Chapter 4
Systems Design: Process Costing
Solutions to Questions
4-1
A process costing system is appropriate
when a homogeneous product is produced on a
continuous basis.
4-2
Process costing and job-order costing
are similar in the following ways:
1. Both systems have the same basic
purposes, which are to assign materials,
labor, and overhead cost to products and to
provide a mechanism for computing unit
costs.
2. Both systems use the same basic accounts.
3. Cost flows through the accounts in basically
the same way in both systems.
4-3
Costs are accumulated by department in
a process costing system.
4-4
Cost accumulation is simpler under
process costing because costs only need to be
identified by department—not by separate job.
Usually a company has only a few departments,
whereas there can be hundreds or even
thousands of jobs in a job-order costing system.
4-5
A Work in Process account is maintained
for each separate processing department in a
process costing system.
4-6
The journal entry to transfer the costs
of partially completed goods from the Mixing
Department to the Firing Department would be:
4-7
The costs that might be added to the
Firing Department’s Work in Process account
would include: (1) cost transferred in from the
Mixing Department, (2) materials cost, (3) labor
cost, and (4) overhead cost.
4-8
Under the weighted-average method,
the equivalent units of production consist of
units transferred to the next department (or to
finished goods) during the period plus the
equivalent units in the department’s ending
Work in Process inventory.
4-9
A quantity schedule shows the physical
flow of units through a department during a
period. It serves several purposes. First, it
provides the manager with information about
activity in his or her department and also shows
the manager the stage of completion of any inprocess units. Second, it provides data for
computing the equivalent units and for
preparing the other parts of the production
report.
4-10 A unit of product accumulates cost in
each department that it passes through, with
the costs of one department added to the costs
of the preceding department in a snowballing
fashion.
Work in Process, Firing ......................................
XXXX
Work in Process, Mixing ..............................
XXXX
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Solutions Manual, Chapter 4
137
Brief Exercise 4-1 (30 minutes)
a. To record issuing raw materials for use in production:
Work in Process—Molding Department .........
$28,000
Work in Process—Firing Department.............
$5,000
Raw Materials .......................................
$33,000
b. To record direct labor costs incurred:
Work in Process—Molding Department .........
Work in Process—Firing Department.............
Wages Payable .....................................
$18,000
$5,000
$23,000
c. To record applying manufacturing overhead:
Work in Process—Molding Department .........
Work in Process—Firing Department.............
Manufacturing Overhead .......................
$24,000
$37,000
$61,000
d. To record transfer of unfired, molded bricks from the Molding
Department to the Firing Department:
Work in Process—Firing Department.............
$67,000
Work in Process—Molding Department ...
$67,000
e. To record transfer of finished bricks from the Firing Department to the
finished goods warehouse:
Finished Goods............................................ $108,000
Work in Process—Firing Department ......
$108,000
f. To record Cost of Goods Sold:
Cost of Goods Sold ......................................
Finished Goods .....................................
$106,000
$106,000
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138
Introduction to Managerial Accounting, 2nd Edition
Brief Exercise 4-2 (10 minutes)
Weighted-Average Method
Equivalent Units
Materials Conversion
Units transferred to the next department ........................
410,000
Work in process, October 31:
30,000 units × 70% ....................................................
21,000
30,000 units × 50% ....................................................
Equivalent units .............................................................
431,000
410,000
15,000
425,000
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Solutions Manual, Chapter 4
139
Brief Exercise 4-3 (15 minutes)
Weighted-Average Method
1. Work in process, May 1 ......................................................
Started into production during May .....................................
Total kilograms in process ..................................................
Deduct work in process, May 31 ..........................................
Completed and transferred out during May ..........................
2. Kilograms to be accounted for:
Work in process, May 1 (materials 80% complete;
conversion 20% complete) ............................................
Started into production during the month ..........................
Total kilograms to be accounted for ....................................
Kilograms accounted for as follows:
Transferred out during the month .....................................
Work in process, May 31 (materials 40% complete;
conversion 10% complete) ............................................
Total kilograms accounted for .............................................
80,000
300,000
380,000
50,000
330,000
80,000
300,000
380,000
330,000
50,000
380,000
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140
Introduction to Managerial Accounting, 2nd Edition
Brief Exercise 4-4 (15 minutes)
1.
Materials
Labor
Work in process, May 1 ..................................................
$ 14,550 $23,620
Cost added during May ...................................................
88,350
14,330
Total cost (a) .................................................................
$102,900 $37,950
Equivalent units of production (b) ...................................
1,200
1,100
Cost per equivalent unit (a) ÷ (b) ...................................
$85.75
$34.50
2.
Overhead
$118,100
71,650
$189,750
1,100
$172.50
Cost per EU for materials ................................................
$ 85.75
Cost per EU for labor ......................................................
34.50
Cost per EU for overhead ................................................
172.50
Total cost per EU ...........................................................
$292.75
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141
Brief Exercise 4-5 (30 minutes)
1. Computation of the total cost per EU:
Cost per EU for materials ................................................
$24.00
Cost per EU for labor ......................................................
7.00
Cost per EU for overhead ................................................
14.00
Total cost per EU ...........................................................
$45.00
2. Computation of equivalent units in ending inventory:
Materials
Labor
Units in ending inventory ................................................
1,500
1,500
Percentage completed ....................................................
90%
40%
Equivalent units of production .........................................
