Process Costing

CHAPTER 17 PROCESS-COSTING 17-1

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

17-2

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

17-3

Equivalent units is a derived amount of output units that takes the quantity of each input (factor of production) in units completed or in work in process, and converts it into the amount of completed output units that could be made with that quantity of input. Each equivalent unit is comprised of the physical quantities of direct materials and conversion costs inputs necessary to produce output of one fully completed unit. Equivalent unit measures are necessary since all physical units are not completed to the same extent.

17-4

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

17-5 Step 1: Step 2: Step 3: Step 4: Step 5:

17-6 • • •

The five key steps in process costing follow: Summarize the flow of physical units of output. Compute output in terms of equivalent units. Compute equivalent unit costs. Summarize total costs to account for. Assign total costs to units completed and to units in ending work in process. Three inventory methods associated with process costing are: Weighted average. First-in, first-out. Standard costing.

17-7

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

17-8

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

17-1

17-9

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

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

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

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

17-13 There are two reasons why the accountant should distinguish between transferred-in costs and additional direct materials costs for a particular department: (a) All direct materials may not be added at the beginning of the department process. (b) The control methods and responsibilities may be different for transferred-in items and materials added in this department.

17-14 No. Transferred-in costs or previous department costs are costs incurred in a previous department that have been charged to a subsequent department. These costs may be costs incurred in that previous department during this accounting period or a preceding accounting period.

17-15 Materials are only one cost item. Other items (often included in a conversion costs pool) include labor, energy, and maintenance. If the costs of these items vary over time, this variability can cause a difference when weighted-average or FIFO is used. A second factor is the amount of inventory on hand at the beginning or end of an accounting period. The smaller the amount of production held in beginning or ending inventory relative to the total number of units transferred out, the smaller the effect on operating income or inventory amounts from use of weighted-average or FIFO.

17-16 (25 min.) Equivalent units, zero beginning inventory. 1.

Direct materials cost per unit ($720,000 ÷ 10,000) Conversion cost per unit ($760,000 ÷ 10,000) Assembly Department cost per unit

$ 72 76 $148

2a. Solution Exhibit 17-16A calculates the equivalent units of direct materials and conversion costs in the Assembly Department of International Electronics in February 2001. Solution Exhibit 17-16B computes equivalent units costs. 2b.

Direct materials cost per unit Conversion cost per unit Assembly Department cost per unit

$ 72 80 $152

17-2

17-16 (Cont’d.) 3. The difference in the Assembly Department cost per unit calculated in requirements 1 and 2 arises because the costs incurred in January and February are the same but fewer equivalent units of work are done in February relative to January. In January, all 10,000 units introduced are fully completed resulting in 10,000 equivalent units of work done with respect to direct materials and conversion costs. In February, of the 10,000 units introduced, 10,000 equivalent units of work is done with respect to direct materials but only 9,500 equivalent units of work is done with respect to conversion costs. The Assembly Department cost per unit is, therefore, higher. SOLUTION EXHIBIT 17-16A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Assembly Department of International Electronics for February 2001 (Step 2) (Step 1) Flow of Production Work in process, beginning Started during current period To account for Completed and transferred out during current period Work in process, ending* 1,000 × 100%; 1,000 × 50% Accounted for Work done in current period only

Physical Units 0 10,000 10,000 9,000 1,000

Equivalent Units Direct Materials

Conversion Costs

9,000

9,000

1,000

500

10,000

9,500

10,000

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

SOLUTION EXHIBIT 17-16B Compute Equivalent Unit Costs, Assembly Department of International Electronics for February 2001

(Step 3)Costs added during February Divide by equivalent units of work done in current period (Solution Exhibit 17-l6A) Cost per equivalent unit

17-3

Total Production Costs $1,480,000

Direct Materials $720,000 ÷ 10,000 $ 72

Conversion Costs $760,000 ÷ $

9,500 80

17-17 (20 min.) Journal entries. (Continuation of 17-16) 1.

2.

3.

Work in Process––Assembly Accounts Payable To record $720,000 of direct materials purchased and used in production during February 2001

720,000

Work in Process––Assembly Various accounts To record $760,000 of conversion costs for February 2001; examples include energy, manufacturing supplies, all manufacturing labor, and plant depreciation

760,000

Work in Process––Testing Work in Process––Assembly To record 9,000 units completed and transferred from Assembly to Testing during February 2001 at $152 × 9,000 units = $1,368,000

720,000

760,000

1,368,000 1,368,000

Postings to the Work in Process––Assembly account follow. Work in Process –– Assembly Department Beginning inventory, Feb. 1 0 3. Transferred out to 1. Direct materials 720,000 Work in Process––Testing 2. Conversion costs 760,000 Ending inventory, Feb. 28 112,000

17-4

1,368,000

17-18 (25 min.) Zero beginning inventory, materials introduced in middle of process. 1. Solution Exhibit 17-18A shows equivalent units of work done in the current period of Chemical P, 50,000; Chemical Q, 35,000; Conversion costs, 45,000. 2. Solution Exhibit 17-18B calculates cost per equivalent unit of work done in the current period for Chemical P, Chemical Q, and Conversion costs, summarizes the total Mixing Department costs for July 2001, and assigns these costs to units completed (and transferred out) and to units in ending work in process. SOLUTION EXHIBIT 17-18A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Mixing Department of Vaasa Chemicals for July 2001

Flow of Production Work in process, beginning Started during current period To account for Completed and transferred out during current period Work in process, ending* 15,000 × 100%; 15,000 × 0%; 15,000 × 66 2/3% Accounted for Work done in current period only

(Step 1) Physical Units 0 50,000 50,000 35,000 15,000

(Step 2) Equivalent Units Chemical P

Chemical Q

Conversion Costs

35,000

35,000

35,000

15,000

0

10,000

50,000

35,000

45,000

50,000

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

17-5

17-18 (Cont’d.) SOLUTION EXHIBIT 17-18B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process, Mixing Department of Vaasa Chemicals for July 2001

(Step 3)Costs added during February Divide by equivalent units of work done in current period (Solution Exhibit 17-l8A) Cost per equivalent unit (Step 4)Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (35,000 units) Work in process ending (15,000 units) Chemical P Chemical Q Conversion costs Total work in process Total costs accounted for

Total Production Conversion Costs Chemical P Chemical Q Costs $455,000 $250,000 $70,000 $135,000 ÷ 50,000 $ 5

÷35,000 $ 2

÷ 45,000 $ 3

$455,000

$350,000

(35,000*× $5) + (35,000*×$2) + (35,000*×$3)

75,000 0 30,000 105,000 $455,000

15,000† × $5

*Equivalent units completed and transferred out from Solution Exhibit 17-18A, Step 2. † Equivalent units in work in process, ending from Solution Exhibit 17-18A, Step 2.

17-6

0† × $2

10,000†×$3

17-19 (15 min.) Weighted-average method, equivalent units. Under the weighted-average method, equivalent units are calculated as the equivalent units of work done to date. Solution Exhibit 17-19 shows equivalent units of work done to date for the Satellite Assembly Division of Aerospatiale for direct materials and conversion costs. SOLUTION EXHIBIT 17-19 Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing, Satellite Assembly Division of Aerospatiale for May 2001 (Step 1) Physical Units (given)

Flow of Production Work in process beginning Started during current period To account for Completed and transferred out during current period Work in process, ending* (12 × 60%; 12 × 30%) Accounted for Work done to date

(Step 2) Equivalent Units Direct Conversion Materials Costs

8 50 58 46 12 58

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

17-7

46.0 7.2

46.0 3.6

53.2

49.6

17-20 (20 min.) Weighted-average method, assigning costs. (Continuation of 17-19) Solution Exhibit 17-20 calculates cost per equivalent unit of work done to date in the Assembly Department of Aerospatiale, summarizes total costs to account for, and assigns costs to units completed and to units in ending work-in-process inventory. SOLUTION EXHIBIT 17-20 Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing, Satellite Assembly Department of Aerospatiale for May 2001 Total Production Costs (Step 3)

(Step 4) (Step 5)

Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-19) Cost per equivalent unit of work done to date Total costs to account for Assignment of costs: Completed and transferred out (46 units) Work in process, ending (12 units) Direct materials Conversion costs Total work in process Total costs accounted for

* †

$ 5,844,000 46,120,000

Direct Materials

Conversion Costs

$ 4,933,600 32,200,000 $37,133,600

$

÷ 53.2 $ 698,000

÷ $

49.6 299,000

51,964,000 45,862,000 5,025,600 1,076,400 6,102,000 $51,964,000

(46*× $698,000) + (46* × $299,000) 7.2†× $698,000

Equivalent units completed and transferred out from Solution Exhibit 17-19, Step 2. Equivalent units in work in process, ending from Solution Exhibit 17-19, Step 2.

