Solution manual cost management measuring monitoring and motivating performance 1st by wolcott ch06

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Process Costing LEARNING OBJECTIVES Chapter addresses the following questions: Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 How are costs assigned to mass-produced products? What are equivalent units, and how they relate to the production process? How is the weighted average method used in process costing? How is the FIFO method used in process costing? What alternative methods are used for mass production? How is process costing performed for multiple production departments? How are spoilage costs handled in process costing? What are the uses and limitations of process cost information? These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual exercises and problems COMPLEXITY SYMBOLS The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems Questions Having a Single Correct Answer: No Symbol This question requires students to recall or apply knowledge as shown in the textbook This question requires students to extend knowledge beyond the applications e shown in the textbook Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10):  Step skills (Identifying)  Step skills (Exploring)  Step skills (Prioritizing)  Step skills (Envisioning) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-2 Cost Management QUESTIONS 6.1 Weighted average and FIFO process costing produce similar equivalent unit costs whenever the unit cost of production does not change or whenever there are no beginning or ending work-in-process inventories In addition, the equivalent unit costs will be similar if the number of equivalent units produced during the period is large relative to inventories 6.2 A process would complete more units during the period than it started when there are more units in beginning inventory than in ending inventory 6.3 This approach would overstate the cost of spoiled units because partially complete units would be treated as if they had received 100% of direct materials and conversion costs, regardless of the amount actually allocated to those units 6.4 If the beginning and ending inventories are the same from one period to the next, the number of units started is equal to the number of units completed and transferred out This means that WIP inventory can be ignored when calculating equivalent units However, if costs change from one period to the next, then the cost allocated to ending WIP will not be the same as the cost allocated to beginning WIP 6.5 Judgment is needed to determine the percentage complete that is used in process costing calculations Each unit or batch of units is complete to a different degree than other units or batches because the process is continuous The percent complete is an average completion percentage that is estimated using judgment 6.6 If the percent completion in year is overestimated, then the equivalent units for those units will be too high in year In turn, this will cause the cost per equivalent unit in year to be understated In year 2, this misstatement will cause the equivalent units for completion of beginning WIP to be too low The understatement of equivalent units will cause the cost per equivalent unit to be overstated in year 6.7 The weighted average method ignores the period in which product is started In addition, costs from beginning inventories are added to costs of this period All products completed are then given an average cost, regardless of when they were started The FIFO method, on the other hand, tracks work completed and costs from the prior period separately from work completed and costs incurred during the current period Under FIFO, beginning WIP consists of last period’s costs and work valued separately At the end of the accounting period, this period’s costs to complete these units are added Then the total costs for beginning WIP from last period and this period are summed and attached to the beginning inventory units that were completed this period Then the units started and completed this period are valued using this period’s costs If an organization’s costs fluctuate regularly, the FIFO method will reflect the most current costs so that managers can investigate changes in cost more quickly 6.8 Goods that are mass-produced have uniform specifications and are made in large batches or on a continuous assembly line Services that are mass-produced are performed using To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-3 the same skills and time and each task is very similar Goods that are custom produced come in many variations and are made to specifications that vary with each order Many services are custom, such as accounting, health care, and law services because each customer requires different inputs to match their needs While it is relatively easy to track costs for custom made goods by attaching tags or using individual records to log costs of materials and labor, it is impossible to trace costs to mass-produced units Job order costing is used for custom products Direct material and labor costs are traced to each product and overhead costs are allocated using some allocation base that is labor or machine related