Chapter 4
Systems Design: Process Costing
Solutions to Questions
4-1
A process costing system should be
used in situations where a homogeneous
product is produced on a continuous basis.
4-4
In a process costing system, a Work in
Process account is maintained for each separate
processing department.
4-2
1. Job-order costing and process costing have
the same basic purposes—to assign
materials, labor, and overhead cost to
products and to provide a mechanism for
computing unit product costs.
2. Both systems use the same basic
manufacturing accounts.
3. Costs flow through the accounts in basically
the same way in both systems.
4-5
4-3
Cost accumulation is simpler under
process costing because costs only need to be
assigned to departments—not separate jobs. A
company usually has a small number of
processing departments, whereas a job-order
costing system often must keep track of the
costs of hundreds or even thousands of jobs.
The journal entry would be:
Work in Process, Firing ......................................
XXXX
Work in Process, Mixing ..............................
XXXX
4-6
The costs that might be added in the
Firing Department include: (1) costs transferred
in from the Mixing Department; (2) materials
costs added in the Firing Department; (3) labor
costs added in the Firing Department; and (4)
overhead costs added in the Firing Department.
4-7
Under the weighted-average method,
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.
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Solutions Manual, Chapter 4
143
Brief Exercise 4-1 (20 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
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 ...
61,000
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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Introduction to Managerial Accounting, 4th Edition
Brief Exercise 4-2 (10 minutes)
Weighted-Average Method
Units transferred to the next department .......
Ending work in process:
Materials: 30,000 units × 70% complete .....
Conversion: 30,000 units × 50% complete ..
Equivalent units of production .......................
Equivalent Units
Materials Conversion
410,000
21,000
431,000
410,000
15,000
425,000
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Solutions Manual, Chapter 4
145
Brief Exercise 4-3 (15 minutes)
Weighted-Average Method
Work in process, May 1 ........
Cost added during May ........
Total cost (a) ......................
Equivalent units of
production (b)...................
Cost per equivalent unit
(a) ÷ (b) ..........................
Materials
Labor
$ 14,550
88,350
$102,900
$23,620
14,330
$37,950
1,200
1,100
$85.75
$34.50
Overhead
$118,100
71,650
$189,750
Total
1,100
$172.50 $292.75
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Introduction to Managerial Accounting, 4th Edition
Exercise 4-4 (15 minutes)
Weighted-Average Method
Ending work in process inventory:
Equivalent units of production .................
Cost per equivalent unit ..........................
Cost of ending work in process inventory .
Units completed and transferred out:
Units transferred to the next department .
Cost per equivalent unit ..........................
Cost of units completed and transferred
out ....................................................
Materials Conversion
Total
300
$31.56
$9,468
100
$9.32
$932 $10,400
1,300
$31.56
1,300
$9.32
$41,028
$12,116 $53,144
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Solutions Manual, Chapter 4
147
Exercise 4-5 (15 minutes)
Weighted-Average Method
Pounds transferred to the Packing Department
during May .......................................................
Work in process, May 31:
Materials: 20,000 pounds × 100% complete .......
Labor and overhead: 20,000 pounds × 90%
complete ........................................................
Equivalent units of production ..............................
Labor &
Materials Overhead
490,000
490,000
20,000
510,000
18,000
508,000
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Introduction to Managerial Accounting, 4th Edition
Exercise 4-6 (20 minutes)
Weighted-Average Method
1.
Units transferred to the next
department ....................................
Ending work in process:
Materials: 50,000 units × 60%
complete......................................
Labor: 50,000 units × 20%
complete......................................
Overhead: 50,000 units × 20%
complete......................................
Equivalent units of production ............
2.
Materials
Labor
790,000 790,000
Overhead
790,000
30,000
10,000
820,000 800,000
Materials
Labor
10,000
800,000
Overhead
Cost of beginning work in process ....... $ 68,600 $ 30,000 $ 48,000
Costs added during the period ............ 907,200 370,000 592,000
Total cost (a) ..................................... $975,800 $400,000 $640,000
Equivalent units of production (b) ....... 820,000 800,000 800,000
Cost per equivalent unit (a) ÷ (b)........
$1.19
$0.50
$0.80
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Solutions Manual, Chapter 4
149
Exercise 4-7 (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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150
Introduction to Managerial Accounting, 4th Edition
Exercise 4-8 (30 minutes)
Weighted-Average Method
1.
Units transferred to the next process ...............