17-8

910,400 13,920,000 $14,830,400

3.6† × $299,000

17-21 (15 min.) FIFO method, equivalent units. Under the FIFO method, equivalent units are calculated as the equivalent units of work done in the current period only. Solution Exhibit 17-21 shows equivalent units of work done in May 2001 in the Assembly Department of Aerospatiale for direct materials and conversion costs. SOLUTION EXHIBIT 17-21 Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing, Satellite Assembly Division of Aerospatiale for May 2001

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 8 × (100% − 90%); 8 × (100% − 40%) Started and completed 38 × 100%, 38 × 100% Work in process, ending* (given) 12 × 60%; 12 × 30% Accounted for Work done in current period only §

(Step 1) Physical Units 8 50 58

(Step 2) Equivalent Units Direct Conversion Materials Costs (work done before current period)

8 0.8

4.8

38.0

38.0

7.2

3.6

46.0

46.4

†

38 12 58

Degree of completion in this department: direct materials, 90%; conversion costs, 40%. 46 physical units completed and transferred out minus 8 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: direct materials, 60%; conversion costs, 30%. †

17-9

17-22 (20 min.)

FIFO method, assigning costs. (Continuation of 17-21)

Solution Exhibit 17-22 calculates cost per equivalent unit of work done in May 2001 in the Assembly Department of Aerospatiale, summarizes total costs to account for, and assigns costs to units completed and to units in ending work-in-process inventory. SOLUTION EXHIBIT 17-22 Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing, Satellite Assembly Division of Aerospatiale for May 2001 Total Production Direct Conversion Costs Materials Costs (costs of work done before current Work in process, beginning ($4,933,600 + $910,400) $ 5,844,000 period)

(Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Solution Exhibit 17-21) Cost per equivalent unit of work done in current period (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (46 units): Work in process, beginning (8 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (38 units) Total costs of units completed & transf. out Work in process, ending (12 units) Direct materials Conversion costs Total work in process, ending Total costs accounted for

46,120,000

$32,200,000

$ 13,920,000

÷ 46 $ 700,000

÷ $

$51,964,000

$ 5,844,000 560,000 0.8*× $700,000 1,440,000 4.8*× $300,000 7,844,000 † † 38,000,000 (38 × $700,000) + (38 × $300,000) 45,844,000 5,040,000 1,080,000 6,120,000 $51,964,000

7.2# × $700,000

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-21, Step 2. † Equivalent units started and completed from Solution Exhibit 17-21, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-21, Step 2.

17-10

46.4 300,000

3.6#× $300,000

17-23 (25-30 min.) Standard-costing method, assigning costs. 1. The calculations of equivalent units for direct materials and conversion costs are identical to the calculations of equivalent units under the FIFO method. Solution Exhibit 17-21 shows the equivalent unit calculations under standard costing given by the equivalent units of work done in May 2001 in the Assembly Department. 2. Solution Exhibit 17-23 summarizes the total costs to account for, and assigns these costs to units completed and transferred out and to units in ending work in process. 3.

Solution Exhibit 17-23 shows the direct materials and conversion cost variances for Direct materials Conversion costs

$230,000 U $232,000 U

SOLUTION EXHIBIT 17-23 Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Use of Standard Costs in Process Costing, Satellite Assembly Division of Aerospatiale for May 2001. Total Production Costs (Step 3) Standard cost per equivalent unit (given) Work in process, beginning (given) Direct materials, 7.2 × $695,000; Conversion costs, 3.2 × $295,000 Costs added in current period at standard costs Direct materials, 46.0 × $695,000; Conversion costs, 46.4 × $295,000 (Step 4) Costs to account for (Step 5) Assignment of costs at standard costs: Completed and transferred out (46 units): Work in process, beginning (8 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (38 units) Total costs of units transferred out

Direct Materials $ 695,000

Conversion Costs $ 295,000

$31,970,000

$13,688,000

$ 5,948,000

45,658,000 $51,606,000

$ 5,948,000 556,000 1,416,000 7,920,000 37,620,000 45,540,000

0.8* × $695,000

4.8* × $295,000

38† × $695,000 + 38† × $295,000 7.2#× $695,000

Work in process, ending (12 units) Direct materials Conversion costs Total work in process, ending Total costs accounted for Summary of variances for current performance: Costs added in current period at standard prices (see above) Actual costs incurred (given) Variance

17-11

3.6# × $295,000

5,004,000 1,062,000 6,066,000 $51,606,000 $31,970,000 32,200,000 $ 230,000 U

$13,688,000 13,920,000 $ 232,000 U

*Equivalent units to complete beginning work in process from Solution Exhibit 17-21, Step 2. † Equivalent units started and completed from Solution Exhibit 17-21, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-21, Step 2.

17-24 (25 min.)

Weighted-average method, assigning costs.

1. & 2. Solution Exhibit 17-24 calculates the cost per equivalent unit of work done to date for direct materials and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out and to units in ending work-in-process inventory. SOLUTION EXHIBIT 17-24 Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing, Chatham Company for July 2001 Total Production Costs (Step 3)

(Step 4) (Step 5)

Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (given) Cost per equivalent unit of work done to date Total costs to account for Assignment of costs: Completed and transferred out (34,000 units) Work in process, ending (16,000 units) Direct materials Conversion costs Total work in process Total costs accounted for

*Equivalent units completed and transferred out (given). † Equivalent units in work in process, ending (given).

17-12

$130,000 651,000

Direct Materials

Conversion Costs

$ 60,000 280,000 $340,000

$ 70,000 371,000 $441,000

÷ 50,000 $ 6.80

÷ 42,000 $ 10.50

$781,000 588,200 108,800 84,000 192,800 $781,000

(34,000* × $6.80) + (34,000* × $10.50)

16,000† × $6.80

8,000† × $10.50

17-25

(30 min.)

FIFO method, assigning costs.

1. & 2. Solution Exhibit 17-25A calculates the equivalent units of work done in the current period. Solution Exhibit 17-25B, calculates the cost per equivalent unit of work done in the current period for direct materials and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out and to units in ending work-in-process inventory. SOLUTION EXHIBIT 17-25A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing, Chatham Company for July 2001

(Step 1) Physical Units Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 10,000 × (100% − 100%); 10,000 × (100% – 70%) Started and completed 24,000 × 100%, 24,000 × 100% Work in process, ending* (given) 16,000 × 100%; 16,000 × 50% Accounted for Work done in current period only §

10,000 40,000 50,000

(Step 2) Equivalent Units Direct Conversion Materials Costs (work done before current period)

10,000 24,000

0

3,000

24,000

24,000

16,000

8,000

40,000

35,000

†

16,000 50,000

Degree of completion in this department: direct materials, 100%; conversion costs, 70%. 34,000 physical units completed and transferred out minus 10,000 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: direct materials, 100%; conversion costs, 50%. †

17-13

17-25 (Cont’d.) SOLUTION EXHIBIT 17-25B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing, Chatham Company for July 2001

Work in process, beginning ($60,000 + $70,000)

Total Production Costs $130,000 651,000

(Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Solution Exhibit 17-25A) Cost per equivalent unit of work done in current period

Direct Conversion Materials Costs (costs of work done before current period) $280,000 $371,000 ÷ 40,000

÷

5,000

$

$

10.60

7

$781,000

(Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (34,000 units): Work in process, beginning (10,000 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (24,000 units) Total costs of units completed & transferred out Work in process, ending (16,000 units) Direct materials Conversion costs Total work in process, ending Total costs accounted for

$130,000 0 31,800 161,800 422,400 584,200 112,000 84,800 196,800 $781,000

0* × $7

3,000* × $10.60

24,000† × $7 + 24,000† × 10.60 16,000# × $7

8,000# × $10.60

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-25A, Step 2. † Equivelant units started and completed from Solution Exhibit 17-25A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-25A, Step 2.

