CHAPTER
17
Process Costing
Overview
This chapter explains how process-costing systems determine the cost of products or services. In the simplest case, a process has no beginning or ending work-in-process inventory. Considerable complexity is added when a process has both beginning and ending work-in-process inventory; this case necessitates selecting an inventory costflow method. The chapter illustrates two of these methods: the weighted-average method and the first-in, first-out (FIFO) method. Many detailed exhibits are included in the chapter because process costing is highly procedural. The chapter also explains how operation-costing systems determine the cost of products. The Appendix to the chapter describes the standard-costing method of process costing. Case 1
Case 2
Case 3
Beginning
Inventory
No
No
Yes
Ending
Inventory
No
Yes
Yes
3. Case 1 is simple because there is no workin-process inventory in the Assembly Department.
That is, all units of SG-40 are started and completed during the accounting period. The unit cost of the 400 units of SG-40 in this case is computed as follows:
Direct material costs
$32,000 ÷ 400
Conversion costs
$24,000 ÷ 400
Cost per unit
$ 80
60
$140
Highlights
1. In a process-costing system, the unit cost of a product (or service) is obtained by assigning total costs to many identical or similar units of output. A process-costing system separates 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 to assign costs to products. The key feature of process costing is that it averages production costs over all units produced. Industries using process costing include chemical, pharmaceutical, and semiconductor.
2. The chapter uses three cases to illustrate process costing of cell-phone model SG-40 in the
Assembly Department of Pacific Electronics. The following table shows the cases differ in regard to whether or not the Assembly Department has work-in-process inventory.
4. Case 2 has some unfinished units of SG40 in the Assembly Department at the end of the accounting period but no beginning work-inprocess inventory. Whenever there is an ending work-in-process inventory (with or without beginning work-in-process inventory), use a five-step procedure to compute the cost of fully completed and partially completed units:
Step 1: Summarize the flow of physical units of output. Step 2: Compute output in terms of equivalent units. Step 3: Summarize total costs to account for.
Step 4: Compute cost per equivalent unit.
Step 5: Assign total costs to units completed and to units in ending work in process.
Steps 1 and 2 deal only with units, whereas Steps
3, 4, and 5 incorporate costs. Step 1 tracks where physical units come from and where they go to during the accounting period. That is, units in beginning inventory + units started = units completed + units in ending inventory. In Step 2, equivalent units is a derived amount of output
223
units that (a) takes the quantity of each input (factor of production) in units completed and in incomplete units of work in process, and (b) converts the quantity of input into the amount of completed output units that could be produced with that quantity of input. For SG-40, direct materials are added at the beginning of the process in the Assembly Department, and conversion costs are added evenly throughout the process. EXHIBIT 17-1, text p.633, shows the details for
Steps 1 and 2 in Case 2.
5. The accuracy of the completion percentages used for partially completed units in equivalent unit computations depends on the care and skill of the estimator and the nature of the process.
Estimating the degree of completion is usually easier for direct materials than for conversion costs. That’s because the quantity of direct materials needed for a completed unit and a partially completed unit can be measured accurately, whereas it is more difficult to measure what proportion of the total conversion costs needed to complete units has been used for the units still in process. Because of the difficulties in estimating completion percentages for conversion costs, department supervisors and line managers— individuals most familiar with the process—often make these estimates.
6. Steps 3, 4, and 5 together are called the production cost worksheet. In Step 3, total costs to account for are equal to the sum of the amounts debited to the department’s Work in Process account. When there is no beginning inventory, the
Assembly Department’s debits are for direct materials used and conversion costs incurred during the period. Step 4 computes cost per equivalent unit by dividing the costs in each input cost category by the respective quantity of equivalent units. Step
5 assigns total costs to account for from Step 3 (a) to units completed and transferred out of the process and (b) to units remaining in process at the end of the period. EXHIBIT 17-2, text p.634, shows the details for Steps 3, 4, and 5 in Case 2.
