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Criminology
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CRM 200
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Tsogbadral Galaabaatar
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Fall

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Chapter 6: Process Costing 239 Chapter 6 Process Costing LEARNING OBJECTIVES Chapter 6 addresses the following questions: LO1 Assign costs to mass-produced products using equivalent units to the production process. LO2 Apply and compare FIFO and weighted average methods in process costing. LO3 Apply alternative methods in mass production for multiple departments LO4 Describe how spoilage costs are handled in process costing. LO5 Explain how process costing information affects managers’ incentives and decisions These learning questions (LO1 through LO5) are cross-referenced in the textbook to individual exercises and problems. © 2012 John Wiley and Sons Canada, Ltd. 240 Cost Management QUESTIONS 6.1 Weighted average and FIFO process costing produce similar equivalent unit costs whenever the unit cost of production does not change or whenever there are no beginning or ending work-in-process inventories. In addition, the equivalent unit costs will be similar if the number of equivalent units produced during the period is large relative to inventories. 6.2 A process would complete more units during the period than it started when there are more units in beginning inventory than in ending inventory. 6.3 This approach would overstate the cost of spoiled units because partially complete units would be treated as if they had received 100% of direct materials and conversion costs, regardless of the amount actually allocated to those units. 6.4 If the beginning and ending inventories are the same from one period to the next, the number of units started is equal to the number of units completed and transferred out. This means that WIP inventory can be ignored when calculating equivalent units. However, if costs change from one period to the next, then the cost allocated to ending WIP will not be the same as the cost allocated to beginning WIP. 6.5 Judgment is needed to determine the percentage complete that is used in process costing calculations. Each unit or batch of units is complete to a different degree than other units or batches because the process is continuous. The percent complete is an average completion percentage that is estimated using judgment. 6.6 If the percent completion in year 1 is overestimated, then the equivalent units for those units will be too high in year 1. In turn, this will cause the cost per equivalent unit in year 1 to be understated. In year 2, this misstatement will cause the equivalent units for completion of beginning WIP to be too low. The understatement of equivalent units will cause the cost per equivalent unit to be overstated in year 2. 6.7 The weighted average method ignores the period in which product is started. In addition, costs from beginning inventories are added to costs of this period. All products completed are then given an average cost, regardless of when they were started. The FIFO method, on the other hand, tracks work completed and costs from the prior period separately from work completed and costs incurred during the current period. Under FIFO, beginning WIP consists of last period’s costs and work valued separately. At the end of the accounting period, this period’s costs to complete these units are added. Then the total costs for beginning WIP from last period and this period are summed and attached to the beginning inventory units that were completed this period. Then the units started and completed this period are valued using this period’s costs. If an organization’s costs fluctuate regularly, the FIFO method will reflect the most current costs so that managers can investigate changes in cost more quickly. 6.8 Goods that are mass-produced have uniform specifications and are made in large batches or on a continuous assembly line. Services that are mass-produced are performed using © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 241 the same skills and time and each task is very similar. Goods that are custom produced come in many variations and are made to specifications that vary with each order. Many services are custom, such as accounting, health care, and law services because each customer requires different inputs to match their needs. While it is relatively easy to track costs for custom made goods by attaching tags or using individual records to log costs of materials and labour, it is impossible to trace costs to mass-produced units. Job order costing is used for custom products. Direct material and labour costs are traced to each product and overhead costs are allocated using some allocation base that is labour or machine related. For mass-production, process costing is used. Equivalent units are calculated to account for units that are partially complete. Direct materials costs are allocated separately. Direct labour and overhead are combined and called conversion costs. These are allocated to complete and partially completed units. 6.9 They should be counted as ending WIP inventory in the department. Completed units imply that the units have been transferred to the next department or to finished goods, which is not the case with these units. 