CHAPTER 17

PROCESS-COSTING SYSTEMS

17-1 Industries using process costing in their manufacturing area include chemical processing, oil refining, pharmaceutical, plastics, brick and tile manufacturing, semiconductor chips, beverages and breakfast cereals.

17-2 Process costing systems separate costs into cost categories according to the timing of when costs are introduced into the process. Often, only two cost classifications, direct materials and conversion costs, are necessary. Direct materials are frequently added at one point in time, often the start or the end of the process and all conversion costs are added at about the same time, but in a pattern different from direct materials costs.

17-3 Equivalent units measure output in terms of the physical quantities of each of the inputs (factors of production) that have been consumed when producing the units. Each equivalent unit is comprised of the physical quantities of direct materials and conversion costs inputs necessary to produce output of one fully completed unit. Equivalent unit measures are necessary since all physical units are not completed to the same extent.

17-4 The accuracy of the estimates of completion depend on the care and skill of the estimator and the nature of the process. Aircraft blades may differ substantially in the finishing necessary to obtain a final product. The amount of work may not always be easy to ascertain in advance.

17-5 The four key steps in process costing follow:

Step 1: Summarize the flow of physical units of output.

Step 2: Compute output in terms of equivalent units.

Step 3: Compute equivalent unit costs.

Step 4: Summarize total costs to account for and assign these costs to units completed and to units in ending Work in Process.

17-6 Three inventory methods associated with process costing are:

• Weighted average.

• First-in, first-out.

• Standard costing.

17-7 The weighted-average process-costing method assigns the average equivalent unit cost of all work done to date (regardless of when it was done) to equivalent units completed and transferred out, and to equivalent units in ending inventory.

17-8 FIFO computations are distinctive because they assign the cost of the earliest equivalent units available (starting with equivalent units in beginning work-in-process inventory) to units completed and transferred out, and the cost of the most recent equivalent units worked on during the period to ending work-in-process inventory. In contrast, the weighted average method costs units completed and transferred out and in ending work in process at the same average cost.

17-9 FIFO should be called a modified or departmental FIFO method because the goods transferred in during a given period usually bear a single average unit cost as a matter of convenience.

17-10 A major advantage of FIFO is that managers can judge the performance in the current period independently from the performance in the preceding period.

17-11 The journal entries in process-costing are basically like those made in job-costing systems. The main difference is that, in process costing, there is often more than one work-in-process account––one for each process.

17-12 Standard-cost procedures are particularly appropriate to process-costing systems where there are various combinations of materials and operations. Standard-cost procedures avoid the intricacies involved in detailed tracking with weighted-average or FIFO methods when there are frequent price variations over time.

17-13 There are two reasons why the accountant should distinguish between transferred-in costs and additional direct materials costs for a particular department:

(a) All direct materials may not be added at the beginning of the department process.

(b) The control methods and responsibilities may be different for transferred-in items and materials added in this department.

17-14 No. Previous department costs (also called transferred-in costs) are costs incurred in a previous department that have been charged to a subsequent department. These costs may be costs incurred in that previous department during this accounting period or a preceding accounting period.

17-15 Materials are only one cost item. Other items (often included in a conversion costs pool) include labor, energy, and maintenance. If the costs of these items vary over time, this variability can cause a difference when weighted-average or FIFO is used.

A second factor is the amount of inventory on hand at the beginning or end of an accounting period. The smaller the amount of production held in beginning or ending inventory relative to the total number of units transferred out, the smaller the effect on operating income or inventory amounts from use of weighted-average or FIFO.

17-16 (25 min.) No beginning inventory.

1. Direct materials cost per unit ($720,000 ÷ 10,000) $ 72

Conversion cost per unit ($760,000 ÷ 10,000) 76

Assembly Department cost per unit $148

2. Solution Exhibit 17-16A calculates the equivalent units of direct materials and conversion costs in the Assembly Department of International Electronics in February 19_7.

Solution Exhibit 17-16B computes equivalent units costs

Direct materials cost per unit $ 72

Conversion cost per unit 80

Assembly Department cost per unit $152

3. The difference in the Assembly Department cost per unit calculated in requirements 1 and 2 arises because the costs incurred in January and February are the same but fewer equivalent units of work are done in February relative to January. In January, all 10,000 units introduced are fully completed resulting in 10,000 equivalent units of work done with respect to direct materials and conversion costs. In February, of the 10,000 units introduced, 10,000 equivalent units of work is done with respect to direct materials but only 9,500 equivalent units of work is done with respect to conversion costs. The Assembly Department cost per unit is therefore higher.

17-16 (Cont'd.)

SOLUTION EXHIBIT 17-16A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Assembly Department of International Electronics for February 19_7

*Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

SOLUTION EXHIBIT 17-16B

Step 3 : Compute Equivalent Unit Costs

Assembly Department of International Electronics for February 19_7

17-17 (20 min.) Journal entries.