7. Using dollar amounts from EXHIBIT 172, journal entries for the Assembly Department for
February are as follows:
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CHAPTER 17
Work in Process–Assembly
Accounts Payable Control
32,000
Work in Process–Assembly
Various accounts
18,600
32,000
18,600
Work in Process–Testing
24,500
Work in Process–Assembly
24,500
Because the Assembly Department had no beginning inventory in February, Work in Process—
Assembly has a balance at the end of February of
$26,100 ($0 + $32,000 + $18,600 − $24,500).
8. Case 3 adds complexity: there is both beginning and ending work-in-process inventory of
SG-40 in the Assembly Department. Under these conditions it is necessary to select an inventory cost-flow method. The chapter illustrates two of these methods:
•
•
The weighted-average process-costing method calculates cost per equivalent unit of all work done to date (regardless of the accounting period in which it is done) and assigns this cost (a) to equivalent units completed and transferred out of the process and (b) to equivalent units in ending work-in-process inventory.
The first-in, first-out (FIFO) processcosting method (a) assigns the cost of the previous accounting period’s equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process, and (b) assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory.
Both methods use the five-step procedure presented in paragraph 4.
9. The key difference in computing equivalent units (Step 2) under the two methods concerns work done on the physical units to account for in the process.
•
The weighted-average method combines work done to date, regardless of whether it is performed in the previous period or the current
•
period. Thus, the stage of completion of the current period’s beginning work in process is not used in computing equivalent units.
The FIFO method separates work done on beginning inventory in the previous period from work done on it in the current period.
EXHIBIT 17-4, text p.636, shows the details of
Steps 1 and 2 for the weighted-average method.
EXHIBIT 17-6, text p.640, is a parallel presentation for the FIFO method.
10. To compute cost per equivalent unit (Step
4), the weighted-average method divides costs incurred to date in each cost category by the respective amount of work done to date, whereas the
FIFO method divides costs incurred in the current period in each cost category by the respective amount of work done in the current period. The assignment of costs (Step 5) is more complicated under FIFO because units completed and transferred out of the process have both a beginning inventory component and a started and completed component, instead of a single component for these units under weighted average. The major advantage of FIFO is that it provides managers with information about changes in cost per unit from one period to the next. This information can be used for evaluating performance in the current period by comparing actual costs and budgeted costs. EXHIBIT 17-5, text p.637, shows the details of Steps 3, 4, and 5 for the weighted-average method. EXHIBIT 17-7, text p.641, is a parallel presentation for the FIFO method.
11. The cost of units completed, and hence operating income, can differ materially between the weighted-average and FIFO methods if (a) the direct materials or conversion costs per unit vary significantly from period to period, and (b) the physical unit levels of beginning and ending work in process are large in relation to the total number of units transferred out of the process. Thus, as companies move toward long-term procurement contracts to reduce differences in unit costs from period to period, and reduce inventory levels, the difference in cost of units completed under the weighted-average and FIFO methods decreases.
12. Many process-costing systems have two
or more departments or processes in the production cycle. In the Pacific Electronics example, beginning text p.643, the SG-40 component moves from the Assembly Department to the Testing Department and then to Finished Goods. In the Testing Department, direct materials (crating and other packing materials) are added at the end of the process, and conversion costs are added evenly throughout the process. Because the Testing Department is not the first process in the production cycle, it has an input cost category called transferred-in costs (also called previous department costs). Transferred-in costs are costs incurred in previous departments that are carried forward as the product’s cost when it moves to a subsequent process in the production cycle. That is, as units move from one department to the next, their costs are transferred with them. SG-40’s cost, therefore, consists of the transferred-in costs as well as the direct materials and conversion costs added in the
Testing Department.
13. As in a first-department situation, the fivestep procedure assigns the costs of a subsequent department to units completed and transferred out, and to units in ending inventory. In calculating a subsequent department’s equivalent units (Step 2), transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process. Recall that the weightedaverage equivalent units are work done to date, whereas the FIFO equivalent units are work done in the current period. EXHIBIT 17-8, text p.645, and EXHIBIT 17-10, text p.646, show this contrast in the computation of equivalent units.
14. Steps 3, 4, and 5 are basically the same for a subsequent department as for a first department, except transferred-in costs must be accounted for.