1,350
600
Overhead
1,500
40%
600
3. Cost Reconciliation
Total
Cost
Materials
Labor
Overhead
Cost accounted for as follows:
Transferred to the next
department: 18,000 units at
$45.00 per unit ............................................................
$810,000
18,000 18,000 18,000
Work in process, ending:
Materials, at $24.00 per EU ..........................................
32,400
1,350
Labor, at $7.00 per EU .................................................
4,200
600
Overhead, at $14.00 per EU .........................................
8,400
600
Total work in process .....................................................
45,000
Total cost ......................................................................
$855,000
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142
Introduction to Managerial Accounting, 2nd Edition
Exercise 4-6 (15 minutes)
Work in Process—Mixing ................................................
330,000
Raw Materials Inventory ...........................................
330,000
Work in Process—Mixing ................................................
260,000
Work in Process—Baking ................................................
120,000
Wages Payable .........................................................
380,000
Work in Process—Mixing ................................................
190,000
Work in Process—Baking ................................................
90,000
Manufacturing Overhead ...........................................
280,000
Work in Process—Baking ................................................
760,000
Work in Process—Mixing ...........................................
760,000
Finished Goods ..............................................................
980,000
Work in Process—Baking ...........................................
980,000
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143
Exercise 4-7 (20 minutes)
Weighted-Average Method
Quantity
Schedule
Pounds to be accounted for:
Work in process, May 1 (materials
100% complete, labor and
overhead 55% complete) ..........................................
30,000
Started into production during May ..............................
480,000
Total pounds to be accounted for ...................................
510,000
Equivalent Units
Labor &
Materials Overhead
Pounds accounted for as follows:
Transferred to Packing Department
during May* .............................................................
490,000
490,000
Work in process, May 31 (materials
100% complete, labor and
overhead 90% complete) ..........................................
20,000
20,000
Total pounds accounted for ............................................
510,000
510,000
490,000
18,000
508,000
*30,000 + 480,000 – 20,000 = 490,000.
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Introduction to Managerial Accounting, 2nd Edition
Exercise 4-8 (30 minutes)
Weighted-Average Method
1. For the sake of brevity, only the portion of the quantity schedule from which the equivalent units are
computed is shown below.
Quantity
Schedule
Equivalent Units (EU)
Materials Conversion
Units accounted for as follows:
Transferred to the next process ....................................
300,000
300,000
Work in process, June 30 (materials
50% complete, conversion 25%
complete) .................................................................
40,000
20,000
Total units accounted for ................................................
340,000
320,000
2.
Total
Cost
Materials
Cost to be accounted for:
Work in process, June 1 ...............................................
$ 71,500 $ 56,600
Cost added by the department .....................................
599,500
385,000
Total cost to be accounted for (a) ...................................
$671,000 $441,600
Equivalent units (b) ........................................................320,000
Cost per equivalent unit (a) ÷ (b).................................... $1.38 +
300,000
10,000
310,000
Conversion
$ 14,900
214,500
$229,400
310,000
$0.74 =
Whole
Unit
$2.12
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145
Exercise 4-9 (20 minutes)
Weighted-Average Method
Total
Cost
Equivalent Units (EU)
Materials Conversion
Cost accounted for as follows:
Transferred to the next process:
300,000 units at $2.12 each ......................................
$636,000 300,000
Work in process, June 30:
Materials, at $1.38 per EU .........................................
27,600 20,000
Conversion, at $0.74 per EU ......................................
7,400
Total work in process ..................................................
35,000
Total cost accounted for .................................................
$671,000
300,000
10,000
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146
Introduction to Managerial Accounting, 2nd Edition
Exercise 4-10 (30 minutes)
Weighted-Average Method
1.
Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1
(materials 80%
complete, labor and
overhead 75%
complete) .................................................................
80,000
Started into production ................................................
760,000
Total gallons accounted for .............................................
840,000
Equivalent Units
Materials Labor Overhead
Gallons accounted for as
follows:
Transferred to the next
department ...............................................................
790,000 790,000 790,000
Work in process, May 31
(materials 60%
complete, labor and
overhead 20%
complete) .................................................................
50,000
30,000 10,000
Total gallons accounted for .............................................
840,000 820,000 800,000
790,000
10,000
800,000
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147
Exercise 4-10 (continued)
2.
Total Costs
Materials
Labor
Overhead
Cost to be accounted for:
Work in process, May 1 ................................................
$ 146,600
$ 68,600
$ 30,000
$ 48,000
Cost added during the
month ......................................................................
1,869,200
907,200
370,000
592,000
Total cost to be accounted
for (a) .........................................................................
$2,015,800 $975,800
$400,000
$640,000
Equivalent units (b) ........................................................
—
820,000
800,000
800,000
Cost per equivalent unit
(a) ÷ (b) .....................................................................
$1.19 +
$0.50 +
$0.80 =
Whole
Unit
$2.49
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148
Introduction to Managerial Accounting, 2nd Edition
Problem 4-11 (30 minutes)
Weighted-Average Method
1. The computation of equivalent units would be:
Quantity
Equivalent Units (EU)
Schedule Materials Labor Overhead
Units accounted for as follows:
Transferred to the next
department ..............................................................
35,600
35,600 35,600
Work in process, April 30
(materials 80% complete,
labor and overhead 60%
complete) ................................................................
7,400
5,920
4,440
Total units and equivalent
units of production ...................................................
