relatively easy to compute using the weighted-average method, and it
results in a more-representative average unit cost when input prices fluctuate markedly from
month to month.
The cost of units completed and, hence, a firm’s operating income differ materially between the weighted-average and FIFO methods when (1) the direct materials or conversion cost
per equivalent unit varies significantly from period to period and (2) the physical-inventory
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ChaPter 17
ProCess Costing
DecisiOn
Point
What are the weightedaverage and first-in,
first-out (FIFO) methods of
process costing? Under
what conditions will they
yield different levels of
operating income?
levels of the work in process are large relative to the total number of units transferred out
of the process. As changes in unit costs and inventory levels across periods decrease, the difference in the costs of units completed under the weighted-average and FIFO methods also
decreases.3
When the cost of units completed under the weighted-average and FIFO methods differs substantially, which method should a manager choose? In a period of falling prices, as
in the Pacific Electronics case, the higher cost of goods sold under the FIFO method will lead
to lower operating income and lower tax payments, saving the company cash and increasing
the company’s value. FIFO is the preferred choice, but managers may not make this choice.
If the manager’s compensation, for instance, is based on operating income, the manager may
prefer the weighted-average method, which increases operating income even though it results
in higher tax payments. Top managers must carefully design compensation plans to encourage managers to take actions that increase a company’s value. For example, the compensation
plan might reward after-tax cash flow metrics, in addition to operating income metrics, to
align decision making and performance evaluation.
Occasionally, choosing a process-costing method can be more difficult. Suppose, for example, that by using FIFO a company would violate its debt covenants (agreements between a
company and its creditors that the company will maintain certain financial ratios) resulting in its
loans coming due. In this case, a manager may prefer the weighted-average method even though
it results in higher taxes because the company does not have the liquidity to repay its loans.
In a period of rising prices, the weighted-average method will decrease taxes because cost
of goods sold will be higher and operating income lower. Readers familiar with the last-in,
first-out (LIFO) method (not presented in this chapter) will appreciate that with rising prices,
the LIFO method reduces operating income and taxes even more than the weighted-average
method.
Finally, how is activity-based costing related to process costing? Like activity-based processing, each process—assembly, testing, and so on—can be considered a different (production) activity. However, no additional activities need to be identified within each process to
use process costing. That’s because products are homogeneous and use the resources of each
process in a uniform way. The bottom line is that activity-based costing has less applicability
in process-costing environments, especially when compared to the significant role it plays in
job costing. The appendix illustrates the use of the standard costing method for the assembly
department.
Transferred-In Costs in Process Costing
Learning
Objective
5
Apply process-costing
methods to situations with
transferred-in costs
. . . using weighted-average
and FIFO methods
Many process-costing systems have two or more departments or processes in the production
cycle. As units move from department to department, the related costs are also transferred by
monthly journal entries. 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.
We now extend our Pacific Electronics example to the testing department. As the assembly process is completed, the assembly department of Pacific Electronics immediately
transfers SG-40 units to the testing department. Conversion costs are added evenly during the
testing department’s process. At the end of the testing process, the units receive additional direct materials, including crating and other packing materials to prepare them for shipment. As
units are completed in testing, they are immediately transferred to Finished Goods. The testing department costs consist of transferred-in costs, as well as direct materials and conversion
costs added during testing.
3
For example, suppose the beginning work-in-process inventory for March was 125 physical units (instead of 225), and suppose the
costs per equivalent unit of work done in the current period (March) were direct materials, $75, and conversion costs, $55. Assume
that all other data for March are the same as in our example. In this case, the cost of units completed and transferred out would
be $52,833 under the weighted-average method and $53,000 under the FIFO method. The work-in-process ending inventory would
be $10,417 under the weighted-average method and $10,250 under the FIFO method (calculations not shown). These differences
are much smaller than in the chapter example. The weighted-average ending inventory is higher than the FIFO ending inventory by
only $167 ($10,417 - $10,250), or 1.6% ($167 , $10,250 = 0.016), compared with 4.9% higher in the chapter example.
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transferred-in Costs in ProCess Costing
The following diagram represents these facts:
Conversion costs
added evenly
during process
Assembly
Department
Transfer
Finished
Goods
Testing
Department
Direct materials
added at end
of process
The data for the testing department for March 2017 are as follows:
$
Work in process, beginning inventory (March 1)
Degree of completion, beginning work in process
Transferred-in during March
Completed and transferred out during March
Work in process, ending inventory (March 31)
Degree of completion, ending work in process
Total costs added during March:
Direct materials and conversion costs
Transferred-in (Weighted-average from Exhibit 17-5) a
Transferred-in (FIFO from Exhibit 17-7)a
%
&
Physical Units Transferred-In
(SG-40s)
Costs
240
$33,600
100%
400
440
200
100%
$52,000
$52,480
'
(
Direct
Materials
$
0
0%
Conversion
Costs
$18,000
62.5%
0%
80%
$13,200
$48,600
a
The transferred-in costs during March are different under the weighted-average method (Exhibit 17-5) and the FIFO
method (Exhibit 17-7). In our example, beginning work-in-process inventory, $51,600 ($33,600 1 $0 1 $18,000) is the same
under both the weighted-average and FIFO inventory methods because we assume costs per equivalent unit to be the
same in both January and February. If costs per equivalent unit had been different in the two months, work-in-process
inventory at the end of February (beginning of March) would be costed differently under the weighted-average and FIFO
methods. The basic approach to process costing with transferred-in costs, however, would still be the same as what we
describe in this section.
Transferred-in costs are treated as if they are a separate type of direct materials added at the
beginning of the process. That is, the transferred-in costs are always 100% complete at the beginning of the process in the new department. When successive departments are involved, the
transferred units from one department become all or a part of the direct materials of the next
department; however, they are called transferred-in costs, not direct materials costs.
Transferred-In Costs and the Weighted-Average Method
To examine the weighted-average process-costing method with transferred-in costs, we use the
five-step procedure described earlier (page 679) to assign the costs of the testing department to
units completed and transferred out and to the units in ending work in process.
Exhibit 17-8 shows Steps 1 and 2. The computations are similar to the calculations
of equivalent units under the weighted-average method for the assembly department in
Exhibit 17-4. The one difference here is that we have transferred-in costs as an additional input. All units, whether completed and transferred out during the period or in ending work in
process, are always fully complete with respect to transferred-in costs. The reason is that the
transferred-in costs are the costs incurred in the assembly department, and any units received
693
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694
ChaPter 17
ProCess Costing
Summarize the Flow of Physical Units and Compute Output in Equivalent Units Using
the Weighted-Average Method for the Testing Department for March 2017
exHibit 17-8
$
%
&
(Step 1)
Flow of Production
Work in process, beginning (given, p. 693)
Transferred-in during current period (given, p. 693)
To account for
Completed and transferred out during current period
Work in process, ending a (given, p. 693)
(200 3 100%; 200 3 0%; 200 3 80%)
Accounted for
Equivalent units of work done to date
a
'
(
(Step 2)
Equivalent Units
Transferred-In
Direct
Costs
Materials
Physical
Units
240
400
640
440
200
640
Conversion
Costs
440
440
440
200
0
160
640
440
600
Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.
in the testing department must have first been completed in the assembly department. In
contrast, the direct materials costs have a zero degree of completion in both beginning and
ending work-in-process inventories because, in the testing department, direct materials are
introduced at the end of the process.
Exhibit 17-9 describes Steps 3, 4, and 5 for the weighted-average method. Beginning
work in process and work done in the current period are combined for the purposes of computing the cost per equivalent unit for the transferred-in costs, direct materials costs, and
conversion costs.
exHibit 17-9
Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed and Units in Ending Work-in-Process Inventory
Using the Weighted-Average Method for the Testing Department for March 2017
$
%
(Step 3)
Work in process, beginning (given, p. 693)
Costs added in current period (given, p. 693)
Total costs to account for
(Step 4)
Costs incurred to date
Divide by equivalent units of work done to date (Exhibit 17-8)
Cost per equivalent unit of work done to date
(Step 5)
Assignment of costs:
&
'
Total
Production
Costs
$ 51,600
113,800
$165,400
Transferred-In
Costs
$33,600
52,000
$85,600
(
)
1
1
1
Direct
Materials
$
0
13,200
$13,200
*
+
Conversion
Costs
1 $18,000
48,600
1
1 $66,600
$85,600
4 640
$133.75
$13,200
4 440
$ 30.00
$66,600
4 600
$111.00
Completed and transferred out (440 units)
Work in process, ending (200 units)
Total costs accounted for
a
Equivalent units completed and transferred out from Exhibit 17-8, Step 2.
b
Equivalent units in ending work in process from Exhibit 17-8, Step 2.
$120,890
44,510
$165,400
a
(440 3 $133.75)
b
(200 3 $133.75)
$85,600
1
1
1
a
(440 3 $30)
b
(0 3 $30)
$13,200
1 (440a 3 $111)
1 (160b 3 $111)
1 $66,600
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transferred-in Costs in ProCess Costing
The journal entry for the transfer from testing to Finished Goods (see Exhibit 17-9) is as
follows:
Finished Goods Control
Work in Process—Testing
To record cost of goods completed and transferred from
testing to Finished Goods.
120,890
120,890
Entries in the Work in Process—Testing account (see Exhibit 17-9) are as follows:
Work in Process—Testing
Beginning inventory, March 1
51,600
Transferred out
Transferred-in costs
52,000
Direct materials
13,200
Conversion costs
48,600
Ending inventory, March 31
120,890
44,510
Transferred-In Costs and the FIFO Method
To examine the FIFO process-costing method with transferred-in costs, we again use the fivestep procedure. Exhibit 17-10 shows Steps 1 and 2. Other than accounting for transferred-in
costs, computing the equivalent units is the same as under the FIFO method for the assembly
department (see Exhibit 17-6).
Exhibit 17-11 describes Steps 3, 4, and 5. In Step 3, the $165,880 in total costs to account
for under the FIFO method differ from the total costs under the weighted-average method,
which are $165,400. This is because of the difference in the costs of completed units transferred in from the assembly department under the two methods—$52,480 under FIFO and
exHibit 17-10
Summarize the Flow of Physical Units and Compute Output in Equivalent Units Using
the FIFO Method for the Testing Department for March 2017
$
%
&
'
(
(Step 1)
Flow of Production
Work in process, beginning (given, p. 693)
Transferred in during current period (given, p. 693)
To account for
Completed and transferred out during current period:
From beginning work in process a
[240 3 (100% ] 100%); 240 3 (100% ] 0%); 240 3 (100% ] 62.5%)]
Started and completed
(2 0 0 3 1 0 0 % ; 2 0 0 3 1 0 0 % ; 2 0 0 3 1 0 0 % )
Work in process, ending c (given, p. 693)
(2 0 0 3 1 0 0 % ; 2 0 0 3 0 % ; 2 0 0 3 8 0 % )
Accounted for
Equivalent units of work done in current period
a
(Step 2)
Equivalent Units
Physical Transferred-In
Direct
Conversion
Units
Costs
Materials
Costs
(work done before current period)
240
400
640
240
200b
200
640
0
240
90
200
200
200
200
0
160
400
440
450
Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 62.5%.
440 physical units completed and transferred out minus 240 physical units completed and transferred out from beginning
work-in-process inventory.
c
Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.
b
695
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696
ChaPter 17
exHibit 17-11
$
ProCess Costing
Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed and Units in Ending Work-in-Process Inventory
Using the FIFO Method for the Testing Department for March 2017
%
(Step 3) Work in process, beginning (given, p. 693)
Costs added in current period (given, p. 693)
Total costs to account for
&
Total
Production
Costs
$ 51,600
114,280
$165,880
'
(
)
Transferred-In
Cost
1
$33,600
1
52,480
1
$86,080
*
Direct
Materials
$
0
13,200
$13,200
+
Conversion
Costs
1
$18,000
1
48,600
1
$66,600
$52,480
4 400
$131.20
(Step 4) Costs added in current period
Divide by equivalent units of work done in current period (Exhibit 17-10)
Cost per equivalent unit of work done in current period
$13,200
4 440
$
30
$48,600
4 450
$ 108
(Step 5) Assignment of costs:
Completed and transferred out (440 units):
Work in process, beginning (240 units)
Started and completed (200 units)
Total costs of units completed and transferred out
Work in process, ending (200 units)
Total costs accounted for
$33,600
1
(0 3 $131.20)
1
$ 51,600
Costs added to beginning work in process in current period
Total from beginning inventory
16,920
68,520
53,840
122,360
43,520
$165,880
a
$0
1
a
$18,000
a
(240 3 $30) 1 (90 3 $108)
b
b
b
(200 3 $131.20) 1 (200 3 $30) 1 (200 3 $108)
c
(200 3 $131.20) 1
$86,080
1
c
(0 3 $30)
$13,200
c
1 (160 3 $108)
1
$66,600
a
Equivalent units used to complete beginning work in process from Exhibit 17-10, Step 2.
b
Equivalent units started and completed from Exhibit 17-10, Step 2.
c
Equivalent units in ending work in process from Exhibit 17-10, Step 2.
$52,000 under the weighted-average method. The cost per equivalent unit for the current
period in Step 4 is calculated on the basis of costs transferred in and work done in the current
period only. Step 5 then accounts for the total costs of $165,880 by assigning them to the units
transferred out and those in ending work-in-process inventory. Again, other than considering
transferred-in costs, the calculations mirror those under the FIFO method for the assembly
department (in Exhibit 17-7).
Remember that in a series of interdepartmental transfers, each department is regarded as
separate and distinct for accounting purposes. The journal entry for the transfer from testing
to Finished Goods (see Exhibit 17-11) is as follows:
Finished Goods Control
Work in Process—Testing
To record the cost of goods completed and transferred
from testing to Finished Goods.
122,360
122,360
The entries in the Work in Process—Testing account (see Exhibit 17-11) are as follows:
Work in Process—Testing
Beginning inventory, March 1
51,600
Transferred out
Transferred-in costs
52,480
Direct materials
13,200
Conversion costs
48,600
Ending inventory, March 31
43,520
122,360
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697
Points to Remember About Transferred-In Costs
Some points to remember when accounting for transferred-in costs are as follows:
1. Be sure to include the transferred-in costs from previous departments in your calculations.
2. When calculating the costs to be transferred using the FIFO method, do not overlook
costs assigned in the previous period to units that were in process at the beginning of the
current period but are now included in the units transferred. For example, do not overlook
the $51,600 in Exhibit 17-11.
3. Unit costs may fluctuate between periods. Therefore, transferred units may contain
batches accumulated at different unit costs. For example, the 400 units transferred in at
$52,480 in Exhibit 17-11 using the FIFO method consist of units that have different unit
costs of direct materials and conversion costs when these units were worked on in the
assembly department (see Exhibit 17-7). Remember, however, that when these units are
transferred to the testing department, they are costed at one average unit cost of $131.20
($52,480 , 400 units), as in Exhibit 17-11.
4. Units may be measured in different denominations in different departments. Consider each
department separately. For example, unit costs could be based on kilograms in the first
department and liters in the second department. Accordingly, as units are received in the
second department, their measurements must be converted to liters.
DecisiOn
Point
How are the weightedaverage and FIFO
process-costing methods
applied to transferred-in
costs?
Hybrid Costing Systems
Product-costing systems do not always fall neatly into either job-costing or process-costing
categories. Many production systems are hybrid systems in which both mass production
and customization occur. Consider Ford Motor Company. Automobiles are manufactured in
a continuous flow (suited to process costing), but individual units may be customized with
different engine sizes, transmissions, music systems, and so on (which requires job costing).
A hybrid-costing system blends characteristics from both job-costing and process-costing
systems. Managers must design product-costing systems to fit the particular characteristics of
different production systems.
Firms that manufacture closely related standardized products (for example, various types
of televisions, dishwashers, washing machines, and shoes) tend to use hybrid-costing systems.
They use process costing to account for the conversion costs and job costing for the material
and customizable components. Consider Nike, which has a message for shoppers looking
for the hottest new shoe design: Just do it … yourself! Athletic apparel manufacturers have
long individually crafted shoes for professional athletes. Now, Nike is making it possible for
other customers to design their own shoes and clothing. Using the Internet and mobile applications, Nike’s customers can personalize with their own colors and patterns for Jordanbrand sneakers and other apparel. Concepts in Action: Hybrid Costing for Under Armour 3D
Printed Shoes describes customization and the use of a hybrid-costing system at one of Nike’s
rivals, Under Armour. The next section explains operation costing, a common type of hybridcosting system.
Overview of Operation-Costing Systems
An operation is a standardized method or technique performed repetitively, often on different materials, resulting in different finished goods. Multiple operations are usually conducted
within a department. For instance, a suit maker may have a cutting operation and a hemming
operation within a single department. The term operation, however, is often used loosely. It
may be a synonym for a department or process. For example, some companies may call their
finishing department a finishing process or a finishing operation.
An operation-costing system is a hybrid-costing system applied to batches of similar,
but not identical, products. Each batch of products is often a variation of a single design, and
it proceeds through a sequence of operations. Within each operation, all product units are
treated exactly alike, using identical amounts of the operation’s resources. A key point in the
Learning
Objective
6
Understand the need for
hybrid-costing systems
such as operation costing
. . . when product-costing
does not fall into jobcosting or process-costing
categories
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698
ChaPter 17
ProCess Costing
cOncepts
in actiOn
Hybrid Costing for Under Armour
3D Printed Shoes
Under Armour is the fastest-growing sportswear company in the world.
Known for its high-tech fitness apparel and celebrity endorsers such
as Stephen Curry, in 2016, Under Armour introduced customized,
3D-printed shoes to its product lineup.
The Under Armour Architech training shoes feature a 3D-printed
midsole that increases stability during exercise. To create the 3D-printed
elements, computers create an accurate 3D model of a customer’s foot
using photographs taken from multiple angles. Under Armour then
prints the midsoles in their Baltimore, Maryland lab and stitches them
into the Architech shoes, which are traditionally manufactured ahead of
time. The result is a customized pair of shoes tailored for each person’s
Ashok Saxena/Alamy Stock Photo
unique feet.
3D-printed shoes, like Architech, use a hybrid-costing system. Accounting for the 3D printing of the midsoles and
customization requires job costing, but the similar process used to make the shoes they are stitched into lends itself to process costing. The cost of making each pair of shoes is calculated by accumulating all production costs and dividing by the
number of shoes made. In other words, while each pair of Architechs is different, the production cost is roughly the same.