These steps under the weighted-average and FIFO methods, as described for a first department in paragraph 10, are applied in a similar manner to a subsequent department. EXHIBIT 17-9, text
p.645, shows the details of Steps 3, 4, and 5 for weighted average. EXHIBIT 17-11, text p.647, is a parallel presentation for FIFO.
15. Product-costing systems do not always fall neatly into either job-costing or process- costing categories. A hybrid-costing system blends
PROCESS COSTING
225
characteristics from both job-costing and processcosting systems. Manufacturers of a relatively wide variety of closely related standardized products tend to use hybrid-costing systems. Examples are televisions, dishwashers, and washing machines.
16. An operation-costing system is a hybridcosting system applied to batches of similar, but not identical, products. Individual batches of products are often a variation of a single design and proceed through a sequence of selected, though not necessarily the same, operations. An operation is a standardized method or technique that is performed repetitively, often on different materials, resulting in different finished goods. Within each operation, all product units are treated exactly alike, using identical amounts of the operation’s resources. Manufacturers of clothing and shoes commonly use operation-costing systems.
17. (Appendix, paragraphs 17-19) Under the standard-costing method of process costing, standards are set for quantities of inputs needed to produce output. Standard costs per input unit can be assigned to these physical quantities to develop standard costs per output unit. The standardcosting method is especially useful for companies manufacturing a wide variety of similar products,
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such as rubber products, textiles, ceramics, paints, and packaged food products. Identifying standard costs for each individual product overcomes the disadvantage of costing all products at a single average actual cost amount.
18. Variances arise under the standard-costing method when the standard costs assigned to products on the basis of work done in the current period do not equal the actual costs incurred in the current period. As described in Chapters 7 and 8, variances can be analyzed in little or much detail for planning and control purposes.
19. In addition to their role in planning and control, standard costs make it easier to use the five-step procedure presented in paragraph 4.
Steps 1 and 2 are the same under standard costing as under FIFO, but Step 4 requires no computations under standard costing because cost per equivalent unit is the standard cost per unit of output. Step 5 assigns the total standard costs to account for from Step 3 to units completed and transferred out of the process and to units in ending work-in-process inventory.
Featured Exercise
Rogers Company manufacturers a component, Y-28, in a two-process production cycle, Departments 1 and 2.
In Department 2, direct materials are added at the beginning of the process and conversion costs are added evenly throughout the process. Conversion costs were 60% complete for the 6,000 units in process on May 1, and 75% complete for the 8,000 units in process on May 31. Twelve thousand units were completed and transferred out of Department 2 during May. Department 2’s costs for May are as follows:
Work in process, May 1
Costs added in May
Transferred-in
Costs
$140,000
280,000
Direct
Materials
$ 28,000
112,000
Conversion
Costs
$ 72,000
216,000
a. Using the weighted-average method in Department 2 for May:
• Summarize the flow of physical units of output.
• Compute output in terms of equivalent units.
• Compute cost per equivalent unit.
• Summarize total costs to account for.
• Assign total costs to units completed and transferred out and to units in ending work-in-process inventory.
• Prepare the journal entry to record the transfer of completed work to Finished Goods.
b. Using the FIFO method, repeat part (a).
Solution
PROCESS COSTING
227
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Solution
a. Weighted-average method:
Flow of Production
Work in process, beginning
Transferred-in during May
Physical units to account for
Completed and transferred out during May
Work in process, ending
8,000 × 100%; 100%; 75%
Physical units accounted for
Work done to date
Equivalent Units
Direct
Conversion
Materials
Costs
Physical
Units
6,000
14,000*
20,000
Trans.-in
Costs
12,000
8,000
12,000
12,000
12,000
8,000
8,000
6,000
20,000
20,000
18,000
20,000
*A plug figure: 20,000 units accounted for minus 6,000 units in beginning inventory.
