Cost Accounting (Raiborn and Kinney) SOLMAN Chapter 06 PDF

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Chapter 6 1 CHAPTER 6 PROCESS COSTING QUESTIONS 1. A company that produces homogeneous goods in mass quantities is likely to use a process costing system. The company can either have a single department or multiple departments. Job order costing and process costing are similar in that they are both ...

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CHAPTER 6 PROCESS COSTING QUESTIONS 1.

A company that produces homogeneous goods in mass quantities is likely to use a process costing system. The company can either have a single department or multiple departments. Job order costing and process costing are similar in that they are both methods of assigning costs to products. Also, the methods use similar product accounts (raw materials, work in process, finished goods, cost of goods sold) to capture the costs associated with production and use similar cost pools (DM, DL, OH). Job order costing and process costing differ in the way in which costs are gathered. In a job order costing system, costs are accumulated by department and by job; in a process costing system, costs are accumulated by production departments for the products that flow through those departments. In process costing, production must be determined on the basis of equivalent units to properly allocate the costs associated with each cost component to the work that was completed during the period and to the work that is still in process at the end of the period. Equivalent units of production are unnecessary in job order costing.

2.

The only difference between weighted average and FIFO equivalent units of production is in the treatment of the work that was completed on beginning inventory in the prior period. Under weighted average, the work performed on beginning inventory in the prior period is combined with the work performed during the current period. Under FIFO, the work performed on beginning inventory during the prior period is held out separately and not commingled with the work performed during the current period. The FIFO method more accurately portrays the actual physical flow of units through the manufacturing process, because it is most likely that the units in beginning inventory will be the first units to be completed during the current period - thus a first-in, first-out flow.

3.

Equivalent units of production is an approach to put partially completed and wholly completed units on a comparable basis. Without use of equivalent units, partially completed and fully completed units would be combined as if they were homogeneous measures of output. This would result in meaningless data since fully and partially completed units are different outputs.

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4.

One EUP calculation is generally not sufficient for all cost components because the components may be at different percentages of completion within a production department. However, if components are at the same percentage of completion, a single EUP calculation can be made. For example, if overhead is applied on the basis of direct labor, a single “conversion” cost component calculation can be made. Or, if several direct materials are added at the beginning of the process, these DMs may be combined as a single cost component.

5.

The units "started and completed" in a period are calculated as the total units completed during the period minus the units that were in the beginning inventory. This figure can be used in both the weighted average and FIFO methods shown in the chapter. (There are, however, other methods of computing EUP in which the units started and completed are not shown separately.) This calculation is not necessary for the weighted average method because work performed on the current period’s beginning inventory in the prior period need not be separated from work performed to complete the beginning inventory in the current period. This calculation is necessary for the FIFO method because work in the prior period cannot be commingled with work performed in the current period. Under weighted average, costs are assigned to ending inventory by multiplying the cost per EUP for each cost component times the EUP calculated for that component; these costs are then totaled. Costs are assigned to the units completed/transferred out by multiplying the total cost per EUP times the number of units that have been completed and transferred out during the period. The cost assigned to ending inventory is handled the same way for FIFO as for weighted average. In determining the cost of the units completed and transferred out, however, the cost of completing the beginning inventory must first be determined by multiplying the equivalent units of production performed this period for each cost component times the cost per EUP for each cost component. The cost of completing the beginning inventory is then added to the original beginning inventory cost to find the total cost of producing the beginning inventory units. The cost of the units started and completed in the current period is found by multiplying the total cost per EUP times the number of units started and completed this period. Adding the total cost of producing beginning inventory to the cost of the units started and completed will give the total cost transferred out of the department during the period.

6.

The only difference between process costing in a multi-department environment and a single department environment is that there will be a cost component labeled "Transferred In." The costs of previous departments must follow the flow of goods into successor departments to determine the full cost of production.