17-14

17-26 (30 min.) Standard-costing method, assigning costs. 1. The calculations of equivalent units for direct materials and conversion costs are identical to the calculations of equivalent units under the FIFO method. Solution Exhibit 17-25A shows the equivalent unit calculations for standard costing given by the equivalent units of work done in July 2001. Solution Exhibit 17-26 uses the standard costs (direct materials, $6.50; conversion costs, $10.30) to summarize total costs to account for, and to assign these costs to units completed and transferred out and to units in ending work-in-process inventory. 2.

Solution Exhibit 17-26 shows the direct materials and conversion costs variances for Direct materials Conversion costs

$20,000 U $10,500 U

SOLUTION EXHIBIT 17-26 Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Use of Standard Costs in Process Costing, Chatham Company for July 2001. Total Production Costs (Step 3) Standard cost per equivalent unit (given) Work in process, beginning (given) Direct materials, 10,000 × $6.50; Conversion costs, 7,000 × $10.30 Costs added in current period at standard costs Direct materials, 40,000 × $6.50; Conversion costs, 35,000 × $10.30 (Step 4) Costs to account for (Step 5) Assignment of costs at standard costs: Completed and transferred out (34,000 units): Work in process, beginning (10,000 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (24,000 units) Total costs of units transferred out Work in process, ending (16,000 units) Direct materials Conversion costs Total work in process, ending Total costs accounted for Summary of variances for current performance: Costs added in current period at standard prices (see above) Actual costs incurred (given) Variance

Direct Materials $

6.50

$

10.30

$137,100

620,500 $757,600

$137,100 0 30,900 168,000 403,200 571,200

104,000 82,400 186,400 $757,600

260,000

360,500

0* × $6.50 3,000*× $10.30 (24,000†× $6.50) + (24,000†× $10.30)

16,000#× $6.50

$260,000 280,000 $ 20,000 U

*Equivalent units to complete beginning work in process from Solution Exhibit 17-25A, Step 2. † Equivalent units started and completed from Solution Exhibit 17-25A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-25A, Step 2.

17-15

Conversion Costs

8,000# × $10.30

$360,500 371,000 $ 10,500 U

17-16

17-27

(35–40 min.)

Transferred-in costs, weighted-average method.

1. & 2. Solution Exhibit 17-27A calculates the equivalent units of work done to date. Solution Exhibit 17-27B calculates the cost per equivalent unit of work done to date for transferred-in costs, direct materials, and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out and to units in ending work-in-process inventory. SOLUTION EXHIBIT 17-27A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing Cooking Department of Hideo Chemicals for June 2001

Flow of Production Work in process beginning Transferred in during current period To account for Completed and transferred out during current period Work in process, ending* 30 × 100%; 30 × 0%; 30 × 50% Accounted for Work done to date

(Step 1) Physical Units (given) 40 80 120 90 30

(Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs

90

90

90

30

0

15

120

90

105

120

*Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 50%.

17-17

17-27 (Cont’d.) SOLUTION EXHIBIT 17-27B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing Cooking Department of Hideo Chemicals for June 2001 Total Production Transferred Costs -in Costs (Step 3) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-27A) Equivalent unit costs of work done to date (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (90 units) Work in process, ending (30 units) Transferred-in costs Direct materials Conversion costs Total work in process Total costs accounted for

$ 58,000 172,925

Direct Materials

Conversion Costs

$ 40,000 87,200 $127,200

$

0 36,000 $36,000

$18,000 49,725 $67,725

÷ $

÷ $

÷ $

120 1,060

90 400

105 645

$230,925 $189,450

(90*× $1,060) + (90* × $400) + (90*× $645)

31,800 0 9,675 41,475 $230,925

30†× $1,060

0† × $400

15† × $645

*Equivalent units completed and transferred out from Solution Exhibit 17-27A, Step 2. †Equivalent units in work in process, ending from Solution Exhibit 17-27A, Step 2.

17-28 (35–40 min.) Transferred-in costs, FIFO method. 1. & 2. Solution Exhibit 17-28A calculates the equivalent units of work done in the current period (for transferred-in costs, direct-materials, and conversion costs) to complete beginning work-inprocess inventory, to start and complete new units, and to produce ending work in process. Solution Exhibit 17-28B calculates the cost per equivalent unit of work done in the current period for transferred-in costs, direct materials, and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out and to units in ending work-inprocess inventory.

17-18

17-28 (Cont’d.) SOLUTION EXHIBIT 17-28A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing Cooking Department of Hideo Chemicals for June 2001 (Step 2) (Step 1) Equivalent Units Physical TransferredDirect Conversion Units in Costs Materials Costs

Flow of Production Work in process, beginning (given) Transferred-in during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 40 × (100% − 100%); 40 × (100% − 0%); 40 × (100% − 75%) Started and completed 50 × 100%; 50 × 100%; 50 × 100% Work in process, ending* (given) 30 × 100%; 30 × 0%; 30 × 50% Accounted for Work done in current period only §

40 80 120

(work done before current period)

40 0

40

10

50

50

50

30

0

15

80

90

75

†

50

30 120

Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 75%. 90 physical units completed and transferred out minus 40 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 50%. †

17-19

17-28 (Cont’d.) SOLUTION EXHIBIT 17-28B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing Cooking Department of Hideo Chemicals for June 2001 Total

Work in process, beginning ($39,200 + $0 + $18,000)

Production

Transferred

Costs

-in Costs

Direct Materials

Conversion

Costs

$ 57,200 (Costs of work done before current period)

(Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Solution Exhibit 17-28A) Cost per equiv. unit of work done in current period (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (90 units): Work in process, beginning (40 units) Transferred-in costs added in current period Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (50 units) Total costs of units completed & tfd. out Work in process, ending (30 units) Transferred-in costs Direct materials Conversion costs Total work in process, ending Total costs accounted for

171,325

$85,600

$36,000

÷ 80 $ 1,070

÷ $

90 ÷ 400 $

75 663

$228,525

$ 57,200 0 0*×$1,070 16,000 40*×$400 6,630 10*×$663 79,830 106,650 (50†×$1,070) + (50†× $400)+ (50†×$663) 186,480 32,100 30#×$1,070 0 0#×$30 9,945 15#×$663 42,045 $228,525

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-28A, Step 2. † Equivalent units started and completed from Solution Exhibit 17-28A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-28A, Step 2.

17-20

$49,725

17-29 (20 min.) Operation costing. 1. Conversion costs of each operation, the total units produced and the conversion cost per unit for the month of June are as follows:

Conversion costs Total units produced Conversion cost per unit 2.

Framing $75,000 3,000 $25

Assembly $105,000 3,000 $35

Staining $36,000 1,500 $24

Painting $54,000 1,500 $36

Costs of Work Order 626 and Work Order 750 are as follows:

Number of windows Direct materials costs Conversion costs: Framing (50; 100 × $25) Assembly (50; 100 × $35) Staining (0; 100 × $24) Painting (50; 0 × $36) Total costs Total cost per window

Work Order 626 50 $ 5,500

Work Order 750 100 $ 9,800

1,250 1,750 – 1,800 $10,300

2,500 3,500 2,400 – $18,200

$10,300 = $206 50

$18,200 100 = $182

17-30 (25 min.) Weighted-average method. 1.

Solution Exhibit 17-30A shows equivalent units of work done to date Direct materials 100 equivalent units Conversion costs 97 equivalent units

2. & 3. Solution Exhibit 17-30B calculates cost per equivalent unit of work done to date, summarizes the total Assembly Department costs for October 2001, and assigns these costs to units completed (and transferred out) and to units in ending work in process using the weighted-average method.

17-21

17-30 (Cont’d.) SOLUTION EXHIBIT 17-30A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing, Assembly Department of Global Defense Inc. for October 2001

Flow of Production Work in process beginning Started during current period To account for Completed and transferred out during current period Work in process, ending* 10 × 100%; 10 × 70% Accounted for Work done to date

(Step 1) Physical Units (given)

(Step 2) Equivalent Units Direct Conversion Materials Costs

20 80 100 90 10

90

90

10

7

100

97

100

*Degree of completion in this department: direct materials, 100%; conversion costs, 70%.