Work in process, beginning
Costs added in May
Costs incurred to date
Divide by equivalent units
Equivalent unit costs
Total costs to account for
Assignment of costs:
Completed and trans. out
Work in process, ending
Transferred-in costs
Direct materials
Conversion costs
Total work in process
Total costs accounted for
Total
Production
Costs
$240,000
608,000
Trans.-in
Costs
$140,000
280,000
$420,000
÷ 20,000
$
21
Direct
Materials
$ 28,000
112,000
$140,000
÷ 20,000
$
7
Conversion
Costs
$ 72,000
216,000
$288,000
÷ 18,000
$
16
$848,000
$528,000
168,000
56,000
96,000
320,000
$848,000
12,000 × ($21 + $7 + $16)
8,000 × $21
8,000 × $7
6,000 × $16
The journal entry to record the transfer of completed work:
Finished Goods
Work in Process—Dept. 2
528,000
528,000
PROCESS COSTING
229
b. FIFO method:
Flow of Production
Work in process, beginning
Transferred-in during May
Physical units to account for
Completed and transferred out during May:
Work in process, beginning
6,000×0%; 0%; (100%−60%)
Started and completed
6,000×100%; 100%; 100%
Work in process, ending
8,000×100%; 100%; 75%
Physical units accounted for
Work done in May
Physical
Units
6,000
14,000*
20,000
Trans.-in
Costs
Equivalent Units
Direct
Conversion
Materials
Costs
6,000
0
0
2,400
6,000
6,000
6,000
8,000
8,000
6,000
14,000
14,000
14,400
6,000
8,000
20,000
*A plug figure: 20,000 units accounted for minus 6,000 units in beginning inventory.
Work in process, beginning
Costs added in May
Divide by equivalent units
Equivalent unit costs
Total costs to account for
Assignment of costs:
Work in process, beginning
Direct materials added in May
Conversion costs added in May
Total work in process, beg.
Started and completed
Total completed and trans. out
Work in process, ending
Transferred-in costs
Direct materials
Conversion costs
Total work in process, ending
Total costs accounted for
Total
Production
Costs
$240,000
608,000
Trans.-in
Direct
Conversion
Costs
Materials
Costs
(costs of work done before May)
$280,000
$112,000
$216,000
÷ 14,000
÷ 14,000
÷ 14,400
$
20
$
8
$
15
$848,000
$240,000
-036,000
276,000
258,000
534,000
0 × $8
2,400 × $15
6,000 × ($20 + $8 + $15)
160,000
64,000
90,000
314,000
$848,000
8,000 × $20
8,000 × $8
6,000 × $15
The journal entry to record the transfer of completed work:
Finished Goods
Work in Process—Dept. 2
230
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534,000
534,000
Review Questions and Exercises
Completion Statements
Fill in the blank(s) to complete each statement.
1. The overall objective of the five-step procedure to process costing is to assign the total costs to account for to units _______________________
_____________________________ and to units
________________________________.
2. ____________________________ is a derived amount of output units that takes the quantity of each input (factor of production) in units completed and in incomplete units of work in process, and converts the quantity of input in-to the amount of completed output units that could be produced with that quantity of input.
3. The journal entry to transfer completed goods out of Painting, the final processing department in the production cycle, is:
Debit: _________________________________
Credit: _________________________________
4. A hybrid-costing system applied to batches of similar, but not identical, products is called an
_______________________ system.
____
6.
____
7.
____
8.
____
9.
____
10.
____
11.
True-False
Indicate whether each statement is true (T) or false
(F).
___
___
___
___
___
1. A process-costing system separates costs into cost categories according to the timing of when costs are introduced into the process.
2. In a process for a given month, physical units are always equal to or greater than equivalent units.
3. In terms of physical units in a processing department, the sum of units completed and transferred out and units in ending work in process is equal to the sum of units in beginning inventory and units started during the current period.
4. In process costing, estimating the degree of completion of units is usually more accurate for conversion costs than for direct materials.
5. The weighted-average method focuses on the total costs and total equivalent units completed to date, whereas the
FIFO method computes unit costs by confining equivalent units to work done in the current period.
The weighted-average method uses the stage of completion of the current period’s beginning work in process in computing equivalent units.
The FIFO method does not use the costs of beginning inventory in computing cost per equivalent unit for the current period. In computing equivalent units, transferred-in costs are treated as if they are a separate type of direct material added at the beginning of the process.