1. Work in Process––Assembly 720,000

Accounts Payable 720,000

To record $720,000 of direct materials

purchased and used in production during

February 19_7

2. Work in Process––Assembly 760,000

Various accounts 760,000

To record $760,000 of conversion costs

for February 19_7; examples include energy,

manufacturing supplies, all manufacturing

labor, and plant depreciation

3. Work in Process––Testing 1,368,000

Work in Process––Assembly 1,368,000

To record 9,000 units completed and

transferred from Assembly to Testing

during Februry 19_7 at

$152 ¥ 9,000 units = $1,368,000

 

Postings to the Work in Process––Assembly account follow.

Work in Process –– Assembly Department

Beginning inventory, Feb. 1 0 3. Transferred out to

1. Direct materials 720,000 Work in Process-testing 1,368,000

2. Conversion costs 760,000

Ending inventory, Feb. 28 112,000

17-18 (25 min.) No beginning inventory, materials introduced in middle of

process.

1. Solution Exhibit 17-18A shows equivalent units of work done in the current period of Chemical P, 50,000; Chemical Q, 35,000; Conversion costs, 45,000.

2(a) Solution Exhibit 17-18B calculates cost per equivalent unit of work done in the current period for chemical P, Chemical Q, and conversion costs.

2(b) Solution Exhibit 17-18C summarizes the total Mixing Department costs for July 19_7, and assigns these costs to units completed (and transferred out) and to units in ending work in process.

SOLUTION EXHIBIT 17-18A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Mixing Department of Vaasa Chemicals for July 19_7

*Degree of completion in this department: chemical P, 100%; chemical Q, 0%; conversion costs, 66 2/3%.

Note that chemical Q has not been included in the ending work in process, since the ending WIP is 66 2/3% complete and chemical Q is only added when the units are 75% or three-fourths complete.

† Ending work in process = Beginning work in process + Units started – Units completed

= 0 + 50,000 – 35,000 = 15,000 units

SOLUTION EXHIBIT 17-18B

Step 3 : Compute Equivalent Unit Costs

Mixing Department of Vaasa Chemicals for July 19_7

17-18C

17-19 (10-15 min.) Journal entries.

1. Work in Process––Mixing 320,000

Accounts Payable 320,000

To record chemical P ($250,000) and

Chemical Q ($70,000) purchased and used

in production during July 19_7.

2. Work in Process––Mixing 135,000

Various Accounts 135,000

To record Mixing Department conversion

costs for July 19_7; examples include energy,

labor, and plant depreciation.

3. Work in Process––Refining 350,000

Work in Process––Mixing 350,000

To record cost of goods completed

and transferred from Mixing to

Refining Department during July 19_7.

 

 

17-20 (20 min.) Equivalent units and equivalent unit costs.

1&2. Solution Exhibit 17-20A shows equivalent units of work done in the current period. Solution Exhibit 17-20B calculates cost per equivalent unit of beginning work in process and of work done in the current period.

SOLUTION EXHIBIT 17-20A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Assembly Division of Aerospatiale for May 19-7

Completed and transferred out

during current period 46 46.0 46.0

Add work in process, ending* 12

12 ¥ 60%; 12 ¥ 30% 7.2 3.6

Total accounted for 58 53.2 49.6

Deduct work in process, beginning§ 8

8 ¥ 90%; 8 ¥ 40% 7.2 3.2

Started during current period 50

Work done in current period only 46.0 46.4

* Degree of completion in this department: direct materials, 60%; conversion costs, 30%.

§ Degree of completion in this department: direct materials, 90%; conversion costs, 40%.

SOLUTION EXHIBIT 17-20B

Step 3: Compute Equivalent Unit Costs:

Assembly Division of Aerospatiale for May 19_7

17-21 Weighted-average method.

17-22 (20-30 min.) FIFO method.

17-23 (25 mins) Standard Costing method.

1. Solution Exhibit 17-23 presents step 4: summarize total costs to account for and assign these costs to units completed and to units in ending work in process using the standard costing method for Chatham Company in July 19_7.

2. a. Direct Materials Control (at actual) 210,000

Accounts Payable 210,000

To record direct materials purchased and

used in production during July 19_7.

b. Conversion Costs Control (at actual) 301,000

Various Accounts 301,000

To record conversion costs for July 19_7

c. Work in Process (at standard costs) 183,000

Direct Materials Variances 27,000

Direct Materials Control 210,000

To record actual direct materials used

and total direct materials variances

d. Work in Process (at standard costs) 285,600

Conversion Cost Variances 15,400

Conversion Cost Control 301,000

To record actual conversion costs

and total conversion-costs variances

e. Finished Products Inventory (at standard costs) 554,200

Work in Process (at standard costs) 554,200

To record cost of units completed and

transferred at standard cost from work in process

to finished goods

 

SOLUTION EXHIBIT 17-23

Step 4

 

17-24 (30 mins.) Transferred-in costs, equivalent-unit costs, working

backwards.