The combination of mass production with customized parts is called mass customization. 3D printing enables mass
customization by allowing customers to tailor specific elements of certain products to their specifications or wants. Along
with athletic shoes, 3D printing is letting people create personalized jewelry, earphones, and mobile phone cases. While 3D
printing is still in its infancy, by 2020 the market for 3D printers and software is expected to eclipse $20 billion.
Sources: Andrew Zaleski, “Here’s Why 2016 Could Be 3D Printing’s Breakout Year,” Fortune (December 30, 2015); John Kell, “Under Armour
Debuts First-Ever 3D-Printed Shoes,” Fortune (March 8, 2016); John Brownlee, “What Under Armour’s New 3-D-Printed Shoe Reveals about the
Future of Footwear,” Fast Company, Co. Design blog (March 25, 2015); Daniel Burrus, “3D Printed Shoes: A Step in the Right Direction,” Wired
(September 2014).
operation system is that each batch does not necessarily move through the same operations as
other batches. Batches are also called production runs.
In a company that makes suits, managers may select a single basic design for every
suit to be made, but depending on specifications, each batch of suits varies somewhat from
other batches. Batches may vary with respect to the material used or the type of stitching.
Semiconductors, textiles, and shoes are also manufactured in batches and may have similar
variations from batch to batch.
An operation-costing system uses work orders that specify the needed direct materials and step-by-step operations. Product costs are compiled for each work order. Direct
materials that are unique to different work orders are specifically identified with the appropriate work order, as in job costing. However, each unit is assumed to use an identical
amount of conversion costs for a given operation, as in process costing. A single average
conversion cost per unit is calculated for each operation. This is done by dividing the total
conversion costs for that operation by the number of units that pass through it. This average cost is then assigned to each unit passing through the operation. Units that do not pass
through an operation are not allocated any costs for that operation. There were only two
cost categories—direct materials and conversion costs—in the examples we have discussed.
However, operation costing can have more than two cost categories. The costs in each category are identified with specific work orders using job-costing or process-costing methods
as appropriate.
Managers find operation costing useful in cost management because operation costing
focuses on control of physical processes, or operations, of a given production system. For
example, in clothing manufacturing, managers are concerned with fabric waste, how many
fabric layers can be cut at one time, and so on. Operation costing measures, in financial terms,
how well managers have controlled physical processes.
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hyBrid Costing systems
Illustrating an Operation-Costing System
The Baltimore Clothing Company, a clothing manufacturer, produces two lines of blazers for
department stores: those made of wool and those made of polyester. Wool blazers use betterquality materials and undergo more operations than polyester blazers do. The operations
information on Work Order 423 for 50 wool blazers and Work Order 424 for 100 polyester
blazers is as follows:
Direct materials
Operations
1. Cutting cloth
2. Checking edges
3. Sewing body
4. Checking seams
5. Machine sewing of collars and lapels
6. Hand sewing of collars and lapels
Work Order 423
Wool
Satin full lining
Bone buttons
Work Order 424
Polyester
Rayon partial lining
Plastic buttons
Use
Use
Use
Use
Do not use
Use
Use
Do not use
Use
Do not use
Use
Do not use
The cost data for these work orders, started and completed in March 2017, are as follows:
Number of blazers
Direct materials costs
Conversion costs allocated:
Operation 1
Operation 2
Operation 3
Operation 4
Operation 5
Operation 6
Total manufacturing costs
Work Order 423
50
$ 6,000
Work Order 424
100
$3,000
580
400
1,900
500
—
700
$10,080
1,160
—
3,800
—
875
—
$8,835
As in process costing, all product units in any work order are assumed to consume identical
amounts of conversion costs of a particular operation. Baltimore’s operation-costing system
uses a budgeted rate to calculate the conversion costs of each operation. The budgeted rate for
Operation 1 (amounts assumed) is as follows:
Operation 1 budgeted
Operation 1 budgeted
conversion costs for 2017
conversion@cost
=
Operation 1 budgeted
rate for 2017
product units for 2017
=
$232,000
20,000 units
= $11.60 per unit
The budgeted conversion costs of Operation 1 include labor, power, repairs, supplies, depreciation, and other overhead of this operation. If some units have not been completed (so all
units in Operation 1 have not received the same amounts of conversion costs), the conversioncost rate is computed by dividing the budgeted conversion costs by the equivalent units of the
conversion costs, as in process costing.
As the company manufactures blazers, managers allocate the conversion costs to the
work orders processed in Operation 1 by multiplying the $11.60 conversion cost per unit by
the number of units processed. Conversion costs of Operation 1 for 50 wool blazers (Work
Order 423) are $11.60 per blazer * 50 blazers = $580 and for 100 polyester blazers (Work
699
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700
ChaPter 17
ProCess Costing
Order 424) are $11.60 per blazer * 100 blazers = $1,160. When equivalent units are used
to calculate the conversion-cost rate, costs are allocated to work orders by multiplying the
conversion cost per equivalent unit by the number of equivalent units in the work order.
The direct materials costs of $6,000 for the 50 wool blazers (Work Order 423) and $3,000 for
the 100 polyester blazers (Work Order 424) are specifically identified with each order, as in
job costing. The basic point of operation costing is this: Operation unit costs are assumed to
be the same regardless of the work order, but direct materials costs vary across orders when
the materials for each work order vary.
Journal Entries
The actual conversion costs for Operation 1 in March 2017—assumed to be $24,400, including the actual costs incurred for Work Order 423 and Work Order 424—are entered into a
Conversion Costs Control account:
1. Conversion Costs Control
Various accounts (such as Wages Payable
Control and Accumulated Depreciation)
24,400
24,400
The summary journal entries for assigning the costs to polyester blazers (Work Order 424)
follow. Entries for wool blazers would be similar. Of the $3,000 of direct materials for Work
Order 424, $2,975 are used in Operation 1, and the remaining $25 of materials are used in another operation. The journal entry to record direct materials used for the 100 polyester blazers
in March 2017 is as follows:
2. Work in Process, Operation 1
Materials Inventory Control
2,975
2,975
The journal entry to record the allocation of conversion costs to products uses the budgeted
rate of $11.60 per blazer times the 100 polyester blazers processed, or $1,160:
3. Work in Process, Operation 1
Conversion Costs Allocated
1,160
1,160
The journal entry to record the transfer of the 100 polyester blazers (at a cost of $2,975 +
$1,160) from Operation 1 to Operation 3 (polyester blazers do not go through Operation 2) is
as follows:
4. Work in Process, Operation 3
Work in Process, Operation 1
4,135
4,135
After posting these entries, the Work in Process, Operation 1, account appears as follows:
② Direct materials
③ Conversion costs allocated
Ending inventory, March 31
DecisiOn
Point
What is an operationcosting system, and when
is it a better approach to
product costing?
Work in Process, Operation 1
2,975
④ Transferred to Operation 3
1,160
4,135
0
The costs of the blazers are transferred through the operations in which blazers are worked
on and then to finished goods in the usual manner. Costs are added throughout the fiscal year
in the Conversion Costs Control account and the Conversion Costs Allocated account. Any
overallocation or underallocation of conversion costs is disposed of in the same way as overallocated or underallocated manufacturing overhead in a job-costing system, that is, using
either the adjusted allocation-rate, proration, or writeoff to cost of goods sold approach (see
pages 129–133).
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ProBlem for self-study
Harvest Bakery sells dinner rolls and multigrain bread. The company needs to determine the cost of two work orders for the month of July. Work Order 215 is for
2,400 packages of dinner rolls and Work Order 216 is for 2,800 loaves of multigrain bread. The following information shows the different operations used by the
two work orders:
Operations
1. Bake
2. Shape loaves
3. Cut rolls
Work Order 215
Work Order 216
Use
Do not use
Use
Use
Use
Do not use
17-4
try it!
For July, Harvest Bakery budgeted that it would make 9,600 packages of dinner rolls and
13,000 multigrain loaves (with associated direct materials costs of $5,280 and $11,700,
respectively). Budgeted conversion costs for each operation in July were: Baking, $18,080;
Shaping, $3,250; and Cutting, $1,440.
a. Using the budgeted number of packages as the denominator, calculate the budgeted
conversion-cost rates for each operation.
b. Using the information in requirement (a), calculate the budgeted cost of goods
manufactured for the two July work orders.
Problem for self-stuDy
Allied Chemicals operates an assembly process as the second of three processes at its plastics plant. Conversion costs are added evenly during the process, while direct materials are
added at the end. The following data pertain to the assembly department for June 2017:
$
Work in process, beginning inventory
Degree of completion, beginning work in process
Transferred in during current period
Completed and transferred out during current period
Work in process, ending inventory
Degree of completion, ending work in process
%
&
'
(
Physical
Units
50,000
Transferred-In
Costs
Direct
Materials
Conversion
Costs
100%
0%
80%
100%
0%
40%
200,000
210,000
?
Compute equivalent units under (1) the weighted-average method and (2) the FIFO method.
701
Required
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702
ChaPter 17
ProCess Costing
Solution
1. The weighted-average method uses equivalent units of work done to date to compute cost
per equivalent unit. The calculations of equivalent units follow:
$
%
(Step 1)
Flow of Production
Work in process, beginning (given)
Transferred-in during current period (given)
To account for
Completed and transferred out during current period
Work in process, ending a
(40,000 3 100%; 40,000 3 0%; 40,000 3 40%)
Accounted for
Equivalent units of work done to date
a
b
Physical
Units
50,000
200,000
250,000
210,000
40,000b
250,000
&
'
(
(Step 2)
Equivalent Units
Transferred-In
Direct Conversion
Costs
Materials
Costs
210,000
210,000
210,000
40,000
0
16,000
250,000
210,000
226,000
Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%.
250,000 physical units to account for minus 210,000 physical units completed and transferred out.
2. The FIFO method uses equivalent units of work done in the current period only to compute cost per equivalent unit. The calculations of equivalent units follow:
$
%
(Step 1)
Flow of Production
Work in process, beginning (given)
Transferred-in during current period (given)
To account for
Completed and transferred out during current period:
From beginning work in process a
[50,0003 (100% ] 100%); 50,000 3(100% ] 0%); 50,000 3(100% ] 80%)]
Started and completed
(160,000 3 100%; 160,000 3 100%; 160,000 3 100%)
Work in process, ending c
(40,000 3 100%; 40,000 3 0%; 40,000 3 40%)
Accounted for
Equivalent units of work done in current period
a
Physical
Units
50,000
200,000
250,000
50,000
160,000b
40,000d
250,000
&
'
(
(Step 2)
Equivalent Units
Transferred-In
Direct
Conversion
Costs
Materials
Costs
0
50,000
10,000
160,000
160,000
160,000
40,000
0
16,000
200,000
210,000
186,000
Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.
210,000 physical units completed and transferred out minus 50,000 physical units completed and transferred out from beginning
work-in-process inventory.
c
Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%.
d250,000 physical units to account for minus 210,000 physical units completed and transferred out.
b
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deCision Points
703
DecisiOn Points
The following question-and-answer format summarizes the chapter’s learning objectives. Each
decision presents a key question related to a learning objective. The guidelines are the answer
to that question.
Decision
Guidelines
1. Under what conditions is a process-costing
system used?
A process-costing system is used to determine cost of a product
or service when masses of identical or similar units are produced.
Industries using process-costing systems include the food, textiles,
and oil-refining industries.
2. How are average unit costs computed when no
inventories are present?
Average unit costs are computed by dividing the total costs in a
given accounting period by the total units produced in that period.
3. What are the five steps in a process-costing sys- The five steps in a process-costing system are (1) summarize the flow
tem, and how are equivalent units calculated?
of physical units of output, (2) compute the output in terms of equivalent units, (3) summarize the total costs to account for, (4) compute
the cost per equivalent unit, and (5) assign the total costs to units
completed and to units in ending work-in-process inventory.
An equivalent unit is a derived measure of output that (a) takes the
quantity of each input (factor of production) in units completed or
in incomplete units in work in process and (b) converts the quantity of input into the amount of completed output units that could
be made with that quantity of input.
4. What are the weighted-average and first-in,
first-out (FIFO) methods of process costing?
Under what conditions will they yield different
levels of operating income?
The weighted-average method computes unit costs by dividing
total costs in the Work in Process account by total equivalent units
completed to date and assigns this average cost to units completed
and to units in ending work-in-process inventory.
The first-in, first-out (FIFO) method computes unit costs based on
costs incurred during the current period and equivalent units of
work done in the current period.
Operating income can differ materially between the two methods
when (1) direct material or conversion cost per equivalent unit varies significantly from period to period and (2) physical-inventory
levels of work in process are large in relation to the total number of
units transferred out of the process.
5. How are the weighted-average and FIFO
process-costing methods applied to
transferred-in costs?
The weighted-average method computes transferred-in costs per
unit by dividing the total transferred-in costs to date by the total
equivalent transferred-in units completed to date and assigns this average cost to units completed and to units in ending work-in-process
inventory. The FIFO method computes the transferred-in costs per
unit based on the costs transferred in during the current period and
equivalent units of transferred-in costs of work done in the current
period. The FIFO method assigns transferred-in costs in the beginning work-in-process inventory to units completed; it assigns costs
transferred in during the current period first to complete the beginning inventory, next to start and complete new units, and finally to
units in ending work-in-process inventory.
6. What is an operation-costing system, and when Operation costing is a hybrid-costing system that blends characterisis it a better approach to product costing?
tics from both job-costing (for direct materials) and process-costing
systems (for conversion costs). It is a better approach to product
costing when production systems share some features of custom-order
manufacturing and other features of mass-production manufacturing.
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704
ChaPter 17
ProCess Costing
aPPenDix
Standard-Costing Method of Process Costing
Chapter 7 described accounting in a standard-costing system. Recall that this involves making
entries using standard costs and then isolating variances from these standards in order to support management control. This appendix describes how the principles of standard costing can
be employed in process-costing systems.
Benefits of Standard Costing
Companies that use process-costing systems produce masses of identical or similar units of
output. In such companies, it is fairly easy to budget for the quantities of inputs needed to produce a unit of output. Standard cost per input unit can then be multiplied by input quantity
standards to develop a standard cost per output unit.
The weighted-average and FIFO methods become very complicated when used in process
industries, such as textiles, ceramics, paints, and packaged food, that produce a wide variety of
similar products. For example, a steel-rolling mill uses various steel alloys and produces sheets
of varying sizes and finishes. The different types of direct materials used and the operations
performed are few, but used in various combinations, they yield a wide variety of products. In
these cases, if the broad averaging procedure of actual process costing were used, the result
would be inaccurate costs for each product. Therefore, managers in these industries typically
use the standard-costing method of process costing.
Under the standard-costing method, teams of design and process engineers, operations
personnel, and management accountants work together to determine separate standard costs
per equivalent unit on the basis of different technical processing specifications for each product.
Identifying standard costs for each product overcomes the disadvantage of costing all products
at a single average amount, as under actual costing.
Computations Under Standard Costing
We return to the assembly department of Pacific Electronics, but this time we use standard
costs. Assume the same standard costs apply in February and March 2017. Data for the assembly department are as follows:
$
%
Physical Units
(SG-40s)
(1)
Standard cost per unit
&
Direct
Materials
(2)
$
74
225
Work in process, beginning inventory (March 1)
100%
Degree of completion of beginning work in process
Beginning work-in-process inventory at standard costs
$16,650a
275
Started during March
400
Completed and transferred out during March
100
Work in process, ending inventory (March 31)
Degree of completion of ending work in process
100%
$19,800
Actual total costs added during March
a Work in process, beginning inventory at standard costs:
Direct materials: 225 physical units 3 100% completed 3 $74 per unit 5 $16,650
'
Conversion
Costs
(3)
$
54
(
Total
Costs
(4) 5 (2) 1 (3)
60%
a
$ 7,290
$23,940
50%
$16,380
$36,180
Conversion costs: 225 physical units 3 60% completed 3 $54 per unit 5 $7,290
We illustrate the standard-costing method of process costing using the five-step procedure introduced earlier (page 679).
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aPPendix
705
exHibit 17-12
$
%
(Step 1)
Flow of Production
Work in process, beginning (given, p. 704)
Started during current period (given, p. 704)
To account for
Completed and transferred out during current period:
From beginning work in process a
[225 3 (100% ] 100%); 225 3 (100% ] 60%)]
Started and completed
(1 7 5 3 1 0 0 % ; 1 7 5 3 1 0 0 % )
Work in process, ending c (given, p. 704)
(1 0 0 3 1 0 0 % ; 1 0 0 3 5 0 % )
Accounted for
Equivalent units of work done in current period
Physical
Units
225
275
500
225
175b
100
500
&
'
(Step 2)
Equivalent Units
Direct
Conversion
Materials
Costs
0
90
175
175
100
50
275
315
a
Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
400 physical units completed and transferred out minus 225 physical units completed and
transferred out from beginning work-in-process inventory.
c
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
b
Exhibit 17-12 presents Steps 1 and 2. These steps are identical to the steps described for the
FIFO method in Exhibit 17-6 because, as in FIFO, the standard-costing method also assumes
that the earliest equivalent units in beginning work in process are completed first. Work done in
the current period for direct materials is 275 equivalent units. Work done in the current period
for conversion costs is 315 equivalent units.
Exhibit 17-13 describes Steps 3, 4, and 5. In Step 3, total costs to account for (that is,
the total debits to Work in Process—Assembly) differ from total debits to Work in Process—
Assembly under the actual-cost-based weighted-average and FIFO methods. That’s because,
as in all standard-costing systems, the debits to the Work in Process account are at standard
costs, rather than actual costs. These standard costs total $61,300 in Exhibit 17-13. In Step 4,
costs per equivalent unit are standard costs: direct materials, $74, and conversion costs, $54.
Therefore, costs per equivalent unit do not have to be computed as they were for the weightedaverage and FIFO methods.
Exhibit 17-13, Step 5, assigns total costs to units completed and transferred out and to
units in ending work-in-process inventory, as in the FIFO method. Step 5 assigns amounts
of standard costs to equivalent units calculated in Exhibit 17-12. These costs are assigned
(1) first to complete beginning work-in-process inventory, (2) next to start and complete
new units, and (3) finally to start new units that are in ending work-in-process inventory.
Note how the $61,300 total costs accounted for in Step 5 of Exhibit 17-13 equal total costs
to account for.