Transferred-in costs for Process Two in the current period cannot include conversion costs that are incurred in Process
One in the current period.
An operation-costing system allocates different amounts of conversion costs to different products that undergo a given operation. (Appendix) Standard costing uses “work done during the current period” as the basis to compare actual costs and standard costs for control purposes.
Multiple Choice
Select the best answer to each question. Space is provided for computations after the quantitative questions.
____
1. (CPA) Kew Co. had 3,000 units in work in process at April 1 of the current fiscal year, which were 60% complete as to conversion costs. During April, 10,000 units are completed. At April 30, 4,000 units remain in work in process and are
40% complete as to conversion costs.
Direct materials are added at the beginning of the process. Conversion costs are added evenly throughout the process. Assuming Kew uses the weightedaverage method, how many units were started during April?
a. 9,000
b. 9,800
c. 10,000
d. 11,000
PROCESS COSTING
231
___
___
2. (CPA) Under which of the following conditions will the first-in, first-out method of process costing yield the same cost per equivalent unit as the weightedaverage method?
a. If units produced are homogeneous in nature.
b. If there is no beginning inventory.
c. If there is no ending inventory.
d. If beginning and ending inventories are each 50% complete.
3. (CPA) Walton, Incorporated, had 8,000 units of work in process in Department
A on October 1 of the current fiscal year
. These units were 60% complete as to conversion costs, which are added evenly throughout the process. Direct materials are added at the beginning of the process. During October, 34,000 units are started and 36,000 units completed.
Walton has 6,000 units of work in process on October 31. These units are 80% complete as to conversion costs. For October, how much did the equivalent units under the weighted-average method exceed the equivalent units under the first-in, first-out method?
a.
b.
c.
d.
232
Direct
Materials
0
0
8,000
8,000
CHAPTER 17
Conversion
Costs
3,200
4,800
3,200
4,800
____
4. (CMA) Kimbeth Manufacturing uses a process-costing system to manufacture
Dust Density Sensors for the mining industry. The following information pertains to operations for May 2010:
Units
Beginning work-in-process inventory, May 1
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
16,000
100,000
92,000
24,000
The beginning inventory was 60% complete for direct materials and 20% complete for conversion costs. The ending inventory is 90% complete for direct materials and 40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
•
•
Beginning inventory costs are direct materials, $54,560; conversion costs, $35,560.
Costs incurred during May are direct materials used, $468,000; conversion costs, $574,040.
Using the weighted-average method, the total cost of the units in the ending work-in-process inventory at May 31,
2010, is:
a. $86,400.
b. $153,960.
c. $154,800.
d. $155,328.
e. $156,960.
___
5. Using the information in question 4 and the FIFO method, the total cost of units in the ending work-in-process inventory at May 31, 2010, is:
a. $153,168.
b. $154,800.
c. $155,328.
d. $156,960.
e. $159,648.
____
a.
b.
c.
d.
____
___
6. (CPA) The Wiring Department is the second stage of Flem Company’s production cycle. On May 1 of the current fiscal year, the beginning work-inprocess inventory consisted of 25,000 units that are 60% complete as to conversion costs. During May, 100,000 units are transferred in from the first stage of Flem’s production cycle. On
May 31, the ending work-in-process inventory consists of 20,000 units that are
80% complete as to conversion costs.
Direct materials are added at the end of the process, and conversion costs are added evenly throughout the process.
Using the weighted-average method, the equivalent units are:
a.
b.
c.
d.
Transferred-in Direct Conversion
Costs
Materials
Costs
100,000
125,000
100,000
125,000
105,000
106,000
125,000
105,000
121,000
125,000
125,000
121,000
7. Using the information in question 6 and the FIFO method, the equivalent units are: 8. (CPA) An error is made in estimating the percentage of completion of the current month’s ending work-in-process inventory. The error results in understating the percentage of completion of conversion costs. What is the resulting effect of this error on:
1. Equivalent units of conversion costs? 2. Cost per equivalent unit?
3. Costs assigned to work completed during the period?
a.
b.
c.
d.