1. Solution Exhibit 17-24A calculates equivalent units of (a) beginning work in process and (b) work done in the current period for each cost element. To calculate equivalent units of beginning work in process, divide the value of beginning work in process by the cost per equivalent unit of beginning work in process. Similarly, to calculate equivalent units of work done in the current period divide total costs added in the current period by the cost per equivalent unit of work done in the current period.

2 &3. See Solution Exhibit 17-24B.

Using information about physical units given in the exercise,

  =   +   –  

= 15,000 + 9,000 – 5,000

= 19,000

Equivalent units of beginning work in process and equivalent units of work done in current period (rows 4 and 5 of Solution Exhibit 17-24B) have been calculated in Solution Exhibit 17-24A. Equivalent units of units completed and transferred out for each cost element equal the 19,000 physical units completed and transferred out. Equivalent units of ending work in process for each cost element are then given by:

  =   +   –  

  = 15,000 + 9,000 – 19,000 = 5,000 units

  = 0 + 19,000 – 19,000 = 0 units

  = 9,000 + 11,000 – 19,000 = 1,000 units

3a. Percentage of completion of beginning work in process inventory

Transferred-in costs: 15,000 equivalent units ÷ 15,000 physical units = 100%

Direct materials: 0 equivalent units ÷ 15,000 physical units = 0%

Conversion costs: 9,000 equivalent units ÷ 15,000 physical units = 60%

 

17-24 (Cont'd.)

3b. Percentage of completion of ending work in process inventory

Transferred-in costs: 5,000 equivalent units ÷ 5,000 physical units = 100%

Direct materials: 0 equivalent units ÷ 5,000 physical units = 0%

Conversion costs: 1,000 equivalent units ÷ 5,000 physical units = 20%

SOLUTION EXHIBIT 17-24A

Step 3: Compute Equivalent Units Under the Weighted-Average Method

Thermoassembly Process of Bangkok Plastics for June 19_7

SOLUTION EXHIBIT 17-24B

Step 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Thermoassembly Process of Bangkok Plastics for June 19_7

17-25 (35-40 mins.) Transferred-in costs, weighted average method.

1. Solution Exhibit 17-25A calculates the equivalent tons of solvent completed and transferred out, and in ending work in process for each cost element. The key steps to the calculations are:

(1) Fill in row 4 for equivalent units of beginning work-in-process as given in the exercise assignment (Although not needed for doing the exercise, note that the physical units column is the same as the transferred-in column since all transferred-in units are always 100% complete)

(2) Fill in row 5 for equivalent units of work done in June 19_7 as given in the exercise assignment

(3) Adding the numbers in rows 4 and 5 gives the numbers for row 3, the total tons to be accounted for

(4) Fill in row 1 with 90 (tons completed and transferred out).

(5) Subtracting the numbers in row 1 from the numbers in row 3 gives the equivalent tons in ending work in process for each cost element.

2. Solution Exhibit 17-25B presents computations of equivalent unit costs under the weighted-average method.

3. Solution Exhibit 17-25C presents a summary of total costs to account for and assigns these costs to tons completed and to tons in ending work in process using the weighted-average method.

17-25 (Cont'd.)

SOLUTION EXHIBIT 17-25A

Step 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Cooking Department of Hideo Chemicals for June 19_7

* Degree of completion in this department: transferred-in costs, 100%; direct materials, 0% conversion costs, 50%, calculated by dividing equivalent units for each cost element by the physical units.

|| Degree of completion in this department: transferred-in costs, 100%; direct materials, 0% conversion costs, 75%, calculated by dividing equivalent units for each cost element by the physical units.

SOLUTION EXHIBIT 17-25B

Step 3: Compute Equivalent Unit Costs Under the Weighted-Average Method

Cooking Department of Hideo Chemicals for June 19_7

SOLUTION EXHIBIT 17-25C

Step 4:

17-26 (35-40 mins) Transferred-in costs, FIFO method.

1. The calculations for equivalent tons of solvent completed and ending work in process for each cost element are exactly as in requirement 1 of Exercise 17-25 shown in Solution Exhibit 17-25A.

2. Solution Exhibit 17-26A presents computations of equivalent unit costs under the FIFO method.

3. Solution Exhibit 17-26B presents a summary of total costs to account for and assigns these costs to tons completed and to tons in ending work in process using the FIFO method.

 

 

Solution Exhibit 17-26A

Step 3: Compute Equivalent Unit Costs Under the FIFO Method

Cooking Department of Hideo Chemicals for June 19_7

 

SOLUTION EXHIBIT 17-26B

Step 4: Summarize Total Costs to Account For and Assign These Costs to

Units Completed and to Units in Ending Work in Process Using the FIFO Method

Cooking Department of Hideo Chemicals June

 

 

17-27 (35-40 mins.) Transferred-in costs, standard costing method.