SOLUTION EXHIBIT 17-30B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing, Assembly Department of Global Defense Inc. for October 2001 Total Production Costs (Step 3)

(Step 4) (Step 5)

Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-30A) Cost per equivalent unit of work done to date Total costs to account for Assignment of costs: Completed and transferred out (90 units) Work in process, ending (10 units) Direct materials Conversion costs Total work in process Total costs accounted for

$ 580,000 2,935,000

Direct Materials

Conversion Costs

$ 460,000 2,000,000 $2,460,000

$ 120,000 935,000 $1,055,000

÷ $

÷ 97 $10,876.29

100 24,600

$3,515,000 $3,192,866

246,000 76,134 322,134 $3,515,000

(90* × $24,600) + (90* × $10,876.29) 10† × $24,600

*Equivalent units completed and transferred out from Solution Exhibit 17-30A, Step 2. † Equivalent units in work in process, ending from Solution Exhibit 17-30A, Step 2.

17-22

7† × $10,876.29

17-31 (10 min.) Journal entries. 1.

2.

3.

Work in Process––Assembly Department Accounts Payable Direct materials purchased and used in production in October.

2,000,000

Work in Process––Assembly Department Various accounts Conversion costs incurred in October.

935,000

Work in Process––Testing Department Work in Process––Assembly Department Cost of goods completed and transferred out in October from the Assembly Department to the Testing Department.

2,000,000

935,000

3,192,866

Work in Process––Assembly Department Beginning inventory, October 1 580,000 3. Transferred out to 1. Direct materials 2,000,000 Work in Process–Testing 2. Conversion costs 935,000 Ending Inventory, October 31 322,134

17-23

3,192,866

3,192,866

17-32 (20 min.) FIFO method. 1. The equivalent units of work done in the current period in the Assembly Department in October 2001 for direct materials and conversion costs are shown in Solution Exhibit 17-32A. 2. The cost per equivalent unit of work done in the current period in the Assembly Department in October 2001 for direct materials and conversion costs is calculated in Solution Exhibit 17-32B. 3. Solution Exhibit 17-32B summarizes the total Assembly Department costs for October 2001, and assigns these costs to units completed (and transferred out) and units in ending work in process under the FIFO method. The cost per equivalent unit of beginning inventory and of work done in the current period differ: Beginning Inventory Direct materials Conversion costs

$23,000 ($460,000 ÷ 20 equiv. units) $10,000 ($120,000 ÷ 12 equiv. units)

Work Done in Current Period $25,000 $11,000

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

Cost of units completed and transferred out Work in process, ending Total costs accounted for

Weighted Average (Solution Exhibit 17-30B) $3,192,866 322,134 $3,515,000

FIFO (Solution Exhibit 17-32B) $3,188,000 327,000 $3,515,000

Difference –$4,866 +$4,866

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

17-24

17-32 (Cont’d.) SOLUTION EXHIBIT 17-32A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing, Assembly Department of Global Defense Inc. for October 2001

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 20 × (100% − 100%); 20 × (100% − 60%) Started and completed 70 ×100%, 70 × 100% Work in process, ending* (given) 10 × 100%; 10 × 70% Accounted for Work done in current period only §

(Step 2) (Step 1) Equivalent Units Physical Direct Conversion Units Materials Costs 20 (work done before current 80 period) 100

20 0

8

70

70

10

7

80

85

†

70 10 100

Degree of completion in this department: direct materials, 100%; conversion costs, 60%. 90 physical units completed and transferred out minus 20 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: direct materials, 100%; conversion costs, 70%. †

17-25

17-32 (Cont’d.) SOLUTION EXHIBIT 17-32B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing, Assembly Department of Global Defense Inc. for October 2001

Work in process, beginning ($460,000 + $120,000) (Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Solution Exhibit 17-32A) Cost per equivalent unit of work done in current period (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (90 units): Work in process, beginning (20 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (70 units) Total costs of units completed & transf. out Work in process, ending (10 units) Direct materials Conversion costs Total work in process, ending Total costs accounted for

Total Production Costs $ 580,000 2,935,000

Direct Conversion Materials Costs (costs of work done before current period) $2,000,000 $935,000 ÷ $

÷ 85 $ 11,000

80 25,000

$3,515,000

$ 580,000 0 88,000 668,000 2,520,000 3,188,000 250,000 77,000 327,000 $3,515,000

0* × $25,000

8* × $11,000

(70†× $25,000) + (70† × $11,000) 10# × $25,000

7# × $11,000

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-32A, Step 2. † Equivelant units started and completed from Solution Exhibit 17-32A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-32A, Step 2.

17-33 (30 min.) Transferred-in costs, weighted average. (Related to 17-30 to 17-32) 1. Transferred-in costs are 100% complete, and direct materials are 0% complete in both beginning and ending work-in-process inventory. The reason is that transferred-in costs are always 100% complete as soon as they are transferred in from the Assembly Department to the Testing Department. Direct materials in beginning or ending work in process for the Testing Department are 0% complete because direct materials are added only when the testing process is 90% complete and the units in beginning and ending work in process are only 70% and 60% complete respectively. 2. Solution Exhibit 17-33A computes the equivalent units of work done to date in the Testing Department for transferred-in costs, direct materials, and conversion costs. 3. Solution Exhibit 17-33B calculates the cost per equivalent unit of work done to date in the Testing Department for transferred-in costs, direct materials, and conversion costs, summarizes total Testing Department costs for October 2001, and assigns these costs to units completed and transferred out and to units in ending work in process using the weighted-average method. 17-26

17-33 (Cont’d.) 4.

Journal entries: a. Work in Process––Testing Department Work in Process––Assembly Department Cost of goods completed and transferred out during October from the Assembly Department to the Testing Department b.

3,192,866 3,192,866

Finished Goods Work in Process––Testing Department Cost of goods completed and transferred out during October from the Testing Department to Finished Goods inventory

9,303,123 9,303,123

SOLUTION EXHIBIT 17-33A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing Testing Department of Global Defense Inc. for October 2001

Flow of Production Work in process beginning Transferred in during current period To account for Completed and transferred out during current period Work in process, ending* 15 × 100%; 15 × 0%; 15 × 60% Accounted for Work done to date

(Step 1) Physical Units (given) 30 90 120 105 15

(Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs

105

105

105

15

0

9

120

105

114

120

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

17-27

17-33 (Cont’d.) SOLUTION EXHIBIT 17-33B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing Testing Department of Global Defense Inc. for October 2001

Total Production Costs (Step 3) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-33A) Equivalent unit costs of work done to date (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (105 units) Work in process, ending (15 units) Transferred-in costs Direct materials Conversion costs Total work in process Total costs accounted for

$1,317,600 8,658,866

Transferred -in Costs

Direct Materials

Conversion Costs

$ 985,800 3,192,866 $4,178,666

$

0 3,885,000 $3,885,000

$ 331,800 1,581,000 $1,912,800

÷ $

÷ $

÷ $

120 34,822.22

105 37,000

114 16,778.95

$9,976,466 $9,303,123

(105*× $34,822.22)+(105*×$37,000)+(105*×$16,778.95)

522,333 0 151,010 673,343 $9,976,466

15†× $34,822.22

0† × $37,000

9† × $16,778.95

*Equivalent units completed and transferred out from Solution Exhibit 17-33A, Step 2. † Equivalent units in work in process, ending from Solution Exhibit 17-33A, Step 2.

17-34 (30 min.) Transferred-in costs, FIFO method. (Continuation of 17-33) 1. As explained in Problem 17-33, requirement 1, transferred-in costs are 100% complete and direct materials are 0% complete in both beginning and ending work-in-process inventory. 2. The equivalent units of work done in October 2001 in the Testing Department for transferredin costs, direct materials, and conversion costs are calculated in Solution Exhibit 17-34A. 3. Solution Exhibit 17-34B calculates the cost per equivalent unit of work done in October 2001 in the Testing Department for transferred-in costs, direct materials, and conversion costs, summarizes total Testing Department costs for October 2001, and assigns these costs to units completed and transferred out and to units in ending work in process using the FIFO method. 4.