____
Transferred-in Direct Conversion
Costs
Materials
Costs
100,000
100,000
111,000
100,000
105,000
106,000
100,000
105,000
111,000
125,000
125,000
106,000
1
Understate
Understate
Overstate
Overstate
2
Overstate
Understate
Understate
Overstate
3
Overstate
Overstate
Understate
Understate
9. (Appendix, CPA) Under the standardcosting method, how (if at all) are equivalent units used in the computations for process costing?
a. Equivalent units are not used.
b. Actual equivalent units are multiplied by the standard cost per unit.
c. Standard equivalent units are multiplied by the standard cost per unit.
d. Standard equivalent units are multiplied by the actual cost per unit.
PROCESS COSTING
233
Review Exercises
1. Ozark Company uses a process-costing system. The following information is for the Testing Department for January 2011:
Units
Work in process, January 1,
40% complete
Transferred in during January
Completed and transferred out of the department during January
Work in process, January 31,
50% complete
January 1 inventory costs:
Transferred-in costs
Conversion costs
Current costs in January:
Transferred-in costs
Conversion costs
300
600
700
200
$28,200
5,560
51,000
36,040
No direct materials are added in the Testing Department.
a. Using the weighted-average method:
(1) Compute total physical units accounted for.
(2) Compute equivalent units of transferred-in costs and conversion costs.
(3) Compute cost per equivalent unit of transferred-in costs and conversion costs.
(4) Compute cost of units completed and transferred out of the department.
(5) Compute cost of work-in-process inventory, January 31.
b. Repeat part (a) using the FIFO method.
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2. (Appendix) Fisher Company manufactures two models of aircraft subassemblies, X and Y. The following information is for November 2010:
Direct materials
Conversion costs
(allocated on the basis of machinehours used)
Operation 1
Operation 2
Operation 3
Total manufacturing costs
Production Orders
2,000 Units
1,000 Units of Model X of Model Y
$48,000
$64,000
20,000
?
−
$ ?
10,000
?
5,000
$ ?
For Operation 2, budgeted costs for the year 2010 are $200,000 for direct manufacturing labor and
$880,000 for manufacturing overhead. Budgeted machine-hours are 36,000. Each product unit requires
10 minutes of machine time in Operation 2.
a. Compute the total conversion costs allocated to each model in Operation 2.
b. Compute the total manufacturing costs and the unit cost of each model in finished form.
c. Assume at the end of November that 100 units of Model X are in process through Operation 1 only, and that 200 units of Model Y are in process through Operation 2 only. Assume no direct materials are added in Operation 2 and that $8,000 (of the $64,000) direct materials are added to the 1,000 units of Model Y in Operation 3. Compute the cost of ending work-in-process inventory for each model. PROCESS COSTING
235
Answers and Solutions to Chapter 17 Review Questions and Exercises
Completion Statements
1.
2.
3.
4.
completed and transferred out of the process, in ending work in process
Equivalent units
Finished Goods Control, Work in Process—Painting operation-costing True-False
1.
2.
3.
4.
T
T
T
F
5. T
6. F
7. T
8. T
9. F
10. F
In process costing, estimating the degree of completion of units is usually more accurate for direct materials than for conversion costs. That’s because the quantity of direct materials needed for a completed unit or a partially completed unit can be measured accurately, whereas it is more difficult to measure what proportion of the total conversion costs needed to complete units has been used for units still in process.
Under the weighted-average method, the stage of completion of the current period’s beginning work in process is not used in computing equivalent units. For example, the 225 units of beginning work in process in Exhibit 17-4, text p.631, are 40% complete on March 1, but this stage of completion is disregarded in computing equivalent units under the weighted-average method.
Transferred-in costs always include conversion costs incurred in the current period and may include some conversion costs incurred in the previous period. That’s because, if none of these conversion costs are incurred in the current period, the transfer would have taken place in the previous period.
Under an operation-costing system, identical amounts of conversion costs are allocated to all the different products that undergo a given operation.
11. T
Multiple Choice
1. d
3. d
Total physical units accounted for = 10,000 + 4,000 = 14,000
Units started during current period = 14,000 − 3,000 = 11,000
This answer is not affected by the process-costing method used.