6.10 This is what is referred to as "continuous processing." Units just entering the process have had little done to them, while units just about to leave the process have had all or most of the conversion done. On average, the units in process are 50% complete as to conversion. 6.11 The cost of spoiled units is added to the total cost of goods transferred and increases the cost per unit. 6.12 Job costing is often used when products are manufactured in batches. In this firm, a single batch would have a specific sized wire and specific length of nail. The cost of each type of nail will depend primarily on the cost of the type of wire used and the time required for each type. Therefore job costing is the most appropriate method. This information would be lost if process cost techniques were employed. 6.13 Here are three factors. 1. If inspection costs are high and the cost to produce a single unit is very low, managers may decide to reduce the number of time units are inspected. In this case, inspection might occur only when units are completed. 2. If production costs are high and units go through several different departments, inspection may take place earlier in the manufacturing process so that spoiled units are caught when they are relatively incomplete. 3. If a firm is developing a strategy of high quality products, inspection may take place more often to insure that products are free of defects. 6.14 Three factors that managers consider are :1) saving the cost of the spoiled units,2)being able to sell those units therebyincreasing the contribution margin and 3) in some industries all firms need to compete on quality, and increased spoilage may lead to increased defects in units sold, harming the reputation of the company resulting in a loss of market share. 6.15 The Lake Wobegon effect occurs when managers or employees overrate their own performance. Managers may believe that their operations are above average even though © 2012 John Wiley and Sons Canada, Ltd. 242 Cost Management they may not have benchmark information about competitors’ operations or other manufacturing plant benchmarks. If managers believe their operations are better than average, they may not emphasize improvements. It is also possible that their operations are below average and they do not realize this. © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 243 MULTIPLE CHOICE 6.16. In process costing, if the units in beginning inventory are at less than 100% completion, what will be the cost of production per equivalent unit for the period under weighted-average costing during periods of rising prices? a) The same as the cost per equivalent unit under FIFO b) Higher than the cost per equivalent unit under FIFO c) The relationship is indeterminate d) Lower than the cost per equivalent unit under FIFO Ans: D 6.17. In process costing, the journal entry to record factory overhead applied would include which of the following? a) A debit to work in process b) A credit to work in process c) A debit to cost of goods sold d) A credit to cost of goods sold Ans: A Use the following information to answer Question 6.18 to 6.20. The information below pertains to production activities in the refining department of Burn Corporation. All units in work in process (WIP) were costed using the FIFO cost flow assumption. Percentage of Conversion Refining Department Units Completion Costs WIP, February 1 25,000 80% $ 22,000 Units started and cost incurred during February 135,000 $ 143,000 Units completed and transferred to the mixing 100,000 department WIP, February 28 ? 50% $ ? 6.18. What were the conversion costs per equivalent unit of production last period and this period, respectively? a) $1.10 and $1.30 b) $1.10 and $1.45 c) $1.30 and $1.30 d) $1.30 and $1.43 Ans: A (25,000 * .80 = 20,000 EU; $22,000 / 20,000 = $1.10) (25,000+135,000-100,000 = 60,000; 60,000 * 50% = 30,000 EU) (30,000 + 100,000 = 130,000 EU; $143,000 + $22,000 = $165,000) ($165,000 / 130,000 EU= 1.2692 round to 1.30) © 2012 John Wiley and Sons Canada, Ltd. 244 Cost Management 6.19. What was the conversion cost in the work in process inventory account at February 28? a) $39,000 b) $39,600 c) $42,500 d) $45,000 Ans: A (from 6.18: 30,000 EU * $1.30 = $39,000) 6.20. What was the per-unit conversion cost of the units started last period and completed this period? a) $0.86 b) $1.14 c) $1.25 d) $1.30 Ans: B [(80% * $1.10) + (20% * $1.30) = $1.14] © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 245 EXERCISES 6.21 Equivalent Units, No Beginning WIP -- Carina Medical Supplies A. With no beginning WIP and all units started and completed, the total cost is divided by number of units started and completed to calculate equivalent unit costs. Direct materials equivalent unit cost = $360,000/200,000 units = $1.80 per unit Conversion equivalent unit cost = $380,000/200,000 units = $1.90 per unit B. 180,000 units started and completed; 20,000 in ending WIP Direct materials are added at the beginning of processing, so all units started (200,000 units) were 100% complete with respect to direct materials. Direct materials equivalent unit cost = $360,000/200,000 units = $1.80 per unit Conversion equivalent units: Started and completed 180,000 units Ending WIP (20,000 × 50% complete) 10,000 units Total 190,000 units Conversion equivalent unit cost = $380,000/190,000 units = $2.00 per unit C. The direct materials equivalent unit costs were the same in