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The term transferred out cost is the cost amount that is sent from a WIP inventory account to either the next WIP department or to FG inventory. Under the WA method, the units transferred are not distinguished by when they were begun (whether in the previous or the current period); thus, all transferred out units have the same per-unit cost and only one computation is necessary. Under the FIFO method, the units that were in the beginning WIP inventory are considered separately from those that were begun in the current period. Thus, the beginning WIP costs must attach to those specific units, which must then be completed at current period costs for direct material, direct labor, and overhead. After determination of the total cost to manufacture the beginning WIP inventory units, the next computation reflects the units that were started and completed in the current period, which only contain current period costs.

8.

The cost per unit transferred out of the first department will always be equal to the cost per unit transferred in to the second department unless there is a change in the unit measurement in the second department. For example, if the first department might use pounds of cereal, but the second department might measure units in 24-oz. boxes of cereal. Thus, if the cost per pound transferred out were $2.00, the cost per box transferred in would be $3.00.

9.

Under a standard costing system, the Raw Material, In-Process, and Finished Goods Inventory accounts are accounted for at standard costs. Actual costs of each process or each department are also captured in a standard costing system and variances can be computed as differences between the standard and actual amounts for each cost component. The variances provide information to management about the efficiency of operations because they reflect differences between expected (standard) and actual costs.

10.

A hybrid costing system is one in which process costing is used to account for certain product costs and job order costing is used to account for other product costs. Hybrid costing is common in environments that have, for example, material costs that vary substantially from one production run to another (gold versus copper), but require all products to flow through the same physical conversion processes. In this example, the material would be accounted for on a job order basis and the conversion would be accounted for using process costing.

11.

The “method of neglect” is used to treat the cost of normal spoilage in a process costing system. Under this method, the spoiled units are simply ignored in the cost of production report because it is assumed that there will always be a given level (or less) of spoilage and that such a level cannot be eliminated. By using the method, the good production absorbs the cost of the spoiled production.

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12.

Normal loss refers to an expected reduction in production quantity based on the production technology and production practices of the company. Abnormal loss refers to a quantity of loss above the normal loss quantity. Normal loss creates an expected cost of production so the cost of such a loss is inventoriable as part of the cost of good production using the “method of neglect.” The method of neglect requires no specific computations regarding spoiled units; all costs are assigned to good units. The cost of spoiled units that have been found at an inspection point will be assigned to all units that have passed the inspection point. Thus, the method of neglect assigns spoilage costs by simply ignoring (neglecting) the spoiled units. The method of neglect raises the cost per equivalent unit because no costs are assigned to the spoiled units. Abnormal spoilage cost is not expected, and, thus, it is not inventoriable. Abnormal losses would be more likely to be preventable than normal losses because abnormal losses are less likely to be caused by factors that are inherent in the materials or production methods. For example, a known amount of material loss (waste) is to be expected if lower quality materials are utilized. However, any loss beyond the expected amount would likely be caused by other factors that are subject to management control, e.g., production errors. EXERCISES

14.

Each student will have a different answer. No answer provided.

13.

a. 32,000 + 800,000 = 832,000 pounds b. & c.

Beginning WIP inventory Started Accountable for Completed Ending WIP inventory

Beginning WIP inventory Started & completed Ending WIP inventory (35%) EUP

32,000 800,000 832,000 (808,000) 24,000 Units 32,000 776,000 24,000 832,000

DM 32,000 776,000 24,000 832,000

CC_ 32,000 776,000 8,400 816,400

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a. & b. Beginning WIP inventory540,000 540,000 Started 765,000 630,000 To account for 1,305,000 135,000

Beginning WIP inventory Started and completed Ending WIP inventory Accounted for

Beginning WIP inventory Started & completed Ending WIP inventory (60%) EUP 15.

Units 540,000 630,000 135,000 1,305,000

a.