Journal entries: a. Work in Process––Testing Department Work in Process––Assembly Department Cost of goods completed and transferred out during October from the Assembly Dept. to the Testing Dept.

17-28

3,188,000 3,188,000

17-34 (Cont’d.) b.

Finished Goods Work in Process––Testing Department Cost of goods completed and transferred out during October from the Testing Department to Finished Goods inventory.

9,281,527 9,281,527

SOLUTION EXHIBIT 17-34A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing Testing Department of Global Defense Inc. for October 2001 (Step 2) (Step 1) Equivalent Units Physical TransferredDirect Conversion Units in Costs Materials Costs

Flow of Production Work in process, beginning (given) Transferred-in during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 30 × (100% − 100%); 30 × (100% − 0%); 30 × (100% − 70%) Started and completed 75 × 100%; 75 × 100%; 75 × 100% Work in process, ending* (given) 15 × 100%; 15 × 0%; 15 × 60% Accounted for Work done in current period only §

30 90 120

(work done before current period)

30 0

30

9

75

75

75

15

0

9

90

105

93

75† 15 120

Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 70%. 105 physical units completed and transferred out minus 30 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 60%. †

17-29

17-34 (Cont’d.) SOLUTION EXHIBIT 17-34B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing Testing Department of Global Defense Inc. for October 2001

Total

Work in process, beginning ($331,800 + $0 + $980,060)) (Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Solution Exhibit 17-34A) Cost per equiv. unit of work done in current period (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (105 units): Work in process, beginning (30 units) Tfd-in costs added in current period Dir materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (75 units) Total costs of units completed & tfd. out Work in process, ending (15 units) Transferred-in costs Direct materials Conversion costs Total work in process, ending Total costs accounted for

Production

Transferred

Costs

-in Costs

Direct Materials

Costs

$1,311,860 (Costs of work done before current period) 8,654,000 $3,188,000 $3,885,000 $1,581,000 ÷ $

90 ÷ 35,422.22 $

105 ÷ 37,000 $

93 17,000

$9,965,860

$1,311,860 0 0*× $35,422.22 1,110,000 30*×$37,000 153,000 9*×$17,000 2,574,860 6,706,667 (75†×$35,422.22)+(75†×$37,000)+(75†×$17,000) 9,281,527 # 531,333 15 × $35,422.22 0#×$37,000 0 153,000 9#×$17,000 684,333 $9,965,860

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-34A, Step 2. † Equivalent units started and completed from Solution Exhibit 17-34A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-34A, Step 2.

17-30

Conversion

17-35 (25 min.)

Weighted-average method.

Solution Exhibit 17-35A shows equivalent units of work done to date of Direct materials Conversion costs

2,500 equivalent units 2,125 equivalent units

Note that direct materials are added when the Forming Department process is 10% complete. Both the beginning and ending work in process are more than 10% complete and hence are 100% complete with respect to direct materials. Solution Exhibit 17-35B calculates cost per equivalent unit of work done to date for direct materials and conversion costs, summarizes the total Forming Department costs for April 2001, and assigns these costs to units completed (and transferred out), and to units in ending work in process using the weighted-average method. SOLUTION EXHIBIT 35A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing, Forming Department of Star Toys for April 2001

Flow of Production Work in process beginning Started during current period To account for Completed and transferred out during current period Work in process, ending* 500 × 100%; 500 × 25% Accounted for Work done to date

(Step 1) Physical Units (given)

(Step 2) Equivalent Units Direct Conversion Materials Costs

300 2,200 2,500 2,000 500

2,000

2,000

500

125

2,500

2,125

2,500

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

17-31

17-35 (Cont’d.) SOLUTION EXHIBIT 35B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing, Forming Department of Star Toys for April 2001 Total Production Costs

(Step 3) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-35A) Cost per equivalent unit of work done to date (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (2,000 units) Work in process, ending (500 units) Direct materials Conversion costs Total work in process Total costs accounted for

$

9,625 112,500

Direct Materials

Conversion Costs

$ 7,500 70,000 $77,500

$ 2,125 42,500 $44,625

÷ 2,500 $ 31

÷ 2,125 $ 21

$122,125 $104,000

2,000* × $31 + 2,000* × $21

15,500 2,625 18,125 $122,125

500† × $31

125† × $21

*Equivalent units completed and transferred out from Solution Exhibit 17-35A, Step 2. † Equivalent units in work in process, ending from Solution Exhibit 17-35A, Step 2.

17-36 (5–10 min.) Journal entries. (Continuation of 17-35) 1. Work in Process––Forming Department Accounts Payable To record direct materials purchased and used in production during April

70,000

2. Work in Process––Forming Department Various Accounts To record Forming Department conversion costs for April

42,500

3. Work in Process––Finishing Department Work in Process––Forming Department To record cost of goods completed and transferred out in April from the Forming Department to the Finishing Department

17-32

70,000

42,500

104,000 104,000

17-36 (Cont’d.)

Work in Process––Forming Department Beginning inventory, April 1 9,625 3. Transferred out to 1. Direct materials 70,000 Work in Process––Finishing 2. Conversion costs 42,500 Ending inventory, April 30 18,125

17-37

(20 min.)

104,000

FIFO method. (Continuation of 17-35)

The equivalent units of work done in April 2001 in the Forming Department for direct materials and conversion costs are shown in Solution Exhibit 17-37A. Solution Exhibit 17-37B calculates the cost per equivalent unit of work done in April 2001 in the Forming Department for direct materials and conversion costs, summarizes the total Forming Department costs for April 2001, and assigns these costs to units completed (and transferred out) and to units in ending work in process under the FIFO method. The equivalent units of work done in beginning inventory is: direct materials, 300 × 100% = 300; and conversion costs 300 × 40% = 120. The cost per equivalent unit of beginning inventory and of work done in the current period are:

Beginning Inventory Direct materials Conversion costs

$25 ($7,500 ÷ 300) $17.708 ($2,125 ÷ 120)

Work Done in Current Period (Calculated Under FIFO Method) $31.818 $21.197

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

Cost of units completed and transferred out Work in process, ending Total costs accounted for

Weighted Average FIFO (Solution (Solution Exhibit 17-35B) Exhibit 17-37B) Difference $104,000 $103,566 –$434 18,559 +$434 18,125 $122,125 $122,125

The FIFO ending inventory is higher than the weighted-average ending inventory by $434. This is because FIFO assumes that all the lower-cost prior-period units in work in process are the first to be completed and transferred out while ending work in process consists of only the highercost current-period units. The weighted-average method, however, smoothes out cost per equivalent unit by assuming that more of the higher-cost units are completed and transferred out, while some of the lower-cost units in beginning work in process are placed in ending work in process. Hence, in this case, the weighted-average method results in a higher cost of units completed and transferred out and a lower ending work-in-process inventory relative to FIFO. 17-33

17-37 (Cont’d.) SOLUTION EXHIBIT 17-37A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing, Forming Department of Star Toys for April 2001

(Step 1) Physical Units

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 300 × (100% − 100%); 300 × (100% − 40%) Started and completed 1,700 × 100%; 1,700 × 100% Work in process, ending* (given) 500 × 100%; 500 × 25% Accounted for Work done in current period only §

300 2,200 2,500

(Step 2) Equivalent Units Direct Conversion Materials Costs (work done before current period)

300 0

180

1,700

1,700

1,700

500

125

2,200

2,005

†

500 2,500

Degree of completion in this department: direct materials, 100%; conversion costs, 40%. 2,000 physical units completed and transferred out minus 300 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: direct materials, 100%; conversion costs, 25%. †

17-34

17-37 (Cont’d.) SOLUTION EXHIBIT 17-37B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing, Forming Department of Star Toys for April 2001 Total Production Costs Work in process, beginning (given: $7,500 + $2,125) (Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Exhibit 17-37A) Cost per equivalent unit of work done in current period (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (2,000 units): Work in process, beginning (300 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (1,700 units) Total costs of units completed & tsfd. out Work in process, ending (100 units) Direct materials Conversion costs Total work in process, ending Total costs accounted for

$

9,625 112,500

Direct Materials

Conversion Costs

(work done before current period) $70,000 $42,500 ÷ 2,200

÷ 2,005

$31.818

$21.197

$122,125

$

9,625 0 3,815 13,440 90,126 103,566

15,909 2,650 18,559 $122,125

0* × $31.818

180* × $21.197

(1,700† × $31.818) + (1,700† × $21.197)

500# × $31,818

125# × $21.197

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-37A, Step 2. † Equivelant units started and completed from Solution Exhibit 17-37A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-37A, Step 2.