1. The calculation for equivalent tons of solvent completed and ending work in process for each cost element are exactly as in requirement 1 of Exercise 17-25 shown in Solution Exhibit 17-25 A.

2. Equivalent unit costs per ton for each cost category are given in the exercise:

Transferred-in costs $1,050

Direct materials 390

Conversion costs 640

3. Solution Exhibit 17-27 presents a summary of total costs to account for and assigns these costs to tons completed and to tons in ending work in process using the standard costing method.

SOLUTION EXHIBIT 17-27

Step 4: Summarize Total Costs to Account For and Assign These Costs to

Units Completed and to Units in Ending Work in Process Using Standard Costs

Cooking Department of Hideo Chemicals for June 19_7

17-28 (25 min.) Weighted-average method.

1. Solution Exhibit 17-28A shows equivalent units of work done in the current period of

Direct materials 80 equivalent units

Conversion costs 85 equivalent units

2. Solution Exhibit 17-28B calculates cost per equivalent unit of beginning work in process and of work done in the current period for direct materials and conversion costs.

3. Solution Exhibit 17-28C summarizes the total Assembly Department costs for October 19_7, and assigns these costs to units completed (and transferred out) and to units in ending work in process using the weighted-average method.

17-28 (Cont'd.)

SOLUTION EXHIBIT 17-28A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Assembly Department of Global Defense Inc. for October 19-7

Completed and transferred out

during current period 90 90 90

Add work in process, ending* 10

10 ¥ 100†%; 10 ¥ 70% 10 7

Total accounted for 100 100 97

Deduct work in process, beginning§ 20

20 ¥ 100†%; 20 ¥ 60% 20 12

Started during current period 80

Work done in current period only 80 85

† Direct materials are 100% complete in work in process inventories since all direct materials are introduced at the beginning of the Assembly Process.

* Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

§ Degree of completion in this department: direct materials, 100%; conversion costs, 60%.

 

SOLUTION EXHIBIT 17-28B

Step 3: Compute Equivalent Unit Costs:

Assembly Department of Global Defense Inc. for October 19-7

SOLUTION EXHIBIT 17-28C

EXHIBIT 17-7

17-29 (10 min.) Journal entries.

1. Work in Process –– Assembly Department $2,000,000

Accounts Payable $2,000,000

Direct materials purchased and used in

production in October

2. Work in Process –– Assembly Department $935,000

Various accounts $935,000

Conversion costs incurred in October

3. Work in Process –– Testing Department $3,192,866

Work in Process –– Assembly Department $3,192,866

Cost of goods completed and transferred out

in October from the Assembly Department

to the Testing Department

17-30 (20 min.) FIFO method.

1. The equivalent units of work done in the Assembly Department in October 19_7 for direct materials and conversion costs are the same as in problem 17-28 and are shown in Solution Exhibit 17-28A.

2. The cost per equivalent unit of work done in the Assembly Department in October 19_7 for direct materials and conversion costs are calculated in problem 17-28 in Solution Exhibit 17-28B.

3. Solution Exhibit 17-30 summarizes the total Assembly Department costs for October 19_7, and assigns these costs to units completed (and transferred out) and units in ending work-in-process under the FIFO method.

The cost per equivalent unit of beginning inventory and of work done in the current period differ:

The following table summarizes the costs assigned to units completed and those still in process under the weighted-average and FIFO process-costing methods for our example.

The FIFO ending inventory is higher than the weighted-average ending inventory by $4,866. This is because, FIFO assumes that all the lower-cost prior-period units in work in process are the first to be completed and transferred out while ending work in process consists of only the higher-cost current-period units. The weighted-average method, however, smoothes out cost per equivalent unit by assuming that more of the higher-cost units are completed and transferred out, while some of the lower-cost units in beginning work in process are placed in ending work in process. Hence, in this case, the weighted-average method results in a higher cost of units completed and transferred out and a lower ending work-in-process inventory relative to FIFO.

SOLUTION EXHIBIT 17-30

17-31 (30 min.) Transferred-in costs, weighted average.

1. Transferred in costs are 100% complete and direct materials are 0% complete in both beginning and ending work-in-process inventory. The reason is that transferred-in costs are always 100% complete as soon as they are transferred in from the Assembly Department to the Testing Department. Direct materials in beginning or ending work in process for the Testing Department are 0% complete because direct materials are only added at the end of the testing process as the units become finished goods.

2. Solution Exhibit 17-31A computes the equivalent units of work done in October 19_7 in the Testing Department for transferred-in costs, direct materials, and conversion costs.

3. Solution Exhibit 17-31B calculates the cost per equivalent unit of beginning work in process and of work done in October 19_7 in the Testing Department for transferred-in costs, direct materials, and conversion costs.

4. Solution Exhibit 17-31C summarizes total Testing Department costs for October 19_7, and assigns these costs to units completed and transferred out and to units in ending work in process using the weighted-average method.