Parts A and B because the units in ending WIP were 100% complete with respect to direct materials. However, for conversion costs, the ending WIP was only 50% complete so the 20,000 units in ending WIP counted as only 10,000 equivalent units. Because the denominator was smaller in Part A than in Part B, the conversion cost per unit was larger in Part B compared to Part A. 6.22 Equivalent Units Under Weighted Average - Francisco’s Assumptions: Work performed in May: Beginning WIP 9,000 % complete direct materials 100% % complete conversion costs 40% Units started 50,000 Units completed and transferred out 47,000 Ending WIP 12,000 % complete direct materials 100% % complete conversion costs 30% © 2012 John Wiley and Sons Canada, Ltd. 246 Cost Management Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP WIP Complete WIP This Period Account for Physical Units 9,000 0 38,000 12,000 50,000 59,000 Equivalent Units: Total Work Direct Materials 9,000 0 38,000 12,000 50,000 59,000 Conversion Costs 3,600 5,400 38,000 3,600 47,000 50,600 Weighted average equivalent units for direct materials is 59,000 (total work this period) because the ending units get 100% credit for direct materials, since direct materials are added at the beginning of processing. Equivalent units for conversion costs are 50,600 (total work this period) because ending inventory units are only 30% complete and, hence, have only 30% of the conversion costs (since conversion costs are incurred evenly during production). 6.23 Equivalent Units, FIFO - Francisco’s Assumptions: Work performed in May: Beginning WIP 9,000 % complete direct materials 100% % complete conversion costs 40% Units started 50,000 Units completed and transferred out 47,000 Ending WIP 12,000 % complete direct materials 100% % complete conversion costs 30% Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP WIP Complete WIP This Period Account for Physical Units 9,000 0 38,000 12,000 50,000 59,000 Equivalent Units: Total Work Direct Materials 9,000 0 38,000 12,000 50,000 59,000 Conversion Costs 3,600 5,400 38,000 3,600 47,000 50,600 FIFO equivalent units are found under Total Work Performed This Period. Therefore direct materials equivalent units are 50,000 (excludes beginning inventory because direct materials were added last period and includes ending inventory because materials were added this period), and equivalent units for conversion costs are 47,000 (excluding work done on beginning WIP but including this period’s work to complete those units and including the portion of work completed on ending WIP. © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 247 6.24 Equivalent Unit Cost Under Weighted Average - Fine Fans Assumptions for October: Work performed: Costs: Beginning WIP 9,000 Beginning WIP % complete direct materials 100% Direct materials NT$ 18,000 % complete conversion costs 20% Conversion costs 36,000 Units started 100,000 Total beginning WIP costs 54,000 Costs added this month Units completed and transferred out 94,000 Ending WIP 15,000 Direct materials 100,000 % complete direct materials 100% Conversion costs 200,000 % complete conversion costs 60% Total costs added 300,000 Total costs to account forNT$354,000 Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP (20%) WIP (80%) Complete WIP (60%) This Period Account for Physical Units 9,000 0 85,000 15,000 100,000 109,000 Equivalent Units: Total Work Direct Materials 9,000 0 85,000 15,000 100,000 109,000 Conversion Costs 1,800 7,200 85,000 9,000 101,200 103,000 Calculate Actual Cost per Equivalent Unit Weighted Average: Direct materials: Beginning WIP + Direct materials cost = $118,000 = $ 1.08 Equivalent units for total work 109,000 Conversion costs: Beginning WIP + Conversion cost = $236,000 = 2.29 Equivalent units for total work 103,000 Total cost per equivalent unit: $3.37 © 2012 John Wiley and Sons Canada, Ltd. 248 Cost Management 6.25 Equivalent Unit Cost, FIFO - Fine Fans Assumptions for October: Work performed: Costs: Beginning WIP (FIFO and Weighted Beginning WIP 9,000 Average) Direct materials $ 18,000 % complete direct materials 100% % complete conversion costs 20% Conversion costs 36,000 Units started 100,000 Total beginning WIP costs 54,000 Units completed and transferred out 94,000 Costs added this month Direct materials 100,000 Ending WIP 15,000 % complete direct materials 100% Conversion costs 200,000 % complete conversion costs 60% Total costs added 300,000 Total costs to account for $354,000 Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP (20%) WIP (80%) Complete WIP (60%) This Period Account for Physical Units 9,000 0 85,000 15,000 100,000 109,000 Equivalent Units: Total Work Direct Materials 9,000 0 85,000 15,000 100,000 109,000 Conversion Costs 1,800 7,200 85,000 9,000 101,200 103,000 Calculate Actual Cost Per Equivalent Unit First-in, First-out: Direct materials: _____________Direct materials cost_____________ = $100,000 = $ 1.00 Equivalent units for total work performed this period 100,000 Conversion costs: ______________Conversion costs______________ = $200,000 = 1.98 Equivalent units for total work performed this period 101,200 Total cost per equivalent unit: $2.98 6.26 Cumulative Exercise (Chapter 5): Abnormal Spoilage Calculation [Note: This exercise requires application of knowledge from Chapter 5.] When spoiled units are sold, the net realizable value offsets the cost. In this case the total cost of