43,000
41,520 40,040
35,600
4,440
40,040
2. The cost reconciliation follows:
Total
Cost
Equivalent Units (EU)
Materials Labor Overhead
Cost accounted for as follows:
Transferred to the next
department: 35,600 units ×
$2.90 per unit ..........................................................
$103,240 35,600 35,600
Work in process, April 30:
Materials, at $0.50 per EU .........................................
2,960
5,920
Labor, at $1.10 per EU ..............................................
4,884
4,440
Overhead, at $1.30 per EU ........................................
5,772
Total work in process ..................................................
13,616
Total cost ...................................................................
$116,856
35,600
4,440
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149
Problem 4-12 (45 minutes)
Weighted-Average Method
1. The equivalent units for the month would be:
Quantity
Schedule
Equivalent Units (EU)
Materials Conversion
Units accounted for as follows:
Transferred to next department ...................................
92,000
92,000
Work in process, May 30
(materials 75% complete;
conversion 50% complete) ........................................
14,000
10,500
Total units and equivalent units
of production............................................................
106,000
102,500
2.
Total
Cost
Materials
92,000
7,000
99,000
Conversion
Work in process, May 1 ..................................................
$ 16,400
$ 5,900
$ 10,500
Cost added during the
month .........................................................................
431,200
194,200
237,000
Total cost (a) .................................................................
$447,600 $200,100
$247,500
Equivalent units of
production (b) .............................................................
102,500
99,000
Cost per EU (a) ÷ (b) .....................................................
$1.95 +
$2.50 =
Whole
Unit
$4.45
3. Total units transferred ....................................................
92,000
Less units in the beginning inventory ...............................
6,000
Units started and completed during May ..........................
86,000
4. No, the manager should not be rewarded for good cost control. The
reason for the Mixing Department’s low unit cost for May is traceable to
the fact that costs of the prior month have been averaged in with May’s
costs in computing the lower, $1.95 per unit figure. This is a major
criticism of the weighted-average method in that the figures computed
for product costing purposes can’t be used to evaluate cost control or
measure performance for the current period.
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Introduction to Managerial Accounting, 2nd Edition
Problem 4-13 (60 minutes)
Weighted-Average Method
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:
Work in process, April 1 (materials
85% complete; conversion 60%
complete) ................................................................
7,000
Started into production ................................................
88,000
Total units ..................................................................
95,000
Equivalent Units (EU)
Materials Conversion
Units accounted for as follows:
Transferred to bottling: ...............................................
82,000
82,000
Work in process, April 30
(materials 60% complete,
conversion 20% complete) ........................................
13,000
7,800
Total units and equivalent units of
production...............................................................
95,000
89,800
5
82,000
2,600
84,600
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151
Problem 4-13 (continued)
Costs per Equivalent Unit
Total
Cost
Materials
Conversion
Cost to be accounted for:
Work in process, April 1 ...............................................
$ 14,800 $ 6,800
Cost added during April ...............................................
249,730
105,450
Total cost (a) ..............................................................
$264,530 $112,250
Equivalent units of production (b) ...................................
Cost per EU (a) ÷ (b) .....................................................
Whole
Unit
$
8,000
144,280
$152,280
89,800
84,600
$1.25 +
$1.80
=
$3.05
Cost Reconciliation
Total
Cost
Cost accounted for as follows:
Transferred to bottling:
82,000 units × $3.05 per unit ....................................
$250,100
Work in process, April 30:
Materials, at $1.25 per EU .........................................
9,750
Conversion, at $1.80 per EU ......................................
4,680
Total work in process ..................................................
14,430
Total cost ...................................................................
$264,530
Equivalent Units (EU)
Materials
Conversion
82,000
7,800
82,000
2,600
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Introduction to Managerial Accounting, 2nd Edition
Problem 4-14 (60 minutes)
Weighted-Average Method
1. 2., and 3.
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:
Work in process, July 1
(materials 100%
complete; labor and
overhead 90% complete) ..........................................
15,000
Started into production ................................................
160,000
Total units ..................................................................
175,000
Equivalent Units (EU)
Materials Labor Overhead
Units accounted for as follows:
Transferred out ...........................................................
155,000 155,000 155,000 155,000
Work in process, July 31
(materials 40%
complete; labor and
overhead 10% complete) ..........................................
20,000
8,000
2,000
2,000
Total units and equivalent
units of production ...................................................
175,000 163,000 157,000 157,000
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153
Problem 4-14 (continued)
Cost per Equivalent Unit
Total
Cost
Materials
Cost to be accounted for:
Work in process, July 1 ................................................
$ 53,120
$ 14,100
Cost added during the month .......................................
558,660
142,380
Total cost (a) ...............................................................
$611,780
$156,480
Equivalent units of production (b)....................................
163,000
Cost per EU (a) ÷ (b) .....................................................
$0.96 +
Cost Reconciliation
Labor
Overhead
$ 22,680
237,940
$260,620
157,000
$ 16,340
178,340
$194,680
157,000
$1.66 +
Whole
Unit
$1.24 = $3.86
Equivalent Units (EU)
Total
Cost
Materials
Cost accounted for as follows:
Transferred out:
155,000 units × $3.86 per
unit ..........................................................................
$598,300
155,000
Work in process, July 31:
Materials, at $0.96 per EU..........................................
7,680
8,000
Labor, at $1.66 per EU ..............................................