5. Journal entries:

i. Work in Process –– Testing Department 3,192,866

Work in Process –– Assembly Department 3,192,866

Cost of goods completed and transferred out

during October from the Assembly Department

to the Testing Department

ii. Finished Goods 9,303,123

Work in Process –– Testing Department 9,303,123

Cost of goods completed and transferred out

during October from the Testing Department

to Finished Goods inventory

 

17-31 (Cont'd.)

SOLUTION EXHIBIT 17-31A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Testing Department of Global Defense Inc. for October 19_7

Completed and transferred out

during current period 105 105 105 105

Add work in process, ending* 15

(15 ¥ 100%; 15 ¥ 0%; 15 ¥ 60%) 15 0 9

Total accounted for 120 120 105 114

Deduct work in process, beginning|| 30

(30 ¥ 100%; 30 ¥ 0%; 30 ¥ 70%) 30 0 21

Transferred in during current period 90

Work done in current period only 90 105 93

* Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 60%.

||Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 70%.

 

SOLUTION EXHIBIT 17-31B

Step 3: Compute Equivalent Unit Costs Under the Weighted-Average Method

Testing Department of Global Defense Inc. for October 19-7

SOLUTION EXHIBIT 17-31C

17-32 (30 min.) Transferred-in costs, FIFO costing.

1. As explained in Problem 17-31, requirement 1, transferred-in costs are 100% complete and direct materials are 0% complete in both beginning and ending work-in-process inventory.

2. The equivalent units of work done in October 19_7 in the Testing Department for transferred-in costs, direct materials and conversion costs are exactly as in Solution Exhibit 17-31A.

3. Solution Exhibit 17-32A calculates the cost per equivalent unit of beginning work in process and of work done in October 19_7 in the Testing Department for transferred-in costs, direct materials, and conversion costs.

4. Solution Exhibit 17-32B summarizes total Testing Department costs for October 19_7, and assigns these costs to units completed and transferred out and to units in ending work in process using the FIFO method.

5. Journal entries:

i. Work in Process –– Testing Department 3,188,000

Work in Process –– Assembly Department 3,188,000

Cost of goods completed and transferred out

during October from the Assembly Dept. to

the Testing Dept.

 

ii. Finished Goods 9,281,527

Work in Process –– Testing Department 9,281,527

Cost of goods completed and transferred out

during October from the Testing Department

to Finished Goods inventory

 

17-32 (Cont'd.)

SOLUTION EXHIBIT 17-32A

Step 3: Compute Equivalent Unit Costs Under the FIFO Method

Testing Department of Global Defense Inc. for October 19-7

SOLUTION EXHIBIT 17-32B

17-15

17-33 (25 min.) Weighted-average method.

Solution Exhibit 17-33A shows equivalent units of work done in the current period of

Direct materials 2,200 equivalent units

Conversion costs 2,005 equivalent units

Solution Exhibit 17-33B calculates cost per equivalent unit of beginning work in process and of work done in the current period for direct materials and conversion costs.

Solution Exhibit 17-33C summarizes the total Forming Department costs for April 19_7, and assigns these costs to units completed (and transferred out) and to units in ending work in process using the weighted-average method.

17-33 (Cont'd.)

SOLUTION EXHIBIT 17-33A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Forming Department of Star Toys for April 19-7

Completed and transferred out

during current period 2,000 2,000 2,000

Add work in process, ending* 500

500 ¥ 100%; 500 ¥ 25% 500 125

Total accounted for 2,500 2,500 2,125

Deduct work in process, beginning§ 300

300 ¥ 100%; 300 ¥ 40% 300 120

Started during current period 2,200

Work done in current period only 2,200 2,005

* Degree of completion in this department: direct materials, 100%; conversion costs, 25%.

§ Degree of completion in this department: direct materials, 100%; conversion costs, 40%.

 

SOLUTION EXHIBIT 17-33B

Step 3: Compute Equivalent Unit Costs:

Forming Department of Star Toys for April 19_7

SOLUTION EXHIBIT 17-33C

17-34 (5-10 min.) Journal entries.

1. Work in Process –– Forming Department 70,000

Accounts Payable 70,000

To record direct materials purchased and

used in production during April

2. Work in Process –– Forming Department 42,500

Various Accounts 42,500

To record Forming Department conversion

costs for April

3. Work in Process –– Finishing Department 104,000

Work in Process - Forming Department 104,000

To record cost of goods completed and transferred out

in April from the Forming Department

to the Finishing Department

Work in Process –– Forming Department

Beginning inventory, April 1 9,625 3. Transferred out to

1. Direct materials 70,000 Work in Process-finishing 104,000

2. Conversion costs 42,500

Ending inventory, April 30 18,125

17-35 (20 min.) FIFO computations.

The equivalent units of work done in the Forming Department in April 19_7 for direct materials and conversion costs are the same as in problem 17-33 and are shown in Exhibit 17-33A.

The cost per equivalent unit of work done in the Forming Department in April 19_7 for direct materials and conversion costs are calculated in problem 17-33 and Exhibit 17-33B.