Ending work in process:
Materials: 40,000 units × 50% complete .......
Conversion: 40,000 units × 25% complete ....
Equivalent units of production .........................
2.
Materials Conversion
300,000
20,000
320,000
300,000
10,000
310,000
Materials Conversion
Cost of beginning work in process .................. $ 56,600 $ 14,900
Cost added during the period ......................... 385,000
214,500
Total cost (a) ................................................ $441,600 $229,400
Equivalent units of production (b)................... 320,000
310,000
Cost per equivalent unit (a) ÷ (b) ...................
$1.38
$0.74
3.
Ending work in process inventory:
Equivalent units of production
(see above) ........................
Cost per equivalent unit (see
above) ...............................
Cost of ending work in process
inventory ............................
Materials Conversion
20,000
10,000
$1.38
$0.74
$27,600
$7,400
Total
$35,000
Units completed and transferred out:
Units transferred to the next
department ........................
Cost per equivalent unit
(see above) ........................
Cost of units completed and
transferred out ...................
300,000
300,000
$1.38
$0.74
$414,000
$222,000
$636,000
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Solutions Manual, Chapter 4
151
Problem 4-9A (45 minutes)
Weighted-Average Method
1. a. Work in Process—Bending Department ..........
Work in Process—Drilling Department ...........
Raw Materials .........................................
394,210
100,800
b. Work in Process—Bending Department ..........
Work in Process—Drilling Department ...........
Salaries and Wages Payable ....................
638,144
250,600
c. Manufacturing Overhead ..............................
Accounts Payable ....................................
685,000
d. Work in Process—Bending Department ..........
Work in Process—Drilling Department ...........
Manufacturing Overhead .........................
493,584
189,000
495,010
888,744
685,000
682,584
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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Introduction to Managerial Accounting, 4th Edition
Problem 4-9A (continued)
2.
(g)
Accounts Receivable
2,700,000
Bal.
Bal.
Raw Materials
500,000 (a)
495,010
4,990
Bal.
(a)
(b)
(d)
Bal.
Work in Process
Bending Department
45,369 (e)
1,536,990
394,210
638,144
493,584
34,317
Work in Process
Drilling Department
Bal.
10,000 (f)
1,650,000
(a)
100,800
(b)
250,600
(d)
189,000
(e) 1,536,990
Bal.
437,390
Bal.
(f)
Bal.
Finished Goods
110,000 (g)
1,600,000
1,650,000
160,000
Manufacturing Overhead
(c)
685,000 (d)
682,584
Bal.
2,416
Accounts Payable
(c)
685,000
Salaries and Wages Payable
(b)
888,744
Sales
(g)
2,700,000
(g)
Cost of Goods Sold
1,600,000
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Solutions Manual, Chapter 4
153
Problem 4-10A (60 minutes)
Weighted-Average Method
1. Equivalent Units of Production
Transferred to next department........................
Ending work in process:
Materials: 20,000 units* x 40% complete .......
Conversion: 20,000 units* x 10% complete ....
Equivalent units of production ..........................
Materials Conversion
155,000
8,000
163,000
155,000
2,000
157,000
*Units transferred to the next department = Units in beginning WIP +
Units started into production − Units in ending WIP
155,000 = 15,000 + 160,000 − Units in ending WIP
Units in ending WIP = 15,000 + 160,000 − 155,000 = 20,000
2. Cost per Equivalent Unit
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) ÷ (b) ...............
Materials Conversion
$ 14,100
142,380
$156,480
163,000
$0.96
$ 22,680
237,940
$260,620
157,000
$1.66
3. Cost of Ending Work in Process Inventory and Units Transferred Out
Materials Conversion
Ending work in process inventory:
Equivalent units of production
(materials: 20,000 units x 40%
complete; conversion: 20,0000
units x 10% complete) .......
8,000
Cost per equivalent unit .......
$0.96
Cost of ending work in process
inventory ...........................
$7,680
Units completed and transferred out:
Units transferred to the next
department .......................
155,000
Cost per equivalent unit .......
$0.96
Cost of units completed and
transferred out...................
$148,800
Total
2,000
$1.66
$3,320
$11,000
155,000
$1.66
$257,300
$406,100
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154
Introduction to Managerial Accounting, 4th Edition
Problem 4-10A (continued)
4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($14,100 + $22,680) ..................................
Costs added to production during the period
($142,380 + $237,940) ..............................
Total cost to be accounted for .......................