3,320
Overhead, at $1.24 per EU ........................................
2,480
Total work in process ...................................................
13,480
Total cost ....................................................................
$611,780
Labor
Overhead
155,000
155,000
2,000
2,000
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154
Introduction to Managerial Accounting, 2nd Edition
Problem 4-15 (75 minutes)
Weighted-Average Method
1. A completed production report follows:
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:
Work in process, March 1
(materials 100% complete; labor
and overhead 60% complete) ....................................
4,500
Started into production ................................................
56,800
Total Units ..................................................................
61,300
Equivalent Units (EU)
Labor &
Materials Overhead
Units accounted for as follows:
Transferred to mixing...................................................
58,400
58,400
Work in process, March 31
(materials 100% complete; labor
and overhead 70% complete) ....................................
2,900
2,900
Total Units and equivalent units of
production ................................................................
61,300
61,300
58,400
2,030
60,430
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155
Problem 4-15 (continued)
Cost per Equivalent Unit
Total
Cost
Labor &
Overhead
Materials
Cost to be accounted for:
Work in process, March 1 ............................................
$ 12,365
$ 9,125
Cost added during March .............................................
188,794
113,475
Total cost (a) ..............................................................
$201,159 $122,600
Equivalent units of production (b) ...................................
Cost per EU (a) ÷ (b) .....................................................
Cost Reconciliation
Whole
Unit
$ 3,240
75,319
$78,559
61,300
$2.00 +
60,430
$1.30 = $3.30
Equivalent Units (EU)
Total
Labor &
Cost
Materials
Overhead
Cost accounted for as follows:
Transferred to mixing: 58,400 units ×
$3.30 per unit ...........................................................
$192,720
58,400
Work in process, March 31:
Materials, at $2.00 per EU ............................................
5,800
2,900
Labor and overhead, at $1.30 per EU ............................
2,639
Total work in process ...................................................
8,439
Total cost .......................................................................
$201,159
58,400
2,030
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Introduction to Managerial Accounting, 2nd Edition
Problem 4-15 (continued)
2. In computing unit costs, the weighted-average method mixes costs of
the prior period in with current period costs. Thus, under the weightedaverage method, unit costs are influenced to some extent by what
happened in a prior period. This problem becomes particularly
significant when attempting to measure performance in the current
period. Good cost control in the current period might be concealed to
some degree by the unit costs that have been brought forward in the
beginning inventory. The reverse could also be true in that poor cost
control during a period might be concealed somewhat (or entirely) by
the costs of the prior period that have been brought forward and added
in with current period costs.
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157
Problem 4-16 (90 minutes)
Weighted-Average Method
1. The equivalent units would be:
Materials
Labor
Overhead
Units completed
during the year ............................................................
635,000
635,000
635,000
Work in process,
December 31:
30,000 units ×
100% .......................................................................
30,000
30,000 units ×
80% .........................................................................
24,000
24,000
Total equivalent
units (a) ......................................................................
665,000
659,000
659,000
The costs per equivalent unit would be:
Materials
Labor
Overhead
Work in process,
January 1 ....................................................................
$ 18,000
$ 9,555
$ 7,644 *
Cost added
during the year ............................................................
979,500
616,495
493,196 **
Total costs (b)................................................................
$997,500
$626,050
$500,840
Whole
Unit
Cost per EU
(b) ÷ (a) .....................................................................
$1.50 +
$0.95 +
$0.76 = $3.21
* $9,555 × 80% = $7,644
** $616,495 × 80% = $493,196
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Introduction to Managerial Accounting, 2nd Edition
Problem 4-16 (continued)
2. The amount of cost that should be assigned to the ending inventories is:
Work in
Process
Finished
Goods
Work in process:
Materials:
30,000 units × $1.50 per unit ....................................
$45,000
Labor:
24,000 EU × $0.95 per EU .........................................
22,800
Overhead:
24,000 EU × $0.76 per EU .........................................
18,240
Finished goods:
12,000 units × $3.21 per unit .......................................
$38,520
Total cost that should be assigned
to inventories ..............................................................
$86,040
$38,520
Total
$ 45,000
22,800
18,240
38,520
$124,560
3. The necessary adjustments would be:
Work in
Process
Finished
Goods
Cost that should be assigned to
inventories (above) ......................................................
$86,040
$ 38,520
Year-end balances in the accounts ..................................
85,000
60,000
Difference ......................................................................
$ 1,040 $(21,480)
Debit
Total
$ 124,560
145,000
$(20,440)
Credit
Work in Process Inventory ..............................................
1,040
Cost of Goods Sold .........................................................
20,440
Finished Goods .........................................................
21,480
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159
Problem 4-16 (continued)
4. The simplest computation of the cost of goods sold would be:
Beginning finished goods inventory .................................
0
Units completed during the year......................................
635,000
Units available for sale ....................................................
635,000
Less units in ending finished goods inventory ...................12,000
Units sold during the year ...............................................
623,000
Cost per equivalent unit (from part 1) .............................
× $3.21
Cost of goods sold ..........................................................
$1,999,830
Alternative computation:
Total manufacturing cost incurred:
Materials (part 1) .........................................................
$ 997,500
Labor (part 1) ..............................................................
626,050
Overhead (part 1) ........................................................
500,840
Total manufacturing cost ................................................
2,124,390
Less cost assigned to inventories (part 2) ........................
124,560
Cost of goods sold ..........................................................