spoiled units is $16,000 (80×$200). However, $2,000 is recovered by selling the spoiled units for their net realizable value. So the total cost for abnormal spoilage is $14,000 ($16,000 - $2,000) © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 249 6.27 Abnormal Spoilage Journal Entry [Note: This problem requires students to extend concepts about journal entries for spoilage from Chapter 5 to Chapter 6.] A)When spoiled units are sold, the net realizable value offsets the cost. In this case the total cost of spoiled units is $16,000 (80*$200). However, $2,000 is recovered by selling the spoiled units for their net realizable value. The journal entry for normal spoilage follows: Finished Goods Inventory 14,000 Cash 2,000 Work-in-Process inventory $16,000 B) The journal entry for abnormal spoilage follows. Loss from Abnormal Spoilage $14,000 Cash 2,000 Work-in-Process inventory $16,000 6.28 Normal and Abnormal Spoilage , Solve for Unknown Number of spoiled units = 10,000 – 8,000 = 2,000 Cost of spoiled units = 2,000*$5 = $10,000 6.29 Journal Entry for Normal and Abnormal Spoilage A. When all spoilage is normal, the total cost of units (good and spoiled) is transferred into finished goods. That cost is $50,000 (10,000*$5). The journal entries follow. Finished Goods Inventory $50,000 Work-in-Process Inventory $50,000 B For abnormal spoilage, only the cost of good units is transferred to finished goods. The cost of spoiled units is recorded as a separate loss. The cost of good units is $40,000 (8,000*$5). Finished Goods Inventory $40,000 Loss from Abnormal Spoilage 10,000 Work-in-Process Inventory $50,000 © 2012 John Wiley and Sons Canada, Ltd. 250 Cost Management 6.30 Solving for Unknowns, Equivalent Units, FIFO -- Reliable Fittings A. Use physical units to determine the number of units started: Beginning WIP units + Units started – Units completed = Ending WIP units 6,000 + Units started – 20,000 = 8,000 Units started = 8,000 + 20,000 – 6,000 = 22,000 units B Equivalent units under the FIFO method include only work performed during the current period; equivalent units in beginning WIP are excluded: Direct materials are added at the beginning of processing, so equivalent units = number of units started = 22,000 units Conversion costs: Complete beginning WIP inventory: 6,000 units × (1–60%) 2,400 units Started and completed: 22,000 units completed – 6,000 units beg. WIP 16,000 units Start ending WIP inventory: 8,000 units × 40% 3,200 units Total equivalent units 21,600 units 6.31 Solving for Unknowns, Equivalent Units, Weighted Average -- Reliable Fittings A. Use physical units to determine the number of units started: Beginning WIP units + Units Started – Units Completed = Ending WIP units 6,000 + Units Started – 20,000 = 8,000 Units started = 8,000 + 20,000 – 6,000 = 22,000 units (Same as 6.30) B Equivalent units under the weighted average method include both beginning WIP and work performed during the current period: Direct materials: Units completed 20,000 units Start ending WIP inventory: 8,000 units × 100% 8,000 units Total equivalent units 28,000 units Conversion costs: Units completed 20,000 units Start ending WIP inventory: 8,000 units × 40% 3,200 units Total equivalent units 23,200 units © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 251 6.32 through 6.35 Cost per Equivalent Unit and Account for Costs Under Weighted Average and FIFO -- Felix and Sons Assumptions for December: Work performed: Costs: Beginning WIP (FIFO and Weighted Average) Beginning WIP 8,000 % complete direct materials 100% Direct materials $ 19,200 % complete conversion costs 75% Conversion costs 7,200 Total beginning WIP costs 26,400 Units started (12,000 – 8,000 + 6,000) 10,000 Units completed and transferred out 12,000 Costs added this month Ending WIP 6,000 Direct materials 31,200 % complete direct materials 100% Conversion costs 21,600 % complete conversion costs 50% Total costs added 52,800 Total costs to account for $79,200 Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP (25%) WIP (75%) Complete WIP (50%) This Period Account for Physical Units 8,000 0 4,000 6,000 10,000 18,000 Equivalent Units: Total Work Direct Materials 8,000 0 4,000 6,000 10,000 18,000 Conversion Costs 6,000 2,000 4,000 3,000 9,000 15,000 Calculate Actual Cost Per Equivalent Unit Weighted Average: Direct materials: Beginning WIP + Direct materials cost = $50,400 = $ 2.80 Equivalent units for total work 18,000 Conversion costs: Beginning WIP + Conversion cost = $28,800 = 1.92 Equivalent units for total work 15,000 Total cost per equivalent unit: $4.72 First-in, First-out: Direct materials: _____________Direct materials cost_____________ = $31,200 = $ 3.12 Equivalent units for total work performed this period 10,000 Conversion costs: ______________Conversion costs______________ = $21,600 = 2.40 Equivalent units for total work performed this period 9,000 Total cost per equivalent unit: $5.52 © 2012 John Wiley and Sons Canada, Ltd. 252 Cost Management Process Cost Reports for December 31 First-in, First-Out Weighted Average Computation Units Costs Computation Units Costs From November Beginning WIP cost report 8,000 $26,400 Costs to complete beginning WIP: Direct materials 0x$3.12 0 Conversion costs 2,000x$2.40 4,800 Total costs added this period _____ 4,800 Total cost of beginning WIP transferred out 8,000 31,200 New units started, completed, 4,00 and transferred out 