Solution Exhibit 17-35 summarizes the total Assembly Department costs for April 19_7, and assigns these costs to units completed (and transferred out) and units in ending work-in-process under the FIFO method.

The cost per equivalent unit of beginning inventory and of work done in the current period differ:

The following table summarizes the costs assigned to units completed and those still in process under the weighted-average and FIFO process-costing methods for our example.

The FIFO ending inventory is higher than the weighted-average ending inventory by $434. This is because, FIFO assumes that all the lower-cost prior-period units in work in process are the first to be completed and transferred out while ending work in process consists of only the higher-cost current-period units. The weighted-average method, however, smoothes out cost per equivalent unit by assuming that more of the higher-cost units are completed and transferred out, while some of the lower-cost units in beginning work in process are placed in ending work in process. Hence, in this case, the weighted-average method results in a higher cost of units completed and transferred out and a lower ending work-in-process inventory relative to FIFO.

SOLUTION EXHIBIT 17-35

17-36 (30 min.) Transferred-in costs, weighted average.

1. Solution Exhibit 17-36A computes the equivalent units of work done in April 19_7 in the Finishing Department for transferred-in costs, direct materials, and conversion costs.

Solution Exhibit 17-36B calculates the cost per equivalent unit of beginning work in process and of work done in April 19_7 in the Finishing Department for transferred-in costs, direct materials, and conversion costs.

Solution Exhibit 17-36C summarizes total Finishing Department costs for April 19_7, and assigns these costs to units completed and transferred out and to units in ending work in process using the weighted-average method.

2. Journal entries:

i. Work in Process –– Finishing Department 104,000

Work in Process –– Forming Department 104,000

Cost of goods completed and transferred out

during April from the Forming Department

to the Finishing Department

ii. Finished Goods 168,552

Work in Process –– Finishing Department 168,552

Cost of goods completed and transferred out

during April from the Finishing Department

to Finished Goods inventory

17-36 (Cont'd.)

SOLUTION EXHIBIT 17-36A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Finishing Department of Star Toys for April 19_7

Completed and transferred out

during current period 2,100 2,100 2,100 2,100

Add work in process, ending* 400

(400 ¥ 100%; 400 ¥ 0%; 400 ¥ 60%) 400 0 120

Total accounted for 2,500 2,500 2,100 2,220

Deduct work in process, beginning|| 500

(500 ¥ 100%; 500 ¥ 0%; 500 ¥ 60%) 500 0 300

Transferred in during current period 2,000

Work done in current period only 2,000 2,100 1,920

* Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 30%.

||Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 60%.

 

SOLUTION EXHIBIT 17-36B

Step 3: Compute Equivalent Unit Costs Under the Weighted-Average Method

Finishing Department of Star Toys for April 19-7

17-36C

17-37 (30 min.) Transferred-in costs, FIFO costing.

1. The equivalent units of work done in April 19_7 in the Finishing Department for transferred-in costs, direct materials, and conversion costs are exactly as in Solution Exhibit 17-36A.

Solution Exhibit 17-37A calculates the cost per equivalent unit of beginning work in process and of work done in April 19_7 in the Finishing Department for transferred-in costs, direct materials, and conversion costs.

Solution Exhibit 17-37B summarizes total Finishing Department costs for April 19_7, and assigns these costs to units completed and transferred out and to units in ending work in process using the FIFO method.

Journal entries:

i. Work in Process –– Finishing Department 103,566

Work in Process –– Forming Department 103,566

Cost of goods completed and transferred out

during April from the Forming Dept. to

the Finishing Dept.

ii. Finished Goods 166,723

Work in Process –– Finishing Department 166,723

Cost of goods completed and transferred out

during April from the Forming Department

to the Finishing Department

SOLUTION EXHIBIT 17-37A

Step 3: Compute Equivalent Unit Costs Under the FIFO Method

Finishing Department of Star Toys for April 19-7

17-37 (Cont'd.)

2. The cost per equivalent unit of beginning inventory and of work done in the current period differ:

The following table summarizes the costs assigned to units completed and those still in process under the weighted-average and FIFO process-costing methods for our example.

The FIFO ending inventory is higher than the weighted-average ending inventory by $1,165. This is because, FIFO assumes that all the lower-cost prior-period units in work in process (resulting from the lower transferred-in costs in beginning inventory) are the first to be completed and transferred out while ending work in process consists of only the higher-cost current-period units. The weighted-average method, however, smoothes out cost per equivalent unit by assuming that more of the higher-cost units are completed and transferred out, while some of the lower-cost units in beginning work in process are placed in ending work in process. Hence, in this case, the weighted-average method results in a higher cost of units completed and transferred out and a lower ending work-in-process inventory relative to FIFO. Note that the difference in cost of units completed and transferred out (–$1,829) do not fully offset the difference in ending work in process inventory (+$1,165). This is because the FIFO and weighted average methods result in different values for transferred-in costs with respect to both beginning inventory and costs transferred in during the period.