$1,999,830
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Introduction to Managerial Accounting, 2nd Edition
Problem 4-17 (120 minutes)
Weighted-Average Method
1. a. Work in Process—Bending Department ............................
394,210
Work in Process—Drilling Department .............................
100,800
Raw Materials ...........................................................
495,010
b. Work in Process—Bending Department ............................
638,144
Work in Process—Drilling Department .............................
250,600
Salaries and Wages Payable ......................................
888,744
c. Manufacturing Overhead ................................................
685,000
Accounts Payable ......................................................
685,000
d. Work in Process—Bending Department ............................
493,584
Manufacturing Overhead ...........................................
493,584
Work in Process—Drilling Department .............................
189,000
Manufacturing Overhead ...........................................
189,000
e. Work in Process—Drilling Department .............................
1,536,990
Work in Process—Bending Department....................... 1,536,990
f. Finished Goods ..............................................................
1,650,000
Work in Process—Drilling Department ........................ 1,650,000
g. Accounts Receivable .......................................................
2,700,000
Sales ........................................................................ 2,700,000
Cost of Goods Sold .........................................................
1,600,000
Finished Goods ......................................................... 1,600,000
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161
Problem 4-17 (continued)
2.
(g)
Accounts Receivable
2,700,000
Bal.
(a)
(b)
(d)
Bal.
Work in Process
Bending Department
45,369 1,536,990
394,210
638,144
493,584
34,317
Bal.
(f)
Bal.
Finished Goods
110,000 1,600,000
1,650,000
160,000
Accounts Payable
685,000
Sales
2,700,000
Bal.
Bal.
(e)
(g)
Work in Process
Drilling Department
Bal.
10,000 1,650,000
(a)
100,800
(b)
250,600
(d)
189,000
(e) 1,536,990
Bal.
437,390
(a)
(f)
Manufacturing Overhead
(c)
685,000
682,584 (d)
Bal.
2,416
Salaries and Wages Payable
888,744 (b)
(c)
(g)
Raw Materials
500,000
495,010
4,990
(g)
Cost of Goods Sold
1,600,000
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Introduction to Managerial Accounting, 2nd Edition
Problem 4-17 (continued)
3. The production report for the Bending Department follows:
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:
Work in process, May 1 (materials 80%
complete, labor and overhead 60% complete) ............
12,000
Started into production ................................................
270,000
Total units ...................................................................
282,000
Equivalent Units (EU)
Materials Labor Overhead
Units accounted for as follows:
Transferred to Drilling:
273,000 * 273,000 273,000
Work in process, May 31 (materials 90%
complete, labor and overhead 60% complete) ............9,000
8,100
5,400
Total units and equivalent units of production ...............
282,000
281,100 278,400
273,000
5,400
278,400
* 282,000 units – 9,000 units = 273,000 units
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163
Problem 4-17 (continued)
Costs per Equivalent Unit
Total Cost
Materials
Cost to be accounted for:
Work in process, May 1 ...............................................
$ 45,369
$ 13,385
Cost added during May ................................................
1,525,938
394,210
Total cost (a) ..............................................................
$1,571,307
$407,595
Equivalent units of production (b) ...................................
281,100
Cost per EU (a) ÷ (b) .....................................................$1.45 +
Labor
Overhead
$ 18,880
638,144
$657,024
$ 13,104
493,584
$506,688
278,400
$2.36 +
Whole
Unit
278,400
$1.82 = $5.63
Cost Reconciliation
Total
Cost
Equivalent Units (EU)
Materials
Labor
Overhead
Cost accounted for as follows:
Transferred to Drilling: 273,000;
× $5.63 per unit .......................................................
$1,536,990
273,000
Work in process, May 31:
Materials, at $1.45 per EU .........................................
11,745
8,100
Labor, at $2.36 per EU ..............................................
12,744
Overhead, at $1.82 per EU ........................................
9,828
Total work in process ..................................................
34,317
Total cost ...................................................................
$1,571,307
273,000
5,400
273,000
5,400
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164
Introduction to Managerial Accounting, 2nd Edition
Problem 4-18 (120 minutes)
Weighted-Average Method
1. a. Work in Process—Drying Department ..............................
540,460
Work in Process—Salting Department ..............................
295,000
Raw Materials ...........................................................
835,460
b. Work in Process—Drying Department ..............................
397,970
Work in Process—Salting Department ..............................
201,000
Salaries and Wages Payable ......................................
598,970
c. Manufacturing Overhead ................................................
542,000
Accounts Payable ......................................................
542,000
d. Work in Process—Drying Department ..............................
208,170
Work in Process—Salting Department ..............................
340,000
Manufacturing Overhead ...........................................
548,170
e. Work in Process—Salting Department ..............................
1,200,000
Work in Process—Drying Department ......................... 1,200,000
f. Finished Goods ..............................................................
1,980,000
Work in Process—Salting Department......................... 1,980,000
g. Accounts Receivable .......................................................
2,500,000
Sales ........................................................................ 2,500,000
Cost of Goods Sold .........................................................
1,930,000
Finished Goods ......................................................... 1,930,000
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165
Problem 4-18 (continued)
2.
(g)
Accounts Receivable
2,500,000
Bal.
(a)
(b)
(d)
Bal.
Work in Process
Drying Department
97,400 1,200,000
540,460
397,970
208,170
44,000
Bal.