Costs accounted for as follows:
Cost of ending work in process inventory ......
Cost of units completed and transferred out ..
Total cost accounted for ...............................
$ 36,780
380,320
$417,100
$ 11,000
406,100
$417,100
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Solutions Manual, Chapter 4
155
Problem 4-11A (60 minutes)
Weighted-Average Method
1.
The equivalent units were:
Transferred to next department..................
Ending work in process:
Materials: 14,000 units x 75% complete ...
Conversion: 14,000 units x 50% complete
Equivalent units of production ....................
2.
The costs per equivalent unit were:
Cost of beginning work in process .............
Cost added during the period ....................
Total cost (a) ...........................................
Equivalent units of production (b) .............
Cost per equivalent unit, (a) ÷ (b) ............
3. Total units transferred ...............................
Less units in the beginning inventory ..........
Units started and completed during May .....
Materials
92,000
10,500
102,500
Materials
$ 5,900
194,200
$200,100
102,500
$1.95
Conversion
92,000
7,000
99,000
Conversion
$ 10,500
237,000
$247,500
99,000
$2.50
92,000
6,000
86,000
4. No, the manager should not be rewarded for good cost control. The
Mixing Department’s material cost for May is due to the fact that low
costs of the prior month have been averaged with May’s higher costs.
This is a major criticism of the weighted-average method. The costs
computed for product costing purposes shouldn’t be used to evaluate
cost control or measure performance for the current period.
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Introduction to Managerial Accounting, 4th Edition
Problem 4-12A (60 minutes)
Weighted-Average Method
1. a. Work in Process—Drying Department ............
Work in Process—Salting Department ............
Raw Materials .........................................
540,460
295,000
b. Work in Process—Drying Department ............
Work in Process—Salting Department ............
Salaries and Wages Payable ....................
397,970
201,000
c. Manufacturing Overhead ..............................
Accounts Payable ....................................
542,000
d. Work in Process—Drying Department ............
Work in Process—Salting Department ............
Manufacturing Overhead .........................
208,170
340,000
835,460
598,970
542,000
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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Solutions Manual, Chapter 4
157
Problem 4-12A (continued)
2.
(g)
Accounts Receivable
2,500,000
Bal.
(a)
(b)
(d)
Bal.
Work in Process
Drying Department
97,400 (e)
1,200,000
540,460
397,970
208,170
44,000
Bal.
(f)
Bal.
Finished Goods
57,000 (g)
1,930,000
1,980,000
107,000
Bal.
Bal.
Bal.
(a)
(b)
(d)
(e)
Bal.
(c)
Accounts Payable
(c)
542,000
Sales
(g)
2,500,000
Raw Materials
850,000 (a)
14,540
835,460
Work in Process
Salting Department
33,000 (f)
1,980,000
295,000
201,000
340,000
1,200,000
89,000
Manufacturing Overhead
542,000 (d)
548,170
Bal.
6,170
Salaries and Wages Payable
(b)
598,970
(g)
Cost of Goods Sold
1,930,000
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Introduction to Managerial Accounting, 4th Edition
Problem 4-13A (60 minutes)
Weighted-Average Method
1. Equivalent Units of Production
Transferred to next department........................
Ending work in process:
Materials: 13,000 units x 60% complete .........
Conversion: 13,000 units x 20% complete ......
Equivalent units of production ..........................
2. Cost per Equivalent Unit
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) ÷ (b) ...............
3. Applying Costs to Units
Materials Conversion
82,000
7,800
89,800
2,600
84,600
Materials Conversion
$ 6,800
105,450
$112,250
89,800
$1.25
Materials Conversion
Ending work in process inventory:
Equivalent units of production
(materials: 13,000 units x 60%
complete; conversion: 13,000
units x 20% complete) .......
7,800
Cost per equivalent unit .......
$1.25
Cost of ending work in process
inventory ...........................
$9,750
Units completed and transferred out:
Units transferred to the next
department .......................
82,000
Cost per equivalent unit .......
$1.25
Cost of units completed and
transferred out...................
$102,500
82,000
$ 8,000
144,280
$152,280
84,600
$1.80
Total
2,600
$1.80
$4,680
$14,430
82,000
$1.80
$147,600
$250,100
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Solutions Manual, Chapter 4
159
Problem 4-13A (continued)
4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($6,800 + $8,000) .....................................
Costs added to production during the period
($105,450 + $144,280) ..............................
Total cost to be accounted for .......................