Accounting for Variances
Process-costing systems using standard costs record actual direct materials costs in Direct
Materials Control and actual conversion costs in Conversion Costs Control (similar to
Variable and Fixed Overhead Control in Chapter 8). In the journal entries that follow, the first
two record these actual costs. In entries 3 and 4a, the Work-in-Process—Assembly account
Summarize the Flow
of Physical Units and
Compute Output
in Equivalent Units
Using the StandardCosting Method for the
Assembly Department
for March 2017
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706
ChaPter 17
ProCess Costing
exHibit 17-13
$
Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed and Units in Ending Work-in-Process Inventory
Using the Standard-Costing Method for the Assembly Department for March 2017
%
&
'
Total
Production
Costs
$23,940
37,360
$61,300
Direct
Materials
(225 3 $74)
(275 3 $74)
$37,000
(Step 3)
Work in process, beginning
Costs added in current period at standard costs
Total costs to account for
(Step 4)
Standard cost per equivalent unit (given, p. 704)
$
(Step 5)
Assignment of costs at standard costs:
Completed and transferred out (400 units):
Work in process, beginning (225 units)
Costs added to beginning work in process in current period
Total from beginning inventory
Started and completed (175 units)
$23,940
4,860
28,800
22,400
Total costs of units completed and transferred out
51,200
(
)
*
1
1
1
Conversion
Costs
(135 3 $54)
(315 3 $54)
$24,300
128
$
74
1
$
54
Work in process, ending (100 units)
Total costs accounted for
10,100
$61,300
(225 3 $74)
(0 a 3 $74)
1
1
(135 3 $54)
(90a 3 $54)
(175b 3 $74)
1
(175b 3 $54)
(100 c 3 $74)
$37,000
1
1
(50c 3 $54)
$24,300
F
$17,010
$16,380
$ 630
Summary of variances for current performance:
Costs added in current period at standard costsd
Actual costs incurred (given, p. 704)
Variance
$20,350
$19,800
$ 550
F
a
b
d
Equivalent units used to complete beginning work in process from Exhibit 17-12, Step 2.
Equivalent units started and completed from Exhibit 17-12, Step 2.
c
Equivalent units in ending work in process from Exhibit 17-12, Step 2.
From Step 3 above: Direct Materials: (275 3 $74); Conversion Costs: (315 3 $54)
accumulates direct materials costs and conversion costs at standard costs. Entries 3 and 4b
isolate total variances. The final entry transfers out completed goods at standard costs.
1. Assembly Department Direct Materials Control (at actual costs)
Accounts Payable Control
To record the direct materials purchased and used in production during
March. This cost control account is debited with actual costs.
2. Assembly Department Conversion Costs Control (at actual costs)
Various accounts such as Wages Payable Control and Accumulated
Depreciation
To record the assembly department conversion costs for March. This cost
control account is debited with actual costs.
Entries 3, 4, and 5 use standard cost amounts from Exhibit 17-13.
3. Work in Process—Assembly (at standard costs)
Direct Materials Variances
Assembly Department Direct Materials Control
To record the standard costs of direct materials assigned to units worked on
and total direct materials variances.
19,800
19,800
16,380
16,380
20,350
550
19,800
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aPPendix
4a. Work in Process—Assembly (at standard costs)
Assembly Department Conversion Costs Allocated
To record the conversion costs allocated at standard rates to the units
worked on during March.
4b. Assembly Department Conversion Costs Allocated
Conversion Costs Variances
Assembly Department Conversion Costs Control
To record the total conversion costs variances.
5. Work in Process—Testing (at standard costs)
Work in Process—Assembly (at standard costs)
To record the standard costs of units completed and transferred out from assembly to testing.
17,010
17,010
17,010
630
16,380
51,200
51,200
Variances arise under standard costing, as in entries 3 and 4b. That’s because the standard costs
assigned to products on the basis of work done in the current period do not equal actual costs
incurred in the current period. Recall that variances that result in higher income than expected
are termed favorable, while those that reduce income are unfavorable. From an accounting
standpoint, favorable cost variances are credit entries, while unfavorable ones are debits. In the
preceding example, both direct materials and conversion cost variances are favorable. This is
also reflected in the “F” designations for both variances in Exhibit 17-13.
Variances can be analyzed in little or great detail for planning and control purposes, as described in Chapters 7 and 8. Sometimes direct materials price variances are isolated at the time
direct materials are purchased and only efficiency variances are computed in entry 3. Exhibit 17-14
shows how the costs flow through the general-ledger accounts under standard costing.
Flow of Standard Costs in a Process-Costing System
for the Assembly Department for March 2017
exHibit 17-14
Assembly Department
Direct Materials Control
19,800
19,800
Work in Process—Assembly
Bal. 23,940
20,350
4a 17,010
51,200
Work in Process—Testing
51,200
Transferred
out to
Finished
Goods
xx
Bal. 10,100
Assembly Department
Conversion Costs Control
16,380
4b
Direct Materials Variances
16,380
550
Finished Goods
xx
Cost of
Goods
Sold
Assembly Department
Conversion Costs Allocated
4b
17,010
4a
17,010
Accounts Payable Control
19,800
Various Accounts
16,380
Conversion Costs Variances
4b
630
Cost of Goods Sold
xx
xx
707
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708
ChaPter 17
ProCess Costing
terms to learn
This chapter and the Glossary at the end of the book contain definitions of the following important terms:
equivalent units (p. 679)
first-in, first-out (FIFO) process-costing
method (p. 687)
hybrid-costing system (p. 697)
operation (p. 697)
operation-costing system (p. 697)
previous-department costs (p. 692)
transferred-in costs (p. 692)
weighted-average process-costing
method (p. 684)
assignment material
MyAccountingLab
Questions
17-1
17-2
17-3
17-4
17-5
17-6
17-7
17-8
17-9
17-10
17-11
17-12
17-13
17-14
17-15
MyAccountingLab
Give three examples of industries that use process-costing systems.
In process costing, why are costs often divided into two main classifications?
Explain equivalent units. Why are equivalent-unit calculations necessary in process costing?
What problems might arise in estimating the degree of completion of semiconductor chips in a
semiconductor plant?
Name the five steps in process costing when equivalent units are computed.
Name the three inventory methods commonly associated with process costing.
Describe the distinctive characteristic of weighted-average computations in assigning costs to
units completed and to units in ending work in process.
Describe the distinctive characteristic of FIFO computations in assigning costs to units completed and to units in ending work in process.
Why should the FIFO method be called a modified or department FIFO method?
Identify a major advantage of the FIFO method for purposes of planning and control.
Identify the main difference between journal entries in process costing and job costing.
“The standard-costing method is particularly applicable to process-costing situations.” Do you
agree? Why?
Why should the accountant distinguish between transferred-in costs and additional direct materials costs for each subsequent department in a process-costing system?
“Transferred-in costs are those costs incurred in the preceding accounting period.” Do you
agree? Explain.
“There’s no reason for me to get excited about the choice between the weighted-average and
FIFO methods in my process-costing system. I have long-term contracts with my materials suppliers at fixed prices.” Do you agree with this statement made by a plant controller? Explain.
Multiple-Choice Questions
In partnership with:
17-16 Assuming beginning work in process is zero, the equivalent units of production computed using
FIFO versus weighted average will have the following relationship:
1. FIFO equivalent units will be greater than weighted-average equivalent units.
2. FIFO equivalent units will be less than weighted-average equivalent units.
3. Weighted-average equivalent units are always greater than FIFO equivalent units.
4. Weighted-average equivalent units will be equal to FIFO equivalent units.
17-17 The following information concerns Westheimer Corporation’s equivalent units in May 20X1:
Beginning work-in-process (50% complete)
Units started during May
Units completed and transferred
Ending work-in-process (80% complete)
Units
4,000
16,000
14,000
6,000
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assignment material
Using the weighted-average method, what were Westheimer’s May 20X1 equivalent units?
1. 14,000
2. 18,800
3. 20,000
4. 39,000
17-18 Sepulveda Corporation uses a process costing system to manufacture laptop PCs. The
following information summarizes operations for its VeryLite model during the quarter ending March 31,
Year 1:
Work-in-process inventory, January 1
Started during the quarter
Completed during the quarter
Work-in-process inventory, March 31
Costs added during the quarter
Units
100
500
400
200
Direct
Materials
$ 60,000
$840,000
Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process inventory was 75% complete for direct materials. What were the equivalent units for direct materials for the
quarter using the FIFO method?
1. 450
2. 500
3. 550
4. 600
17-19 Penn Manufacturing Corporation uses a process-costing system to manufacture printers for
PCs. The following information summarizes operations for its NoToner model during the quarter ending
September 30, Year 1:
Work-in-process inventory, July 1
Started during the quarter
Completed during the quarter
Work-in-process inventory, September 30
Costs added during the quarter
Units
100
500
400
200
Direct
Labor
$ 50,000
$775,000
Beginning work-in-process inventory was 50% complete for direct labor. Ending work-in-process inventory
was 75% complete for direct labor. What is the total value of the direct labor in the ending work-in-process
inventory using the weighted-average method?
1. $183,000
2. $194,000
3. $225,000
4. $210,000
17-20 Kimberly Manufacturing uses a process-costing system to manufacture Dust Density Sensors for
the mining industry. The following information pertains to operations for the month of May, Year 5.
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
Units
16,000
100,000
92,000
24,000
The beginning inventory was 60% complete for materials and 20% complete for conversion costs. The ending inventory was 90% complete for materials and 40% complete for conversion costs.
Costs pertaining to the month of May are as follows.
• Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
• Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead,
$391,160.
Using the weighted-average method, the equivalent-unit conversion cost for May is:
1. $5.65
2. $5.83
3. $6.00
4. $6.41
©2016 DeVry/Becker Educational Development Corp. All Rights Reserved.
709
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710
ChaPter 17
ProCess Costing
MyAccountingLab
Exercises
17-21 Equivalent units, zero beginning inventory. Candid, Inc. is a manufacturer of digital cameras. It
has two departments: assembly and testing. In January 2017, the company incurred $800,000 on direct materials and $805,000 on conversion costs, for a total manufacturing cost of $1,605,000.
Required
1. Assume there was no beginning inventory of any kind on January 1, 2017. During January, 5,000 cameras were placed into production and all 5,000 were fully completed at the end of the month. What is
the unit cost of an assembled camera in January?
2. Assume that during February 5,000 cameras are placed into production. Further assume the same total
assembly costs for January are also incurred in February, but only 4,000 cameras are fully completed
at the end of the month. All direct materials have been added to the remaining 1,000 cameras. However,
on average, these remaining 1,000 cameras are only 60% complete as to conversion costs. (a) What are
the equivalent units for direct materials and conversion costs and their respective costs per equivalent
unit for February? (b) What is the unit cost of an assembled camera in February 2017?
3. Explain the difference in your answers to requirements 1 and 2.
Required
Prepare summary journal entries for the use of direct materials and incurrence of conversion costs. Also
prepare a journal entry to transfer out the cost of goods completed. Show the postings to the Work in Process account.
17-22 Journal entries (continuation of 17-21). Refer to requirement 2 of Exercise 17-21.
17-23 Zero beginning inventory, materials introduced in middle of process. Dot and Ken Ice Cream
uses a mixing department and a freezing department in producing its ice cream. Its process-costing system
in the mixing department has two direct materials cost categories (ice cream mix and flavorings) and one
conversion cost pool. The following data pertain to the mixing department for April 2017:
Work in process, April 1
Started in April
Completed and transferred to freezing
Costs:
Ice cream mix
Flavorings
Conversion costs
0
10,000 gallons
8,500 gallons
$27,000
$ 4,080
$53,700
The ice cream mix is introduced at the start of operations in the mixing department, and the flavorings are
added when the product is 40% completed in the mixing department. Conversion costs are added evenly
during the process. The ending work in process in the mixing department is 30% complete.
Required
1. Compute the equivalent units in the mixing department for April 2017 for each cost category.
2. Compute (a) the cost of goods completed and transferred to the freezing department during April and
(b) the cost of work in process as of April 30, 2017.
17-24 Weighted-average method, equivalent units. The assembly division of Quality Time Pieces,
Inc. uses the weighted-average method of process costing. Consider the following data for the month of
May 2017:
Beginning work in process (May 1)a
Started in May 2017
Completed during May 2017
Ending work in process (May 31)b
Total costs added during May 2017
a
b
Required
Physical Units
(Watches)
100
510
450
160
Direct
Materials
$ 459,888
Conversion
Costs
$ 142,570
$3,237,000
$1,916,000
Degree of completion: direct materials, 80%; conversion costs, 35%.
Degree of completion: direct materials, 80%; conversion costs, 40%.
Compute equivalent units for direct materials and conversion costs. Show physical units in the first column
of your schedule.
17-25 Weighted-average method, assigning costs (continuation of 17-24).
Required
For the data in Exercise 17-24, summarize the total costs to account for, calculate the cost per equivalent
unit for direct materials and conversion costs, and assign costs to the units completed (and transferred out)
and units in ending work in process.
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assignment material
17-26 FIFO method, equivalent units. Refer to the information in Exercise 17-24. Suppose the assembly
division at Quality Time Pieces, Inc. uses the FIFO method of process costing instead of the weightedaverage method.
Compute equivalent units for direct materials and conversion costs. Show physical units in the first column
of your schedule.
Required
17-27 FIFO method, assigning costs (continuation of 17-26).
For the data in Exercise 17-24, use the FIFO method to summarize the total costs to account for, calculate the
cost per equivalent unit for direct materials and conversion costs, and assign costs to units completed (and
transferred out) and to units in ending work in process.
Required
17-28 Operation costing. The Carter Furniture Company needs to determine the cost of two work orders
for December 2017. Work Order 1200A is for 250 painted, unassembled chests and Work Order 1250A is for
400 stained, assembled chests. The following information pertains to these two work orders:
Number of chests
Operations
1. Cutting
2. Painting
3. Staining
4. Assembling
6. Packaging
Work Order 1200A
250
Work Order 1250A
400
Use
Use
Do not use
Do not use
Use
Use
Do not use
Use
Use
Use
Selected budget information for December follows:
Chests
Direct materials costs
Unassembled Chests
800
$52,000
Assembled Chests
1,500
$180,000
Total
2,300
$232,000
Budgeted conversion costs for each operation for December follow:
Cutting
Painting
Staining
Assembling
Packaging
$41,400
6,400
24,000
33,000
11,500
1. Using budgeted number of chests as the denominator, calculate the budgeted conversion-cost rates
for each operation.
2. Using the information in requirement 1, calculate the budgeted cost of goods manufactured for the two
December work orders.
3. Calculate the cost per unassembled chest and assembled chest for Work Order 1200A and Work Order
1250A, respectively.
17-29 Weighted-average method, assigning costs. ZanyBrainy Corporation makes interlocking children’s blocks in a single processing department. Direct materials are added at the start of production.
Conversion costs are added evenly throughout production. ZanyBrainy uses the weighted-average method
of process costing. The following information for October 2017 is available.
Work in process, October 1
Started in October
Completed and transferred out during October
Work in process, October 31
a
Physical
Units
12,000a
48,000
55,000
5,000b
Degree of completion: direct materials, 100%; conversion costs, 80%.
Degree of completion: direct materials, 100%; conversion costs, 30%.
b
Equivalent Units
Direct
Conversion
Materials
Costs
12,000
9,600
55,000
5,000
55,000
1,500
Required
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ChaPter 17
ProCess Costing
Total Costs for October 2017
Work in process, beginning
Direct materials
Conversion costs
Direct materials added during October
Conversion costs added during October
Total costs to account for
Required
$ 5,760
14,825
$ 20,585
25,440
58,625
$104,650
1. Calculate the cost per equivalent unit for direct materials and conversion costs.
2. Summarize the total costs to account for, and assign them to units completed (and transferred out) and
to units in ending work in process.
17-30 FIFO method, assigning costs.
Required
1. Do Exercise 17-29 using the FIFO method.
2. ZanyBrainy’s management seeks to have a more consistent cost per equivalent unit. Which method of
process costing should the company choose and why?
17-31 Transferred-in costs, weighted-average method. Trendy Clothing, Inc. is a manufacturer of winter
clothes. It has a knitting department and a finishing department. This exercise focuses on the finishing department. Direct materials are added at the end of the process. Conversion costs are added evenly during
the process. Trendy uses the weighted-average method of process costing. The following information for
June 2017 is available.
$
Required
Work in process, beginning inventory (June 1)
Degree of completion, beginning work in process
Transferred-in during June
Completed and transferred out during June
Work in process, ending inventory (June 30)
Degree of completion, ending work in process
Total costs added during June
%
&
Physical Units Transferred-In
(tons)
Costs
60
$ 60,000
100%
100
120
40
100%
$117,000
'
(
Direct
Materials
0
$
0%
Conversion
Costs
$24,000
50%
0%
$27,000
75%
$62,400
1. Calculate equivalent units of transferred-in costs, direct materials, and conversion costs.
2. Summarize the total costs to account for, and calculate the cost per equivalent unit for transferred-in
costs, direct materials, and conversion costs.
3. Assign costs to units completed (and transferred out) and to units in ending work in process.
17-32 Transferred-in costs, FIFO method. Refer to the information in Exercise 17-31. Suppose that Trendy
uses the FIFO method instead of the weighted-average method in all of its departments. The only changes
to Exercise 17-31 under the FIFO method are that total transferred-in costs of beginning work in process
on June 1 are $45,000 (instead of $60,000) and total transferred-in costs added during June are $114,000
(instead of $117,000).
Required
Do Exercise 17-31 using the FIFO method. Note that you first need to calculate equivalent units of work done
in the current period (for transferred-in costs, direct materials, and conversion costs) to complete beginning
work in process, to start and complete new units, and to produce ending work in process.
17-33 Operation costing. Egyptian Spa produces two different spa products: Relax and Refresh. The
company uses three operations to manufacture the products: mixing, blending, and packaging. Because
of the materials used, Relax is produced in powder form in the mixing department, then transferred to the
blending department, and finally on to packaging. Refresh undergoes no mixing; it is produced in liquid form
in the blending department and then transferred to packaging.
Egyptian Spa applies conversion costs based on labor-hours in the mixing department. It takes 3 minutes to mix the ingredients for a container of Relax. Conversion costs are applied based on the number of
containers in the blending departments and on the basis of machine-hours in the packaging department. It
takes 0.5 minutes of machine time to fill a container, regardless of the product.