(f)
Bal.
Finished Goods
57,000 1,930,000
1,980,000
107,000
Accounts Payable
542,000
Sales
2,500,000
Bal.
Bal.
(e)
(g)
Work in Process
Salting Department
Bal.
33,000 1,980,000
(a)
295,000
(b)
201,000
(d)
340,000
(e) 1,200,000
Bal.
89,000
(a)
(f)
Manufacturing Overhead
(c)
542,000
548,170 (d)
6,170 Bal.
Salaries and Wages Payable
598,970 (b)
(c)
(g)
Raw Materials
850,000
835,460
14,540
(g)
Cost of Goods Sold
1,930,000
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Introduction to Managerial Accounting, 2nd Edition
Problem 4-18 (continued)
3. The production report for the Drying Department follows:
Quantity Schedule and Equivalent Units
Quantity
Schedule
Pounds to be accounted for:
Work in process, December 1 (materials 90%
complete, labor and overhead 80% complete) ............
19,000
Started into production ................................................
191,000 *
Total pounds ...............................................................
210,000
Pounds accounted for as follows:
Transferred to Salting: .................................................
200,000
Work in process, December 31 (materials 100%
complete, labor and overhead 50% complete) ............
10,000
Total pounds and equivalent units of production ............
210,000
Equivalent Units (EU)
Materials
Labor
Overhead
200,000
200,000
200,000
10,000
210,000
5,000
205,000
5,000
205,000
* (200,000 pounds + 10,000 pounds) – 19,000 pounds = 191,000 pounds started
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167
Problem 4-18 (continued)
Cost per Equivalent Unit
Total Cost
Materials
Cost to be accounted for:
Work in process, December 1 ......................................
$ 97,400 $ 47,540
Cost added during December .......................................
1,146,600 540,460
Total cost (a) ..............................................................
$1,244,000 $588,000
Equivalent units of production (b) ...................................
210,000
Cost per EU (a) ÷ (b) .....................................................
$2.80 +
Cost Reconciliation
Total Cost
Labor
Overhead
$ 32,530
397,970
$430,500
$ 17,330
208,170
$225,500
205,000
$2.10 +
Whole
Unit
205,000
$1.10 = $6.00
Equivalent Units (EU)
Materials
Labor
Overhead
Cost accounted for as follows:
Transferred to Salting: 200,000
pounds at $6.00 per pound .......................................
$1,200,000 200,000
Work in process, December 31:
Materials, at $2.80 per EU .........................................
28,000
10,000
Labor, at $2.10 per EU ..............................................
10,500
Overhead, at $1.10 per EU ........................................
5,500
Total work in process ..................................................
44,000
Total cost ...................................................................
$1,244,000
200,000
5,000
200,000
5,000
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168
Introduction to Managerial Accounting, 2nd Edition
Analytical Thinking (90 minutes)
Weighted-Average Method
1. The revised production report follows:
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:
Work in process,
October 1 (material
100% complete,
conversion 7/8
complete) .................................................................
8,000
Received from the
preceding
department* .............................................................
97,000
Total units to be
accounted for ..............................................................
105,000
Equivalent Units (EU)
Transferred
ConverIn
Materials
sion
Units accounted for as
follows:
Transferred to Stamping...............................................
100,000
100,000
100,000
Work in process,
October 31 (material
0% complete,
conversion 2/5
complete) .......................................................
5,000
5,000 month
—
Total units accounted for ................................................
105,000
105,000
100,000
100,000
2,000
102,000
*100,000 + 5,000 – 8,000 = 97,000.
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169
Analytical Thinking (continued)
Costs per Equivalent Unit
Total Cost
Transferred
In
Materials
Cost to be accounted for:
Work in process, October 1 ..........................................
$ 22,420
$ 8,820
$ 3,400
Cost transferred in or added
during the month ......................................................
205,980
81,480
27,600
Total cost to be accounted for (a) ...................................
$228,400
$ 90,300
$ 31,000
Equivalent units (b) ........................................................
105,000
100,000
Cost per equivalent unit (a) ÷ (b) ....................................
$0.86 +
$0.31 +
Cost Reconciliation
Total
Cost
Conversion
Whole
Unit
$ 10,200
96,900
$107,100
102,000
$1.05 = $2.22
Equivalent Units (EU)
Transferred In Materials Conversion
Cost accounted for as follows:
Transferred to Stamping:
100,000 units × $2.22 per unit ..................................
$222,000
Work in process, October 31:
Transferred in cost, at $0.86 per EU ...........................
4,300
Conversion, at $1.05 per EU ......................................
2,100
Total work in process ...................................................
6,400
Total cost accounted for .................................................
$228,400
100,000
5,000
100,000
100,000
2,000
2. The unit cost figure on the report prepared by the accountant is high because none of the cost
incurred during the month was assigned to the units in the ending work in process inventory.
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Introduction to Managerial Accounting, 2nd Edition
Ethics Case (120 minutes)
 This case is difficult—particularly part 3, which requires analytical skills.
 Since there are no beginning inventories, it makes no difference
whether the weighted-average or FIFO method is used by the company.
You may choose to assign the problem specifying that the FIFO method
be used rather than the weighted-average method.
1. The computation of the cost of goods sold follows:
Transferred
In
Conversion
Estimated completion .....................................................
100%
25%
Computation of equivalent units:
Completed and transferred out.....................................