Costs accounted for as follows:
Cost of ending work in process inventory ......
Cost of units completed and transferred out ..
Total cost accounted for ...............................
$ 14,800
249,730
$264,530
$ 14,430
250,100
$264,530
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Introduction to Managerial Accounting, 4th Edition
Problem 4-14A (60 minutes)
Weighted-Average Method
1. Equivalent Units of Production
Transferred to next department* ......................
Ending work in process:
Materials: 2,900 units x 100% complete .........
Conversion: 2,900 units x 70% complete ........
Equivalent units of production ..........................
Materials Conversion
58,400
2,900
61,300
58,400
2,030
60,430
*4,500 + 56,800 – 2,900 = 58,400.
2. Cost per Equivalent Unit
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) ÷ (b) ...............
Materials
$ 9,125
113,475
$122,600
61,300
$2.00
Conversion
$ 3,240
75,319
$78,559
60,430
$1.30
3. Cost of Ending Work in Process Inventory and Units Transferred Out
Materials Conversion
Ending work in process inventory:
Equivalent units of production
(see above) .......................
2,900
Cost per equivalent unit .......
$2.00
Cost of ending work in process
inventory ...........................
$5,800
Units completed and transferred out:
Units transferred to the next
department .......................
58,400
Cost per equivalent unit .......
$2.00
Cost of units completed and
transferred out...................
$116,800
Total
2,030
$1.30
$2,639
$8,439
58,400
$1.30
$75,920
$192,720
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Solutions Manual, Chapter 4
161
Problem 4-14A (continued)
4. In computing unit costs, the weighted-average method mixes costs of
the prior period 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 (or bad) cost control in the current period might be
concealed by the costs that have been brought forward in the beginning
inventory.
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162
Introduction to Managerial Accounting, 4th Edition
Problem 4-15A (90 minutes)
Weighted-Average Method
1. The equivalent units are:
Units completed during the year .....................
Work in process, Dec. 31:
Materials: 30,000 units × 100% complete ....
Labor and overhead: 30,000 units × 80%
complete .................................................
Equivalent units of production ........................
Materials
635,000
Labor
Overhead
24,000
659,000
24,000
659,000
Labor
Overhead
635,000
635,000
30,000
665,000
The costs per equivalent unit are:
Work in process, Jan. 1..................................
Cost added during the year ............................
Total cost (a) ................................................
Equivalent units of production (b)...................
Cost per equivalent unit (a) ÷ (b) ...................
Materials
$ 18,000
979,500
$997,500
665,000
$1.50
$ 9,555
616,495
$626,050
659,000
$0.95
$ 7,644 *
493,196 **
$500,840
659,000
$0.76
* $9,555 × 80% = $7,644
** $616,495 × 80% = $493,196
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Solutions Manual, Chapter 4
163
Problem 4-15A (continued)
2. The amount of cost that should be assigned to the ending inventories is:
Ending work in process inventory:
Equivalent units of production
(see above) ...........................
Cost per equivalent unit ...........
Cost of ending work in process
inventory ...............................
Finished goods inventory:
Equivalent units .......................
Cost per equivalent unit ...........
Cost of ending finished goods
inventory ...............................
Materials
Labor
Overhead
30,000
$1.50
24,000
$0.95
24,000
$0.76
$45,000
$22,800
$18,240
12,000
$1.50
12,000
$0.95
12,000
$0.76
$18,000
$11,400
$9,120
Total
$86,040
$38,520
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164
Introduction to Managerial Accounting, 4th Edition
Problem 4-15A (continued)
3. The necessary adjustments would be:
Work in
Process
Total cost that should be assigned
to inventories (see above) ............ $ 86,040
Year-end balances in the accounts .. 85,000
Error.............................................. $ 1,040
Work in Process Inventory ..................
Cost of Goods Sold .............................
Finished Goods Inventory ..............
Finished
Goods
Total
$38,520 $124,560
60,000 145,000
($21,480) ($20,440)
1,040
20,440
21,480
4. The cost of goods sold can be determined as follows:
Beginning finished goods inventory.......................
Units completed during the year ...........................
Units available for sale .........................................
Less units in ending finished goods inventory ........
Units sold during the year ....................................
Cost per equivalent unit ($1.50 + $0.95 + $0.76) .
Cost of goods sold ...............................................
Alternative computation:
Total manufacturing cost incurred:
Materials (part 1. above) ...................................
Labor (part 1. above) ........................................