17-35

17-38 (30 min.) Transferred-in costs, weighted average. (Related to 17-35 through 17-37) 1. Solution Exhibit 17-38A computes the equivalent units of work done to date in the Finishing Department for transferred-in costs, direct materials, and conversion costs. Solution Exhibit 17-38B calculates the cost per equivalent unit of work done to date in the Finishing Department for transferred-in costs, direct materials, and conversion costs, summarizes total Finishing Department costs for April 2001, and assigns these costs to units completed and transferred out and to units in ending work in process using the weighted-average method. 2.

Journal entries: a. Work in Process––Finishing Department Work in Process––Forming Department Cost of goods completed and transferred out during April from the Forming Department to the Finishing Department b.

104,000 104,000

Finished Goods Work in Process––Finishing Department Cost of goods completed and transferred out during April from the Finishing Department to Finished Goods inventory

168,552 168,552

SOLUTION EXHIBIT 17-38A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing Finishing Department of Star Toys for April 2001

Flow of Production Work in process beginning Transferred in during current period To account for Completed and transferred out during current period Work in process, ending* 400 × 100%; 400 × 0%; 400 × 30% Accounted for Work done to date

(Step 1) Physical Units (given) 500 2,000 2,500 2,100 400

(Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs

2,100

2,100

2,100

400

0

120

2,500

2,100

2,220

2,500

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

17-36

17-38 (Cont’d.) SOLUTION EXHIBIT 17-38B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing Finishing Department of Star Toys for April 2001

Total Production Transferred Costs -in Costs $ 25,000 $ 17,750 165,500 104,000 $121,750

(Step 3) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-38A) Equivalent unit costs of work done to date $190,500 (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (2,100 units) $168,552 Work in process, ending (400 units) Transferred-in costs Direct materials Conversion costs Total work in process Total costs accounted for

19,480 0 2,468 21,948 $190,500

÷ $

2,500 48.70

Direct Materials $ 0 23,100 $23,100

Conversion Costs $ 7,250 38,400 $45,650

÷ 2,100 $ 11

÷ 2,220 $20.563

(2,100*×$48.70)+(2,100* × $11)+(2,100*× $20.563)

400†×$48.70

0† × $11

120† × $20.563

*Equivalent units completed and transferred out from Solution Exhibit 17-38A, Step 2. † Equivalent units in work in process, ending from Solution Exhibit 17-38A, Step 2.

17-39 (30 min.) Transferred-in costs, FIFO method. (Continuation of 17-38) 1. Solution Exhibit 17-39A calculates the equivalent units of work done in April 2001 in the Finishing Department for transferred-in costs, direct materials, and conversion costs. Solution Exhibit 17-37B calculates the cost per equivalent unit of work done in April 2001 in the Finishing Department for transferred-in costs, direct materials, and conversion costs, summarizes total Finishing Department costs for April 2001, and assigns these costs to units completed and transferred out and to units in ending work in process using the FIFO method. Journal entries: a. Work in Process––Finishing Department Work in Process––Forming Department Cost of goods completed and transferred out during April from the Forming Dept. to the Finishing Dept.

17-37

103,566 103,566

17-39 (Cont’d.) b.

Finished Goods Work in Process––Finishing Department Cost of goods completed and transferred out during April from the Finishing Department to Finished Goods inventory.

166,723 166,723

2. The equivalent units of work done in beginning inventory is: Transferred-in costs, 500 × 100% = 500; direct materials, 500 × 0% = 0; and conversion costs, 500 × 60% = 300. The cost per equivalent unit of beginning inventory and of work done in the current period are: Beginning Inventory Transferred-in costs (weighted average) Transferred-in costs (FIFO) Direct materials Conversion costs

$35.50 ($17,750 ÷ 500) $35.04 ($17,520 ÷ 500) — $24.167 ($7,250 ÷ 300)

Work Done in Current Period $52 ($104,000 ÷ 2,000) $51.783 ($103,566 ÷ 2,000) $11 $20

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

Cost of units completed and transferred out Work in process, ending Total costs accounted for

Weighted Average FIFO (Solution (Solution Exhibit 17-38B) Exhibit 17-39B) $166,723 $168,552 23,113 21,948 $190,500 $189,836

Difference –$1,829 +$1,165

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

17-38

17-39 (Cont’d.) SOLUTION EXHIBIT 17-39A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing Finishing Department of Star Toys for April 2001 (Step 2) (Step 1) Equivalent Units Physical TransferredDirect Conversion Units in Costs Materials Costs

Flow of Production Work in process, beginning (given) Transferred-in during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 500 × (100% − 100%); 500 × (100% − 0%); 500 × (100% − 60%) Started and completed 1,600 × 100%; 1,600 × 100%; 1,600 × 100% Work in process, ending* (given) 400 × 100%; 400 × 0%; 400 × 30% Accounted for Work done in current period only §

500 2,000 2,500

(work done before current period)

500

1,600

0

500

200

1,600

1,600

1,600

400

0

120

2,000

2,100

1,920

†

400 2,500

Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 60%. † 2,100 physical units completed and transferred out minus 500 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 30%.

17-39

17-39 (Cont’d.) SOLUTION EXHIBIT 17-39B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing Finishing Department of Star Toys for April 2001

Total Production

Transferred

Costs

-in Costs

Direct Materials

Conversion

Costs

Work in process, beginning (given) ($17,520 + $0 + $7,250) $ 24,770 (Costs of work done before current period) 165,066 $103,566 $23,100 $38,400 (Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Solution Exhibit 17-39A) ÷ 2,000 ÷ 2,100 ÷ 1,920 Cost per equiv. unit of work done in current period $ 51.783 $ 11 $ 20 $189,836 (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (2,100 units): Work in process, beginning (500 units) $ 24,770 Transferred-in costs added in current period 0 0*×$51.783 Direct materials added in current period 5,500 500*×$11 Conversion costs added in current period 4,000 200*×$20 34,270 Total from beginning inventory 132,453 (1,600† × $51.783)+(1,600†×$11)+(1,600†×$20) Started and completed (1,600 units) Total costs of units completed & tfd. out 166,723 Work in process, ending (400 units) # 20,713 400 ×$51.783 Transferred-in costs 0* × $11 Direct materials 0 120* × $20 Conversion costs 2,400 Total work in process, ending 23,113 Total costs accounted for $189,836 *Equivalent units used to complete beginning work in process from Solution Exhibit 17-39A, Step 2. † Equivalent units started and completed from Solution Exhibit 17-39A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-39A, Step 2.

17-40

17-40 (45 min.) Transferred-in costs, weighted-average and FIFO. 1. Solution Exhibit 17-40A computes the equivalent units of work done to date in the Drying and Packaging Department for transferred-in costs, direct materials, and conversion costs. Solution Exhibit 17-40B calculates the cost per equivalent unit of work done to date in the Drying and Packaging Department for transferred-in costs, direct materials, and conversion costs, summarizes total Drying and Packaging Department costs for week 37, and assigns these costs to units completed and transferred out and to units in ending work in process using the weighted-average method. 2. Solution Exhibit 17-40C computes the equivalent units of work done in week 37 in the Drying and Packaging Department for transferred-in costs, direct materials, and conversion costs. Solution Exhibit 17-40D calculates the cost per equivalent unit of work done in week 37 in the Drying and Packaging Department for transferred-in costs, direct materials, and conversion costs, summarizes total Drying and Packaging Department costs for week 37, and assigns these costs to units completed and transferred out and to units in ending work in process using the FIFO method. SOLUTION EXHIBIT 17-40A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing Drying and Packaging Department of Frito-Lay Inc. for Week 37

Flow of Production Work in process beginning Transferred in during current period To account for Completed and transferred out during current period Work in process, ending* 1,000 × 100%; 1,000 × 0%; 1,000 × 40% Accounted for Work done to date

(Step 1) Physical Units (given) 1,250 5,000 6,250 5,250 1,000

(Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs

5,250

5,250

5,250

1,000

0

400

6,250

5,250

5,650

6,250

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

17-41

17-40 (Cont’d.) SOLUTION EXHIBIT 17-40B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Weighted-Average Method of Process Costing Drying and Packaging Department of Frito-Lay Inc. for Week 37

(Step 3) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date (Solution Exhibit 17-40A) Equivalent unit costs of work done to date (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (5,250 units) Work in process, ending (1,000 units) Transferred-in costs Direct materials Conversion costs Total work in process Total costs accounted for

Total Production Costs $ 38,060 159,600

Transferred -in Costs $ 29,000 96,000 $125,000 ÷ $

6,250 20

Conversion Costs $ 9,060 38,400 $47,460

÷ 5,250 $ 4.80

÷ 5,650 $ 8.40

$197,660 $174,300 20,000 0 3,360 23,360 $197,660

5,250*× $20 + 5,250*× $4.80 + 5,250*× $8.40

1,000†× $20

*Equivalent units completed and transferred out from Solution Exhibit 17-40A, Step 2. †Equivalent units in work in process, ending from Solution Exhibit 17-40A, Step 2.