250,000
250,000
Work in process, ending:
Transferred in,
20,000 units × 100% .............................................
20,000
Conversion,
20,000 units × 25% ...............................................
5,000
Total equivalent units .....................................................
270,000
255,000
Transferred
In
Conversion
Cost to be accounted for:
Work in process ..........................................................
0
0
Cost added during the month .......................................
$49,221,000 $16,320,000
Total cost to be accounted for (a) ...................................
$49,221,000 $16,320,000
Whole
Unit
Equivalent units (above) (b) ...........................................
270,000
255,000
Cost per equivalent unit (a) ÷ (b) ...................................
$182.30 +
$64.00 = $246.30
Cost of goods sold = 250,000 units × $246.30 per unit = $61,575,000
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Solutions Manual, Chapter 4
171
Ethics Case (continued)
2. The estimate of the percentage completion of ending work in process
inventories affects the unit costs of finished goods and therefore of the
cost of goods sold. Thad Kostowski would like the estimated percentage
completion figures to be increased for the ending work in process. The
higher the percentage of completion of ending work in process, the
higher the equivalent units for the period and the lower the unit costs.
3. Increasing the percentage of completion can increase net operating
income by reducing the cost of goods sold. To increase net operating
income by $62,500, the cost of goods sold would have to be decreased
by $62,500 from $61,575,000 down to $61,512,500.
The percentage of completion, X, affects the cost of goods sold by its
effect on the unit cost, which can be determined as follows:
Unit cost = $182.30 +
$16,320,000
250,000+20,000X
And the cost of goods sold can be computed as follows:
Cost of goods sold = 250,000 × Unit cost
Since cost of goods sold must be reduced down to $61,512,500, the unit
cost must be $246.05 ($61,512,500 ÷ 250,000 units). Thus, the
required percentage completion, X, to obtain the $62,500 reduction in
cost of goods sold can be found by solving the following equation:
$182.30+
$16,320,000
=$246.05
250,000+20,000X
$16,320,000
=$246.05-$182.30
250,000+20,000X
$16,320,000
=$63.75
250,000+20,000X
250,000+20,000X
1
=
$16,320,000
$63.75
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Introduction to Managerial Accounting, 2nd Edition
Ethics Case (continued)
250,000+20,000X=
$16,320,000
$63.75
250,000+20,000X=256,000
20,000X=256,000-250,000
20,000X=6,000
X=
6,000
=30%
20,000
Thus, changing the percentage completion to 30% will decrease cost
of goods sold and increase net operating income by $62,500 as verified
on the next page.
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173
Ethics Case (continued)
3. (continued)
Transferred In
Estimated completion .....................................................
100%
Computation of equivalent units:
Completed and transferred out.....................................
250,000
Work in process, ending: .............................................
Transferred in, 20,000 units × 100% .........................
20,000
Conversion, 20,000 units × 30% ...............................
Total equivalent units .....................................................
270,000
Transferred In
Cost to be accounted for:
Work in process ..........................................................0
Cost added during the month .......................................
$49,221,000
Total cost to be accounted for (a) ...................................
$49,221,000
Equivalent units (above) (b) ...........................................
270,000
Cost per equivalent unit (a) ÷ (b) ...................................
$182.30
Conversion
30%
250,000
6,000
256,000
Conversion
Whole
Unit
0
$16,320,000
$16,320,000
256,000
+ $63.75 =$246.05
Cost of goods sold = 250,000 units × $246.05 per unit = $61,512,500
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174
Managerial Accounting, 10th Edition
Ethics Case (continued)
4. Carol is in a very difficult position. Collaborating with Thad Kostowski in
subverting the integrity of the accounting system is unethical by almost
any standard. To put the situation in its starkest light, Kostowski is
suggesting that the production managers lie in order to get their bonus.
Having said that, the peer pressure to go along in this situation may be
intense. It is difficult on a personal level to ignore such peer pressure.
Moreover, Carol probably prefers not to risk alienating people she might
need to rely on in the future. On the other hand, Carol should be careful
not to accept at face value Kostowski’s assertion that all of the other
managers are “doing as much as they can to pull this bonus out of the
hat.” Those who engage in unethical or illegal acts often rationalize their
own behavior by exaggerating the extent to which others engage in the
same kind of behavior. Other managers may actually be very
uncomfortable “pulling strings” to make the target profit for the year.
From a broader perspective, if the net profit figures reported by the
managers in a division cannot be trusted, then the company would be
foolish to base bonuses on the net profit figures. A bonus system based
on divisional net profits presupposes the integrity of the accounting
system. However, the company should perhaps reconsider how it
determines the bonus. It is quite common for companies to pay an “all
or nothing” bonus contingent on making a particular target. This
inevitably creates powerful incentives to bend the rules when the target
has not quite been attained. It might be better to have a bonus without
this “all or nothing” feature. For example, managers could be paid a
bonus of x% of profits above target profits rather than a bonus that is a
preset percentage of their base salary. Under such a policy, the effect of
adding that last dollar of profits that just pushes the divisional net
profits over the target profit will add a few pennies to the manager’s
compensation rather than thousands of dollars. Therefore, the
incentives to misstate the net operating income are reduced. Why tempt
people unnecessarily?