Either of two conditions must be met for the two costing methods to produce the same cost per equivalent unit: (i) no beginning inventory or (ii) no period-to-period changes in the cost per equivalent unit of direct materials and conversion costs. Condition (i) is illustrated in Cases 1 and 2, text pp.624-629. Condition (ii) rarely exists.
The differences in equivalent units between the two methods are attributable to work done in the previous period (that is, work done to date minus work done in the current period). The differences can be calculated directly by multiplying physical units in October 1 work-in-process inventory by the percentage of work done in September.
Direct materials: 8,000 × 100% = 8,000
Conversion costs: 8,000 × 60% = 4,800
Alternative solution: Compare the equivalent units computed under each method. These comparisons are as follows (detailed calculations not shown):
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2. b
Direct
Materials
4. e
Equivalent units under weighted average
42,000
40,800
Equivalent units under FIFO
34,000
36,000
Difference in equivalent units
8,000
4,800
Three steps are used to obtain the answer. First, compute equivalent units of work done to date:
Direct materials = 92,000 + 24,000(90%) = 92,000 + 21,600 = 113,600
Conversion costs = 92,000 + 24,000(40%) = 92,000 + 9,600 = 101,600
Second, compute equivalent unit costs of work done to date:
Direct materials =
$54,560 + $468,000 $522,560
=
= $4.60
113,600
113,600
Conversion costs =
5. a
Conversion
Costs
$35,560 + $574,040 $609,600
=
= $6.00
101,600
101,600
Third, compute the total cost of units in ending work in process:
Direct materials = 24,000(90%) × $4.60 = 21,600 × $4.60 = $ 99,360
Conversion costs = 24,000(40%) × $6.00 = 9,600 × $6.00 =
57,600
Work in process, May 31, 2010
$156,960
Three steps are used to obtain the answer. First, compute equivalent units of work done in the current period: Direct materials = 92,000 + 24,000(90%) − 16,000(60%)
= 92,000 + 21,600 − 9,600 = 104,000
Conversion costs = 92,000 + 24,000(40%) − 16,000(20%)
= 92,000 + 9,600 − 3,200 = 98,400
Second, compute equivalent unit costs of work done in the current period:
Direct materials = $468,000 ÷ 104,000 = $4.50
Conversion costs = $574,040 ÷ 98,400 = $5.83
Third, compute the total cost of units in ending work in process:
Direct materials = 24,000(90%) × $4.50 = 21,600 × $4.50 = $ 97,200
Conversion costs = 24,000(40%) × $5.83 = 9,600 × $5.83 =
55,968
Work in process, May 31, 2008
$153,168
6. c
Flow of Production
Work in process, May 1
Transferred-in during May
Physical units to account for
Completed and transferred out during May, 125,000 − 20,000
Work in process, May 31,
20,000×100%; 0%; 80%
Physical units accounted for
Work done to date
Equivalent Units
Direct
Conversion
Materials
Costs
Physical
Units
25,000
100,000
125,000
Trans.-in
Costs
105,000
20,000
105,000
105,000
105,000
20,000
-0-
16,000
125,000
105,000
121,000
125,000
The equivalent units of direct materials for the May 31 inventory is zero because materials are added at the end of the process.