4,000x$5.52 0 22,080 Total units completed and 12,00 transferred out 0 53,280 (12,000)x$4.72 12,000 $56,640 Ending WIP: 6,000 6,000 Direct materials 6,000x$3.12 18,720 6,000x$2.80 16,800 Conversion costs 3,000x$2.40 7,200 3,000x$1.92 5,760 Total ending WIP cost _____ 25,920 _____ 22,560 18,00 Total Accounted For 0 $79,200 18,000 $79,200 6.36 Equivalent Units, Weighted Average, Production Pattern -- Wilson Company A. Summary of physical units: Year 1 Year 2 Year 3 Beginning inventory 0 1,000 1,000 Units started 45,000 50,000 25,000 Ending inventory (1,000) (1,000) (1,000) Units completed 44,000 50,000 25,000 B. Equivalent units under the weighted average method Direct Materials: Year 1 Year 2 Year 3 Units completed 44,000 50,000 25,000 Ending inventory (100%) 1,000 1,000 1,000 Equivalent units 45,000 51,000 26,000 Conversion Costs: Year 1 Year 2 Year 3 Units completed 44,000 50,000 25,000 Ending inventory (50%) 500 500 500 Total equivalent units 44,500 50,500 25,500 © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 253 C. Once every slot on the assembly line is full, units completed will be the same as units started (assuming no spoilage). 6.37 Cost Report, No Beginning WIP A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg). This exercise does not specify whether the process cost report should be prepared using the FIFO or the weighted average method. However, with no beginning inventory, the two methods are the same. Following are the calculations. © 2012 John Wiley and Sons Canada, Ltd. 254 Cost Management 6.38 Units Transferred In, No Direct Material, No Beginning WIP A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg). This exercise does not specify whether costs should be calculated using the FIFO or weighted average method. However, with no beginning inventory, the two methods are the same. Although the exercise does not request a cost report, the easiest way to answer Parts A and B is to first prepare a cost report: Note: Units in ending WIP = Units transferred in – Units completed = 6,000 – 5,000 = 1,000 A. Cost for equivalent units completed during the period = $23,000 B. Cost for ending WIP = $3,050 © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 255 6.39 Weighted Average, Cost Report, Labour and Overhead Allocated Separately -- Germain Company A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg). Note: In this exercise, the conversion costs must be separated into two cost pools because labour costs are incurred when units are one-half complete, while overhead costs are incurred evenly throughout production. Note: Number of units completed and transferred out = 8,000 + 70,000 – 12,000 = 66,000 © 2012 John Wiley and Sons Canada, Ltd. 256 Cost Management 6.40 FIFO, Cost Report -- Yellow Crate Company A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg). Note: Units started and completed = Units started – Units in ending WIP = 98,000 – 10,000 = 88,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 257 6.41 Weighted Average, Cost Report -- Red Dog Products A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg). © 2012 John Wiley and Sons Canada, Ltd. 258 Cost Management 6.42 FIFO, Cost Report -- Red Dog Products A sample spreadsheet showing the solutions for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg). Note: Units in beginning WIP = Units completed – Units started and completed = 88,000 – 68,000 = 20,000 © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 259 PROBLEMS 6.43 Costs and Journal Entries Under Weighted Average and FIFO - Humphrey Manufacturing A and B Assumptions for April: Work performed: Costs: Beginning WIP (FIFO and Weighted Beginning WIP 6,000 Average) % complete direct materials 100% Direct materials $ 7,500 % complete conversion costs 40% Conversion costs 2,125 Units started 42,000 Total beginning WIP costs $ 9,625 Units completed and transferred out 40,000 Costs added this month Ending WIP 8,000 Direct materials $ 70,000 % complete direct materials 100% Conversion costs 42,500 % complete conversion costs 25% Total costs added $112,500 Total costs to account for$122,125 Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP (40%) WIP (60%) Complete WIP (25%) This Period Account for Physical Units 6,000 0 34,000 8,000 42,000 48,000 Equivalent Units: Total Work Direct Materials 6,000 0 34,000 8,000 42,000 48,000 Conversion Costs 2,400 3,600 34,000 2,000 39,600 42,000 Units started and completed = 40,000 – 6,000 = 34,000 Calculate Actual Cost Per Equivalent Unit Weighted Average: Direct materials: Beginning WIP + Direct materials cost = $77,500 = $ 1.6146 Equivalent units for total work 48,000 Conversion costs: Beginning WIP + Conversion cost = $44,625 = 1.0625 Equivalent units for total work 42,000 Total cost per equivalent unit: $2.6771 © 2012 John Wiley and Sons Canada, Ltd. 260 Cost Management First-in, First-out: Direct materials: _____________Direct materials cost_____________ = $70,000 = $1.6667 Equivalent units for total work performed this period 42,000 Conversion costs: ______________Conversion costs______________ = $42,500 = 1.0732 Equivalent units for total work performed this period 39,600 Total cost per equivalent unit: $2.7399 Process Cost Reports for April First-in, First-Out Weighted Average Computation Units Costs Computation Units Costs From March Beginning WIP cost report 6,000 $ 9,625 Costs to complete beginning WIP: Direct materials 0x$1.6667 0 Conversion