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175
Communicating in Practice (30 minutes)
Date:
To:
From:
Subject:
Current Date
Minesh Patel
Student’s Name
Production Report
Referring to the Production Report for the Shaping and Milling Department,
please perform the following steps:
1. Ensure that the current balance in the Shaping and Milling Department
Work in Process account is currently $734,675, which is the total cost to
be accounted for in the Cost Reconciliation section of the Production
Report.
2. Prepare the following journal entry for the 4,800 units that were
transferred during the month from the Shaping and Milling Department
to the Graphics Application Department:
Work in Process, Graphics Application ..............................
715,200
Work in Process, Shaping and Milling ..........................
715,200
3. After this entry is posted to the ledger, the Shaping and Milling
Department account should have an ending account balance of $19,475,
which is the total Work in Process, May 31 amount reflected in the Cost
Reconciliation section of the Production Report.
If you have any questions, please do not hesitate to contact me.
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Introduction to Managerial Accounting, 2nd Edition
Teamwork In Action
Reports similar to the following should be prepared by the Expert Teams
and shared with the Learning Teams:
a. Quantity Schedule and Equivalent Units
The Quantity Schedule and Equivalent Units section of the production
report: (1) accounts for all of the units that were in production during the
period, and (2) computes the equivalent units of production. Imagine that
you are the manager of a department in a factory. You are responsible for
the units that pass through your department during the month. This
section of the report summarizes that activity. In addition, it converts the
information to equivalent units.
The “work in process, beginning of the period” represents the number of
units that are sitting in your department when you arrive at work on the
first day of the month. These units were started last month. During the
month, the department just before yours in the production process will
transfer units into your department (or, if you are the first department in
the process, raw materials will be transferred into your department during
the month). These units are “started into production.” Also, during the
month, your department will work on (or process) units. The units that
have been completely processed are “transferred to the next department.”
It is important to note that the units on hand at the beginning of the
month plus the units that were transferred in must equal the units that
were transferred out plus the units that were still on hand at the end of the
period.
To determine the department’s output for the period, the equivalent units
of production are computed for both materials and conversion (labor and
overhead). The equivalent units of production are determined by adding
the number of completed units that were transferred to the next
department and the equivalent units that are in the ending work in process
inventory. The number of equivalent units in the ending work in process
inventory is computed by multiplying the number of units on hand times
the percent complete.
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Teamwork In Action, continued
b. Costs per Equivalent Unit
The Costs per Equivalent Unit section of the production report: (1)
summarizes the total costs that must be accounted for, and (2) documents
the cost per equivalent unit.
The “costs to be accounted for” section represents the costs added to the
department’s Work in Process account during the period. The “work in
process, beginning of period” is the beginning balance in the inventory
account for this department. Note that this balance is broken out into its
two components: materials and conversion. The “costs added” represent
the materials and conversion costs that were debited to the work in
process account during the period. Materials requisitions generate the
amount used in the entry to record the material costs. The conversion
costs are comprised of: (1) the direct labor wages paid to the employees
who worked in the department during the period and (2) the overhead that
was applied (using the department’s predetermined overhead rate) to the
units that passed through the department during the period.
The “materials cost per equivalent unit” is determined by dividing the total
materials costs (the total of materials in the beginning inventory and the
costs that were added during the period) by the number of equivalent units
of production for materials (which is calculated in the Quantity Schedule
and Equivalent Units section of the report). The “conversion cost per
equivalent unit” is determined by dividing the total conversion costs (the
total of conversion costs in the beginning inventory and the labor and
overhead that were added during the period) by the number of equivalent
units of production for conversion (which is calculated in the Quantity
Schedule and Equivalent Units section of the report). The “whole unit cost
per equivalent unit” is the total of the “material cost per equivalent unit”
and the “conversion cost per equivalent unit.”
c. Cost Reconciliation
The Cost Reconciliation section of the production report summarizes the
total costs that have been accounted for. This section determines the
amount that will be used in the entry to transfer units from this
department’s work in process account to the next. This is referred to as
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Introduction to Managerial Accounting, 2nd Edition
Teamwork In Action, continued
“transferred to the next department” in this section of the report. Also, in
addition to showing the components (materials and conversion) of the
ending balance in this department’s work in process account (for use in
preparing next month’s Production Report), this section proves that ending
balance.
The amount that is “transferred to the next department” is determined by
multiplying the number of units transferred to the next department (which
appears in the Quantity Schedule and Equivalent Units section of the
report) by the whole unit cost per equivalent unit (which is calculated in
the Costs per Equivalent Unit section of the report).
The amount of “materials” in the ending work in process inventory for this
department is determined by multiplying the number of equivalent units
(for materials) that are in the ending work in process (which appears in the
Quantity Schedule and Equivalent Units section of the report) by the
materials cost per equivalent unit (which is calculated in the Costs per
Equivalent Unit section of the report).
The amount of “conversion” in the ending work in process inventory for
this department is determined by multiplying the number of equivalent
units (for conversion) that are in the ending work in process (which
appears in the Quantity Schedule and Equivalent Units section of the
report) by the conversion cost per equivalent unit (which is calculated in
the Costs per Equivalent Unit section of the report).
The “total work in process” is the sum of the amounts just calculated for
“materials” and “conversion.” After all journal entries are made, this
amount should appear as the ending balance in this department’s Work in
Process account.
Finally, the “total cost” is the sum of the costs transferred to the next
department and the ending Work in Process inventory for this department.
Note that this total must equal the total of the “costs to be accounted for”
that appears in the Costs per Equivalent Unit section of the report.
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