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assignment material
713
The budgeted number of containers and expected direct materials cost for each product are as follows:
Number of containers
Direct materials cost
Relax
24,000
$17,160
Refresh
18,000
$13,140
The budgeted conversion costs for each department for May are as follows:
Department
Mixing
Blending
Packaging
Allocation of
Conversion Costs
Direct labor-hours
Number of containers
Machine-hours
Budgeted Conversion Cost
$11,760
$20,160
$ 2,800
1. Calculate the conversion cost rates for each department.
2. Calculate the budgeted cost of goods manufactured for Relax and Refresh for the month of May.
3. Calculate the cost per container for each product for the month of May.
Required
17-34 Standard-costing with beginning and ending work in process. Lawrence Company is a manufacturer of contemporary door handles. The vice president of Design attends home shows twice a year so the
company can keep current with home trends. Because of its volume, Lawrence uses process costing to
account for production. Costs and output figures for August are as follows:
Lawrence Company’s Process Costing
for the Month Ended August 31, 2017
Units
Standard cost per unit
Work in process, beginning inventory (Aug. 1)
Degree of completion of beginning work in process
Started in August
Completed and transferred out
Work in process, ending inventory (Aug. 31)
Degree of completion of ending work in process
Total costs added during August
15,000
Direct Materials
$ 5.75
$ 86,250
100%
Conversion Costs
$
12.25
$ 55,125
30%
100%
$569,000
80%
$1,307,240
100,000
95,000
20,000
1. Compute equivalent units for direct materials and conversion costs. Show physical units in the first
column of your schedule.
2. Compute the total standard costs of handles transferred out in August and the total standard costs of
the August 31 inventory of work in process.
3. Compute the total August variances for direct materials and conversion costs.
4. Prepare summarized journal entries to record both the actual costs and standard costs for direct
materials and conversion costs, including the variances for both production costs.
Problems
17-35 Equivalent units, comprehensive. Louisville Sports manufactures baseball bats for use by players
in the major leagues. A critical requirement for elite players is that each bat they use have an identical look
and feel. As a result, Louisville uses a dedicated process to produce bats to each player’s specifications.
One of Louisville’s key clients is Ryan Brown of the Green Bay Brewers. Producing his bat involves the
use of three materials—ash, cork, and ink—and a sequence of 20 standardized steps. Materials are added
as follows:
Ash:
This is the basic wood used in bats. Eighty percent of the ash content is added at the start of the
process; the rest is added at the start of the 16th step of the process.
Cork: This is inserted into the bat in order to increase Ryan’s bat speed. Half of the cork is introduced at the
beginning of the seventh step of the process; the rest is added at the beginning of the 14th step.
Ink:
This is used to stamp Ryan’s name on the finished bat and is added at the end of the process.
Of the total conversion costs, 6% are added during each of the first 10 steps of the process, and 4% are
added at each of the remaining 10 steps.
Required
MyAccountingLab
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ChaPter 17
ProCess Costing
On May 1, 2017, Louisville had 100 bats in inventory. These bats had completed the ninth step of the
process as of April 30, 2017. During May, Louisville put another 60 bats into production. At the end of May,
Louisville was left with 40 bats that had completed the 12th step of the production process.
Required
1. Under the weighted-average method of process costing, compute equivalent units of work done for
each relevant input for the month of May.
2. Under the FIFO method of process costing, compute equivalent units of work done for each relevant
input for the month of May.
17-36 Weighted-average method. Hoffman Company manufactures car seats in its Boise 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 Hoffman 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.
Hoffman Company uses the weighted-average method of process costing. Data for the assembly department for October 2017 are as follows:
Work in process, October 1a
Started during October 2017
Completed during October 2017
Work in process, October 31b
Total costs added during October 2017
Physical Units
(Car Seats)
4,000
22,500
26,000
500
Direct
Materials
$1,248,000
Conversion
Costs
$ 241,650
$4,635,000
$2,575,125
a
Degree of completion: direct materials,?%; conversion costs, 45%.
Degree of completion: direct materials,?%; conversion costs, 65%.
b
Required
1. For each cost category, compute equivalent units in the assembly department. Show physical units in
the first column of your schedule.
2. What issues should the manager focus on when reviewing the equivalent-unit calculations?
3. For each cost category, summarize total assembly department costs for October 2017 and calculate the
cost per equivalent unit.
4. Assign costs to units completed and transferred out and to units in ending work in process.
Required
Prepare a set of summarized journal entries for all October 2017 transactions affecting Work in Process—
Assembly. Set up a T-account for Work in Process—Assembly and post your entries to it.
17-37 Journal entries (continuation of 17-36).
17-38 FIFO method (continuation of 17-36).
Required
1. Do Problem 17-36 using the FIFO method of process costing. Explain any difference between the cost per
equivalent unit in the assembly department under the weighted-average method and the FIFO method.
2. Should Hoffman’s managers choose the weighted-average method or the FIFO method? Explain briefly.
17-39 Transferred-in costs, weighted-average method (related to 17-36 to 17-38). Hoffman Company,
as you know, is a manufacturer of car seats. Each car seat passes through the assembly department and
testing department. This problem focuses on the testing department. Direct materials are added when the
testing department process is 90% complete. Conversion costs are added evenly during the testing department’s process. As work in assembly is completed, each unit is immediately transferred to testing. As each
unit is completed in testing, it is immediately transferred to Finished Goods.
Hoffman Company uses the weighted-average method of process costing. Data for the testing department for October 2017 are as follows:
Work in process, October 1a
Transferred in during October 2017
Completed during October 2017
Work in process, October 31b
Total costs added during October 2017
a
Physical Units
(Car Seats)
5,500
?
29,800
1,700
TransferredIn Costs
$2,931,000
Direct
Materials
$
0
Conversion
Costs
$ 499,790
$8,094,000
$10,877,000
$4,696,260
Degree of completion: transferred-in costs,?%; direct materials,?%; conversion costs, 65%.
Degree of completion: transferred-in costs,?%; direct materials,?%; conversion costs, 45%.
b
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assignment material
1. What is the percentage of completion for (a) transferred-in costs and direct materials in beginning
work-in-process inventory and (b) transferred-in costs and direct materials in ending work-in-process
inventory?
2. For each cost category, compute equivalent units in the testing department. Show physical units in the
first column of your schedule.
3. For each cost category, summarize total testing department costs for October 2017, calculate the cost
per equivalent unit, and assign costs to units completed (and transferred out) and to units in ending
work in process.
4. Prepare journal entries for October transfers from the assembly department to the testing department
and from the testing department to Finished Goods.
Required
17-40 Transferred-in costs, FIFO method (continuation of 17-39). Refer to the information in Problem 17-39.
Suppose that Hoffman Company uses the FIFO method instead of the weighted-average method in all of its
departments. The only changes to Problem 17-39 under the FIFO method are that total transferred-in costs
of beginning work in process on October 1 are $2,879,000 (instead of $2,931,000) and that total transferred-in
costs added during October are $9,048,000 (instead of $8,094,000).
Required
Using the FIFO process-costing method, complete Problem 17-39.
17-41 Weighted-average method. McKnight Handcraft is a manufacturer of picture frames for large
retailers. Every picture frame passes through two departments: the assembly department and the finishing
department. This problem focuses on the assembly department. The process-costing system at McKnight
has a single direct-cost category (direct materials) and a single indirect-cost category (conversion costs).
Direct materials are added when the assembly department process is 10% complete. Conversion costs are
added evenly during the assembly department’s process.
McKnight uses the weighted-average method of process costing. Consider the following data for the
assembly department in April 2017:
Work in process, April 1a
Started during April 2017
Completed during April 2017
Work in process, April 30b
Total costs added during April 2017
Physical Unit
(Frames)
60
510
450
120
Direct
Materials
$ 1,530
Conversion
Costs
$ 156
$17,850
$11,544
a
Degree of completion: direct materials, 100%; conversion costs, 40%.
Degree of completion: direct materials, 100%; conversion costs, 15%.
b
1. Summarize the total assembly department costs for April 2017, and assign them to units completed (and
transferred out) and to units in ending work in process.
2. What issues should a manager focus on when reviewing the equivalent units calculation?
Required
17-42 FIFO method (continuation of 17-41).
1. Complete Problem 17-41 using the FIFO method of process costing.
2. If you did Problem 17-41, explain any difference between the cost of work completed and transferred
out and the cost of ending work in process in the assembly department under the weighted-average
method and the FIFO method. Should McKnight’s managers choose the weighted-average method or
the FIFO method? Explain briefly.
17-43 Transferred-in costs, weighted-average method. Spelling Sports, which produces basketballs,
has two departments: cutting and stitching. Each department has one direct-cost category (direct
materials) and one indirect-cost category (conversion costs). This problem focuses on the stitching
department.
Basketballs that have undergone the cutting process are immediately transferred to the stitching department. Direct material is added when the stitching process is 70% complete. Conversion costs are added
evenly during stitching operations. When those operations are done, the basketballs are immediately transferred to Finished Goods.
Required
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716
ChaPter 17
ProCess Costing
Spelling Sports uses the weighted-average method of process costing. The following is a summary of
the March 2017 operations of the stitching department:
A
1
2
3
4
5
6
7
8
Required
Beginning work in process
Degree of completion, beginning work in process
Transferred in during March 2017
Completed and transferred out during March 2017
Ending work in process, March 31
Degree of completion, ending work in process
Total costs added during March
B
C
Physical Units Transferred-In
(basketballs)
Costs
17,500
$ 45,360
100%
56,000
52,000
21,500
100%
$154,560
D
E
Direct
Materials
0
$
0%
Conversion
Costs
$17,660
60%
0%
$28,080
20%
$89,310
1. Summarize total stitching department costs for March 2017, and assign these costs to units completed
(and transferred out) and to units in ending work in process.
2. Prepare journal entries for March transfers from the cutting department to the stitching department
and from the stitching department to Finished Goods.
17-44 Transferred-in costs, FIFO method. Refer to the information in Problem 17-43. Suppose that
Spelling Sports uses the FIFO method instead of the weighted-average method. Assume that all other information, including the cost of beginning WIP, is unchanged.
Required
1. Using the FIFO process-costing method, complete Problem 17-43.
2. If you did Problem 17-43, explain any difference between the cost of work completed and transferred
out and the cost of ending work in process in the stitching department under the weighted-average
method and the FIFO method.
17-45 Standard costing, journal entries. The Warner Company manufactures reproductions of expensive sunglasses. Warner uses the standard-costing method of process costing to account for the production of the sunglasses. All materials are added at the beginning of production. The costs and output of
sunglasses for May 2017 are as follows:
Work in process, beginning
Started during May
Completed and transferred out
Work in process, ending
Standard cost per unit
Costs added during May
Required
Physical
Units
22,000
95,000
87,000
30,000
% of Completion for
Conversion Costs
60%
Direct
Materials
$ 48,400
Conversion
Costs
$ 33,000
$ 2.20
$207,500
$ 2.50
$238,000
75%
1. Compute equivalent units for direct materials and conversion costs. Show physical units in the first
column of your schedule.
2. Compute the total standard costs of sunglasses transferred out in May and the total standard costs of
the May 31 inventory of work in process.
3. Compute the total May variances for direct materials and conversion costs.
4. Prepare summarized journal entries to record both the actual costs and standard costs for direct materials and conversion costs, including the variances for both production costs.
17-46 Multiple processes or operations, costing. The Sedona Company is dedicated to making products
that meet the needs of customers in a sustainable manner. Sedona is best known for its KLN water bottle,
which is a BPA-free, dishwasher-safe, bubbly glass bottle in a soft silicone sleeve.
The production process consists of three basic operations. In the first operation, the glass is formed by remelting cullets (broken or refuse glass). In the second operation, the glass is assembled with the silicone gasket
and sleeve. The resulting product is finished in the final operation with the addition of the polypropylene cap.
Consulting studies have indicated that of the total conversion costs required to complete a finished
unit, the forming operation requires 60%, the assembly 30%, and the finishing 10%.
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assignment material
The following data are available for March 2017 (there is no opening inventory of any kind):
Cullets purchased
Silicone purchased
Polypropylene used
Total conversion costs incurred
Ending inventory, cullets
Ending inventory, silicone
Number of bottles completed and transferred
Inventory in process at the end of the month:
Units formed but not assembled
Units assembled but not finished
$67,500
$24,000
$ 6,000
$68,850
$ 4,500
$ 3,000
12,000
4,000
2,000
1. What is the cost per equivalent unit for conversion costs for KLN bottles in March 2017?
2. Compute the cost per equivalent unit with respect to each of the three materials: cullets, silicone, and
polypropylene.
3. What is the cost of goods completed and transferred out?
4. What is the cost of goods formed but not assembled?
5. What is the cost of goods assembled but not finished?
Required
17-47 Benchmarking, ethics. Amanda McNall is the corporate controller of Scott Quarry. Scott Quarry
operates 12 rock-crushing plants in Scott County, Kentucky, that process huge chunks of limestone rock
extracted from underground mines.
Given the competitive landscape for pricing, Scott’s managers pay close attention to costs. Each plant
uses a process-costing system, and at the end of every quarter, each plant manager submits a production
report and a production-cost report. The production report includes the plant manager’s estimate of the percentage of completion of the ending work in process as to direct materials and conversion costs, as well as
the level of processed limestone inventory. McNall uses these estimates to compute the cost per equivalent
unit of work done for each input for the quarter. Plants are ranked from 1 to 12, and the three plants with
the lowest cost per equivalent unit for direct materials and conversion costs are each given a bonus and
recognized in the company newsletter.
McNall has been pleased with the success of her benchmarking program. However, she has recently
received anonymous e-mails that two plant managers have been manipulating their monthly estimates of
percentage of completion in an attempt to obtain the bonus.
1. Why and how might managers manipulate their monthly estimates of percentage of completion and
level of inventory?
2. McNall’s first reaction is to contact each plant controller and discuss the problem raised by the anonymous communications. Is that a good idea?
3. Assume that each plant controller’s primary reporting responsibility is to the plant manager and that
each plant controller receives the phone call from McNall mentioned in requirement 2. What is the
ethical responsibility of each plant controller (a) to Amanda McNall and (b) to Scott Quarry in relation
to the equivalent-unit and inventory information each plant provides?
4. How might McNall learn whether the data provided by particular plants are being manipulated?
Required
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18
Spoilage, Rework,
and Scrap
Learning Objectives
1
Understand the definitions of
spoilage, rework, and scrap
2
Identify the differences between
normal and abnormal spoilage
3
Account for spoilage in process
costing using the weightedaverage method and the first-in,
first-out (FIFO) method
4
5
6
7
Account for spoilage at various
stages of completion in process
costing
Account for spoilage in job costing
Account for rework in job costing
Account for scrap
When a product doesn’t meet specification but is subsequently
repaired and sold, it is called rework.
Companies try to minimize rework, as well as spoilage and scrap, during production.
Why? Because higher-than-normal levels of spoilage and scrap can have a significant
negative effect on a company’s profits. Rework can also cause companies to incur
substantial costs over many years, as the following article about Honda shows.
AirbAg rework SinkS HondA’S
record YeAr1
In 2015, Japanese automobile manufacturer Honda Motor Corp. set many company
sales records. In the United States, Honda sold a record 1.6 million cars. In China, it
sold 1 million cars in a year for the first time. Despite these record sales Honda’s profits
were down sharply. Why? Huge rework costs associated with recalling millions of cars
with defective airbags.
By the end of 2015, Honda was forced to recall more than 25 million of its
vehicles worldwide. Each of the vehicles had potentially defective airbags supplied
by Takata Corporation. Airbag inflators use an
explosive propellant similar to gunpowder to deploy
airbags in the event of a crash. Because of defects
in the manufacturing process, the propellant in
millions of Takata inflators can degrade over time
and explode at random. When that happens, the
airbag’s metal housing can rupture, sending lethal
shrapnel into the car. Ten deaths were linked to
failed Takata airbags.
With so many vehicles requiring rework, Honda’s
recall costs soared. Honda spent $2.6 billion on
recall-related expenses, including rework costs
associated with replacing defective Takata airbags,
compensation for Honda dealers, and legal expenses. Billions of dollars in future rework costs are
anticipated, as well. As a result, Honda announced
that it would no longer use Takata airbags for its new
vehicles under development.
Sergio Azenha/Alamy Stock Photo
1
718
Sources: Yoko Kubota, “Honda Motor Profit Slides on Recall Costs,” The Wall Street Journal (January 29, 2016);
Yoko Kubota, “Honda Air-Bag Recall Costs Take a Toll,” The Wall Street Journal (November 4, 2015); Hiroku
Tabuchi, “Honda Expands Recall of Takata Airbags as Its Longtime Partner’s Crisis Widens,” The New York Times
(February 3, 2016).
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For Honda, Takata, and other companies, the costs of producing defective output can be
enormous. Accordingly, companies are increasingly focused on improving the quality of, and
reducing defects in, their products, services, and activities. A rate of defects regarded as normal
in the past is no longer tolerable, and companies strive for ongoing improvements in quality. Firms
in industries as varied as construction (Skanska), aeronautics (Lockheed Martin), product development software (Dassault Systemes), and specialty food (Tate & Lyle) have set zero-defects goals.
Reducing defects, and the waste associated with them, is also a key element of the sustainability
programs now in place at many enlightened organizations and government bodies.
In this chapter, we focus on three types of costs that arise as a result of defects—spoilage,
rework, and scrap—and ways to account for them. We also describe how to determine (1) the cost
of products, (2) cost of goods sold, and (3) inventory values when spoilage, rework, and scrap occur.
Defining Spoilage, Rework, and Scrap
The following terms used in this chapter may seem familiar to you, but be sure you understand
them in the context of management accounting.
Spoilage refers to units of production—whether fully or partially completed—that do
not meet the specifications required by customers for good units and are discarded or sold
at reduced prices. Some examples of spoilage are defective shirts, jeans, shoes, and carpeting
sold as “seconds” and defective aluminum cans sold to aluminum manufacturers for remelting to produce other aluminum products.
Rework refers to units of production that do not meet the specifications required by customers but that are subsequently repaired and sold as good finished units. For example, defective units of products (such as smartphones, tablets, and laptops) detected during or after the
production process but before the units are shipped to customers can sometimes be reworked
and sold as good products.
Scrap is residual material that results from manufacturing a product. Examples are short
lengths from woodworking operations, edges from plastic molding operations, and frayed
cloth and end cuts from suit-making operations. Scrap can sometimes be sold for relatively
small amounts. In that sense, scrap is similar to byproducts, which we studied in Chapter 16.
The difference is that scrap arises as a residual from the manufacturing process and is not a
product targeted for manufacture or sale by the firm.
A certain amount of spoilage, rework, or scrap is inherent in many production processes.
For example, semiconductor manufacturing is so complex and delicate that some spoiled
units are inevitable due to dust adhering to wafers in the wafer production process and crystal
defects in the silicon substrate. Usually, the spoiled units cannot be reworked. In the manufacture of high-precision machine tools, spoiled units can be reworked to meet standards,
but only at a considerable cost. And in the mining industry, companies process ore that contains varying amounts of valuable metals and rock. Some amount of rock, which is scrap, is
inevitable.
Learning
Objective
1
Understand the definitions
of spoilage,
. . . unacceptable units of
production
rework,
. . . unacceptable units of
production subsequently
repaired
and scrap
. . . leftover material
DecisiOn
Point
What are spoilage, rework,
and scrap?
Two Types of Spoilage
Accounting for spoilage includes determining the magnitude of spoilage costs and distinguishing between the costs of normal and abnormal spoilage.2 To manage, control, and reduce
spoilage costs, companies need to highlight them, not bury them as an unidentified part of the
costs of good units manufactured.
To illustrate normal and abnormal spoilage, consider Mendoza Plastics, which uses
plastic injection molding to make casings for the iMac desktop computer. In January
2017, Mendoza incurs costs of $3,075,000 to produce 20,500 units. Of these 20,500 units,
20,000 are good units and 500 are spoiled units. Mendoza has no beginning inventory and
no ending inventory that month. Of the 500 spoiled units, 400 units are spoiled because
2
The helpful suggestions of Samuel Laimon, University of Saskatchewan, are gratefully acknowledged.
Learning
Objective
2
Identify the differences
between normal spoilage
. . . spoilage inherent in an
efficient production process
and abnormal spoilage
. . . spoilage that would
not arise under efficient
operation
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Chapter 18
Spoilage, rework, and SCrap
the injection molding machines are unable to manufacture good casings 100% of the
time. That is, these units are spoiled even though the machines were run carefully and
efficiently. The remaining 100 units are spoiled because of machine breakdowns and operator errors.
Normal Spoilage
Normal spoilage is spoilage inherent in a particular production process. In particular, it arises
even when the process is carried out in an efficient manner. The 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 defective units. For this reason, normal spoilage
costs are inventoried, that is, they are included in the cost of the good units completed. The
following calculations show how Mendoza Plastics accounts for the cost of the 400 units’ normal spoilage:
Manufacturing cost per unit, $3,075,000 , 20,500 units = $150
Manufacturing costs of good units alone, $150 per unit * 20,000 units
Normal spoilage costs, $150 per unit * 400 units
Manufacturing costs of good units completed (includes normal spoilage)
$3,060,000
Manufacturing cost per good unit =
= $153
20,000 units
$3,000,000
60,000
$3,060,000
Normal spoilage rates are computed by dividing the units of normal spoilage by total good
units completed, not total actual units started in production. At Mendoza Plastics, the normal
spoilage rate is therefore computed as 400 , 20,000 = 2%. There is a tradeoff between the
speed of production and the normal spoilage rate. Managers make a conscious decision about
how many units to produce per hour with the understanding that, at the chosen rate, a certain
level of spoilage is unavoidable.
Abnormal Spoilage
DecisiOn
Point
What is the distinction
between normal and
abnormal spoilage?
Learning
Objective
3
Account for spoilage in
process costing using the
weighted-average method
. . . spoilage cost based on
total costs and equivalent
units completed to date
and the first-in, first-out
(FIFO) method
. . . spoilage cost based on
costs of current period and
equivalent units of work
done in current period
Abnormal spoilage is spoilage that is not inherent in a particular production process and
would not arise under efficient operating conditions. At Mendoza, the 100 units spoiled due
to machine breakdowns and operator errors are abnormal spoilage. (If Mendoza had set
100% good units as its goal, then all 500 units of spoilage would be considered abnormal.)
Abnormal spoilage is usually regarded as avoidable and controllable. Line operators and
other plant personnel generally can decrease or eliminate abnormal spoilage by identifying the reasons for machine breakdowns, operator errors, and so forth, and by taking steps
to prevent their recurrence. To highlight the effect of abnormal spoilage costs, companies
calculate the units of abnormal spoilage and record the cost in the Loss from Abnormal
Spoilage account, which appears as a separate line item in the income statement. That is,
unlike normal spoilage, the costs of abnormal spoilage are not considered inventoriable and
are written off as a period expense. At Mendoza, the loss from abnormal spoilage is $15,000
($150 per unit * 100 units).
Issues about accounting for spoilage arise in both process-costing and job-costing systems. We discuss both instances next, beginning with spoilage when process costing is used.
Spoilage in Process Costing Using
Weighted-Average and FIFO
How do process-costing systems account for spoiled units? We have already said that units
of abnormal spoilage should be counted and recorded separately in a Loss from Abnormal
Spoilage account. But what about units of normal spoilage? The correct method is to count
these units when computing both physical and equivalent output units in a process-costing
system. The following example illustrates this approach.
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Spoilage in proCeSS CoSting USing weighted-average and FiFo
721
Count All Spoilage
Example 1: Chipmakers, Inc., manufactures computer chips for television sets.
All direct materials are added at the beginning of the production process. To
highlight issues that arise with normal spoilage, we assume there’s no beginning inventory and focus only on the direct materials costs. The following data
are for May 2017.
$
%
Work in process, beginning inventory (May 1)
Started during May
Good units completed and transferred out during May
Units spoiled (all normal spoilage)
Work in process, ending inventory (May 31)
Direct materials costs added in May
Physical
Units
0
10,000
5,000
1,000
4,000
&
Direct
Materials
$270,000
Spoilage is detected upon completion of the process and has zero net disposal value.
An inspection point is the stage of the production process at which products are
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. As
a result, the spoiled units in our example are assumed to be 100% complete for direct
materials.
Exhibit 18-1 calculates and assigns the cost of the direct materials used to produce both
good units and units of normal spoilage. Overall, Chipmakers generated 10,000 equivalent
units of output: 5,000 equivalent units in good units completed (5,000 physical units * 100%),
4,000 units in ending work in process (4,000 physical units * 100%), and 1,000 equivalent
units in normal spoilage (1,000 physical units * 100%). Given total direct material costs
of $270,000 in May, this yields an equivalent-unit cost of $27. The total cost of good units
completed and transferred out, which includes the cost of normal spoilage, is then $162,000
exHibit 18-1
$
Costs to account for
Divide by equivalent units of output
Cost per equivalent unit of output
Assignment of costs:
Good units completed (5,000 units 3 $27 per unit)
Add normal spoilage (1,000 units 3 $27 per unit)
Total costs of good units completed and transferred out
Work in process, ending (4,000 units 3 $27 per unit)
Costs accounted for
%
Approach Counting
Spoiled Units When
Computing Output in
Equivalent Units
$270,000
410,000
$
27
$ 135,000
27,000
162,000
108,000
$ 270,000
Using Equivalent Units
to Account for the
Direct Materials Costs
of Good and Spoiled
Units for Chipmakers,
Inc., for May 2017
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Chapter 18
Spoilage, rework, and SCrap
(6,000 equivalent units * $27). The ending work in process is assigned a cost of $108,000
(4,000 equivalent units * $27).
Notice that the 4,000 units in ending work in process are not assigned any of the
costs of normal spoilage because they have not yet been inspected. Undoubtedly some of
the units in ending work in process will be found to be spoiled after they are completed
and inspected in the next accounting period. At that time, their costs will be assigned to
the good units completed in that period. Notice too that Exhibit 18-1 delineates the cost
of normal spoilage as $27,000. By highlighting the magnitude of this cost, the approach
helps to focus management’s attention on the potential economic benefits of reducing
spoilage.
Five-Step Procedure for Process Costing with Spoilage
Example 2: Anzio Company manufactures a recycling container in its forming
department. Direct materials are added at the beginning of the production
process. Conversion costs are added evenly during the production process. Some units of this product 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. That is, for every 10 good units
produced, there is 1 unit of normal spoilage. Summary data for July 2017 are
as follows:
$
Work in process, beginning inventory (July 1)
Degree of completion of beginning work in process
Started during July
Good units completed and transferred out during July
Work in process, ending inventory (July 31)
Degree of completion of ending work in process
Total costs added during July
Normal spoilage as a percentage of good units
Degree of completion of normal spoilage
Degree of completion of abnormal spoilage
%
&
Physical
Units
(1)
1,500
Direct
Materials
(2)
$12,000
100%
'
(
Conversion
Total
Costs
Costs
(3)
(4) 5 (2) 1 (3)
$ 21,000
$ 9,000
60%
8,500
7,000
2,000
100%
$76,500
50%
$89,100
100%
100%
100%
100%
$165,600
10%
We can slightly modify the five-step procedure for process costing used in Chapter 17 to include the costs of Anzio Company’s spoilage.
Step 1: Summarize the Flow of Physical Units of Output. Identify the number of units of
both normal and abnormal spoilage.
Good units
Total
Units in beginning
Units
Units in ending
= a
+
b - ° completed and +
¢
Spoilage
work@in@process inventory started
work@in@process inventory
transferred out
= (1,500 + 8,500) - (7,000 + 2,000)
= 10,000 - 9,000
= 1,000 units
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Spoilage in proCeSS CoSting USing weighted-average and FiFo
Recall that Anzio Company’s normal spoilage is 10% of good output. So, the number of units
of normal spoilage equals 10% of the 7,000 units of good output, or 700 units. With this information, we can then calculate the number of units of abnormal spoilage:
Abnormal spoilage = Total spoilage - Normal spoilage
= 1,000 units - 700 units
= 300 units
Step 2: Compute the Output in Terms of Equivalent Units. Managers compute the equivalent units for spoilage the same way they compute equivalent units for good units. All spoiled
units are included in the computation of output units. Because Anzio’s inspection point is at
the completion of production, the same amount of work will have been done on each spoiled
and each completed good unit.
Step 3: Summarize the Total Costs to Account For. The total costs to account for are all the
costs debited to Work in Process. The details for this step are similar to Step 3 in Chapter 17.
Step 4: Compute the Cost per Equivalent Unit. This step is similar to Step 4 in Chapter 17.
Step 5: Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Workin-Process Inventory. This step now includes computing of the cost of spoiled units as well as
the cost of good units.
We illustrate these five steps of process costing for the weighted-average and FIFO methods
next. The standard-costing method is illustrated in the appendix to this chapter.
Weighted-Average Method and Spoilage
Exhibit 18-2, Panel A, presents Steps 1 and 2 to calculate the equivalent units of work
done to date and includes calculations of equivalent units of normal and abnormal spoilage. Exhibit 18-2, Panel B, presents Steps 3, 4, and 5 (together called the production-cost
worksheet).
In Step 3, managers summarize the total costs to account for. In Step 4, they calculate
the cost per equivalent unit using the weighted-average method. Note how, for each cost category, the costs of beginning work in process and the costs of work done in the current period
are totaled and divided by equivalent units of all work done to date to calculate the weightedaverage cost per equivalent unit. In the final step, managers assign the total costs to completed
units, normal and abnormal spoiled units, and ending inventory by multiplying the equivalent
units calculated in Step 2 by the cost per equivalent unit calculated in Step 4. Also note that
the $13,825 costs of normal spoilage are added to the costs of the good units completed and
transferred out.
Cost per good unit
Total costs transferred out (including normal spoilage)
completed and transferred =
Number of good units produced
out of the process
= $152,075 , 7,000 good units = $21.725 per good unit
This amount is not equal to $19.75 per good unit, the sum of the $8.85 cost per equivalent unit of direct materials plus the $10.90 cost per equivalent unit of conversion costs.
That’s because the cost per good unit equals the sum of the direct materials and conversion costs per equivalent unit, which is $19.75, plus a share of normal spoilage, $1.975
($13,825 , 7,000 good units), for a total of $21.725 per good unit. The $5,925 costs of abnormal spoilage are charged to the Loss from Abnormal Spoilage account and do not appear
in the costs of good units.3
3
The actual costs of spoilage (and rework) are often greater than the costs recorded in the accounting system because the opportunity
costs of disruption of the production line, storage, and lost contribution margins are not recorded in accounting systems. Chapter 19
discusses these opportunity costs from the perspective of cost management.
723
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724
Chapter 18
exHibit 18-2
Spoilage, rework, and SCrap
Weighted-Average Method of Process Costing with Spoilage for the Forming Department
for July 2017
PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units
$
%
&
(Step 1)
Flow of Production
Work in process, beginning (given, p. 722)
Started during current period (given, p. 722)
To account for
Good units completed and transferred out during current period
b
c
Work in process, ending (given, p. 722)
(2,000 3 100%; 2,000 3 50%)
Accounted for
Equivalent units of work done to date
7,000
700
700
300
300
2,000
1,000
10,000
9,000
2,000
10,000
a
Normal spoilage is 10% of good units transferred out; 10% 3 7,000 5 700 units. Degree of completion of normal spoilage
in this department: direct materials, 100%; conversion costs, 100%.
b
Abnormal spoilage 5 Total spoilage ] Normal spoilage 5 1,000 ] 700 5 300 units. Degree of completion of abnormal spoilage
in this department: direct materials, 100%; conversion costs, 100%.
7,000
300
Abnormal Spoilage
(300 3 100%; 300 3 100%)
7,000
700
Normal Spoilage
(700 3 100%; 700 3 100%)
(
(Step 2)
Equivalent Units
Conversion
Direct
Costs
Materials
10,000
a
Physical
Units
1,500
8,500
'
c
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
PANEL B: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit,
and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory
(Step 3)
(Step 4)
(Step 5)
Work in process, beginning (given, p. 722)
Costs added in current period (given, p. 722)
Total costs to account for
Costs incurred to date
Divide by equivalent units of work done to date (Panel A)
Cost per equivalent unit
Assignment of costs:
Good units completed and transferred out (7,000 units):
Costs before adding normal spoilage
Total
Production
Costs
$ 21,000
165,600
$186,600
$88,500
410,000
$ 8.85
(A)
(B)
Work in process, ending (2,000 units)
(C)
(A) 1 (B) 1 (C) Total costs accounted for
d
$98,100
4 9,000
$ 10.90
(7,000d 3 $8.85) 1 (7,000d3 $10.90)
13,825
152,075
5,925
(700d 3 $8.85) 1 (700d 3 $10.90)
28,600
$186,600
1
1
1
Conversion
Costs
$ 9,000
89,100
$98,100
$138,250
Normal spoilage (700 units)
Total costs of good units completed and transferred out
Abnormal spoilage (300 units)
Direct
Materials
$12,000
76,500
$88,500
Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.
d
(300d 3 $8.85) 1 (300 3 $10.90)
d
(2,000 3 $8.85) 1 (1,000d3 $10.90)
$88,500
$98,100
1
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Spoilage in proCeSS CoSting USing weighted-average and FiFo
exHibit 18-3
725
First-In, First-Out (FIFO) Method of Process Costing with Spoilage for the
Forming Department for July 2017
PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units
$
%
&
'
(Step 1)
Flow of Production
Physical Units
1,500
8,500
Work in process, beginning (given, p. 722)
Started during current period (given, p. 722)
10,000
To account for
Good units completed and transferred out during current period
From beginning work in process a
[1,500 3 (100% – 100%); 1,500 3 (100% – 60%)]
Started and completed
(5,500 3 100%; 5,500 3 100%)
1,500
700
Abnormal Spoilaged
(300 3 100%; 300 3 100%)
300
Accounted for
Equivalent units of work in current period
0
600
5,500
5,500
700
700
300
300
2,000
1,000
8,500
8,100
5,500b
Normal Spoilagec
(700 3 100%; 700 3 100%)
Work in process, ending e (given, p. 722)
(2,000 3 100%; 2,000 3 50%)
(
(Step 2)
Equivalent Units
Direct Materials Conversion Costs
2,000
10,000
a
Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
b
7,000 physical units completed and transferred out minus 1,500 physical units completed and transferred out from beginning work-in-process inventory.
c
Normal spoilage is 10% of good units transferred out; 10% 3 7,000 5 700 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.
Abnormal spoilage 5 Total spoilage – Normal spoilage 5 1,000 – 700 5 300 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs,100%.
e
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
d
PANEL B: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed,
Spoiled Units, and Units in Ending Work-in-Process Inventory
Total Production Costs
Direct Materials
$ 21,000
165,600
$186,600
$ 12,000
76,500
$88,500
Conversion Costs
Work in proc ess, beginning (given, p. 722)
Costs added in current period (given, p. 722)
Total costs to account for
Costs added in current period
Divide by equivalent units of work done in current period (Panel A)
Cost per equivalent unit
Assignment of costs:
Good units completed and transferred out (7,000 units):
Work in process, beginning (1,500 units)
Costs added to beginning work in process in current period
Total from beginning inventory before normal spoilage
Started and completed before normal spoilage (5,500 units)
Normal spoilage (700 units)
(A)
(B)
(C)
Total costs of good units completed and transferred out
Abnormal spoilage (300 units)
Work in process, ending (2,000 units)
(Step 3)
(Step 4)
(Step 5)
(A) 1 (B) 1 (C)
Total costs accounted for
fEquivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.
1
1
1
$76,500
48,500
$
9
$ 21,000
6,600
27,600
110,000
14 ,000
$ 9,000
89,100
$ 98,100
$ 89,100
4 8,100
$
11
$9,000
$12,000
(0 f 3 $9)
1
(600 f 3 $11)
(5,500f 3 $9)
1
(5,500f 3 $11)
(700 3 $9)
1
(700f 3 $11)
(300f 3 $9)
1
(300f 3 $11)
f
151,600
6,000
29,000
(2,000 3 $9)
1
(1,000f 3 $11)
$186,600
$88,500
1
$98,100
f
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Chapter 18
Spoilage, rework, and SCrap
trY it!
Azure Textiles Company makes silk banners and uses the weighted-average method
18-1 of process costing. 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.
Work in process, July 1a
Started in July 2017
Good units completed and transferred out in July
Normal spoilage
Abnormal spoilage
Work in process, July 31b
Total costs added during July 2017
Physical Units
(Banners)
1,000
?
9,000
100
50
2,000
Direct
Materials
$ 1,423
Conversion
Costs
$ 1,110
$12,180
$27,750
a
Degree of completion: direct materials, 100%; conversion costs, 50%.
Degree of completion: direct materials, 100%; conversion costs, 30%.
b
Determine the equivalent units of work done in July, and calculate the cost of units completed and transferred out (including normal spoilage), the cost of abnormal spoilage,
and the cost of units in ending inventory.
FIFO Method and Spoilage
Exhibit 18-3, Panel A, presents Steps 1 and 2 using the FIFO method, which focuses on equivalent units of work done in the current period. Exhibit 18-3, Panel B, presents Steps 3, 4, and 5.
Note how when assigning costs, the FIFO method keeps the costs of the beginning work in
process separate and distinct from the costs of the work done in the current period. All spoilage costs are assumed to be related to units completed during the period, using the unit costs
of the current period.4
trY it!
18-2
Consider Azure Textiles Company again. With the same information for July 2017
as provided in Try It 18-1, redo the problem assuming Azure uses FIFO costing
instead.
Chapter 17 highlighted taxes, performance evaluation, and accounting-based covenants
as some of the elements managers must take into account when choosing between the FIFO
and weighted-average methods. It also stressed the importance of making careful estimates
of degrees of completion in order to avoid misstating operating income. All of these considerations apply equally well to the material in this chapter. In addition, a new issue that arises
with spoilage is that of estimating the normal spoilage percentage in an unbiased manner.
A supervisor who wishes to show better performance might categorize more of the spoilage
as normal, thereby reducing the amount that must be written off against income as the loss
from abnormal spoilage. Managers must stress the value of consistent and unbiased estimates
of completion and normal spoilage percentages and drive home the importance of pursuing
ethical actions and reporting the correct income figures, regardless of the short-term consequences of doing so.
4
To simplify calculations under FIFO, spoiled units are accounted for as if they were started in the current period. Although some of
the beginning work in process probably did spoil, all spoilage is treated as if it came from current production.
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inSpeCtion pointS and alloCating CoStS oF normal Spoilage
727
Journal Entries
The information from Panel B in Exhibits 18-2 and 18-3 supports the following journal entries
to transfer good units completed to finished goods and to recognize the loss from abnormal
spoilage.
Finished Goods
Work in Process—Forming
To record the transfer of good units completed in July.
Loss from Abnormal Spoilage
Work in Process—Forming
To record the abnormal spoilage detected in July.
Weighted-Average
152,075
152,075
DecisiOn
Point
FIFO
151,600
5,925
151,600
6,000
5,925
6,000
How do the weightedaverage and FIFO
methods of process
costing calculate the
costs of good units and
spoilage?
Inspection Points and Allocating Costs
of Normal Spoilage
Spoilage might occur at various stages of a production process, but it is typically detected
only at one or more inspection points. The cost of spoiled units equals all costs incurred in
producing them up to the point of inspection. When spoiled goods have a disposal value (for
example, carpeting sold as “seconds”), we compute a net cost of the spoilage by deducting the
disposal value from the costs of the spoiled goods.
The unit costs of normal and abnormal spoilage are the same when the two are detected
at the same inspection point. This is the case in our Anzio Company example, where inspection occurs only upon completion of the units. However, situations may arise when abnormal
spoilage is detected at a different point than normal spoilage. Consider shirt manufacturing.
Normal spoilage in the form of defective shirts is identified upon inspection at the end of the
production process. Now suppose a faulty machine causes many defective shirts to be produced at the halfway point of the production process. These defective shirts are abnormal
spoilage and occur at a different point in the production process than normal spoilage. Then
the per-unit cost of the abnormal spoilage, which is based on costs incurred up to the halfway
point of the production process, differs from the per-unit cost of normal spoilage, which is
based on costs incurred through the end of the production process.
The costs of abnormal spoilage are separately accounted for as losses of the accounting period in which they are detected. However, recall that normal spoilage costs are added
to the costs of good units, which raises an additional issue: Should normal spoilage costs be
allocated between completed units and ending work-in-process inventory? The common approach is to presume that normal spoilage occurs at the inspection point in the production
cycle and to allocate its cost over all units that have passed that point during the accounting
period.
Anzio Company inspects units only at the end of the production process. So, the units
in ending work-in-process inventory are not assigned any costs of normal spoilage. Suppose
Anzio were to inspect units at an earlier stage. Then, if the units in ending work in process
have passed the inspection point, the costs of normal spoilage would be allocated to units in
ending work in process as well as to completed units. For example, if the inspection point is
at the halfway point of production, then any ending work in process that is at least 50% complete would be allocated a full measure of the normal spoilage costs, and those spoilage costs
would be calculated on the basis of all costs incurred up to the inspection point. However,
if the ending work-in-process inventory is less than 50% complete, no normal spoilage costs
would be allocated to it.
To better understand these issues, assume Anzio Company inspects units at various stages
in the production process. How does this affect the amount of normal and abnormal spoilage?
As before, consider the forming department, and recall that direct materials are added at the
start of production, whereas conversion costs are added evenly during the process.
Consider three different cases: Inspection occurs at (1) the 20%, (2) the 55%, or (3) the
100% completion stage. The last option is the one we have analyzed so far. Assume that
Learning
Objective
4
Account for spoilage
at various stages of
completion in process
costing
. . . spoilage costs vary
based on the point at which
inspection is carried out
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Chapter 18
Spoilage, rework, and SCrap
normal spoilage is 10% of the good units passing inspection. A total of 1,000 units are spoiled
in all three cases. Normal spoilage is computed on the basis of the number of good units that
pass the inspection point during the current period. The following data are for July 2017.
Note how the number of units of normal and abnormal spoilage changes depending on when
inspection occurs.
%
$
&
'
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
Flow of Production
Work in process, beginninga
Started during July
To account for
Good units completed and transferred out
(10,000 ] 1,000 spoiled ] 2,000 ending)
Normal Spoilage
Abnormal Spoilage (1,000 ] normal spoilage)
Work in process, endingb
Accounted for
7,000
750c
250
2,000
10,000
7,000
550d
450
2,000
10,000
7,000
700e
300
2,000
10,000
a
b
Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
c
10% 3 (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, it passed the inspection point in the previous period.
d
10% 3 (8,500 units started ] 1,000 units spoiled ] 2,000 units in ending work in process). Both beginning and
ending work in process are excluded since neither was inspected this period.
e
10% 3 7,000, because 7,000 units are fully completed and inspected in the current period.
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.
0%
20%
50% 55% 60%
100%
1,500 units from beginning work in process
5,500 units started and completed
Work done on 2,000 units in ending work in process
To see the number of units passing each inspection point, consider in the diagram
the vertical lines at the 20%, 55%, and 100% inspection points. Note that the vertical
line at 20% crosses two horizontal lines—5,500 good units started and completed and
2,000 units in ending work in process—for a total of 7,500 good units. (The 20% vertical line does not cross the line representing work done on the 1,500 good units completed
from beginning work in process because these units are already 60% complete at the start
of the period and, hence, are not inspected this period.) Normal spoilage equals 10% of
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inSpeCtion pointS and alloCating CoStS oF normal Spoilage
7,500 = 750 units. On the other hand, the vertical line at the 55% point crosses just the second horizontal line, indicating that only 5,500 good units pass this point. Normal spoilage
in this case is 10% of 5,500 = 550 units. At the 100% point, the normal spoilage is 10% of
7,000 (1,500 + 5,500) good units = 700 units.
Exhibit 18-4 shows how equivalent units are computed under the weighted-average
method if units are inspected at the 20% completion stage. The calculations depend on the
direct materials and conversion costs incurred to get the units to this inspection point. The
spoiled units have 100% of their direct materials costs and 20% of their conversion costs.
Because the ending work-in-process inventory has passed the inspection point, these units
are assigned the normal spoilage costs, just like the units that have been completed and
transferred out. For example, the conversion costs of units completed and transferred out include the conversion costs for 7,000 good units produced plus 20% * (10% * 5,500) = 110
equivalent units of normal spoilage. We multiply by 20% to obtain the equivalent units of
normal spoilage because the conversion costs are only 20% complete at the inspection point.
The conversion costs of the ending work-in-process inventory include the conversion costs
of 50% of 2,000 = 1,000 equivalent good units plus 20% * (10% * 2,000) = 40 equivalent
units of normal spoilage. Thus, the equivalent units of normal spoilage accounted for are
110 equivalent units related to the units completed and transferred out plus 40 equivalent
units related to the units in ending work in process, for a total of 150 equivalent units, as
Exhibit 18-4 shows.
Early inspections can help prevent any further costs being wasted on units that are already spoiled. For example, suppose the units can be inspected when they are 70% complete
rather than 100% complete. If the spoilage occurs prior to the 70% point, a company can
avoid incurring the final 30% of conversion costs on the spoiled units. While not applicable
in the Anzio example, more generally a company can also save on the packaging or other
direct materials that are added after the 70% stage. The downside to conducting inspections
at too early a stage is that units spoiled at later stages of the process may go undetected. It is
for these reasons that firms often conduct multiple inspections and also empower workers to
identify and resolve defects on a timely basis.
729
DecisiOn
Point
How does inspection
at various stages of
completion affect the
amount of normal and
abnormal spoilage?
exHibit 18-4
$
%
(Step 1)
Flow of Production
Work in process, beginning a
Started during current period
To account for
Good units completed and transferred out
Normal Spoilage
(750 3 100%; 750 3 20%)
Abnormal Spoilage
(250 3 100%; 250 3 20%)
Work in process, endingb
(2,000 3 100%; 2,000 3 50%)
Accounted for
Equivalent units of work done to date
Physical
Units
1,500
8,500
10,000
7,000
750
&
(Step 2)
Equivalent Units
Direct
Conversion
Materials
Costs
7,000
7,000
750
150
250
50
2,000
1,000
10,000
8,200
250
2,000
10,000
a
b
'
Degree of completion: direct materials, 100%; conversion costs, 60%.
Degree of completion: direct materials, 100%; conversion costs, 50%.
Computing Equivalent
Units with Spoilage Using
the Weighted-Average
Method of Process
Costing with Inspection
at 20% of Completion for
the Forming Department
for July 2017
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Chapter 18
Spoilage, rework, and SCrap
Normal spoilage is 6% of the good units passing inspection in a forging process. In
18-3 March, a total of 10,000 units were spoiled. Other data include units started during
March, 120,000; work in process, beginning, 14,000 units (20% completed for conversion costs); and work in process, ending, 11,000 units (70% completed for conversion costs).
trY it!
Compute the normal and abnormal spoilage in units, assuming the inspection point is
at (a) the 15% stage of completion, (b) the 40% stage of completion, and (c) the 100%
stage of completion.
Job Costing and Spoilage
Learning
Objective
5
Account for spoilage in job
costing
. . . normal spoilage assigned
directly or indirectly to job;
abnormal spoilage written
off as a loss of the period
The concepts of normal and abnormal spoilage also apply to job-costing systems. Companies
attempt to identify abnormal spoilage separately so they can work to eliminate it altogether.
The costs of abnormal spoilage are not considered to be inventoriable costs and are written
off as costs of the accounting period in which the abnormal spoilage is detected. Normal
spoilage costs in job-costing systems—as in process-costing systems—are inventoriable costs,
although increasingly companies are tolerating only small amounts of spoilage as normal.
When assigning costs, job-costing systems generally distinguish normal spoilage attributable
to a specific job from normal spoilage common to all jobs.
We describe accounting for spoilage in job costing using the following example.
Example 3: In the Hull Machine Shop, 5 aircraft parts out of a job lot of 50
aircraft parts are spoiled. The 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.
Our presentation here and in subsequent sections focuses on how the $2,000 cost per part is
accounted for.
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. The journal entry to recognize the disposal value is as follows (items in parentheses indicate subsidiary ledger postings):
Materials Control (spoiled goods at current net disposal value): 5 units * $600 per unit
Work-in-Process Control (specific job): 5 units * $600 per unit
3,000
3,000
Note that the Work-in-Process Control (for the specific job) has already been debited
(charged) $10,000 for the spoiled parts (5 spoiled parts * $2,000 per part). So, the net cost
of the normal spoilage is $7,000 ($10,000 - $3,000), which is an additional cost of the 45
(50 - 5) good units produced. Therefore, total cost of the 45 good units is $97,000: $90,000
(45 units * $2,000 per unit) incurred to produce the good units plus the $7,000 net cost of
normal spoilage. Cost per good unit is $2,155.56 ($97,000 , 45 good units).
Normal Spoilage Common to All Jobs
In some cases, spoilage may be considered a normal characteristic of the production process.
The spoilage inherent in production will, of course, occur when a specific job is being worked
on. However, the spoilage is not attributable to, and hence is not charged directly to, the specific job. Instead, the spoilage is allocated indirectly to the job as manufacturing overhead
because the spoilage is common to all jobs. The journal entry is as follows:
Materials Control (spoiled goods at current disposal value): 5 units * $600 per unit
Manufacturing Overhead Control (normal spoilage): ($10,000 - $3,000)
Work-in-Process Control (specific job): 5 units * $2,000 per unit
3,000
7,000
10,000
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731
When normal spoilage is common to all jobs, the budgeted manufacturing overhead rate includes a provision for the normal spoilage cost. The normal spoilage cost is spread, through
overhead allocation, over all jobs rather than being allocated to a specific job.5 For example,
if Hull produced 140 good units from all jobs in a given month, the $7,000 of normal spoilage
overhead costs would be allocated at the rate of $50 per good unit ($7,000 , 140 good units).
Normal spoilage overhead costs allocated to the 45 good units in the current job would
be $2,250 ($50 * 45 good units). The total cost of the 45 good units is $92,250: $90,000
(45 units * $2,000 per unit) incurred to produce the good units plus $2,250 of normal spoilage overhead costs. The cost per good unit is $2,050 ($92,250 , 45 good units).
Abnormal Spoilage
If the spoilage is abnormal, the net loss is charged to the Loss from Abnormal Spoilage account.
Unlike normal spoilage costs, abnormal spoilage costs are not included as a part of the cost of
good units produced. The total cost of the 45 good units is $90,000 (45 units * $2,000 per unit).
The cost per good unit is $2,000 ($90,000 , 45 good units).
Materials Control (spoiled goods at current disposal value): 5 units * $600 per unit
Loss from Abnormal Spoilage ($10,000 - $3,000)
Work-in-Process Control (specific job): 5 units * $2,000 per unit
3,000
7,000
10,000
Even though, for external reporting purposes, abnormal spoilage costs are written off in the
accounting period and are not linked to specific jobs or units, companies often identify the
particular reasons for the abnormal spoilage and, when appropriate, link it with specific jobs
or units for cost management purposes.
The accounting treatment described above highlights the potential impact of misclassifying the nature of the spoilage. Normal spoilage costs are inventoriable and are added to the
cost of good units produced, while abnormal spoilage costs are expensed in the accounting
period in which they occur. So, when inventories are present, classifying spoilage as normal
rather than abnormal results in an increase in current operating income. In the above example, if the 45 parts remain unsold at the end of the period, such misclassification would boost
income for that period by $7,000. As with our discussion of completion percentages, it is important for managers to verify that spoilage rates and spoilage categories are not manipulated
by department supervisors for short-term benefits.
DecisiOn
Point
How do job-costing
systems account for
spoilage?
Job Costing and Rework
Rework refers to 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.
Consider the Hull Machine Shop data in Example 3 on page 730. 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)
Materials Control
Wages Payable Control
Manufacturing Overhead Allocated
10,000
4,000
4,000
2,000
Assume the rework costs equal $3,800 ($800 in direct materials, $2,000 in direct manufacturing
labor, and $1,000 in manufacturing overhead).
5
Note that costs already assigned to products are charged back to Manufacturing Overhead Control, which generally accumulates
only costs incurred, not both costs incurred and costs already assigned.
Learning
Objective
6
Account for rework in job
costing
. . . normal rework assigned directly or indirectly to job; abnormal
rework written off as a
loss of the period
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Chapter 18
Spoilage, rework, and SCrap
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
The costs of the rework when it is normal and not attributable to a specific job 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 charged to a loss account.
Loss from Abnormal Rework
Materials Control
Wages Payable Control
Manufacturing Overhead Allocated
DecisiOn
Point
How do job-costing
systems account for
rework?
trY it!
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 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.
Avid Corporation manufactures a sophisticated controller that is compatible with a
18-4 variety of gaming consoles. Excluding rework costs, the cost of manufacturing one
controller is $220. This consists of $120 in direct materials, $24 in direct manufacturing labor, and $76 in manufacturing overhead. Maintaining a reputation for quality
is critical to Avid. Any defective units identified at the inspection point are sent back
for rework. It costs Avid $72 to rework each defective controller, including $24 in direct
materials, $18 in direct manufacturing labor, and $30 in manufacturing overhead.
In August 2017, Avid manufactured 1,000 controllers, 80 of which required rework.
Of these 80 controllers, 50 were considered normal rework common to all jobs and the
other 30 were considered abnormal rework.
a. Prepare journal entries to record the accounting for both the normal and abnormal
rework.
b. What were the total rework costs of controllers in August 2017?
c. Suppose instead that the normal rework is attributable entirely to Job #9, for 200
controllers intended for Australia. In this case, what are the total and unit costs of
the good units produced for that job in August 2017? Prepare journal entries for the
manufacture of the 200 controllers, as well as the normal rework costs.
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aCCoUnting For SCrap
733
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. Scrap is either sold or disposed of quickly or it is stored for later sale,
disposal, or reuse.
To carefully track their scrap, many companies maintain a distinct account for scrap
costs somewhere in their accounting system. The issues here are similar to the issues in
Chapter 16 regarding the accounting for byproducts:
■
■
When should the value of scrap be recognized in the accounting records—at the time
scrap is produced or at the time scrap is sold?
How should the revenues from scrap be accounted for?
To illustrate, 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 the scrap is immaterial, it is simplest to record the physical quantity of scrap returned to the storeroom and to regard the revenues from the sale of scrap as a
separate line item in the income statement. The only journal entry is as follows:
Sale of scrap:
Cash or Accounts Receivable
Scrap Revenues
900
900
When the dollar amount of the scrap is material and it 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
Job-costing systems sometimes trace scrap revenues to the jobs that yielded the scrap. This
method is used only when the tracing can be done in an economically feasible way. For example,
the Hull Machine Shop and its customers, such as the U.S. Department of Defense, may reach an
agreement that provides for charging specific jobs with all rework or spoilage costs and then crediting these jobs with all scrap revenues that arise from the jobs. The journal entry is as follows:
Scrap returned to storeroom:
Sale of scrap:
No journal entry.
[Notation of quantity received and related job
entered in the inventory record]
Cash or Accounts Receivable
Work-in-Process Control
Posting made to specific job cost record.
900
900
Learning
Objective
7
Account for scrap
. . . reduces cost of job
either at time of sale or at
time of production
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Chapter 18
Spoilage, rework, and SCrap
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.