17-42

Direct Materials $ 0 25,200 $25,200

0† × $480

400† × $8.40

17-40 (Cont’d.) SOLUTION EXHIBIT 40C Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing Drying and Packaging Department of Frito-Lay Inc. for Week 37 (Step 2) (Step 1) Equivalent Units Physical TransferredDirect Conversion Units in Costs Materials Costs

Flow of Production Work in process, beginning (given) Transferred-in during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 1,250 × (100% − 100%); 1,250 × (100% − 0%); 1,250 × (100% − 80%) Started and completed 4,000 × 100%; 4,000 × 100%; 4,000 × 100% Work in process, ending* (given) 1,000 × 100%; 1,000 × 0%; 1,000 × 40% Accounted for Work done in current period only §

1,250 5,000 6,250

(work done before current period)

1,250

4,000

0

1,250

250

4,000

4,000

4,000

1,000

0

400

5,000

5,250

4,650

†

1,000 6,250

Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%. 5,250 physical units completed and transferred out minus 1,250 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%. †

17-43

17-40 (Cont’d.) SOLUTION EXHIBIT 17-40D Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing Drying and Packaging Department of Frito-Lay Inc. for Week 37

Total Production Transferred Costs -in Costs Work in process, beginning ($9,060 + $0 + $28,920) (Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period (Solution Exhibit 17-40C) Cost per equiv. unit of work done in current period (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (5,250 units): Work in process, beginning (1,250 units) Transferred-in costs added in current period Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (4,000 units) Total costs of units completed & tfd. out Work in process, ending (1,000 units) Transferred-in costs Direct materials Conversion costs Total work in process, ending Total costs accounted for

$ 37,980 157,600

Direct Materials

(Costs of work done before current period) $94,000 $25,200 $38,400 ÷ 5,000 $ 18.80

÷ 5,250 $ 4.80

÷ 4,650 $ 8.258

$195,580

$ 37,980 0 6,000 2,065 46,045 127,432 173,477

0*× $18.80 1,250*× $4.80 250*× $8.258 (4,000†× $18.80)+(4,000†× $4.80) +(4,000†×$8.258)

# 18,800 1,000 ×$18.80 0#×$4.80 0 3,303 22,103 $195,580

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-40C, Step 2. † Equivalent units started and completed from Solution Exhibit 17-40C, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-40C, Step 2.

17-44

Conversion Costs

400#×$8.258

17-41 (25 min.) Standard costing with beginning and ending work in process. 1.

Solution Exhibit 17-41A shows equivalent units of work done in the current period of Direct materials Conversion costs

20,000 equivalent units 18,700 equivalent units

Solution Exhibit 17-41B uses the standard costs of work done in the current period: direct materials, $6; conversion costs, $3; to summarize the total Cooking Department costs for May 2001, and assign these costs to units completed (and transferred out) and to units in ending work in process using the standard costing method. 2.

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

Output in equivalent units for May Standard costs of May month's output Direct materials, $6; Conversion costs, $3 Actual costs incurred during May (given) Variances

Direct Materials 20,000

Conversion Costs 18,700

$120,000 125,000 $ 5,000 U

$56,100 57,000 $ 900 U

SOLUTION EXHIBIT 17-41A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units Use of Standard Costs in Process Costing, Cooking Department of Victoria Corporation. for May 2001

Flow of Production Work in process, beginning (given) Started during current period (given) To account for Completed and transferred out during current period: From beginning work in process§ 3,000 × (100% − 100%); 3,000 × (100% − 60%) Started and completed 15,000 × 100%; 15,000 × 100% Work in process, ending* (given) 5,000 × 100%; 5,000 × 50% Accounted for Work done in current period only

§

(Step 1) Physical Units 3,000 20,000 23,000

(Step 2) Equivalent Units Direct Conversion Materials Costs

3,000 0

1,200

15,000

15,000

5,000

2,500

20,000

18,700

15,000|| 5,000 23,000

Degree of completion in this department: direct materials, 100%; conversions, 60%. 18,000 physical units completed and transferred out minus 3,000 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: direct materials, 100%; conversion costs, 50%. ||

17-45

17-41 (Cont’d.) SOLUTION EXHIBIT 17-41B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process Use of Standard Costs in Process Costing, Cooking Department of Victoria Corporation for May 2001. Total Production Costs (Step 3) Standard cost per equivalent unit (given) Work in process, beginning (given) Direct materials, 3,000 × $6; Conversion costs, 1,800 × $3 Costs added in current period at standard costs Direct materials, 20,000 × $6; Conversion costs, 18,700 × $3 (Step 4) Costs to account for (Step 5) Assignment of costs at standard costs: Completed and transferred out (18,000 units): Work in process, beginning (3,000 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (15,000 units) Total costs of units transferred out Work in process, ending (5,000 units) Direct materials Conversion costs Total work in process, ending Total costs accounted for Summary of variances for current performance Costs added in current period at standard prices (see step 3 above) Actual costs incurred (given) Variance

Conversion Costs $ 3

120,000

56,100

$ 23,400 176,100 $199,500

$ 23,400 0 3,600 27,000 135,000 162,000

30,000 7,500 37,500 $199,500

*Equivalent units to complete beginning work Solution Exhibit 17-41A, Step 2. † Equivalent units started and completed from Solution Exhibit 17-41A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-41A, Step 2.

17-46

Direct Materials $ 6

0* × $6

1,200* × $3

(15,000†× $6)+(15,000†×$3)

5,000# × $6

$120,000 125,000 $ 5,000 U

2,500# × $3

$56,100 57,000 $ 900 U

17-42 (15–30 min.) Operation costing, equivalent units. 1. Materials and conversion costs of each operation, the total units produced, and the material and conversion cost per unit for the month of May are as follows:

Units produced Materials costs Materials cost per unit Conversion costs* Conversion cost per unit

Extrusion 16,000 $192,000 12.00 392,000 24.50

Form 11,000 $ 44,000 4.00 132,000 12.00

Trim 5,000 $15,000 3.00 69,000 13.80

Finish 2,000 $12,000 6.00 42,000 21.00

*Direct manufacturing labor and manufacturing overhead

The unit cost and total costs in May for each product are as follows:

Cost Elements Extrusion materials (EM) Form materials (FM) Trim materials (TM) Finish materials Extrusion conversion (EC) Form conversion (FC) Trim conversion (TC) Finish conversion Total unit cost Multiply by units produced Total product costs

Plastic Sheets $ 12.00 – – – 24.50 – – – $ 36.50 × 5,000 $182,500

17-47

Standard Model $ 12.00 4.00 – – 24.50 12.00 – – $ 52.50 × 6,000 $315,000

Deluxe Model $ 12.00 4.00 3.00 – 24.50 12.00 13.80 – $ 69.30 × 3,000 $207,900

Executive Model $ 12.00 4.00 3.00 6.00 24.50 12.00 13.80 21.00 $ 96.30 × 2,000 $192,600

17-42 (Cont’d.) 2.