DM 540,000 630,000 135,000 1,305,000

1,305,000 CC_ 540,000 630,000 81,000 1,251,000

CC__

Beginning WIP inventory (60% comp.) Started Units to account for

Units 40,000 280,000 320,000

Beginning WIP inventory Started and completed Transferred out Ending WIP inventory (75% comp.) Units accounted for

40,000 160,000 200,000 120,000 320,000

40,000 160,000

CC__

Beginning WIP inventory (25% comp.) Started Units to account for

Units 40,000 240,000 280,000

Beginning WIP inventory Started and completed Transferred out Ending WIP inventory (60% comp.) Units accounted for

40,000 180,000 220,000 60,000 280,000

40,000 180,000

Units 15,000 135,000 150,000

CC__

Beginning WIP inventory (30% comp.) Started Units to account for Beginning WIP inventory Started and completed Transferred out Ending WIP inventory (90% comp.) Units accounted for

15,000 115,000 130,000 20,000 150,000

15,000 115,000

b.

c.

90,000 290,000

36,000 256,000

18,000 148,000

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d.

18.

Units 10,000 190,000 200,000

CC__

Beginning WIP inventory (20% comp.) Started Units to account for Beginning WIP inventory Started and completed Transferred out Ending WIP inventory (70% comp.) Units accounted for

10,000 170,000 180,000 20,000 200,000

10,000 170,000

a. & b.

Beginning WIP inventory Started Accountable for Completed Ending WIP inventory

Beginning WIP inventory Started & completed Ending WIP inventory (35%) EUP 17.

14,000 194,000

32,000 800,000 832,000 (808,000) 24,000 Units 32,000 776,000 24,000 832,000

a. & b. Beginning WIP inventory540,000 540,000 Started 765,000 630,000 To account for 1,305,000 135,000

DM

CC_ 12,800 776,000 8,400 797,200

776,000 24,000 800,000

Beginning WIP inventory Started and completed Ending WIP inventory Accounted for

Units Beginning WIP inventory (75%) 540,000 Started & completed 630,000 Ending WIP inventory (60%) 135,000 EUP 1,305,000 20.

a.

DM 630,000 135,000 765,000

1,305,000 CC_ 405,000 630,000 81,000 1,116,000

CC__

Beginning WIP inventory (60% comp.) Started Units to account for

Units 40,000 280,000 320,000

Beginning WIP inventory (40%) Started and completed Transferred out Ending WIP inventory (75% comp.) Units accounted for

40,000 160,000 200,000 120,000 320,000

16,000 160,000 90,000 266,000

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b.

Units 40,000 240,000 280,000

CC__

Beginning WIP inventory (25% comp.) Started Units to account for Beginning WIP inventory (75%) Started and completed Transferred out Ending WIP inventory (60% comp.) Units accounted for

40,000 180,000 220,000 60,000 280,000

30,000 180,000

Units 15,000 135,000 150,000

CC__

Beginning WIP inventory (30% comp.) Started Units to account for Beginning WIP inventory (70%) Started and completed Transferred out Ending WIP inventory (90% comp.) Units accounted for

15,000 115,000 130,000 20,000 150,000

10,500 115,000

CC__

Beginning WIP inventory (20% comp.) Started Units to account for

Units 10,000 190,000 200,000

Beginning WIP inventory (80%) Started and completed Transferred out Ending WIP inventory (70% comp.) Units accounted for

10,000 170,000 180,000 20,000 200,000

8,000 170,000

c.

d.

19.

a. Beginning WIP inventory 50,000 Started 500,000 To account for 60,000

50,000

36,000 246,000

18,000 143,500

14,000 192,000

Beginning WIP inventory

560,000

Started and completed

610,000

Ending WIP inventory Accounted for

Units Beginning WIP inventory 50,000 Started & completed 500,000 Ending WIP inventory 60,000 Equivalent units

DM 50,000

DL 50,000

OH 50,000

500,000 60,000 610,000

500,000 24,000 574,000

500,000 36,000 586,000

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b.

Units Beginning WIP inventory 50,000 Started & completed 500,000 Ending WIP inventory 60,000 Equivalent units

c. Equivalent units (WA) EUP in beginning WIP inventory Equivalent units (FIFO) 22.