Scrap Common to All Jobs
The journal entry in this case is as follows:
Scrap returned to storeroom:
Sale of scrap:
No journal entry.
[Notation of quantity received and related job
entered in the inventory record]
Cash or Accounts Receivable
900
Manufacturing Overhead Control
900
Posting made to subsidiary ledger—“Sales of
Scrap” column on department cost record.
Because the scrap is not linked with any particular job or product, all products bear its costs
without any credit for scrap revenues except in an indirect manner: The expected scrap revenues are considered when setting the budgeted manufacturing overhead rate. Thus, the budgeted overhead rate is lower than it would be otherwise. 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 the 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 selling scrap until its market price is attractive. Volatile price fluctuations are typical for scrap metal. In these cases, it’s not easy to determine a “reasonable
inventory value.”
Scrap Attributable to a Specific Job
The journal entry in the Hull example is as follows:
Scrap returned to storeroom:
Materials Control
Work-in-Process Control
900
900
Scrap Common to All Jobs
The journal entry in this case is as follows:
Scrap returned to storeroom:
Materials Control
Manufacturing Overhead Control
900
900
Notice 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
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aCCoUnting For SCrap
cOncepts
in actiOn
735
Nestlé’s Journey to Zero Waste
for Disposal
Almost one third of global food production is either wasted or lost every
year. Food waste not only generates excess greenhouse gas emissions and
wastes water, but it also negatively affects farmer income and the availability and cost of food worldwide.
Many food and beverage companies around the world are addressing this growing problem. In 2015, Nestlé pledged that all of its production sites worldwide would generate zero waste for disposal by 2020.
That is, no waste will go to a landfill or be incinerated without energy
being recovered from the process beforehand.
As part of this process, Nestlé is focused on reusing scraps and
Bob Pardue—Signs/Alamy Stock Photo
byproducts created during its food manufacturing processes. The company
already recovers 91% of the materials that arise from manufacturing. Examples of recovery that increase sustainability
include the following:
■
Composting: Nestlé’s Shimada factory in Japan recycles some of the coffee grounds produced during the coffee manufacturing process by fermenting them and turning them into soil, which is donated to local parks and schools.
■
Incineration with energy recovery: In 22 Nescafé factories, Nestlé uses the spent coffee grounds resulting from the manufacturing process as a source of renewable energy.
■
Animal feed: Also in Japan, Nestlé’s zero waste KitKat factory in Kasumigaura turns all its food waste into animal feed,
sending it to local farms.
With 468 factories in 86 countries, Nestlé’s zero waste for disposal pledge will require a significant effort to avoid food
waste and improve efficiency throughout its supply chain. That said, the company has already reduced its total waste for
disposal by 62% since 2005 and is committed to further improvement.
Sources: Nestlé SA, “Waste and recovery” (http://www.nestle.com/csv/environmental-sustainability/product-life-cycle/waste-and-recovery), accessed
April 2016; “Nestlé pledges to reduce food loss and waste,” Nestlé SA press release, Vevey, Switzerland, May 12, 2015 (http://www.nestle.com/media/
news/nestle-pledges-to-reduce-food-loss-and-waste).
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:
Reuse of scrap:
Materials Control
Manufacturing Overhead Control
Work-in-Process Control
Materials Control
900
900
900
900
Accounting for scrap under process costing is similar to accounting under job costing when
scrap is common to all jobs. That’s because the scrap in process costing is common to the
manufacture of masses of identical or similar units.
Managers focus their attention on ways to reduce scrap and to use it more profitably,
especially when the cost of scrap is high. For example, General Motors has redesigned its
plastic injection molding processes to reduce the scrap plastic that must be broken away from
its molded products. General Motors also regrinds and reuses the plastic scrap as direct material, saving substantial input costs. Concepts in Action: Nestlé’s Journey to Zero Waste for
Disposal shows how a firm that is deeply committed to principles of environmental sustainability minimizes the waste and scrap from its processes.
DecisiOn
Point
How is scrap accounted
for?
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Chapter 18
Spoilage, rework, and SCrap
Problem for Self-StudY
Burlington Textiles has some spoiled goods that had an assigned cost of $40,000 and zero net
disposal value.
Prepare a journal entry for each of the following conditions under (a) process costing (department A) and (b) job costing:
Required
1. Abnormal spoilage of $40,000
2. Normal spoilage of $40,000 regarded as common to all operations
3. Normal spoilage of $40,000 regarded as attributable to specifications of a particular job
Solution
(a) Process Costing
1. Loss from Abnormal Spoilage
Work in Process—Dept. A
40,000
(b) Job Costing
Loss from Abnormal Spoilage 40,000
40,000
Work-in-Process Control
40,000
(specific job)
40,000
Manufacturing Overhead
Control
Work-in-Process Control
(specific job)
40,000
2. No entry until units are completed
and transferred out. Then the normal
spoilage costs are transferred as
part of the cost of good units.
Work in Process—Dept. B
40,000
Work in Process—Dept. A
40,000
3. Not applicable
No entry. Normal spoilage
cost remains in
Work-in-Process Control
(specific job)
DecisiOn PointS
The following question-and-answer format summarizes the chapter’s learning objectives. Each
decision presents a key question related to a learning objective. The guidelines are the answer
to that question.
Decision
1. What are spoilage, rework, and scrap?
2. What is the distinction between normal and
abnormal spoilage?
Guidelines
Spoilage refers to units of production that do not meet the specifications required by customers for good units and that are discarded
or sold at reduced prices. Spoilage is generally divided into normal
spoilage, which is inherent to a particular production process, and
abnormal spoilage, which arises because of operational inefficiency.
Rework refers to unacceptable units that are subsequently repaired
and sold as acceptable finished goods. 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.
Normal spoilage is inherent in a particular production process
and arises when the process is done in an efficient manner. Abnormal spoilage, on the other hand, is not inherent in a particular
production process and would not arise under efficient operating
conditions. Abnormal spoilage is usually regarded as avoidable and
controllable.
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appendix
Decision
3. How do the weighted-average and FIFO methods of process costing calculate the costs of
good units and spoilage?
737
Guidelines
The weighted-average method combines the costs of beginning
inventory with the costs of the current period when determining
the costs of good units, which include normal spoilage, and the
costs of abnormal spoilage, which are written off as a loss of the
accounting period.
The FIFO method keeps the costs of beginning inventory separate
from the costs of the current period when determining the costs of
good units (which include normal spoilage) and the costs of abnormal
spoilage, which are written off as a loss of the accounting period.
4. How does inspecting at various stages of
completion affect the amount of normal and
abnormal spoilage?
The cost of spoiled units is assumed to equal all costs incurred in
producing spoiled units up to the point of inspection. Spoilage
costs therefore vary based on different inspection points.
5. How do job-costing systems account for
spoilage?
Normal spoilage specific to a job is assigned to that job or,
when common to all jobs, is allocated as part of manufacturing
overhead. The cost of abnormal spoilage is written off as a loss in
the accounting period.
6. How do job-costing systems account for
rework?
Normal rework specific to a job is assigned to that job or, when
common to all jobs, is allocated as part of manufacturing
overhead. Cost of abnormal rework is written off as a loss of the
accounting period.
7. How is scrap accounted for?
Scrap is recognized in a firm’s accounting records either at the
time of its sale or at the time of its production. If the scrap is
immaterial, it is recognized as revenue when it’s sold. If it’s not
immaterial, the net realizable value of the scrap when it’s sold
reduces the cost of a specific job or, when common to all jobs,
reduces Manufacturing Overhead Control.
APPendix
Standard-Costing Method and Spoilage
The standard-costing method simplifies the computations for normal and abnormal spoilage.
To illustrate, we return to the Anzio Company example in the chapter. Suppose Anzio develops
the following standard costs per unit for work done in the forming department in July 2017:
Direct materials
Conversion costs
Total manufacturing cost
$ 8.50
10.50
$19.00
Assume the same standard costs per unit also apply to the beginning inventory: 1,500
(1,500 * 100%) equivalent units of direct materials and 900 (1,500 * 60%) equivalent units
of conversion costs. Hence, the beginning inventory at standard costs is as follows:
Direct materials, 1,500 units * $8.50 per unit
Conversion costs, 900 units * $10.50 per unit
Total manufacturing costs
$12,750
9,450
$22,200
Exhibit 18-5, Panel A, presents Steps 1 and 2 for calculating physical and equivalent units.
These steps are the same as for the FIFO method described in Exhibit 18-3. Exhibit 18-5,
Panel B, presents Steps 3, 4, and 5.
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Chapter 18
Spoilage, rework, and SCrap
Standard-Costing Method of Process Costing with Spoilage for the Forming
Department for July 2017
exHibit 18-5
PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units
$
%
&
'
(Step 1)
Flow of Production
Work in proc ess, beginning (given, p. 722)
Started during current period (given, p. 722)
To account for
Good units completed and transferred out during current period
From beginning work in process a
[1,500 3 (100% – 100%); 1,500 3 (100% – 60%)]
Started and completed
(5,500 3 100%; 5,500 3 100%)
10,000
1,500
5,500
Normal Spoilagec
(700 3 100%; 700 3 100%)
700
Abnormal Spoilaged
(300 3 100%; 300 3 100%)
300
Work in process, ending e (given, p. 722)
(2,000 3 100%; 2,000 3 50%)
Accounted for
Equivalent units of work done in current period
Physical
Units
1,500
8,500
(
(Step 2)
Equivalent Units
Direct
Conversion
Costs
Materials
0
600
5,500
5,500
700
700
300
300
2,000
1,000
8,500
8,100
b
2,000
10,000
a
Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
b
7,000 physical units completed and transferred out minus 1,500 physical units completed and transferred out from beginning
work-in-process inventory.
c
Normal spoilage is 10% of good units transferred out; 10% 3 7,000 5 700 units. Degree of completion of normal spoilage in this
department: direct materials, 100%; conversion costs, 100%.
d
Abnormal spoilage 5 Actual spoilage – Normal spoilage 5 1,000 – 700 5 300 units. Degree of completion of abnormal spoilage in this
department: direct materials, 100%; conversion costs, 100%.
e
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
PANEL B: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit,
and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory
$
%
(Step 3)
(Step 4)
(Step 5)
Work in process, beginning (1,500 units)
Costs added to beginning work in process in current period
Total from beginning inventory before normal spoilage
Started and completed before normal spoilage (5,500 units)
Normal spoilage (700 units)
(A)
(B)
Work in proc ess, beginning (given, p. 722)
Costs added in current period at standard costs
Total costs to account for
Standard costs per equivalent unit (given, p. 722)
Assignment of costs:
Good units completed and transferred out (7,000 units):
Total costs of good units completed and transferred out
Abnormal spoilage (300 units)
(C)
Work in process, ending (2,000 units)
(A) 1 (B) 1(C) Total costs accounted for
f
Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.
&
'
Total
Production
Costs
$ 22,200
157,300
$179,500
$ 19.00
Direct
Materials
(1,500 3 $8.50)
(8,500 3 $8.50)
$85,000
$ 8.50
(
)
Conversion
Costs
1 (900 3 $10.50)
1 (8,100 3 $10.50)
$94,500
1
$ 10.50
$ 22,200
6,300
28,500
(1,500 3 $8.50)
1
(900 3 $10.50)
(0f 3 $8.50)
1
(600 f 3 $10.50)
104,500
13,300
(5,500f 3 $8.50)
(700f 3 $8.50)
1
1
(5,500 3 $10.50)
f
(700 3 $10.50)
146,300
5,700
(300f 3 $8.50)
1
(300 f 3 $10.50)
1
(1,000 f 3 $10.50)
$94,500
27,500
$179,500
f
(2,000 3 $8.50)
$85,000
1
f
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aSSignment material
739
The costs to account for in Step 3 are at standard costs and, hence, they differ from
the costs to account for under the weighted-average and FIFO methods, which are at actual
costs. In Step 4, cost per equivalent unit is simply the standard cost: $8.50 per unit for
direct materials and $10.50 per unit for conversion costs. The standard-costing method
makes calculating equivalent-unit costs unnecessary, so it simplifies process costing. In
Step 5, managers assign standard costs to units completed (including normal spoilage), to
abnormal spoilage, and to ending work-in-process inventory by multiplying the equivalent
units calculated in Step 2 by the standard costs per equivalent unit presented in Step 4.
This enables managers to measure and analyze variances in the manner described in the
appendix to Chapter 17 (pages 705–707).6
Finally, note that the journal entries corresponding to the amounts calculated in Step 5 are
as follows:
Finished Goods
Work in Process—Forming
To record transfer of good units completed in July.
Loss from Abnormal Spoilage
Work in Process—Forming
To record abnormal spoilage detected in July.
6
146,300
146,300
5,700
5,700
For example, from Exhibit 18-5, Panel B, the standard costs for July are direct materials used, 8,500 * $8.50 = $72,250, and
conversion costs, 8,100 * $10.50 = $85,050. From page 722, the actual costs added during July are direct materials, $76,500, and
conversion costs, $89,100, resulting in a direct materials variance of $72,250 - $76,500 = $4,250 U and a conversion costs variance
of $85,050 - $89,100 = $4,050 U. These variances could then be subdivided further as in Chapters 7 and 8; the abnormal spoilage
would be part of the efficiency variance.
termS to leArn
This chapter and the Glossary at the end of the book contain definitions of the following important terms:
abnormal spoilage (p. 720)
inspection point (p. 721)
normal spoilage (p. 720)
rework (p. 719)
scrap (p. 719)
spoilage (p. 719)
ASSignment mAteriAl
Questions
18-1
18-2
18-3
18-4
18-5
18-6
18-7
18-8
18-9
18-10
18-11
Why is there an unmistakable trend in manufacturing to improve quality?
Distinguish among spoilage, rework, and scrap.
“Normal spoilage is planned spoilage.” Discuss.
“Costs of abnormal spoilage are losses.” Explain.
“What has been regarded as normal spoilage in the past is not necessarily acceptable as normal
spoilage in the present or future.” Explain.
“Units of abnormal spoilage are inferred rather than identified.” Explain.
“In accounting for spoiled units, we are dealing with cost assignment rather than cost
incurrence.” Explain.
“Total input includes abnormal as well as normal spoilage and is, therefore, inappropriate as a
basis for computing normal spoilage.” Do you agree? Explain.
“The inspection point is the key to the allocation of spoilage costs.” Do you agree? Explain.
“The unit cost of normal spoilage is the same as the unit cost of abnormal spoilage.” Do you
agree? Explain.
“In job costing, the costs of normal spoilage that occur while a specific job is being done are
charged to the specific job.” Do you agree? Explain.
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18-12 “The costs of rework are always charged to the specific jobs in which the defects were originally
discovered.” Do you agree? Explain.
18-13 “Abnormal rework costs should be charged to a loss account, not to manufacturing overhead.”
Do you agree? Explain.
18-14 When is a company justified in inventorying scrap?
18-15 How do managers use information about scrap?
MyAccountingLab
Multiple-Choice Questions
In partnership with:
18-16 All of the following are accurate regarding the treatment of normal or abnormal spoilage by a firm
with the exception of:
a. Abnormal spoilage is excluded in the standard cost of a manufactured product.
b. Normal spoilage is capitalized as part of inventory cost.
c. Abnormal spoilage has no financial statement impact.
d. Normal and abnormal spoilage units affect the equivalent units of production.
18-17 Which of the following is a TRUE statement regarding the treatment of scrap by a firm?
a.
b.
c.
d.
Scrap is always allocated to a specific job.
Scrap is separated between normal and abnormal scrap.
Revenue received from the sale of scrap on a job lowers the total costs for that job.
There are costs assigned to scrap.
18-18 Healthy Dinners Co. produces frozen dinners for the health conscious consumer. During the quarter ended September 30, the company had the following cost data:
Dinner ingredients
Preparation labor
Sales and marketing costs
Plant production overhead
Normal food spoilage
Abnormal food spoilage
General and administrative expenses
$3,550,000
900,000
125,000
50,000
60,000
40,000
75,000
Based on the above, what is the total amount of period expenses reflected in the company’s income statement for the quarter ended September 30?
a. $200,000
b. $240,000
c. $290,000
d. $300,000
18-19 Fresh Products, Inc. incurred the following costs during December related to the production of its
162,500 frozen ice cream cone specialty items:
Food product labor
Ice cream cone ingredients
Sales and marketing costs
Factory overhead
Normal food spoilage
Abnormal spoilage
$175,000
325,000
10,000
16,000
4,000
3,000
What is the per unit inventory cost allocated to the company’s frozen ice cream cone specialty items for
December?
a. $3.18
b. $3.20
c. $3.22
d. $3.26
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Exercises
741
MyAccountingLab
18-20 Normal and abnormal spoilage in units. The following data, in physical units, describe a grinding
process for January:
Work in process, beginning
Started during current period
To account for
19,300
145,400
164,700
Spoiled units
Good units completed and transferred out
Work in process, ending
Accounted for
12,000
128,000
24,700
164,700
Inspection occurs at the 100% completion stage. Normal spoilage is 5% of the good units passing inspection.
1. Compute the normal and abnormal spoilage in units.
2. Assume that the equivalent-unit cost of a spoiled unit is $8. Compute the amount of potential savings if all
spoilage were eliminated, assuming that all other costs would be unaffected. Comment on your answer.
Required
18-21 Weighted-average method, spoilage, equivalent units. (CMA, adapted) Consider the following
data for November 2017 from MacLean 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. MacLean Manufacturing Company uses
the weighted-average method of process costing.
Work in process, November 1a
Started in November 2017
Good units completed and transferred
out during November 2017
Normal spoilage
Abnormal spoilage
Work in process, November 30b
Total costs added during November 2017
Physical Units
(Pennants)
1,350
?
8,800
Direct
Materials
$ 966
Conversion
Costs
$ 711
$10,302
$30,055
80
50
1,700
a
Degree of completion: direct materials, 100%; conversion costs, 45%.
Degree of completion: direct materials, 100%; conversion costs, 35%.
b
Compute equivalent units for direct materials and conversion costs. Show physical units in the first column
of your schedule.
Required
18-22 Weighted-average method, assigning costs (continuation of 18-21).
For the data in Exercise 18-21, summarize the total costs to account for; calculate the cost per equivalent
unit for direct materials and conversion costs; and assign costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work-in-process inventory.
Required
18-23 FIFO method, spoilage, equivalent units. Refer to the information in Exercise 18-21. Suppose
MacLean Manufacturing Company uses the FIFO method of process costing instead of the weightedaverage method.