Overhead (part 1. above) ..................................
Total manufacturing cost .....................................
Less cost assigned to inventories
($86,040 + $38,520).........................................
Cost of goods sold ...............................................
0
635,000
635,000
12,000
623,000
× $3.21
$1,999,830
$ 997,500
626,050
500,840
2,124,390
124,560
$1,999,830
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Solutions Manual, Chapter 4
165
Ethics Case (120 minutes)
 This case is difficult—particularly part 3, which requires analytical skills.
 Because 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 specify that the FIFO method be used rather than
the weighted-average method.
1. Computation of the Cost of Goods Sold:
Units completed and sold.......................
Ending work in process:
Transferred in:
20,000 units x 100% complete...........
Conversion:
20,000 units x 25% complete ............
Equivalent units of production ................
Cost of beginning work in process ..........
Cost added during the period .................
Total cost (a) ........................................
Equivalent units of production (b) ..........
Cost per equivalent unit, (a) ÷ (b) .........
Transferred In
250,000
Conversion
250,000
20,000
270,000
Transferred In
5,000
255,000
Conversion
$
0 $
0
49,221,000 16,320,000
$49,221,000 $16,320,000
270,000
255,000
$182.30
$64.00
Cost of goods sold = 250,000 units × ($182.30 + $64.00) per unit =
$61,575,000.
2. The estimate of the percentage completion of ending work in process
inventories affects the unit costs of finished goods and therefore the
cost of goods sold. Thad Kostowski would like the estimated percentage
completion of the ending work in process to be increased. 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. See the next page
for the necessary calculations.
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Introduction to Managerial Accounting, 4th Edition
Ethics Case (continued)
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 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
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 ÷ 20,000 = 30%
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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Solutions Manual, Chapter 4
167
Ethics Case (continued)
3. (continued)
Computation of the Cost of Goods Sold:
Units completed and sold.......................
Ending work in process:
Transferred in:
20,000 units x 100% complete...........
Conversion:
20,000 units x 30% complete ............
Equivalent units of production ................
Cost of beginning work in process ..........
Cost added during the period .................
Total cost (a) ........................................
Equivalent units of production (b) ..........
Cost per equivalent unit, (a) ÷ (b) .........
Transferred In
250,000
Conversion
250,000
20,000
270,000
Transferred In
6,000
256,000
Conversion
$
0 $
0
49,221,000 16,320,000
$49,221,000 $16,320,000
270,000
256,000
$182.30
$63.75
Cost of goods sold = 250,000 units × ($182.30 per unit + $63.75 per
unit) = $61,512,500.
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.
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168
Introduction to Managerial Accounting, 4th Edition
Ethics Case (continued)
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.
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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Solutions Manual, Chapter 4
169
Analytical Thinking (90 minutes)
1. The revised computations follow:
Equivalent Units of Production
Transferred to next department........................
Ending work in process:
Transferred in: 5,000 units x 100% complete ..
Materials: 5,000 units x 0% complete.............
Conversion: 5,000 units x 2/5 complete ...........
Equivalent units of production ..........................
Cost of beginning work in process ...................
Cost added during the period ..........................
Total cost (a) .................................................
Equivalent units of production (b) ...................
Cost per equivalent unit, (a) ÷ (b) ..................
Transferred
In
100,000
5,000
105,000
Transferred
In
$ 8,820
81,480
$90,300
105,000
$0.86
Materials
100,000
0
100,000
Materials
$ 3,400
27,600
$31,000
100,000
$0.31
Conversion
100,000
2,000
102,000
Conversion
$ 10,200
96,900
$107,100
102,000
$1.05
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170
Introduction to Managerial Accounting, 4th Edition
Analytical Thinking (continued)
Ending work in process inventory:
Equivalent units of production (see above) ..
Cost per equivalent unit .............................
Cost of ending work in process inventory ....
Units completed and transferred out:
Units transferred to the next department.....
Cost per equivalent unit .............................
Cost of units completed and transferred out
Transferred
In
Materials
Conversion
Total
5,000
$0.86
$4,300
0
$0.31
$0
2,000
$1.05
$2,100
$6,400
100,000
$0.86
$86,000
100,000
$0.31
$31,000
100,000
$1.05
$105,000
$222,000
2. The unit cost computed above is $2.22 (= $0.86 + $0.31 + $1.05) versus $2.284 on the original
report. The unit cost 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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Solutions Manual, Chapter 4
171