PROCESS COSTING
237
7. b
Flow of Production
Work in process, May 1
Transferred-in during May
Physical units to account for
Completed and transferred out during May
From work in process, May 31,
25,000×0%; 100%; 40%
Started and completed
100,000 − 20,000
80,000 × 100%
Work in process, May 31
20,000×100%; 0%; 80%
Physical units accounted for
Work done to date
8. a
Physical
Units
25,000
100,000
125,000
Trans.-in
Costs
Equivalent Units
Direct
Conversion
Materials
Costs
25,000
-0-
25,000
10,000
80,000
80,000
80,000
20,000
-0-
16,000
100,000
105,000
106,000
80,000
20,000
125,000
Regardless of whether the FIFO or weighted-average method is used, the effects of this error are the same because both methods treat ending inventory exactly alike. To illustrate the effects of the error, use assumed figures to satisfy the situation described. For example, assume ending inventory is estimated to be 50% complete as to conversion costs instead of the correct figure of 70%. Using assumed figures, the effect of this error on each of the three items specified in the question is as follows:
(1) Equivalent units of conversion costs are understated:
Physical
Units
-01,100
1,100
9. b
238
Equivalent Units
Before
After
Correction
Correction
Work in process, beginning
Started during current period
Physical units to account for
Completed and transferred out during current period, 1,100 − 200
900
900
900
Work in process, ending,
200
100
140
200 × 50%; 200 × 70%
1,000
1,040
Physical units accounted for
1,100
(2) Cost per equivalent unit is overstated:
Before correction: $2,080 ÷ 1,000 = $2.08 per unit
After correction: $2,080 ÷ 1,040 = $2.00 per unit
(3) Cost of work completed and transferred out is overstated:
Before correction: 900 units × $2.08 = $1,872
After correction: 900 units × $2.00 = $1,800
If this illustration had been based on direct materials instead of conversion costs, the conclusions would be the same; however, an error in computing the percentage of completion of direct materials is less likely to occur because the quantity of direct materials needed for a completed unit or a partially completed unit can be measured accurately.
Under the standard-costing method, costs are computed by multiplying actual equivalent units for each cost category by the respective standard cost per unit, as shown in Exhibit 17-13, text p.656.
CHAPTER 17
Review Exercise 1
a. (1) Total physical units accounted for = 300 + 600 = 900
(2) Equivalent units of work done to date:
Transferred-in costs = 700(100%) + 200(100%) = 900
Conversion costs = 700(100%) + 200(50%) = 800
(3) Cost per equivalent unit:
Transferred-in costs = ($28,200 + $51,000) ÷ 900
= $79,200 ÷ 900 = $88
Conversion costs
= ($5,560 + $36,040) ÷ 800
= $41,600 ÷ 800 = $52
(4) Costs transferred out = 700($88 + $52) = $98,000
(5) Cost of ending work in process = 200($88) + 200(50%)($52)
= $17,600 + $5,200 = $22,800
b. (1) Same as a(1) above, 900.
(2) Equivalent units of work done in current period:
Transferred-in costs = (700 − 300)100% + 200(100%) = 600
Conversion costs
= 300(100% − 40%) + (700 − 300)100% + 200(50%)
= 180 + 400 + 100 = 680
(3) Cost per equivalent unit:
Transferred-in costs = $51,000 ÷ 600 = $85
Conversion costs
= $36,040 ÷ 680 = $53
(4) Costs transferred out = ($28,200 + $5,560) + 300(100% − 40%)$53 + (700 −
300(100%)($85 + $53)
= $33,760 + $9,540 + $55,200 = $98,500
(5) Cost of ending work in process = 200(100%)($85) + 200(50%)($53)
= $17,000 + $5,300 = $22,300
Review Exercise 2
a.
Budgeted allocation rate = $200,000 + $880,000 = $30 per machine-hour for conversion costs
36,000
Units produced per hour = 60 minutes ÷ 10 minutes per unit = 6 units
Conversion costs allocated per unit = $30 ÷ 6 = $5
Conversion costs allocated to 2,000 units of Model X = 2,000 × $5 = $10,000
Conversion costs allocated to 1,000 units of Model Y = 1,000 × $5 = $5,000
b.
Direct materials
Conversion costs:
Operation 1
Operation 2
Operation 3
Total manufacturing costs
Divide by number of units
Manufacturing cost per unit
Model X
$48,000
Model Y
$64,000
20,000
10,000
-0$78,000
÷2,000
$
39
10,000
5,000
5,000
$84,000
÷1,000
$
84
PROCESS COSTING
239
c.
Model X
Direct materials:
$48,000 × (100 ÷ 2,000)
($64,000 − $8,000) × (200 ÷ 1,000)
Conversion costs:
Operation 1:
$20,000 × (100 ÷ 2,000)
$10,000 × (200 ÷ 1,000)
Operation 2:
$5,000 × (200 ÷ 1,000)
Ending work in process ($17,600)
240
CHAPTER 17
Model Y
$2,400
$11,200
1,000
2,000
$3,400
1,000
$14,200 