0 500,000 60,000 560,000

DL 15,000 500,000 24,000 539,000

OH 12,500 500,000 36,000 548,500

610,000 (50,000) 560,000

574,000 (35,000) 539,000

586,000 (37,500) 548,500

a. Beginning inventory Units started Units to account for

7,200 374,000 381,200

b. Units completed Beginning inventory Started & completed

368,400 (7,200) 361,200

c. Units to account for Units completed Units in EI

381,200 (368,400) 12,800

Beginning inventory Started & completed Ending inventory EUP (WA)

DM 7,200 361,200 8,960 377,360

DL 7,200 361,200 3,200 371,600

OH 7,200 361,200 1,280 369,680

Beginning inventory Started & completed Ending inventory EUP (FIFO)

DM 2,880 361,200 8,960 373,040

DL 4,320 361,200 3,200 368,720

OH 5,760 361,200 1,280 368,240

EUP (WA) Equivalent units in BI EUP (FIFO)

DM 377,360 (4,320) 373,040

DL 371,600 (2,880) 368,720

OH 369,680 (1,440) 368,240

d.

e.

21.

DM

a. Total tons to account for: Beginning WIP inventory Tons started Total

180,000 2,400,000 2,580,000

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b. Total tons to account for: Less tons in ending WIP inventory Tons transferred out Less tons in beginning WIP inventory Tons started & completed (tons) c. Weighted average: Beginning WIP inventory Started & completed Ending WIP inventory EUP

2,580,000 (105,000) 2,475,000 (180,000) 2,295,000

Material 180,000 2,295,000 105,000 2,580,000

d. FIFO: Material Complete beginning WIP inventory 0 108,000 Started & completed 2,295,000 Ending WIP inventory 105,000 EUP 2,400,000 e. EUP (WA) Equivalent units in BI EUP 24.

DM 2,580,000 (180,000) 2,400,000

DM Beginning WIP inventory$14,920 Current period 78,880 Total costs $93,800 Divided by EUP 26,800 Cost per EUP $3.50

Conversion 180,000 2,295,000 47,250 2,522,250 Conversion

2,295,000 47,250 2,450,250

CC 2,522,250 (72,000) 2,450,250

DL Overhead $ 20,020 $ 9,900 95,880* 42,600 $115,900 $52,500 24,400 21,000 $4.75 $2.50

*

Direct Labor = Conversion Cost – Overhead = $138,480 - $42,600 = $95,880

23. WA EUP Beginning WIP EUP FIFO EUP

DM 26,800 (3,600) 23,200

Current period cost Divided by EUP Cost per EUP

$78,880 23,200 $3.40

DL Overhead 24,400 21,000 (4,000) (3,960) 20,400 17,040 $95,880 20,400 $4.70

$42,600 17,040 $2.50

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26.

a.

DM $ 9,800 27,000 $36,800

DL $ 3,160 17,360 $20,520

OH $ 5,010 42,240 $47,250

Total $ 17,970 86,600 $104,570

b. Total costs WA EUP Cost per EUP

$36,800 80,000 $0.46

$20,520 76,000 $0.27

$47,250 75,000 $0.63

$104,570

c. Current costs FIFO EUP Cost per EUP

$27,000 60,000 $0.45

$17,360 62,000 $0.28

$42,240 66,000 $0.64

$ 86,600

Beginning WIP Current period Total

d. WA EUP FIFO EUP Beg. WIP EUP Percent complete 25.

80,000 60,000 20,000 100%

Units Beginning WIP inventory 9,800 Units started 81,500 Units to account for 91,300

Beginning WIP 21,448 Current period 389,044 Total cost $410,492 Divided by EUP Cost per EUP

Other Materials 9,800 76,900 1,840 88,540

DL 9,800 76,900 920 87,620

Other Canisters Materials DL $ 7,382 $ 6,671 $ 3,963

$1.37

75,000 66,000 9,000 45%

Beginning WIP inventory Started & completed Ending WIP inventory Accounted for

Canisters Beginning WIP inventory 9,800 Started & completed 76,900 EI 4,600 EUP 91,300 Costs:

76,000 62,000 14,000 70%

$1.36

Units 9,800 76,900 4,600 91,300 OH_ 9,800 76,900 460 87,160

$

OH 3,432

65,658

86,296

79,276

157,814

$73,040

$92,967

$83,239

$161,246

÷ 91,300 $0.80

÷ 88,540 $...