SOLUTION EXHIBIT 17-37B

17-38 (45 min.) Transferred-in costs, weighted average and FIFO.

1. Solution Exhibit 17-38A computes the equivalent units of work done in week 37 in the Drying and Packaging Department for transferred-in costs, direct materials, and conversion costs.

2. Solution Exhibit 17-38B calculates the cost per equivalent unit of beginning work in process and of work done in week 37 in the Drying and Packaging Department for transferred-in costs direct materials, and conversion costs.

Solution Exhibit 17-38C summarizes total drying and packaging Department costs for week 37, and assigns these costs to units completed and transferred out and to units in ending work in process using the weighted-average method.

3. Solution Exhibit 17-38D calculates the cost per equivalent unit of beginning work in process and of work done in week 37 in the Drying and Packaging Department for transferred-in costs, direct materials, and conversion costs.

Solution Exhibit 17-38E summarizes total Drying and Packaging Department costs for week 37, and assigns these costs to units completed and transferred out and to units in ending work in process using the FIFO method.

17-38 (Cont'd.)

SOLUTION EXHIBIT 17-38A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Drying and Packaging Department of Frito-Lay Inc. for Week 37

Completed and transferred out

during current period 5,250 5,250 5,250 5,250

Add work in process, ending* 1,000

(1,000 ¥ 100%; 1,000 ¥ 0%;1,000 ¥ 40%) 1,000 0 400

Total accounted for 6,250 6,250 5,250 5,650

Deduct work in process, beginning|| 1,250

(1,250 ¥ 100%; 1,250 ¥ 0%; 1,250 ¥ 80%) 1,250 0 1,000

Transferred in during current period 5,000

Work done in current period only 5,000 5,250 4,650

* Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%.

||Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.

 

SOLUTION EXHIBIT 17-38B

Step 3: Compute Equivalent Unit Costs Under the Weighted-Average Method

Drying and Packaging Department of Frito-Lay Inc. for Week 37

SOLUTION EXHIBIT 17-38C

17-38 (Cont'd.)

SOLUTION EXHIBIT 17-38D

Step 3: Compute Equivalent Unit Costs Under the FIFO Method

Drying and Packaging Department of Frito-Lay Inc. for Week 37

SOLUTION EXHIBIT 17-38E

17-39 (25 min.) Standard costing with beginning and ending work in

process.

1. Solution Exhibit 17-39A shows equivalent units of work done in the current period of

Direct materials 20,000 equivalent units

Conversion costs 18,700 equivalent units

Solution Exhibit 17-39B calculates the standard cost per equivalent unit of beginning work in process. The standard costs of work done in the current period are given as: direct materials, $6, conversion costs, $3.

Solution Exhibit 17-39C summarizes the total Cooking Department costs for May 19_7, and assigns these costs to units completed (and transferred out) and to units in ending work in process using the standarad costing method.

2. May variances for direct materials and conversion costs are as follows:

17-39 (Cont'd.)

SOLUTION EXHIBIT 17-39A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Cooking Department of Victoria Corporation for May 19-7

Completed and transferred out

during current period 18,000 18,000 18,000

Add work in process, ending* 5,000

5,000 ¥ 100%; 5,000 ¥ 50% 5,000 2,500

Total accounted for 23,000 23,000 20,500

Deduct work in process, beginning§ 3,000

3,000 ¥ 100†%; 3,000 ¥ 60% 3,000 1,800

Started during current period 20,000

Work done in current period only 20,000 18,700

* Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

§ Degree of completion in this department: direct materials, 100%; conversion costs, 60%.

 

 

SOLUTION EXHIBIT 17-39B

Step 3: Compute Equivalent Unit Costs:

Cooking Department of Victoria Corporation for May 19_7

SOLUTION EXHIBIT 17-39C

17-40 (20-25 min.) Equivalent unit computations, benchmarking, ethics.

1. The reported monthly cost per equivalent unit of either direct materials or conversion costs is lower when the plant manager overestimates the percentage of completion of ending work in process; the overestimate increases the denominator and thus decreases the cost per equivalent whole unit. By reporting a lower cost per equivalent unit, the plant manager increases the likelihood of being in the top three ranked plants for the benchmarking comparisons.

A plant manager can manipulate the monthly estimate of percentage of completion by understating the number of steps yet to be undertaken before a suit becomes a finished good.

2. There are several options available:

a. Major shows the letters to the line executive to whom the plant managers report in a hard-line way (say, the corporate manager of manufacturing). This approach is appropriate if the letters allege it is the plant managers who are manipulating the percentage of completion estimates.

b. Major herself shows the letters to the plant managers. This approach runs the danger of the plant managers ignoring or reacting negatively to someone to whom they do not report in a line-mode questioning their behavior. Much will depend here on how Major raises the issue. Unsigned letters need not have much credibility unless they contain specific details.

c. Major discusses the letters with the appropriate plant controllers without including the plant manager in the discussion. While the plant controller has responsibility for preparing the accounting reports from the plant, the plant controller in most cases reports hard-line to the plant manager. If this reporting relationship exists, Major may create a conflict of interest situation for the plant controller. Only if the plant controller reports hard-line to the corporate controller and dotted-line to the plant manager should Major show the letters to the plant controller without simultaneously showing them to the plant manager.