costs 3,600x$1.0732 3,864 Total costs added this period _____ 3,864 Total cost of beginning WIP transferred out 6,000 13,489 New units started, completed, and transferred 34,000x$2.739 34,00 out 9 0 93,157 Total units completed and 40,000x$2.677 40,00 transferred out 40,000 106,646 1 0 $107,084 Ending WIP: 8,000 8,000 Direct materials 8,000x$1.667 13,336 8,000x$1.6146 12,917 Conversion costs 2,000x1.073 2,146 2,000x$1.0625 2,125 Total ending WIP cost _____ 15,482 _____ 15,042 48,00 Total Accounted For 48,000 $122,128 0 $122,126 Differences in total costs are due to rounding errors. If a spreadsheet is used to make these calculations, the totals will have fewer rounding errors. C. Journal entries for weighted average method for April: Work in process inventory $70,000 Raw materials inventory $70,000 To record the cost of raw materials used in production during April. Work in process inventory $42,500 Wages and accounts payable $42,500 To record the conversion costs incurred in production during April. © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 261 Finished goods $107,084 Work in process inventory $107,084 To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage). Journal entries for FIFO method for April: Work in process inventory $70,000 Raw materials inventory $70,000 To record the cost of raw materials used in production during April. Work in process inventory $42,500 Wages and accounts payable $42,500 To record the conversion costs incurred in production during April. Finished goods $106,646 Work in process inventory $106,646 To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage). 6.44 Process Costing for a Service - For Seniors Only A. Process costing is appropriate in this situation because the returns are very similar in the amount of time and therefore cost to complete each one. If the returns were more complex or extra research was needed on certain ones, process costing would no longer be appropriate because there would be too much variation between different returns. B. To determine the costs for April, last year’s cost data is needed as well as data from previous months. Additional information required is the approximatenumber of returns will be done, the salary paid to the employees, overhead costs, the number of employees that will be hired for the month, the amount of time each will work, and the amount of time it takes for each return. Also, an estimate is needed for the number of returns that are likely to be in progress at the beginning of April. C. The first step in determining the cost for April returns is to find the total units in progress and their percent completion. In addition, the number of returns to be completed in April needs to be estimated. Last year’s data will be useful in estimating this year’s volume. Using data mentioned in part B, costs are categorized as direct materials or conversion costs. An equivalent cost per unit for the tax returns can then be estimated. Once the number of returns for the month of April has been predicted, the equivalent costs can be estimated and a total cost for that month can be predicted. It is likely that there will be no ending WIP inventory,because tax returns are due April 30 and this organization’s clients are likely to file by the due date rather than request extensions. © 2012 John Wiley and Sons Canada, Ltd. 262 Cost Management 6.45 FIFO Process Costing, Transferred-In Costs, Direct Materials Added During Process - Benton Industries 1. Summarize Total Costs to Account For FIFO: Transferred-in Direct Materials Conversion Costs Total Cost Beginning WIP $ 40,470 $ 0 $ 14,322 $ 54,792 Current period costs 224,130 166,840 315,228 706,198 Total costs to account for $264,600 $166,840 $329,550 $760,990 2. Summarize Physical and Equivalent Units Work This Period Complete Start Start Total Work Beginning Beginning and Ending Performed Total to WIP (33%) WIP (67%) Complete WIP (40%) This Period Account for Physical Units 15,000 0 82,000 11,000 93,000 108,000 Equivalent Units: Transferred-in 15,000 0 82,000 11,000 93,000 108,000 Direct Materials (at 60%) 0 15,000 82,000 0 97,000 97,000 Conversion Costs 5,000 10,000 82,000 4,400 96,400 101,400 3. Calculate First-in, First-out Cost Per Equivalent Unit Transferred-in: _____________Transferred-in costs_____________ = $224,130 = $ 2.41 Equivalent units for total work performed this period 93,000 Direct materials: _____________Direct materials cost_____________ = $166,840 = 1.72 Equivalent units for total work performed this period 97,000 Conversion costs: ______________Conversion costs______________ = $315,228 = 3.27 Equivalent units for total work performed this period 96,400 Total cost per equivalent unit: $7.40 © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 263 4. Process cost report for the year First-in, First-Out Computation Units Costs Beginning WIP From last year 15,000 $ 54,792 Costs to complete beginning WIP: Direct materials 15,000 x $1.72 25,800 Conversion costs 10,000 x $3.27 32,700 Total costs added this period _______ 58,500 Total cost of beginning WIP transferred out 15,000 113,292 New units started, completed, and transferred out 82,000*$7.40 82,000 606,800 Total units completed and transferred out 97,000 720,092 Ending WIP: 11,000 Transferred-in 11,000 x $2.41 26,510 Direct materials 0 x $1.72 0 Conversion costs 4,400 x $3.27 14,388 Total ending WIP cost _______ 40,898 Total Accounted For 108,000 $760,990 Notice that the total costs summarized above ($760,990) are equal to the costs accounted for in the cost report. 6.46 Process Costing Under Weighted Average, Spoilage, Journal Entries - Victoria’s Closet A. Preparation of process cost report using the weighted average method. Summary of unit information given in the problem: WIP Units Summary of Spoilage Beginning (25% complete) 11,000 Started 74,000 61,000 Good completed Normal spoilage 6,600 8,000 Spoiled Abnormal spoilage ??? Ending (75% complete) 16,000 Total 8,000 When computing equivalent units, notice that the ending WIP inventory units are considered 100% complete with respect to direct materials, since direct materials are added at the beginning of processing. However, the ending WIP inventory units are only 75% complete and, hence, have only 75% of the conversion costs (incurred evenly throughout production). Both normal and abnormal spoilage are assigned 100% of all costs because spoilage occurs just before inspection, which is at the 100% stage of completion. © 2012 John Wiley and Sons Canada, Ltd. 264 Cost Management 1. Summarize Total Costs to Account For Direct Materials Conversion Costs Total Cost Beginning WIP $220,000 $30,000 $ 250,000 Current period costs 1,480,000 942,000 2,422,000 Total costs to account for $1,700,000 $972,000 $2,672,000 2. Summarize Physical and Equivalent Units Work Performed This Period Complete Start Start Total Work Total Spoiled Beginning Beginning and Ending Performed Units to Units WIP (25%) WIP (75%) Complete WIP (75%) This Period Account for (100%) Physical Units 11,000 0 58,000 16,000 74,000 85,000 (8,000) Equivalent Units: Total Work Direct Materials 11,000 0 58,000 16,000 74,000 85,000 (8,000) Conversion Costs 2,750 8,250 58,000 12,000 78,250 81,000 (8,000) Total Spoilage 8,000 Less Normal Spoilage 6,600 Abnormal Spoilage 1,400 3. Calculate Cost per Equivalent Unit: Weighted Average Direct materials: Beginning WIP + Direct materials cost = $1,700,000 = $20 Equivalent units for total work 85,000 Conversion costs: Beginning WIP + Conversion cost = $972,000 = 12 Equivalent units for total work 81,000 Total cost per equivalent unit: $32 4. Weighted Average Process Cost Report for January Computation Units Costs Total units completed and transferred out: Good units (11,000 + 58,000 – 8,000) x$32 61,000 $1,952,000 Normal spoilage 6,600 x $32 ______ 211,200 Total transferred out 61,000 $2,163,200 Abnormal spoilage 1,400 x $32 44,800 Ending WIP: 16,000 Direct materials 16,000 x $20 320,000 Conversion costs 12,000 x $12 144,000 Total ending WIP cost 464,000 Total Good Units Accounted For 85,000 – 8,000 77,000 Total Accounted For $2,672,000 B. Journal entries: Work in process inventory $1,480,000 Raw materials inventory $1,480,000 To record the cost of raw materials used in production during January. © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 265 Work in process inventory $942,000 Wages and accounts payable $942,000 To record the conversion costs incurred in production during January. Finished goods $2,163,200 Work in process inventory $2,163,200 To record the cost of 61,000 units transferred to finished goods during January (includes the cost of normal spoilage). Abnormal spoilage loss $44,800 Work in process inventory $44,800 To record the cost of abnormal spoilage during January. 6.47 Process Costing Under FIFO, Spoilage, - Victoria’s Closet A. This problem is identical to problem 6.31, except that the FIFO method is used instead of the weighted average method. The first two parts of the process cost report are identical under the two methods. Therefore, the following solution shows only the last two parts of the process cost report. 3. Calculate Cost per Equivalent Unit: FIFO Direct materials:_____________Direct materials cost_____________ =$1,480,000 = $20.0000 Equivalent units for total work performed this perio74,000 Conversion costs: ______________Conversion costs______________ = $942,000 = 12.0383 Equivalent units for total work performed this perio78,250 Total cost per equivalent unit: $32.0383 © 2012 John Wiley and Sons Canada, Ltd. 266 Cost Management 4. FIFO Process Cost Report for Victoria’s Closet Computation Units Costs Beginning WIP 11,000 $ 250,000 Costs to complete beginning WIP: Direct materials 0x$20 0 Conversion costs 8,250*$12.0383 99,316 Total costs added this period _____ 99,316 Total cost of beginning WIP transferred out 11,000 349,316 New units started, completed, and transferred out50,000*$32.0383 50,000 1,601,915 Normal spoilage 6,600*$32.0383 ______ 211,453 Units completed and transferred out 61,000 2,162,684 Abnormal spoilage 1,400*$32.0383 44,854 Ending WIP: 16,000 Direct materials 16,000 x $20 320,000 Conversion costs 12,000 x $12.0383 144,460 Total ending WIP cost ______ 464,460 Total Good Units Accounted For 85,000-8,000 77,000 Total Costs Accounted For $2,671,998 6.48 Standard Costing, Spoilage, - Victoria’s Closet A. A standard cost report would be the same as the FIFO cost report from a format standpoint. However, the standard costs would be used instead of equivalent unit costs. That is the only difference. B. If Victoria’s Closet wants to set a benchmark for productivity, standard costs are appropriate. A standard cost is an estimate of cost under efficient operations and therefore acts as a benchmark or budget with which actual costs can be compared. The standards need to be updated regularly, though. 