Compute equivalent units for direct materials and conversion costs. Show physical units in the first column
of your schedule.
Required
18-24 FIFO method, assigning costs (continuation of 18-23).
For the data in Exercise 18-21, use the FIFO method to summarize the total costs to account for; calculate the
cost per equivalent unit for direct materials and conversion costs; and assign costs to units completed and
transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.
18-25 Weighted-average method, spoilage. LaCroix Company produces handbags from leather of moderate quality. It distributes the product through outlet stores and department store chains. At LaCroix’s facility in northeast Ohio, direct materials (primarily leather hides) are added at the beginning of the process,
Required
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Spoilage, rework, and SCrap
while conversion costs are added evenly during the process. Given the importance of minimizing product
returns, spoiled units are detected upon inspection at the end of the process and are discarded at a net
disposal value of zero.
LaCroix uses the weighted-average method of process costing. Summary data for April 2017 are as
follows:
$
Required
Work in process, beginning inventory (April 1)
Degree of completion of beginning work in process
Started during April
Good units completed and transferred out during April
Work in process, ending inventory (April 30)
Degree of completion of ending work in process
Total costs added during April
Normal spoilage as a percentage of good units
Degree of completion of normal spoilage
Degree of completion of abnormal spoilage
%
&
'
Physical
Units
2,400
Direct
Materials
$21,240
100%
Conversion
Costs
$ 13,332
50%
100%
$97,560
75%
$111,408
100%
100%
100%
100%
12,000
10,800
2,160
10%
1. For each cost category, calculate equivalent units. Show physical units in the first column of your
schedule.
2. Summarize the total costs to account for; calculate the cost per equivalent unit for each cost category;
and assign costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.
18-26 FIFO method, spoilage.
Required
1. Do Exercise 18-25 using the FIFO method.
2. What are the managerial issues involved in selecting or reviewing the percentage of spoilage considered normal? How would your answer to requirement 1 differ if all spoilage were viewed as normal?
18-27 Spoilage, journal entries. Plastique produces parts for use in various industries. Plastique uses a
job-costing system. The nature of its process is such that management expects normal spoilage at a rate of
2% of good parts. Data for last month is as follows:
Production (units)
Good parts produced
Direct material cost/unit
10,000
9,750
$ 5.00
The spoiled parts were identified after 100% of the direct material cost was incurred. The disposal value is
$2/part.
Required
1. Record the journal entries if the spoilage was (a) job specific or (b) common to all jobs.
2. Comment on the differences arising from the different treatment for these two scenarios.
18-28 Recognition of loss from spoilage. Spheres Toys manufactures globes at its San Fernando facility.
The company provides you with the following information regarding operations for April 2017:
Total globes manufactured
Globes rejected as spoiled units
Total manufacturing cost
20,000
750
$800,000
Assume the spoiled units have no disposal value.
Required
1. What is the unit cost of making the 20,000 globes?
2. What is the total cost of the 750 spoiled units?
3. If the spoilage is considered normal, what is the increase in the unit cost of good globes manufactured
as a result of the spoilage?
4. If the spoilage is considered abnormal, prepare the journal entries for the spoilage incurred.
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18-29 Weighted-average method, spoilage. LogicCo 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. LogicCo uses the weightedaverage method of process costing.
Summary data for September 2017 are as follows:
$
Work in process, beginning inventory (September 1)
Degree of completion of beginning work in process
Started during September
Good units completed and transferred out during September
Work in process, ending inventory (September 30)
Degree of completion of ending work in process
Total costs added during September
Normal spoilage as a percentage of good units
Degree of completion of normal spoilage
Degree of completion of abnormal spoilage
%
&
'
Physical Units
(Computer Chips)
900
Direct
Materials
$125,766
100%
Conversion
Costs
$ 10,368
30%
100%
$619,650
10%
$253,098
100%
100%
100%
100%
2,754
2,500
490
15%
1. For each cost category, compute equivalent units. Show physical units in the first column of your schedule.
2. Summarize the total costs to account for; calculate the cost per equivalent unit for each cost category;
and assign costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.
Required
18-30 FIFO method, spoilage. Refer to the information in Exercise 18-29.
1. Do Exercise 18-29 using the FIFO method of process costing.
2. Should LogicCo’s managers choose the weighted-average method or the FIFO method? Explain
briefly.
Required
18-31 Standard-costing method, spoilage. Refer to the information in Exercise 18-29. Suppose LogicCo
determines standard costs of $215 per equivalent unit for direct materials and $92 per equivalent unit for
conversion costs for both beginning work in process and work done in the current period.
1. Do Exercise 18-29 using the standard-costing method.
2. What issues should the manager focus on when reviewing the equivalent units calculation?
Required
18-32 Spoilage and job costing. (L. Bamber) Barrett Kitchens produces a variety of items in accordance
with special job orders from hospitals, plant cafeterias, and university dormitories. An order for 2,100 cases
of mixed vegetables costs $9 per case: direct materials, $4; direct manufacturing labor, $3; and manufacturing overhead allocated, $2. The manufacturing overhead rate includes a provision for normal spoilage.
Consider each requirement independently.
1. Assume that a laborer dropped 420 cases. Suppose part of the 420 cases could be sold to a nearby
prison for $420 cash. Prepare a journal entry to record this event. Calculate and explain briefly the unit
cost of the remaining 1,680 cases.
2. Refer to the original data. Tasters at the company reject 420 of the 2,100 cases. The 420 cases are
disposed of for $840. Assume that this rejection rate is considered normal. Prepare a journal entry to
record this event, and do the following:
a. Calculate the unit cost if the rejection is attributable to exacting specifications of this particular job.
b. Calculate the unit cost if the rejection is characteristic of the production process and is not attributable to this specific job.
c. Are unit costs the same in requirements 2a and 2b? Explain your reasoning briefly.
3. Refer to the original data. Tasters rejected 420 cases that had insufficient salt. The product can be
placed in a vat, salt can be added, and the product can be reprocessed into jars. This operation, which
is considered normal, will cost $420. Prepare a journal entry to record this event and do the following:
a. Calculate the unit cost of all the cases if this additional cost was incurred because of the exacting
specifications of this particular job.
Required
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Spoilage, rework, and SCrap
b. Calculate the unit cost of all the cases if this additional cost occurs regularly because of difficulty
in seasoning.
c. Are unit costs the same in requirements 3a and 3b? Explain your reasoning briefly.
18-33 Reworked units, costs of rework. Heyer Appliances assembles dishwashers at its plant in
Tuscaloosa, Alabama. In February 2017, 60 circulation motors that cost $110 each (from a new supplier who
subsequently went bankrupt) were defective and had to be disposed of at zero net disposal value. Heyer
Appliances was able to rework all 60 dishwashers by substituting new circulation motors purchased from
one of its existing suppliers. Each replacement motor cost $125.
1. What alternative approaches are there to account for the materials cost of reworked units?
2. Should Heyer Appliances use the $110 circulation motor or the $125 motor to calculate the cost of
materials reworked? Explain.
3. What other costs might Heyer Appliances include in its analysis of the total costs of rework due to the
circulation motors purchased from the (now) bankrupt supplier?
Required
18-34 Scrap, job costing. The Russell Company has an extensive job-costing facility that uses a variety
of metals. Consider each requirement independently.
1. Job 372 uses a particular metal alloy that is not used for any other job. Assume that scrap is material in
amount and sold for $480 quickly after it is produced. Prepare the journal entry.
2. The scrap from Job 372 consists of a metal used by many other jobs. No record is maintained of the
scrap generated by individual jobs. Assume that scrap is accounted for at the time of its sale. Scrap
totaling $4,500 is sold. Prepare two alternative journal entries that could be used to account for the sale
of scrap.
3. Suppose the scrap generated in requirement 2 is returned to the storeroom for future use, and a journal
entry is made to record the scrap. A month later, the scrap is reused as direct material on a subsequent
job. Prepare the journal entries to record these transactions.
Required
Problems
MyAccountingLab
18-35 Weighted-average method, spoilage. World Class Steaks is a meat-processing firm based in
Texas. It operates under the weighted-average method of process costing and has two departments:
preparation (prep) and shipping. For the prep department, conversion costs are added evenly during the
process, and direct materials are added at the beginning of the process. Spoiled units are detected upon
inspection at the end of the prep process and are disposed of at zero net disposal value. All completed work
is transferred to the shipping department. Summary data for May follow:
$
World Class Steaks: Preparation (Prep) Department
Work
in process, beginning inventory (May 1)
Degree of completion of beginning work in process
Started during May
Good units completed and transferred out during May
Work in process, ending inventory (May 31)
Degree of completion of ending work in process
Total costs added during May
Normal spoilage as a percentage of good units
Degree of completion of normal spoilage
Degree of completion of abnormal spoilage
%
&
'
Physical
Units
7,200
Direct
Materials
$ 10,632
100%
Conversion
Costs
$ 2,778
50%
100%
$111,000
25%
$89,664
100%
100%
100%
100%
60,000
49,200
10,080
10%
Required
For the prep department, summarize the total costs to account for and assign those costs to units completed
and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process. (Problem 18-37 explores additional facets of this problem.)
Required
Do Problem 18-35 using the FIFO method of process costing. (Problem 18-38 explores additional facets of
this problem.)
18-36 FIFO method, spoilage. Refer to the information in Problem 18-35.
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18-37 Weighted-average method, shipping department (continuation of 18-35). In the shipping depart-
ment of World Class Steaks, conversion costs are added evenly during the process, and direct materials
are added at the end of the process. Spoiled units are detected upon inspection at the end of the process
and are disposed of at zero net disposal value. All completed work is transferred to the next department.
The transferred-in costs for May equal the total cost of good units completed and transferred out in May
from the prep department, which were calculated in Problem 18-35 using the weighted-average method of
process costing. Summary data for May follow.
$
World Class Steaks: Shipping Department
Work in process, beginning inventory (May 1)
Degree of completion of beginning work in process
Started during May
Good units completed and transferred out during May
Work in process, ending inventory (May 31)
Degree of completion of ending work in process
Total costs added during May
Normal spoilage as a percentage of good units
Degree of completion of normal spoilage
Degree of completion of abnormal spoilage
%
&
'
(
Physical
Units
25,200
Transferred-In
Costs
$67,397
100%
Direct
Materials
$
0
0%
Conversion
Costs
$ 46,950
70%
0%
$11,520
40%
81,690
$
100%
100%
100%
100%
49,200
52,800
16,800
100%
?
7%
For the shipping department, use the weighted-average method to summarize the total costs to account
for and assign those costs to units completed and transferred out (including normal spoilage), to abnormal
spoilage, and to units in ending work in process.
Required
18-38 FIFO method, shipping department (continuation of 18-36). Refer to the information in Problem
18-37 except that the transferred-in costs of beginning work in process on May 1 are $66,180 (instead
of $67,397). Transferred-in costs for May equal the total cost of good units completed and transferred
out in May from the prep department, as calculated in Problem 18-36 using the FIFO method of process
costing.
For the shipping department, use the FIFO method to summarize the total costs to account for and assign
those costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to
units in ending work in process.
18-39 Physical units, inspection at various levels of completion, weighted-average process costing.
SunEnergy produces solar panels. A key step in the conversion of raw silicon to a completed solar panel
occurs in the assembly department, where lightweight photovoltaic cells are assembled into modules and
connected on a frame. In this department, materials are added at the beginning of the process and conversion takes place uniformly.
At the start of November 2017, SunEnergy’s assembly department had 2,400 panels in beginning work
in process, which were 100% complete for materials and 40% complete for conversion costs. An additional
12,000 units were started in the department in November, and 3,600 units remain in work in process at the
end of the month. These unfinished units are 100% complete for materials and 70% complete for conversion costs.
The assembly department had 1,800 spoiled units in November. Because of the difficulty of keeping moisture out of the modules and sealing the photovoltaic cells between layers of glass, normal
spoilage is approximately 12% of good units. The department’s costs for the month of November are
as follows:
Direct materials costs
Conversion costs
Beginning WIP
$ 76,800
123,000
Costs Incurred During Period
$ 240,000
1,200,000
Required
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Required
Spoilage, rework, and SCrap
1. Using the format on page 728, compute the normal and abnormal spoilage in units for November, assuming the inspection point is at (a) the 30% stage of completion, (b) the 60% stage of completion, and
(c) the 100% stage of completion.
2. Refer to your answer in requirement 1. Why are there different amounts of normal and abnormal spoilage at different inspection points?
3. Now assume that the assembly department inspects at the 60% stage of completion. Using the
weighted-average method, calculate the cost of units transferred out, the cost of abnormal spoilage,
and the cost of ending inventory for the assembly department in November.
18-40 Spoilage in job costing. Jellyfish Machine Shop is a manufacturer of motorized carts for vacation
resorts.
Patrick Cullin, the plant manager of Jellyfish, obtains the following information for Job #10 in August
2017. A total of 46 units were started, and 6 spoiled units were detected and rejected at final inspection,
yielding 40 good units. The spoiled units were considered to be normal spoilage. Costs assigned prior to the
inspection point are $1,100 per unit. The current disposal price of the spoiled units is $235 per unit. When the
spoilage is detected, the spoiled goods are inventoried at $235 per unit.
Required
1. What is the normal spoilage rate?
2. Prepare the journal entries to record the normal spoilage, assuming the following:
a. The spoilage is related to a specific job.
b. The spoilage is common to all jobs.
c. The spoilage is considered to be abnormal spoilage.
18-41 Rework in job costing, journal entry (continuation of 18-40). Assume that the 6 spoiled units of
Jellyfish Machine Shop’s Job #10 can be reworked for a total cost of $1,800. A total cost of $6,600 associated with these units has already been assigned to Job #10 before the rework.
Required
Prepare the journal entries for the rework, assuming the following:
a. The rework is related to a specific job.
b. The rework is common to all jobs.
c. The rework is considered to be abnormal.
18-42 Scrap at time of sale or at time of production, journal entries (continuation of 18-40). Assume that
Job #10 of Jellyfish Machine Shop generates normal scrap with a total sales value of $700 (it is assumed
that the scrap returned to the storeroom is sold quickly).
Required
Prepare the journal entries for the recognition of scrap, assuming the following:
a.
b.
c.
d.
The value of scrap is immaterial and scrap is recognized at the time of sale.
The value of scrap is material, is related to a specific job, and is recognized at the time of sale.
The value of scrap is material, is common to all jobs, and is recognized at the time of sale.
The value of scrap is material, and scrap is recognized as inventory at the time of production and is
recorded at its net realizable value.
18-43 Physical units, inspection at various stages of completion. Chemet manufactures chemicals
in a continuous process. The company combines various materials in a specially configured machine
at the beginning of the process, and conversion is considered uniform through the period. Occasionally,
the chemical reactions among the materials do not work as expected and the output is then considered
spoiled. Normal spoilage is 4% of the good units that pass inspection. The following information pertains
to March 2017:
Beginning inventory
2,500 units (100% complete for materials; 25% complete for
conversion costs)
Units started
30,000
Units in ending work in process
2,100 (100% complete for materials; 70% complete for
conversion costs)
Chemet had 1,900 spoiled units in March 2017.
Required
Using the format on page 728, compute the normal and abnormal spoilage in units, assuming the inspection point is at (a) the 20% stage of completion, (b) the 45% stage of completion, and (c) the 100% stage of
completion.
18-44 Weighted-average method, inspection at 80% completion. (A. Atkinson) The Horsheim
Company is a furniture manufacturer with two departments: molding and finishing. The company uses the
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aSSignment material
weighted-average method of process costing. In August, the following data were recorded for the finishing
department:
Units of beginning work-in-process inventory
Percentage completion of beginning work-in-process units
Units started
Units completed
Units in ending inventory
Percentage completion of ending work-in-process units
Spoiled units
Total costs added during current period:
Direct materials
Direct manufacturing labor
Manufacturing overhead
Work in process, beginning:
Transferred-in costs
Conversion costs
Cost of units transferred in during current period
25,000
25%
175,000
125,000
50,000
95%
25,000
$1,638,000
$1,589,000
$1,540,000
$ 207,250
$ 105,000
$1,618,750
Conversion costs are added evenly during the process. Direct material costs are added when production
is 90% complete. The inspection point is at the 80% stage of production. Normal spoilage is 10% of all good
units that pass inspection. Spoiled units are disposed of at zero net disposal value.
1. For August, summarize total costs to account for and assign these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.
2. What are the managerial issues involved in determining the percentage of spoilage considered normal? How would your answer to requirement 1 differ if all spoilage were treated as normal?
Required
18-45 Job costing, classifying spoilage, ethics. Flextron Company is a contract manufacturer for a variety of pharmaceutical and over-the-counter products. It has a reputation for operational excellence and
boasts a normal spoilage rate of 2% of normal input. Normal spoilage is recognized during the budgeting
process and is classified as a component of manufacturing overhead when determining the overhead rate.
Lynn Sanger, one of Flextron’s quality control managers, obtains the following information for Job No.
M102, an order from a consumer products company. The order was completed recently, just before the close
of Flextron’s fiscal year. The units will be delivered early in the next accounting period. A total of 128,500 units
were started, and 6,000 spoiled units were rejected at final inspection, yielding 122,500 good units. Spoiled
units were sold at $4 per unit. Sanger indicates that all spoilage was related to this specific job.
The total costs for all 128,500 units of Job No. M102 follow. The job has been completed, but the costs
are yet to be transferred to Finished Goods.
Direct materials
Direct manufacturing labor
Manufacturing overhead
Total manufacturing costs
$ 979,000
840,000
1,650,500
$3,469,500
1. Calculate the unit quantities of normal and abnormal spoilage.
2. Prepare the journal entries to account for Job No. M102, including spoilage, disposal of spoiled units,
and transfer of costs to the Finished Goods account.
3. Flextron’s controller, Vince Chadwick, tells Marta Suarez, the management accountant responsible for
Job No. M102, the following: “This was an unusual job. I think all 6,000 spoiled units should be considered normal.” Suarez knows that the work involved in Job No. M102 was not uncommon and that
Flextron’s normal spoilage rate of 2% is the appropriate benchmark. She feels Chadwick made these
comments because he wants to show a higher operating income for the year.
a. Prepare journal entries, similar to requirement 2, to account for Job No. M102 if all spoilage were
considered normal. How will operating income be affected if all spoilage is considered normal?
b. What should Suarez do in response to Chadwick’s comment?
Required
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