3. The plant controller's ethical responsibilities to Major and to Leisure Suits should be the same. These include:

• Competence: The plant controller is expected to have the competence to make equivalent unit computations. This competence does not always extend to making estimates of the percentage of completion of a product. In Leisure Suits' case, however, the products are probably easy to understand and observe. Hence, a plant controller could obtain reasonably reliable evidence on percentage of completion at a specific plant.

• Objectivity: The plant controller should not allow the possibility of the division being written-up favorably in the company newsletter to influence the way equivalent unit costs are computed.

 

 

17-40 (Cont'd.)

4. Major could seek evidence on possible manipulations as follows:

a. Have plant controllers report detailed breakdowns on the stages of production and then conduct end-of-month audits to verify the actual stages completed for ending work in process.

b. Examine trends over time in ending work in process. Divisions that report low amounts of ending work in process relative to total production are not likely to be able to greatly affect equivalent cost amounts by manipulating percentage of completion estimates. Divisions that show sizable quantities of total production in ending work in process are more likely to be able to manipulate equivalent cost computations by manipulating percentage of completion estimates.

 

 

17-41 (50 min.) Weighted-average, FIFO, standard cost methods,

working backwards.

1. Solution Exhibit 17-41 A calculates the equivalent units of work done in the current period for each cost element.

Transferred-in costs 200

Direct materials 220

Conversion costs 225

2. Solution Exhibit 17-41B calculates the cost per equivalent unit of beginning work in process for each cost element.

Transferred-in costs $140

Direct materials –

Conversion costs $120

3. Solution Exhibit 17-41 C shows the total costs to account for in July 19_7 for each cost element.

Transferred-in costs $42,000

Direct materials $ 4,400

Conversion costs $34,200

These costs are derived by calculating the costs of units completed and transferred out and ending work in process in Panel B. This determines the costs accounted for which equals the costs to account for.

4. Solution Exhibit 17-41C shows computations of the cost per equivalent unit of work done in the current period for each cost element:

Transferred-in costs $126

Direct materials $ 20

Conversion costs $112

 

17-41 (Cont'd.)

These numbers are derived by subtracting the row of work in process, beginning from the row to account for calculated in requirement 3. The cost per equivalent unit for each cost element is then derived by dividing the total costs to account for by the equivalent units for each cost element.

The cost of work done in July is less than the costs in earlier months. This is consistent with Greg Andrews' statements that the plant has improved efficiency in July.

5. Under FIFO, the cost of units completed and transferred out in July 19_7 would be higher than the cost calculated using the weighted-average method. This is because the cost of units completed and transferred out would include all the higher cost units from beginning inventory. The units in ending inventory would be valued at the current period costs of $126 for transferred-in costs, $20 for direct materials, and $112 for conversion costs which are lower than (or equal to) the weighted-average valuations of $131.25 for transferred-in costs, $20 for direct materials and $114 for conversion costs. The lower ending inventory valuation under FIFO will result in a higher cost of units completed and transferred out under FIFO.

6. I would favor shifting to a standard cost process costing system. As the variety of products increase, the broad averaging of historical weighted-average or FIFO process costing will result in inaccurate costs. The standard costing system would required determining separate standard or equivalent unit cots on the basis of different technical processing specifications for each product. Each unit of different products produced are costed at the standard costs. At the end of the period variances are calculated for any difference between the actual costs and the standard costs attached to units completed and in ending work in process.

I would not go to a job-costing system because the products are variations of components currently manufactured rather than heterogeneous units. Each product is also produced in a large enough quantity that computing standard times and standard costs is worthwhile. Using a standard costing system is a compromise between the more complicated job costing system and the oversimplified historical cost-based weighted-average or FIFO process costing system.

17-41 (Cont'd.)

Solution Exhibit 17-41 A

Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units

Assembly Department of Detroit Component Works for July 19_7

Completed and transferred out

during current period 220 220 220 220

Add work in process, ending* 100

(100 ¥ 100%; 100 ¥ 0%; 100 ¥ 80%) 100 0 80

Total accounted for 320 320 220 300

Deduct work in process, beginning|| 120

(120 ¥ 100%; 120 ¥ 0%; 120 ¥ 62.5%) 120 0 75

Transferred in during current period 200

Work done in current period only 200 220 225

 

* Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.

||Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 62.5%.

Solution Exhibit 17-41B

Step 3: Compute Equivalent Unit Costs Under the Weighted-Average Method

Assembly Department of Detroit Component Works for July 19_7

Solution Exhibit 17-41C

Step 4: