Demonstration problem barfield raiborn kinney cost accounting_4 doc

ASSEMBLY DEPARTMENT: UNITSBeginning work in process 100% complete for material; 40% complete for labor; Ending work in process 100% complete for material; 70% complete for labor; ASSEMBL

ASSEMBLY DEPARTMENT: UNITS

Beginning work in process (100% complete for material; 40% complete for labor;

Ending work in process (100% complete for material; 70% complete for labor;

ASSEMBLY DEPARTMENT: COSTS

Material Direct Labor Overhead Total

FINISHING DEPARTMENT: UNITS

Beginning work in process (100% complete for transferred-in; 15% complete for material;

Ending work in process (100% complete for transferred-in; 30% complete for material;

FINISHING DEPARTMENT: COSTS

Transferred-In Direct Material Conversion Total

Required:

a. Prepare a cost of production report for the Assembly Department

b Prepare a cost of production report for the Finishing Department.

Solution to Demonstration Problem

Units accounted for 9,050

Systems and Methods of Product Costing

244

COST DATA

Systems and Methods of Product Costing

246

1 What are the typical characteristics of a company that should employ a process

costing system?

2 Why is the process of assigning costs to products essentially an averaging process?

3 How are job order and process costing similar? How do they differ?

4 Why are equivalent units of production used as an output measure in process

costing? In your answer, be sure to address the problems created by partiallycompleted inventories

5 What creates the difference between weighted average and FIFO equivalent

units of production? Which EUP calculation more accurately portrays the tual flow of units through a manufacturing process and why?

ac-6 Why is it necessary to calculate separate equivalent units of production for

each cost component of a product? Are there times when separate EUP ules are not necessary and, if so, why?

sched-7 How are units “started and completed” in the current period calculated? Is this

figure used in both weighted average and FIFO cost assignment? Why or whynot?

8 In which of the six basic steps used in process costing are physical units used

and in which are equivalent units of production used? Are there steps in whichneither physical nor equivalent units are used? Why or why not?

9 How is the unit cost for each cost component assigned to the units produced

during the current period under (a) the weighted average method and (b) theFIFO method?

10 What is the purpose of the cost of production report? How would such a

re-port assist accountants in making journal entries for a period?

11 Would it be correct to subtract the cost computed for EWIP from the total costs

to account for as a shortcut to determine the cost of goods transferred out? Ifyou answered yes, is there a risk in doing this?

12 Why does the “Transferred Out” section of the FIFO method cost of

produc-tion report include multiple computaproduc-tions, whereas the same secproduc-tion for theweighted average report only includes one computation?

13 How does process costing in a multidepartmental manufacturing environment

differ from that of a single-department manufacturing environment? Why doesthis difference exist?

14 Why are the EUP calculations made for standard process costing the same as

the EUP calculations for FIFO process costing?

15 How are inventories accounted for under a standard process costing system?

What information is provided to management when inventories are accountedfor in this manner?

16 What is a hybrid costing system? Under what circumstances is the use of such

a system appropriate?

17 Find five companies, in different industries, on the Internet that you believe

use process costing Name these companies, provide their Web addresses, dicate what products they make, and discuss why you believe they use processcosting

in-Q U E S T I O N S

18 (EUP; weighted average) Newton Quiches uses a weighted average process

costing system All material is added at the start of the production process rect labor and overhead are added at the same rate throughout the process.Newton’s records indicate the following production for October 2000:

Di-E X Di-E R C I S Di-E S

Beginning inventory (70% complete as to conversion) 120,000 units

Ending inventory for October is 20 percent complete as to conversion

a. What are the equivalent units of production for direct material?

b What are the equivalent units of production for labor and overhead?

19 (EUP; FIFO) Assume that Newton Quiches in Exercise 18 uses the FIFO method

of process costing

a. What are the equivalent units of production for direct material?

b What are the equivalent units of production for labor and overhead?

20 (EUP; weighted average & FIFO) McArthur Corporation makes toy metal soldiers

in a one-department production process All metal is added at the beginning

of the process Paint for the figures and the plastic bags for packaging are

considered indirect materials The following information is available relative to

September 2000 production activities:

Beginning inventory: 75,000 figures (60% complete as to labor; 85% complete as to overhead)

Started into production: metal for 250,000 figures, which were cast during the month

Ending inventory: 30,000 figures (70% complete as to labor; 90% complete as to overhead)

a. Compute the EUP for direct material, direct labor, and overhead using

weighted average process costing

b Compute the EUP for direct material, direct labor, and overhead using FIFO

process costing

c. Reconcile the calculations in parts (a) and (b)

21 (Cost per EUP; weighted average) Flickering Figurines manufactures wax

fig-urines In October 2000, company production is 26,800 equivalent units for

direct material, 24,400 equivalent units for labor, and 21,000 equivalent units

for overhead During October, direct material and conversion costs incurred

are as follows:

Direct material $ 78,880

Beginning inventory costs for October were $14,920 for direct material, $36,200

for labor, and $9,900 for overhead What is the weighted average cost per

equivalent unit for the cost components for October?

22 (Cost per EUP; FIFO) Assume that Flickering Figurines in Exercise 21 had 3,600

EUP for direct material in October’s beginning inventory, 4,000 EUP for direct

labor, and 3,960 EUP for overhead What was the FIFO cost per equivalent

unit for direct material, labor, and overhead for October?

23 (Cost per EUP; weighted average & FIFO) Garden Edges manufactures concrete

garden border sections May 2001 production and cost information are as follows:

Direct labor 38,000 sections

Direct labor 31,000 sections

All material is added at the beginning of processing.

a. What is the total cost to account for?

b Using weighted average process costing, what is the cost per equivalent

unit for each cost component?

c. Using FIFO process costing, what is the cost per equivalent unit for eachcost component?

d How many units were in beginning inventory and at what percentage of

completion was each cost component?

24 (EUP; cost per EUP; weighted average) TakeThat manufactures canisters of mace.

On August 1, 2001, the company had 4,800 units in beginning Work in ProcessInventory that were 100 percent complete as to canisters, 60 percent complete

as to other materials, 10 percent complete as to direct labor, and 20 percentcomplete as to overhead During August, TakeThat started 22,500 units intothe manufacturing process Ending Work in Process Inventory included 3,600units that were 100 percent complete as to canisters, 30 percent complete as toother materials, 25 percent complete as to direct labor, and 30 percent complete

as to overhead

Cost information for the month follows:

Other direct materials 3,393

Other direct materials 20,148

Prepare a schedule showing TakeThat’s August 2001 computation of weightedaverage equivalent units of production and cost per equivalent unit

25 (EUP; cost per EUP; FIFO) ReallyRoll makes skateboards and uses a FIFO process

costing system The company began April 2001 with 1,000 boards in processthat were 70 percent complete as to material and 85 percent complete as toconversion During the month, 3,800 additional boards were started On April

30, 800 boards were still in process (60 percent complete as to material and

70 percent complete as to conversion) Cost information for April 2001 is asfollows:

Beginning inventory costs: Direct material $13,181

Current period costs: Direct material $71,064

a. Calculate EUP for each cost component using the FIFO method

b Calculate cost per EUP for each cost component.

26 (Cost assignment; weighted average) Thomson Co uses weighted average process

costing The company’s cost accountant has determined the following tion and cost per EUP information for January 2001:

Units in ending inventory (100% complete as to direct material;

80% complete as to direct labor; 95% complete as to overhead) 37,000

a. What is the cost of the goods transferred during January?

b What is the cost of the goods in ending inventory at January 31, 2001?

c. What is the total cost to account for during January?

Systems and Methods of Product Costing

248

27 (Cost assignment; FIFO) In November 2000, Walker Corporation computed its

costs per equivalent unit under FIFO process costing as follows:

Raw material $12.75

The raw material is added at the start of processing Packaging is added at the

end of the production process immediately before the units are transferred to

the finished goods warehouse

Beginning inventory cost was $513,405 and consisted of:

• $344,520 raw material cost for 27,000 EUP,

• $95,931 direct labor cost for 14,850 EUP, and

• $72,954 overhead cost for 18,900 EUP

Walker transferred a total of 185,000 units to finished goods during November,

which left 16,000 units in ending inventory The EI units were 20 percent

com-plete as to direct labor and 35 percent comcom-plete as to overhead

a. What percentage complete were the beginning inventory units as to raw

material? Packaging? Direct labor? Overhead?

b What was the total cost of the completed beginning inventory units?

c. What was the cost of the units started and completed in November?

d What was the cost of November’s ending inventory?

28 (EUP; cost per EUP; cost assignment; FIFO & weighted average) Berne Company

mass produces miniature speakers for portable CD players The following

T-account presents the firm’s cost information for February 2001:

Work in Process Inventory

2/1 Direct material cost in BI $ 1,027

The company had 400 units in process on February 1 These units were 40

percent complete as to material and 30 percent complete as to conversion

During February, the firm started 1,500 units and ended the month with 150

units still in process The units in ending WIP Inventory were 20 percent

com-plete as to material and 70 percent comcom-plete as to conversion

a. Compute the unit costs for February under the FIFO method for direct

material and for conversion

b Compute the unit costs for February under the weighted average method

for direct material and for conversion

c. Determine the total costs transferred to Finished Goods Inventory during

February using the FIFO method

29 (EUP; weighted average & FIFO; two departments) Jones Metals has two

pro-cessing departments, Fabrication and Assembly Metal is placed into

produc-tion in the Fabricaproduc-tion Department, where it is cut, formed, or ground into

var-ious components These components are transferred to Assembly, where they

are welded, polished, and hot-dip galvanized with sealant The production data

follow for these two departments for March 2001:

Beginning WIP inventory (100% complete as to material;

Ending WIP inventory (100% complete as to material;

Assembly

Beginning WIP inventory (0% complete as to sealant;

Ending WIP inventory (100% complete as to sealant;

a. Determine the equivalent units of production for each cost component foreach department under the weighted average method

b Determine the equivalent units of production for each cost component for

each department under the FIFO method

30 (Standard process costing; variances) DiskCity Products manufactures 3.5-inch

preformatted computer disks and uses a standard process costing system Allmaterial is added at the start of production, and labor and overhead are incurredequally throughout the process The standard cost of one disk is as follows:Direct material $0.13

The following production and cost data are applicable to April 2001:

Beginning inventory (45% complete) 17,000 units

Ending inventory (65% complete) 14,400 units Current cost of direct material $18,400 Current cost of direct labor 2,598

a. What cost is carried as the April beginning balance of Work in ProcessInventory?

b What cost is carried as the April ending balance of Work in Process

Inventory?

c. What cost is transferred to Finished Goods Inventory for April?

d Using the FIFO method, what are the total direct material, direct labor, and

overhead variances for April?

31 (Standard process costing) Tico Company uses a standard FIFO process

cost-ing system to account for its tortilla manufacturcost-ing process The tortillas arepackaged and sold by the dozen The company has set the following standardsfor production of each one-dozen package:

Direct material—ingredients $0.35 Direct material—package 0.05

On June 1, the company had 7,200 individual tortillas in process; these were

100 percent complete as to ingredients, 0 percent complete as to the ing, and 30 percent complete as to labor and overhead One hundred forty-four thousand tortillas were started during June and 147,960 were finished The

packag-Systems and Methods of Product Costing

250

ending inventory was 100 percent complete as to ingredients, 0 percent

com-plete as to the packaging, and 60 percent comcom-plete as to labor and overhead

a. What were the equivalent units of production for June?

b What was the cost of the packages transferred to Finished Goods Inventory

during June?

c. What was the cost of the ending Work in Process Inventory for June?

32 (Hybrid costing) Carolina Coats makes casual coats (one size fits most) Each

coat goes through the same conversion process, but three types of fabric

(Dacron, denim, or cotton) are available The company uses a standard

cost-ing system, and standard costs for each type of coat follow:

Material is added at the start of production In March 2001, there was no

begin-ning Work in Process Inventory and 1,500 coats were started into production

Of these, 200 were Dacron, 600 were denim, and 700 were cotton At the end

of March, 300 jackets (50 Dacron, 100 denim, and 150 cotton) were not yet

completed The stage of completion for each cost component for the 300

un-finished jackets is as follows:

b Determine the total cost of the coats in ending Work in Process Inventory.

33 (EUP; weighted average & FIFO) Patio Company produces outdoor brooms On

April 30, 2001, the firm had 3,600 units in process that were 70 percent

com-plete as to material, 40 percent comcom-plete as to direct labor, and 30 percent

complete as to overhead During May, 186,000 brooms were started Records

indicate that 184,200 units were transferred to Finished Goods Inventory in

May Ending units in process were 40 percent complete as to material, 25

per-cent complete as to direct labor, and 10 perper-cent complete as to overhead

a. Calculate the physical units to account for in May

b How many units were started and completed during May?

c. Determine May’s EUP for each category using the weighted average

method

d Determine May’s EUP for each category using the FIFO method.

e. Reconcile your answers to parts (c) and (d)

34 (EUP; weighted average & FIFO) The Midwest Coal Company mines and

processes coal that is sold to four power plants in central Pennsylvania The

company employs a process costing system to assign production costs to the

coal it processes For the third week in March 2001, the firm had a beginning

Work in Process Inventory of 50,000 tons of ore that were 100 percent

com-plete as to material and 30 percent comcom-plete as to conversion During the

week, an additional 200,000 tons of ore were started in process At the end of

P R O B L E M S

the week, 35,000 tons remained in Work in Process Inventory and were 70percent complete as to material and 60 percent complete as to conversion.For the third week in March:

a. Compute the total units to account for

b Determine how many units were started and completed.

c. Determine the equivalent units of production using the weighted averagemethod

d Determine the equivalent units of production using the FIFO method.

35 (Weighted average) Frankfurt Products manufactures an electronic language

trans-lator The device can translate seven languages in either direction Analysis ofbeginning Work in Process Inventory for February 2001 revealed the following:

During February, Frankfurt Products started production of another 3,800 lators and incurred $85,380 for material, $23,560 for direct labor, and $65,720for overhead On February 28, the company had 400 units in process (70 per-cent complete as to material, 90 percent complete as to direct labor, and 80percent complete as to overhead)

trans-a. Prepare a cost of production report for February using the weighted age method

aver-b Journalize the February transactions.

c. Prepare T-accounts to represent the flow of costs for Frankfurt Productsfor February Use “XXX” where amounts are unknown and identify whateach unknown amount represents

36 (Weighted average) Alt Enterprises manufactures belt buckles in a single-step

production process To determine the proper valuations for inventory balancesand Cost of Goods Sold, you have obtained the following information forAugust 2001:

Units transferred to finished goods 1,800,000Beginning inventory units were 100 percent complete as to material, but only

80 percent complete as to labor and overhead The ending inventory units were

100 percent complete as to material and 50 percent complete as to conversion.Overhead is applied to production at the rate of 60 percent of direct labor cost

a. Prepare a schedule to compute equivalent units of production by cost ponent assuming the weighted average method

com-b Determine the unit production costs for material and conversion.

c. Calculate the costs assigned to completed units and ending inventory forAugust 2000

37 (Weighted average) You have just been hired as the cost accountant for Sun

Valley Micro, a producer of personal computer cases This position has beenvacant for one month John Amos, manager of the firm’s tax department, hasperformed some computations for last month’s information; however, he con-fesses to you that he doesn’t remember a great deal about cost accounting

In the production process, materials are added at the beginning of duction and overhead is applied to each product at the rate of 70 percent of

pro-Systems and Methods of Product Costing

252

direct labor cost There was no Finished Goods Inventory at the beginning of

July A review of the firm’s inventory cost records provides you with the

follow-ing information:

Work in Process 7/1/00

(70% complete as to labor and overhead) 100,000 $ 750,000 $ 215,000

Units started in production 1,300,000

Work in Process 7/31/00

(40% complete as to labor and overhead) 400,000

At the end of July, the cost of Finished Goods Inventory was determined to

be $124,033

a. Prepare schedules for July 2000, to compute the following:

1. Equivalent units of production using the weighted average method

2. Unit production costs for material, labor, and overhead

3. Cost of Goods Sold

b Prepare the journal entries to record the July transfer of completed goods

38 (FIFO cost per EUP) The following information has been gathered from the

records of Jack’s Snacks for August 2001 The firm makes a variety of snacks;

the information presented here is for a cashew and dried mango mix

Materi-als are added at the beginning of processing; overhead is applied on a direct

labor basis The mix is transferred to a second department for packaging Jack’s

uses a FIFO process costing system

Beginning WIP inventory (40% complete as to conversion) 5,000 pounds

Ending WIP inventory (70% complete as to conversion) 4,000 pounds

Beginning inventory cost totaled $13,875 For August 2001, compute the

follow-ing:

a. Equivalent units of production by cost component

b Cost per equivalent unit by cost component.

c. Cost of mix transferred to the packaging department in August

d Cost of August’s ending inventory.

39 (Cost assignment; FIFO) Green Seasons Processors is a contract manufacturer

for the Delectable Dressing Company Green Seasons uses a FIFO process

cost-ing system to account for the production of its salad dresscost-ing All cost-ingredients

are added at the start of the process Delectable provides reusable vats to Green

Seasons for the completed product to be shipped to Delectable for bottling so

Green Seasons incurs no packaging costs April 2001 production and cost

in-formation for Green Seasons Processors is as follows:

Gallons of dressing in beginning inventory 37,000

Gallons transferred out during April 243,000

Gallons of dressing in ending inventory 23,500

Costs of beginning inventory:

The beginning and ending inventories had the following degrees of tion each for labor and overhead:

comple-Beginning Inventory Ending Inventory

a. How many gallons of dressing ingredients were started in April?

b What is the total cost of the completed beginning inventory?

c. What is the total cost of goods completed during April?

d What is the average cost per gallon of all goods completed during April?

e. What is the cost of April’s ending WIP inventory?

40 (Weighted average & FIFO) In a single-process production system, the Cleopatra

Corporation produces press-on fingernails For October 2000, the company’saccounting records reflected the following:

Beginning Work in Process Inventory (100% complete as to material; 30% complete as to direct labor;

Ending Work in Process Inventory (100% complete as to material; 40% complete as to direct labor;

Cost Component Beginning Inventory October

b For October, prepare a cost of production report assuming the company

uses the FIFO method

41 (FIFO; second department) Bixby Company makes porcelain kitchen sinks in

a process requiring operations in three separate departments: Molding, Curing,and Finishing Materials are first introduced in the molding operation andadditional material is added during the curing process The following infor-mation is available for the Curing Department for May 2001:

Beginning WIP Inventory (degree of completion: transferred-in, 100%;

direct material, 80%; direct labor, 40%; overhead, 30%) 8,000 units

Ending WIP Inventory (degree of completion: transferred-in, 100%;

direct material, 70%; direct labor, 50%; overhead, 40%) 4,000 units

Cost Component Beginning Inventory Current Period

Prepare, in good form, a cost of production report for the Curing Department

42 (Two departments; weighted average) The Best of the Season Corporation makes

plastic Christmas trees in two departments: Cutting and Boxing In the CuttingDepartment, wire wrapped with green “needles” is placed into production at

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254

the beginning of the process and is cut to various lengths depending on the

size of the trees being made at that time The “branches” are then transferred

to the Boxing Department where the lengths are separated into the necessary

groups to make a tree These are then placed in boxes and immediately sent

to Finished Goods

The following data are available related to the October 2000 production

in each of the two departments:

PERCENT OF COMPLETION Units Transferred-in Material Conversion

a. Prepare a cost of production report for the Cutting Department assuming

a weighted average method

b Using the data developed from part (a), prepare a cost of production

re-port for the Boxing Department, also using the weighted average method

43 (Cost flows: multiple departments) Sharp Corporation produces accent stripes

for automobiles in 50-inch rolls Each roll passes through three departments

(Striping, Adhesion, and Packaging) before it is ready for shipment to

auto-mobile dealers and detailing shops Product costs are tracked by department

and assigned using a process costing system Overhead is applied to production

in each department at a rate of 60 percent of the department’s direct labor cost

The following information pertains to departmental operations for June 2001:

a. What was the cost of goods transferred from the Striping Department tothe Adhesion Department for the month?

b How much direct labor cost was incurred in the Adhesion Department? How

much overhead was assigned to production in the Adhesion Department forthe month?

c. How much direct material cost was charged to products passing throughthe Packaging Department?

d Prepare the journal entries for all interdepartmental transfers of products

and the cost of the units sold during June 2001

44 (Comprehensive; two departments) Safe-N-Sound makes a backyard fencing

system for pet owners in a two-stage production system In Process 1, wood

is cut and assembled into six-foot fence sections In Process 2, the sections arepressure treated to resist the effects of weather and then coated with a woodpreservative The following production and cost data are available for March

2001 (units are six-foot fence sections):

d Transfer the FIFO costs to the pressure process Determine cost per EUP

on a modified FIFO basis (See footnote 8, page 233.)

e. Assign costs to goods transferred and to inventory in the pressure process

on a modified FIFO basis

f. Assuming there was no beginning or ending inventory of Finished GoodsInventory for March, what was Cost of Goods Sold for March?

45 (Standard process costing) HealthySight is a manufacturer of high-quality lenses

for sunglasses and ski goggles HealthySight uses a standard process costingsystem and carries inventories at standard In May 2001, the following datawere available:

Standard Cost

of 1 Unit

Total manufacturing cost $17.00

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256

Beginning WIP Inventory 10,000 units (100% DM; 70% conversion)

Completed in May 160,000 units

Ending WIP Inventory ? units (100% DM; 60% conversion)

Actual costs for May

Direct material $ 781,000

Total actual cost $2,826,000

a. Prepare an equivalent units of production schedule

b Prepare a cost of production report and assign costs to goods transferred

and to inventory

c. Calculate and label the variances and charge them to Cost of Goods Sold

46 (Multiproduct; hybrid costing) Be-At-Ease Industries manufactures a series of

three models of molded plastic chairs: standard (can be stacked), deluxe (with

arms), and executive (with arms and padding); all are variations of the same

design The company uses batch manufacturing and has a hybrid costing

system

Be-At-Ease has an extrusion operation and subsequent operations to form,

trim, and finish the chairs Plastic sheets are produced by the extrusion

oper-ation, some of which are sold directly to other manufacturers During the

form-ing operation, the remainform-ing plastic sheets are molded into chair seats and the

legs are added; the standard model is sold after this operation During the trim

operation, the arms are added to the deluxe and executive models and the

chair edges are smoothed Only the executive model enters the finish

opera-tion where the padding is added All of the units produced receive the same

steps within each operation

The July production run had a total manufacturing cost of $898,000 The

units of production and direct material costs incurred were as follows:

Produced Materials Materials Materials Materials

Manufacturing costs applied during July were as follows:

Operation Operation Operation Operation

Be sure to account for all costs incurred during the month, and support

your answer with appropriate calculations

b Without prejudice to your answer in part (a), assume that 1,000 units of

the deluxe model remained in Work in Process Inventory at the end of

the month These units were 100 percent complete in the trim operation

Determine the value of the 1,000 units of the deluxe model in Be-At-Ease’s

Work in Process Inventory at the end of July (CMA adapted)

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258

47 (WA and FIFO) Rainbow Paints makes quality paint sold at premium prices in

one production department Production begins with the blending of variouschemicals, which are added at the beginning of the process, and ends withthe canning of the paint Canning occurs when the mixture reaches the 90 per-cent stage of completion The gallon cans are then transferred to the ShippingDepartment for crating and shipment Labor and overhead are added contin-uously throughout the process Factory overhead is applied at the rate of $3per direct labor hour

Prior to May, when a change in the process was implemented, work inprocess inventories were insignificant The change in process enables greaterproduction but results in large amounts of work in process The company hasalways used the weighted average method to determine equivalent productionand unit costs Now, production management is considering changing from theweighted average method to the first-in, first-out method

The following data relate to actual production during May:

Costs for May

Work in process inventory, May 1 Direct material—chemicals $ 45,600 Direct labor ($10 per hour) 6,250

Current month Direct material—chemicals $228,400

Direct labor ($10 per hour) 35,000

Units for May (Gallons)

Work in process inventory, May 1 (25% complete) 4,000

Work in process inventory, May 31 (80% complete) 5,000

a. Prepare a cost of production report for each cost element for May usingthe weighted average method

b Prepare a cost of production report for each cost element for May using

the FIFO method

c. Discuss the advantages and disadvantages of using the weighted averagemethod versus the FIFO method, and explain under what circumstances

C A S E

48 The term total cost to account for has been used in this chapter and in another

setting earlier in the text Find that earlier reference to this term and write abrief report explaining whether or not the term is being used consistently inboth places

49 The weighted average and FIFO methods generally result in approximately the

same unit costs because costs do not usually vary dramatically from period toperiod Discuss some reasons for exceptions to this observation

R E A L I T Y C H E C K

50 Cost accountants use the concept of equivalent units of production (EUP) to

measure actual production for a period in a process costing environment Write

a memo describing what EUP measures and why it is necessary to use EUP

to determine actual production for a period

51 Search the Internet to identify a vendor of process costing software Read the

on-line literature provided by the vendor regarding the software Then, briefly

describe the major features of the software in the areas of product costing, cost

budgeting, and cost control

52 In a team of three or four people, choose a company whose mass production

process you would like to learn Use the library, the Internet, and (if possible)

personal resources to gather information Prepare a visual representation

(sim-ilar to Exhibit 6–2) of that production process In this illustration, indicate the

approximate percentage of completion points at which various materials are

added and where/how labor and overhead flow into and through the process

Assume that 1,000 units of product are flowing through your production process

and are now at the 60 percent completion point as to labor Prepare a written

explanation about the quantity of direct material equivalent units that are

in-cluded in the 1,000 units Also explain how much overhead activity and cost

have occurred and why the overhead percentage is the same as or different

from the percentage of completion for labor

53 Find a Web site or current professional article discussing developments in the

pharmaceutical/medical devices industry Read the materials on that site about

evolving practices in the industry to improve cost effectiveness of operations

Discuss how the industry’s new practices will affect process costing in the

phar-maceutical industry Which cost pools (direct material, direct labor,

manufac-turing overhead) will be affected by the emerging practices? Also, address

whether any of the evolving practices would be better served by life cycle

costing

54 Find the Web page for Agile Software Provide its Web address and discuss

the nature of this Internet-based software and how it can affect cost accounting

practices in industries that manufacture complex products

Special Production Issues:

Lost Units and Accretion

E l e c t r i c

C o m p a n yINTRODUCING

homas Alva Edison invented the first successful

incandescent light bulb in 1879 Shortly thereafter,

General Electric (GE) began providing power and lighting

up America and the world General Electric Company was

formed in 1892 through a merger of Edison Electric Light

Company and Thomson-Houston Company.

Today, GE is the world’s largest diversified services

company as well as a provider of quality,

high-technology industrial and consumer products While

main-taining world-class leadership in its beginnings in providing

power systems and electric lighting, the company has

ex-panded into many areas A few examples include aircraft

engines, medical systems, financial services, television

broadcasting, and transportation systems GE consists of

more than three dozen businesses operating in 100

com-panies around the globe Although widely diverse, GE

businesses are also highly familial and share information,

resources, technology, and intellectual capital.

GE’s sharing among all its businesses includes:

1 a common operating system and a social architecture

characterized by boundaryless behavior,

2 a common leadership development system,

3 one set of common values, and

4 four common initiatives—globalization, product services, e-business, and Six Sigma quality.

Six Sigma is a quality management term used to

define a process for eliminating variation and, therefore, eliminating defects Statistically, Six Sigma quality means improving manufacturing quality to six standard deviations from the specification limit This translates to a rate of 3.4 defects out of a million items processed GE is absolutely committed to delivering flawless products and services to its customers.

At GE, the Six Sigma initiative is in its fifth year—its fifth trip through the operating system From a standing start in 1996, with no financial benefit to the company, it has flourished to the point where it provided more than

$2 billion in benefits in 1999, with much more to come this decade.

Unlike the General Electric (GE) processes that have been subjected to zero-defect

tolerance, most companies tolerate some level of defects by establishing an accepted

quality level (AQL) for their production or service processes AQL is the maximum

limit for the number of defects or errors in a process If the percentage of defects

or errors is less than the AQL, the company considers that it has performed at an

acceptable quality level

Companies viewed as having world-class status in a particular endeavor seek

to continuously tighten the accepted quality level Thus, producing goods with zero

defects and performing services with zero errors are laudable goals and ones toward

which domestic and foreign companies are striving

The examples in Chapter 6 assumed that all units to be accounted for have

either been transferred or are in ending work in process inventory; however, almost

every process produces some units that are spoiled or do not meet production

specifications Phenomena in the production process also may cause the total units

accounted for to be less than the total units to account for In other situations

(unrelated to spoiled units), the addition or expansion of materials after the start

of the process may cause the units accounted for to be greater than those to be

accounted for originally or in a previous department

This chapter covers these more complex issues of process costing Spoiled and

defective units, reworking of defective units, and accretion require adjustments to

the equivalent units of production (EUP) schedule and cost assignments made at

the end of a period The last section of this chapter discusses controlling quality

so that only a minimal number of inferior goods are produced

SOURCES : General Electric Company Web site, http://www.ge.com (June 2000); Robert Buderi, “The Six Sigma Approach Revs Up,” Upside (May 2000), p 50.

accepted quality level (AQL)

1

Systems and Methods of Product Costing

262

LOSS OF UNITS

Few, if any, processes combine material, labor, and overhead with no loss of units.Some of these losses, such as evaporation, leakage, or oxidation, are inherent in theproduction process For example, when Starbucks roasts coffee beans, approximately

20 percent of the original weight is lost from water evaporation This situation results

in shrinkage Modifying the production process to reduce or eliminate the causes of

shrinkage may be difficult, impossible, or simply not cost beneficial

Spoilage of some food products occurs simply by exposure to the atmospherewherever perishable foods are processed or stored In this regard, Louisiana StateUniversity and SIRA Technologies have developed a new monitoring system formeat that can enable meat processors and food retailers to better regulate the safetyrequirements for storage and prevent loss of reputation and revenue from sellingmeat containing harmful bacteria The technology uses a bar code treated with an-tibodies that are sensitive to virulent strains of bacteria.1

As discussed in the companying News Note, spoilage of meats and other perishable foods awaitingcustomer purchases in supermarkets can be further prevented by covering refrig-eration cases each night

ac-At other times, errors in the production process (either by humans or machines)cause a loss of units through rejection at inspection for failure to meet appropriatequality standards or designated product specifications Whether these lost units are

Why do lost units occur in

It is estimated that 75% of the supermarkets in North

America are closed to the public for 6 to 8 hours at night.

With little effort, these supermarkets could claim dollars

that are lost during the stores’ closed hours from

unnec-essary energy consumption and premature spoilage of

many perishable products.

Open refrigerated display cases are the best way for

retailers to present fresh merchandise to consumers

Un-fortunately, these cases are also open to the effects of

heat and UV radiation from the store environment.

There is often a misconception that the refrigerated

air escapes from the display case However, heat or

warm air is actually drawn toward the colder air, raising

the temperatures in the display case; this causes

mer-chandise to warm up and compressors to operate more

frequently.

More frequent compressor operation and exposed

products must be tolerated so that consumers can shop

freely, but when the store is closed, simple steps can be

taken to reduce store energy consumption and extend

product shelf life with ideal cold temperatures.

To solve this problem, an efficient temperature barrier

is needed between the opening of the display case and

the store interior The ideal thermal barrier arrangement

must have several qualities to be effective in increasing store profit:

• Reasonable cost and quick initial payback period;

• Simple and quick to put in operation;

• No interference with customer access to fresh chandise when the store is open;

mer-• No disturbance to the cosmetic appearance of the store;

• Durable commercial quality;

• Hygienic (will not rust or attract dust, mold, and mildew);

• Simple, quick cleaning maintenance that can be done when cleaning the case; and

• Effective in the reflection of heat and UV radiation.

A vertical rolling curtain permanently attached to the top

of the display was agreed upon as the simplest and iest to use arrangement To adapt to this arrangement, a 99% pure aluminum heat-reflective fabric was developed.

eas-To provide strength to the woven aluminum fabric and inate oxidation, it is coated with a thin, transparent film.

elim-SOURCE : Staff, “The Big Cover-Up in the Refrigeration Case,” Air Conditioning, Heating, and Refrigeration News (April 3, 2000), pp 27ff.

http://www.starbucks.com

http://www.siratechnologies

.com

considered defective or spoiled depends on their ability to be economically

re-worked Economically reworked means that (1) the unit can be reprocessed to

a sufficient quality level to be salable through normal distribution channels and

(2) incremental rework cost is less than incremental revenue from the sale of

re-worked units A defective unit can be economically rere-worked, but a spoiled unit

cannot An inspector in the company making the product determines which are

defective and which are spoiled

To illustrate the difference between defective and spoiled units, assume you

order blackened redfish at a restaurant You are now the control inspector If the

redfish brought to you is barely blackened, it is a defective unit because the chef

can cook it longer to bring it up to “product specifications.” The incremental

rev-enue is the selling price of the redfish; the incremental cost is a few moments of

the chef’s time However, if the fish brought to you is blackened to a cinder, it is

a spoiled unit because it cannot be reworked Therefore, a newly cooked

black-ened redfish would have to be provided

A normal loss of units falls within a tolerance level expected during

pro-duction Management creates a range of tolerance of spoiled units specified by the

accepted quality level, as mentioned in the beginning of this chapter If a

com-pany had set its quality goal as 98 percent of goods produced, the comcom-pany would

have been expecting a normal loss of 2 percent Any loss in excess of the AQL is

an abnormal loss Thus, the difference between normal and abnormal loss is

merely one of degree and is determined by management

A variety of methods can be used to account for units lost during production

Selection of the most appropriate method depends on two factors: (1) the cause

of the decrease and (2) management expectations regarding lost units

Under-standing why units decreased during production requires detailed knowledge of

the manufacturing process Management’s expectations are important to determine

the acceptable loss quantities from defects, spoilage, or shrinkage as well as the

revenue and cost considerations of defective and spoiled units

economically reworked

defective unit spoiled unit

How do normal and abnormal losses of units differ and how is each treated in an EUP schedule?

normal loss abnormal loss

3

TYPES OF LOST UNITS

In developing the product design, manufacturing process, and product quality,

management selects a combination of material, labor, and overhead from the wide

resource spectrum available This combination is chosen to provide the lowest

long-run cost per unit and to achieve the designated product specifications—including

those for quality In making this resource combination choice, managers recognize

that, for most combinations, some degree of production error may occur that will

result in lost units Given the resource choices made by management, the

quan-tity or percentage of lost units to be generated in a given period or production

run should be reasonably estimable This estimate is the normal loss because it is

planned for and expected Normal loss is usually calculated on the basis of good

output or actual input

Some companies may estimate the normal loss to be quite high because the

lowest cost material, labor, or overhead support is chosen For example, assume

that Scrape Manufacturing Ltd chooses to install the least advanced, lowest cost

machinery for production purposes because its workers do not have the

educa-tional or technological skills to handle the more advanced equipment The installed

equipment may have fewer quality checks and, thus, produce more spoiled units

than the more advanced equipment Scrape’s managers have decided that the costs

of upgrading worker skills were greater than the cost of lost units

Another reason for high estimated normal losses relates not to the resources

chosen, but to a problem inherent in the product design or in the production

process In other cases, based on cost-benefit analysis, managers may find that a

problem would cost more to eliminate than to tolerate For example, assume a

machine malfunctions once every 100 production runs and improperly blends gredients The machine processes 50,000 runs each year and the ingredients ineach run cost $10 Correcting the problem has been estimated to cost $20,000 peryear Spoilage cost is $5,000 per year (500 spoiled batches ⫻ $10 worth of ingre-dients) plus a minimal amount of overhead costs If company employees are aware

in-of the malfunction and catch every improperly blended run, accepting the spoilage

is less expensive than correcting the problem

If, alternatively, the spoiled runs are allowed to leave the plant, they maycreate substantial quality failure costs in the form of dissatisfied customers and/orsalespeople who might receive the spoiled product Managers in world-class com-panies should be aware that the estimate of the cost to develop a new customer

is $50,000, five times as much as the estimated cost of keeping an existing one.2

In making their cost-benefit analysis, managers must be certain to quantify all thecosts (both direct and indirect) involved in spoilage problems

An abnormal loss is a loss in excess of the normal, predicted tolerance limits.Thus, when an abnormal loss occurs, so does a normal loss (unless zero defectshave been set as the AQL) Abnormal losses generally arise because of human ormachine error during the production process For example, if the tolerances onone of a company’s production machines were set incorrectly, a significant quan-tity of defective products might be produced before the error was noticed Becauseabnormal losses result from nonrandom, special adverse conditions and actions,they are more likely to be preventable than some types of normal losses

Realistically, units are lost in a production process at a specific point ever, accounting for lost units requires that the loss be specified as being eithercontinuous or discrete For example, the weight loss in roasting coffee beans andthe relatively continual breakage of fragile glass ornaments can be considered

How-continuous losses because they occur fairly uniformly throughout the production

process

In contrast, a discrete loss is assumed to occur at a specific point Examples

of discrete losses include adding the wrong amount of vinegar to a recipe for saladdressing or attaching a part to a motor upside down The units are only deemedlost and unacceptable when a quality check is performed Therefore, regardless ofwhere in the process the units were truly “lost,” the loss point is always deemed

to be an inspection point Thus, units that have passed an inspection point should

be good units (relative to the specific characteristics inspected), whereas units thathave not yet passed an inspection point may be good or may be defective/spoiled.Control points can be either built into the system or performed by inspectors.The former requires an investment in prevention costs; the latter results in appraisalcosts Both are effective, but prevention is often more efficient because acceptablequality cannot be inspected into a product; it must be a part of the productionprocess Investments to prevent lost units may relate either to people or machines.(Prevention costs and appraisal costs are formally defined in Chapter 8.)

In determining how many quality control inspection points (machine or human)

to install, management must weigh the costs of having more inspections against thesavings resulting from (1) not applying additional material, labor, and overhead toproducts that are already spoiled or defective (direct savings) and (2) the reduction

or elimination of internal and external failure costs (indirect savings) Quality controlpoints should always be placed before any bottlenecks in the production system sothat the bottleneck resource is not used to process already defective/spoiled units.Additionally, a process that generates a continuous defect/spoilage loss requires aquality control point at the end of production; otherwise, some defective/spoiledunits would not be found and would be sent to customers, creating external failurecosts (Failure costs are formally defined in Chapter 8.)

Systems and Methods of Product Costing

264

2

continuous loss

discrete loss

How are the costs of each type

of loss assigned?

4

ACCOUNTING FOR LOST UNITS

The method of accounting for the cost of lost units depends on whether the loss

is considered normal or abnormal and whether the loss occurred continuously in

the process or at a discrete point Exhibit 7–1 summarizes the accounting for the

cost of lost units

The traditional method of accounting for normal losses is simple Normal loss

cost is considered a product cost and is included as part of the cost of the good

units resulting from the process Thus, the cost of the loss is inventoried in Work

in Process and Finished Goods Inventories and expensed only when the good units

are sold This treatment has been considered appropriate because normal losses

have been viewed as unavoidable costs in the production of good units If the loss

results from shrinkage caused by the production process, such as the weight loss

of roasting coffee beans, this treatment seems logical

Alternatively, consider the company producing fragile scientific lenses: If the

company allows for losses by virtue of the level at which some acceptable

qual-ity was set, then management will not receive valuable information about the cost

of quality losses In contrast, if the same company were to institute a zero-defect

policy, there would by definition be no “normal” loss All losses would be outside

the tolerance specifications for acceptable quality

The costs of normal shrinkage and normal continuous losses are handled

through the method of neglect, which simply excludes the spoiled units in the

equivalent units schedule Ignoring the spoilage results in a smaller number of

equivalent units of production (EUP) and, by dividing production costs by a smaller

EUP, raises the cost per equivalent unit Thus, the cost of lost units is spread

pro-portionately over the good units transferred and those remaining in Work in Process

Inventory

Alternatively, the cost of normal, discrete losses is assigned only to units that

have passed the inspection point Such units should be good units (relative to the

inspected characteristic), whereas the units prior to this point may be good or may

be defective/spoiled Assigning loss costs to units that may be found to be defective/

spoiled in the next period would not be reasonable E X H I B I T 7 – 1

Continuous versus Discrete Losses

Uniformly throughout

Absorbed by all units

in ending inventory and transferred out

Cost Assigned To?

Written off as a loss

on an EUP basis Abnormal

Product

Period

or Normal

Abnormal

Product

Period Written off as a loss

on an EUP basis

method of neglect

Regardless of whether defects/spoilage occur in a continuous or discrete ion, the cost of abnormal losses should be accumulated and treated as a loss inthe period in which those losses occurred This treatment is justified by the costprinciple discussed in financial accounting The cost principle allows only coststhat are necessary to acquire or produce inventory to attach to it All unnecessarycosts are written off in the period in which they are incurred Because abnormallosses are not necessary to the production of good units and the cost is avoidable

fash-in the future, any abnormal loss cost is regarded as a period cost This cost should

be brought to the attention of the production manager who should then gate the causes of the loss to determine how to prevent future similar occurrences.Abnormal loss cost is always accounted for on an equivalent unit basis

investi-Systems and Methods of Product Costing

266

ILLUSTRATIONS OF LOST UNITS

To best understand how to account for a process that creates lost goods, it is ful to know the answers to the following questions:

help-1 What is the process flow?

2 Where is material added during the process?

3 How are labor and overhead applied? (This answer is usually “Continuously,”but not necessarily at the same rate.)

4 At what stage of completion was the beginning inventory and what is the ing inventory?

end-5 Where are the quality control inspection points?

6 How do defective/spoiled units occur? (Continuously or discretely?)Impervious Inc is used to illustrate several alternative situations regarding thehandling of lost units in a process costing environment Impervious produces a high-tech, very durable, nonfade (once color pigment is added) paint base material—hereafter simply referred to as paint—for appliances and equipment The paint isproduced in a single department and then sold to appliance and equipment man-ufacturers All materials are added at the start of the process, and conversion costsare applied uniformly throughout the production process Recyclable containers areprovided by buyers and, therefore, are not a cost to Impervious The companyuses the FIFO method of calculating equivalent units

Spoilage in the production of

CD-ROMs can occur from a

wide variety of causes and at

numerous points in the

produc-tion process Because spoilage

tends to be machine-related,

quality checks are built into the

production system and are often

performed robotically However,

the final quality control analysis

is performed by a replication

operator.

Situation 1—Normal Loss Only; Loss Occurs Throughout

Production Process (Continuous)

During processing, the paint is mechanically blended and cooked, resulting in a

normal loss from shrinkage Mechanical malfunctions sometimes occur and, when

they do, cause some spoilage Any decrease of 10 percent or less of the gallons

placed into production for a period is considered normal The April 2000 data for

Impervious are given below:

GALLONS

To visualize the manufacturing process for Impervious, a flow diagram can be

constructed Such a diagram provides distinct, definitive answers to all of the

ques-tions asked at the beginning of this section

→Continuous reduction in units (shrinkage)→

The steps discussed in Chapter 6 on process costing are followed to determine

the units accountable for, units accounted for, equivalent units of production, costs

accountable for, cost per equivalent unit, and cost assignment These steps are

pre-sented in the cost of production report shown in Exhibit 7–2

The department is accountable for 17,000 gallons of paint: 2,000 gallons in

be-ginning inventory plus 15,000 gallons started into processing during April Only

15,700 gallons (13,200 completed and 2,500 in ending inventory) are accounted for

prior to considering the processing loss The 1,300 lost gallons are included in the

schedule of gallons accounted for to balance to the total 17,000 gallons, but these

gallons are not extended into the computation of equivalent units of production

Using the method of neglect, these gallons simply “disappear” in the EUP

sched-ule Thus, the cost per equivalent gallon of the remaining good production of the

period is higher for each cost component

Had the lost gallons been used in the denominator of the cost per EUP

com-putation, the cost per EUP would have been smaller, and the material cost per unit

would have been $6.85 ($102,750 ⫼ 15,000) Because the lost units do not appear in

the cost assignment section, their costs must be assigned only to good production

The use of the lower cost per EUP would not allow all of the costs to be accounted

for in Exhibit 7–2

Accounting for normal, continuous shrinkage (or defects/spoilage) is the iest of the types of lost unit computations There is, however, a theoretical prob-lem with this computation when a company uses weighted average process cost-ing The units in ending Work in Process Inventory have lost unit cost assigned to

eas-them in the current period and will have lost unit cost assigned again in the next

period But, even with this flaw, this method provides a reasonable measure ofunit cost if the rate of spoilage is consistent from period to period

Situation 2—Normal Spoilage Only; Spoilage Determined at Final Inspection Point in Production Process (Discrete)

This example uses the same basic cost and unit information given above for pervious Inc except that no shrinkage occurs Instead, the paint is inspected atthe end of the production process Any spoiled gallons are removed and discarded

Im-at inspection; a machine malfunction or an improper blending of a bIm-atch of paintusually causes spoilage Any spoilage of 10 percent or less of the gallons placedinto production during the period is considered normal A production flow diagram

is shown at the top of the next page

Systems and Methods of Product Costing

Beginning inventory completed

COST DATA

Beginning inventory costs $ 16,620

Cost of Production Report for

Month Ended April 30, 2000

(FIFO method) (Normal

continuous shrinkage)