6.49 Cumulative Problem (Chapter 4): Normal and Abnormal Spoilage, Quality Decision, Opportunity Costs - Kim Mills Summary of information given in the problem: WIP Units Summary of Spoilage Beginning 20,000 Started ???? 90,000 Good completed Normal spoilage 3,600 7,000 Spoiled Abnormal spoilage ???? Ending 17,000 Total 7,000 A. Abnormal spoilage = 7,000 – 3,600 = 3,400 units © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 267 B. Spoilage costs = 7,000 x $1,000 = $7,000,000 C. The opportunity costs of spoilage can be measured in several ways. First, in addition to the cost of the spoiled units, there is also the contribution margin foregone because the products could not be sold. In addition, there are the opportunity costs of bad units that are sold because they pass through inspection without having been detected as spoiled. Through word of mouth or services such as Consumer Reports or Good Housekeeping, a company’s reputation may suffer and the organization loses market share. These costs can be considerable, especially if competitors have reputations for high quality with similar prices. 6.50 Spoilage with Inspection Point Other Than 100% - Kim Mills A. If inspection occurs when units are 40% complete, direct materials have already been added, but conversion costs will only be 40% added. Equivalent units for direct materials = 100% x 7,000 units = 7,000 units Equivalent units for conversion costs = 40% x 7,000 units = 2,800 units B. Abnormal spoilage for conversion costs = 2,800 (total spoilage per Part A) – 1,440(normal spoilage) = 1,360units. C. Here are several advantages of inspecting units earlier in their manufacturing process: • Kim saves the rest of the conversion cost that would be added. • Units are removed from further handling (storage and control), except to dispose of them. • If the manufacturing process further down the line would tend to hide the defects, a larger number of defective units are identified, and Kim avoids selling defective units to customers. 6.51 Normal and Abnormal Spoilage, Quality Improvements - Empire Forging Summary of information given in the problem: WIP Units Summary of Spoilage Beginning 60,000 Started ???? 420,000 Good completed Normal spoilage 12,600 36,000 Spoiled Abnormal spoilage ?? Ending 68,000 Total 36,000 A. Abnormal spoilage = Total spoilage – Normal spoilage = 36,000 – 12,600 = 23,400 units © 2012 John Wiley and Sons Canada, Ltd. 268 Cost Management B. Units started in May: Refer to the above T-Account, and solve for the unknown number of units started 60,000 + Started – 420,000 – 36,000 = 68,000 Started = 68,000 – 60,000 + 420,000 + 36,000 Started = 464,000 C. Percentage of good units allowed for spoilage is 3% (12,600/420,000). Total spoiled units as a percentage of good units is 8.6% (36,000/420,000). When spoilage rates increase dramatically, it is likely that more spoiled units are sold as good units because they have been overlooked in the inspection process. This leads to more returns and potential loss of market share. In addition, the cost of good units increases, and so the contribution margin on those units decreases. It is also possible that more units have been reworked, and these could be lower quality than first run units, and rework also increases the cost of good units. D. Below are examples of arguments that could be made; students may think of additional arguments. The costs of undetected spoiled units can be quite high. Customers are unhappy with defective units and may not purchase the goods again, so market share could be lost. In addition, if the defect causes any type of harm, the company could be subject to legal action and may have to pay a settlement or high legal fees. These costs are difficult to value. It is much easier to determine the cost of quality improvements, such as more frequent inspections, quality circles with employees to elicit suggestions for improvements, or redesigning the product or manufacturing process to reduce defects. Because of the uncertainty of the costs of spoiled units, the company should analyze costs for returned units and warranty work, develop better tracking systems so that all spoiled units are counted (whether they are reworked or not), and hire a marketing company to identify customers who have quit using its products to determine if quality was a factor in this decision. Once the managers have more information, they will better understand the costs and benefits of quality problems and quality initiatives. © 2012 John Wiley and Sons Canada, Ltd. Chapter 6: Process Costing 269 6.52 Process Costing Under Weighted Average and FIFO, Spoilage, Journal Entries - The Rally Company A sample spreadsheet showing the solution for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/canada/eldenburg). A. Weighted average: Following are excerpts from the sample spreadsheet for this problem. Input Area forAssumptions Work Performed: Work in Process: Beg. WIP End. WIP Units 2,000 Ending WIP Units were not given, % complete direct materials 100% 100% so they must be calculated: % complete conversion costs 80% 25% Beginning WIP 2,000 Units started 18,000 Units started 18,000 Units completed and transferred out 14,800 Totalto account for 20,000 Spoiled Units: Transferred out* -14,800 Normal 1,000 Normalspoilage -1,000 Abnormal 1,000 Abnormalspoilage -1,000
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