Entering trim operation: 2,000 Deluxe units 1,000 Deluxe units 2,000 Executive units Total equivalent units

Equivalent Units Materials Conversion Costs Percent Percent Complete Quantity Complete Quantity 2,000 100 2,000 100 1,000 100 600 60 2,000 100 2,000 100 5,000 4,600

Conversion cost per equivalent unit in trim operation: ($30,000 + $39,000) ÷ 4,600 units = $15 per unit Materials cost per equivalent unit in trim operation (as before) $15,000 ÷ 5,000 units = $3 per unit

Deluxe model work-in-process costs at the trim operation Extrusion material (100% complete when transferred in) Extrusion conversion (100% complete when transferred in) Form material (100% complete when transferred in) Form conversion (100% complete when transferred in) Trim material (100% complete) Trim conversion (60% complete) Work-in-process costs

Unit Cost

Equivalent Units

Total Costs

$12.00

1,000

$12,000

24.50

1,000

24,500

4.00

1,000

4,000

12.00 3.00 15.00 $70.50

1,000 1,000 600

12,000 3,000 9,000 $64,500

17-43 (20–25 min.) Equivalent-unit computations, benchmarking, ethics. 1. The reported monthly cost per equivalent unit of either direct materials or conversion costs is lower when the plant manager overestimates the percentage of completion of ending work in process; the overestimate increases the denominator and, thus, decreases the cost per equivalent whole unit. By reporting a lower cost per equivalent unit, the plant manager increases the likelihood of being in the top three ranked plants for the benchmarking comparisons. A plant manager can manipulate the monthly estimate of percentage of completion by understating the number of steps yet to be undertaken before a suit becomes a finished good.

17-48

17-43 (Cont’d.) 2.

There are several options available: a. Major shows the letters to the line executive to whom the plant managers report in a hard-line way (say, the corporate manager of manufacturing). This approach is appropriate if the letters allege it is the plant managers who are manipulating the percentage of completion estimates. b. Major, herself, shows the letters to the plant managers. This approach runs the danger of the plant managers ignoring or reacting negatively to someone to whom they do not report in a line-mode questioning their behavior. Much will depend here on how Major raises the issue. Unsigned letters need not have much credibility unless they contain specific details. c. Major discusses the letters with the appropriate plant controllers without including the plant manager in the discussion. While the plant controller has responsibility for preparing the accounting reports from the plant, the plant controller, in most cases, reports hard-line to the plant manager. If this reporting relationship exists, Major may create a conflict of interest situation for the plant controller. Only if the plant controller reports hard-line to the corporate controller and dotted-line to the plant manager should Major show the letters to the plant controller without simultaneously showing them to the plant manager. 3. The plant controller's ethical responsibilities to Major and to Leisure Suits should be the same. These include: • Competence: The plant controller is expected to have the competence to make equivalent unit computations. This competence does not always extend to making estimates of the percentage of completion of a product. In Leisure Suits's case, however, the products are probably easy to understand and observe. Hence, a plant controller could obtain reasonably reliable evidence on percentage of completion at a specific plant. • Objectivity: The plant controller should not allow the possibility of the division being written up favorably in the company newsletter to influence the way equivalent unit costs are computed. 4.

Major could seek evidence on possible manipulations as follows: a. Have plant controllers report detailed breakdowns on the stages of production and then conduct end-of-month audits to verify the actual stages completed for ending work in process. b. Examine trends over time in ending work in process. Divisions that report low amounts of ending work in process relative to total production are not likely to be able to greatly affect equivalent cost amounts by manipulating percentage of completion estimates. Divisions that show sizable quantities of total production in ending work in process are more likely to be able to manipulate equivalent cost computations by manipulating percentage of completion estimates.

17-49

17-44 (45 min.)

Transferred-in costs, equivalent unit costs, working backwards.

1. The equivalent units of work done in the current period for each cost category are computed in Solution Exhibit 17-44B using data on costs added in current period and cost per equivalent unit of work done in current period. TransferredDirect In Costs Materials Costs added in current period Divided by equivalent units of work done in current period Equivalent units of work done in current period 2.

Conversion Costs

$58,500

$57,000

$57,200

÷ $6.50

÷

$3

÷ $5.20

19,000

11,000

9,000

Physical units completed Physical units in beginning Physical Physical units in ending = + − and transferred out work in process units added work in process = 15,000 + 9,000 − 5,000 = 19,000

Solution Exhibit 17-44A shows the equivalent units of work done in June to complete beginning work in process and the equivalent units of work done in June to start and complete 4,000 units. Note that direct materials in beginning work in process is 0% complete because it is added only when the process is 80% complete and the beginning WIP is only 60% complete. We had calculated the total equivalent units of work done in the current period in requirement 1: transferred-in costs, 9,000; direct materials, 19,000; and conversion costs, 11,000. The missing number is the equivalent units of each cost category in ending work in process (see Solution Exhibit 17-44A). Transferred-in costs Direct materials Conversion costs

5,000 0 1,000

3. Percentage of completion for each cost category in ending work in process can be calculated by dividing equivalent units in ending work in process for each cost category by physical units of work in process (5,000 units). Transferred-in costs Direct materials Conversion costs

5,000 ÷ 5,000 = 100% 0 ÷ 5,000 = 0% 1,000 ÷ 5,000 = 20%

4. Solution Exhibit 17-44B summarizes the total costs to account for, and assigns these costs to units completed and transferred out and to units in ending work in process.

17-50

17-44 (Cont’d.) SOLUTION EXHIBIT 17-44A Steps 1 and 2: Summarize Output in Physical Units and Compute Equivalent Units FIFO Method of Process Costing Thermo-assembly Department of Lennox Plastics for September 2001 (Step 2) (Step 1) Equivalent Units Physical Transferred- Direct Conversion Units in Costs Materials Costs

Flow of Production Work in process, beginning (given) Transferred-in during current period (given) To account for Completed and transferred out during current period: From beginning work in process§

15,000 9,000 24,000

(work done before current period)

15,000

15,000 × (100% − 100%); 15,000 × (100% − 0%);

15,000 × (100% − 60%) Started and completed 4,000 × 100%; 4,000 × 100%; 4,000 × 100% Work in process, ending* (given) 5,000 × 100%; 5,000 × 0%; 5,000 × 20% Accounted for Work done in current period only (from Solution Exhibit 17-44B) §

0

15,000

6,000

4,000

4,000

4,000

5,000

0

1,000

9,000

19,000

11,000

4,000† 5,000 24,000

Degree of completion in this department: Transferred-in costs, 100%; direct materials, 0%; conversion costs, 60%. † 19,000 physical units completed and transferred out minus 15,000 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.

17-51

17-44 (Cont’d.) SOLUTION EXHIBIT 17-44B Steps 3, 4, and 5: Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed and to Units in Ending Work in Process FIFO Method of Process Costing Thermo-assembly Department of Lennox Plastics for September 2001

Total Production Transferred Costs -in Costs Work in process, beginning ($90,000 + $0 + $45,000) (Step 3) Costs added in current period (given) Divide by equivalent units of work done in current period Cost per equiv. unit of work done in current period (Step 4) Total costs to account for (Step 5) Assignment of costs: Completed and transferred out (19,000 units): Work in process, beginning (15,000 units) Transferred-in costs added in current period Direct materials added in current period Conversion costs added in current period Total from beginning inventory Started and completed (4,000 units) Total costs of units completed & tfd. out Work in process, ending (5,000 units) Transferred-in costs Direct materials Conversion costs Total work in process, ending Total costs accounted for

Direct Materials

$135,000 (Costs of work done before current period) 172,700 $58,500 $57,000 $57,200 ÷ 9,000 $ 6.50

÷19,000 $ 3

÷11,000 $ 5.20

$307,700

$135,000 0 45,000 31,200 211,200 58,800 270,000

0*× $6.50 15,000* × $3 6,000*× $5.20 (4,000†× $6.50) + (4,000†× $3) + (4,000† × $5.20)

# 32,500 5,000 ×$6.50 0 5,200 37,700 1,000#×$5.20 $307,700

0# × $3

*Equivalent units used to complete beginning work in process from Solution Exhibit 17-44A, Step 2. † Equivalent units started and completed from Solution Exhibit 17-44A, Step 2. # Equivalent units in work in process, ending from Solution Exhibit 17-44A, Step 2.

17-52

Conversion Costs