For mass-production, process costing is used Equivalent units are calculated to account for units that are partially complete Direct materials costs are allocated separately Direct labor and overhead are combined and called conversion costs These are allocated to complete and partially completed units 6.9 They should be counted as ending WIP inventory in the department Completed units imply that the units have been transferred to the next department or to finished goods, which is not the case with these units 6.10 This is what is referred to as "continuous processing." Units just entering the process have had little done to them, while units just about to leave the process have had all or most of the conversion done On average, the units in process are 50% complete as to conversion 6.11 The cost of spoiled units is added to the total cost of goods transferred and increases the cost per unit 6.12 Job costing is often used when products are manufactured in batches In this firm, a single batch would have a specific sized wire and specific length of nail The cost of each type of nail will depend primarily on the cost of the type of wire used and the time required for each type Therefore job costing is the most appropriate method This information would be lost if process cost techniques were employed 6.13 Here are three factors If inspection costs are high and the cost to produce a single unit is very low, managers may decide to reduce the number of time units are inspected In this case, inspection might occur only when units are completed If production costs are high and units go through several different departments, inspection may take place earlier in the manufacturing process so that spoiled units are caught when they are relatively incomplete If a firm is developing a strategy of high quality products, inspection may take place more often to insure that products are free of defects 6.14 Advantages of reducing spoilage include saving the cost of the spoiled units and being able to sell those units and increasing the contribution margin In addition, in some industries all firms need to compete on quality, and increased spoilage may lead to increased defects in units sold, harming the reputation of the company resulting in a loss of market share Disadvantages might be that the costs incurred not guarantee that spoilage will be significantly reduced, or that the benefits in improved quality will be worth the costs To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-4 Cost Management EXERCISES 6.15 Francisco’s A and B Assumptions: Work performed in May: Beginning WIP % complete direct materials % complete conversion costs Units started Units completed and transferred out Ending WIP % complete direct materials % complete conversion costs 9,000 100% 40% 50,000 47,000 12,000 100% 30% Summarize Physical and Equivalent Units Physical Units Equivalent Units: Direct Materials Conversion Costs Beginning WIP 9,000 9,000 3,600 Complete Beginning WIP 0 5,400 Work This Period Start Start Total Work Total and Ending Performed Units to Complete WIP This Period Account for 38,000 12,000 50,000 59,000 38,000 38,000 12,000 3,600 50,000 47,000 Total Work 59,000 50,600 A Weighted average equivalent units for direct materials is 59,000 (total work this period) because the ending units get 100% credit for direct materials, since direct materials are added at the beginning of processing Equivalent units for conversion costs are 50,600 (total work this period) because ending inventory units are only 30% complete and, hence, have only 30% of the conversion costs (since conversion costs are incurred evenly during production) B FIFO equivalent units are found under Total Work Performed This Period Therefore direct materials equivalent units are 50,000 (excludes beginning inventory because direct materials were added last period and includes ending inventory because materials were added this period), and equivalent units for conversion costs are 47,000 (excluding work done on beginning WIP but including this period’s work to complete those units and including the portion of work completed on ending WIP To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-5 6.16 Fine Fans A and B Assumptions for October: Work performed: Costs: Beginning WIP % complete direct materials % complete conversion costs Units started Units completed and transferred out Ending WIP % complete direct materials % complete conversion costs 9,000 100% 20% 100,000 94,000 15,000 100% 60% Beginning WIP (FIFO and Weighted Average) Direct materials Conversion costs Total beginning WIP costs Costs added this month Direct materials Conversion costs Total costs added Total costs to account for $ 18,000 36,000 54,000 100,000 200,000 300,000 $354,000 Summarize Physical and Equivalent Units Physical Units Beginning WIP (20%) 9,000 Equivalent Units: Direct Materials Conversion Costs 9,000 1,800 Complete Beginning WIP (80%) 0 7,200 Work This Period Start Start Total Work Total and Ending Performed Units to Complete WIP (60%) This Period Account for 85,000 15,000 100,000 109,000 85,000 85,000 15,000 9,000 100,000 101,200 Total Work 109,000 103,000 Calculate Actual Cost Per Equivalent Unit Weighted Average: Direct materials: Beginning WIP + Direct materials cost = Equivalent units for total work $118,000 109,000 =$ 1.08 Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work $236,000 103,000 = Total cost per equivalent unit: 2.29 $3.37 First-in, First-out: Direct materials: _Direct materials cost _ Equivalent units for total work performed this period = $100,000 100,000 =$ 1.00 Conversion costs: Conversion costs Equivalent units for total work performed this period = $200,000 101,200 = Total cost per equivalent unit: 1.98 $2.98 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-6 Cost Management 6.17 Journal Entry for Abnormal Spoilage [Note: This problem requires students to extend concepts about journal entries for spoilage from Chapter to Chapter 6.] When spoiled units are sold, the net realizable value offsets the cost In this case the total cost of spoiled units is $16,000 (80*$200) However, $2,000 is recovered by selling the spoiled units for their net realizable value The journal entry follows Loss from Abnormal Spoilage Cash Work-in-Process inventory $14,000 2,000 $16,000 6.18 Journal Entry for Normal and Abnormal Spoilage A Number of spoiled units = 10,000 – 8,000 = 2,000 Cost of spoiled units = 2,000*$5 = $10,000 B When all spoilage is normal, the total cost of units (good and spoiled) is transferred into finished goods That cost is $50,000 (10,000*$5) The journal entries follow Finished Goods Inventory Work-in-Process Inventory $50,000 $50,000 C For abnormal spoilage, only the cost of good units is transferred to finished goods The cost of spoiled units is recorded as a separate loss The cost of good units is $40,000 (8,000*$5) Finished Goods Inventory Loss from Abnormal Spoilage Work-in-Process Inventory $40,000 10,000 $50,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-7 6.19 through 6.22 Felix and Sons Assumptions for December: Work performed: Costs: Beginning WIP % complete direct materials % complete conversion costs Units started (12,000 – 8,000 + 6,000) Units completed and transferred out Ending WIP % complete direct materials % complete conversion costs 8,000 100% 75% 10,000 12,000 6,000 100% 50% Beginning WIP (FIFO and Weighted Average) Direct materials Conversion costs Total beginning WIP costs Costs added this month Direct materials Conversion costs Total costs added Total costs to account for $ 19,200 7,200 26,400 31,200 21,600 52,800 $79,200 Summarize Physical and Equivalent Units Physical Units Beginning WIP (30%) 8,000 Equivalent Units: Direct Materials Conversion Costs 8,000 6,000 Complete Beginning WIP (75%) 0 2,000 Work This Period Start Start Total Work Total and Ending Performed Units to Complete WIP (50%) This Period Account for 4,000 6,000 10,000 18,000 4,000 4,000 6,000 3,000 10,000 9,000 Total Work 18,000 15,000 Calculate Actual Cost Per Equivalent Unit Weighted Average: Direct materials: Beginning WIP + Direct materials cost = Equivalent units for total work $50,400 18,000 =$ 2.80 Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work $28,800 15,000 = Total cost per equivalent unit: First-in, First-out: Direct materials: Conversion costs: 1.92 $4.72 _Direct materials cost _ Equivalent units for total work performed this period = $31,200 10,000 =$ 3.12 Conversion costs Equivalent units for total work performed this period = $21,600 9,000 = Total cost per equivalent unit: 2.40 $5.52 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-8 Cost Management Process Cost Reports for December 31 Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period First-in, First-Out Computation Units From November cost report 8,000 4,000x$5.52 Total units completed and transferred out Ending WIP: Direct materials Conversion costs Total ending WIP cost Weighted Average Computation Units 4,800 _ 4,800 8,000 31,200 4,000 22,080 12,000 53,280 (8,000+4,000)x$4.72 6,000x$2.80 3,000x$1.92 _ 18,720 7,200 25,920 18,000 $79,200 6,000 12,000 _ 16,800 5,760 22,560 18,000 $79,200 6.23 Humphrey Manufacturing A and B Assumptions for April: Work performed: Beginning WIP % complete direct materials % complete conversion costs Units started (8,000+40,000-6,000) Units completed and transferred out Ending WIP % complete direct materials % complete conversion costs $56,640 6,000 6,000x$3.12 3,000x2.40 Total Accounted For Costs $26,400 0x$3.12 2,000x$2.40 Total cost of beginning WIP transferred out New units started, completed, and transferred out Costs Costs: 6,000 100% 40% 42,000 40,000 8,000 100% 25% Beginning WIP (FIFO and Weighted Average) Direct materials Conversion costs Total beginning WIP costs Costs added this month Direct materials Conversion costs Total costs added Total costs to account for $ 7,500 2,125 9,625 70,000 42,500 112,500 $122,125 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-9 Summarize Physical and Equivalent Units Physical Units Beginning WIP (40%) 6,000 Equivalent Units: Direct Materials Conversion Costs 6,000 2,400 Complete Beginning WIP (60%) 0 3,600 Work This Period Start Start Total Work Total and Ending Performed Units to Complete WIP (25%) This Period Account for 34,000 8,000 42,000 48,000 34,000 34,000 8,000 2,000 42,000 39,600 Total Work 48,000 42,000 Calculate Actual Cost Per Equivalent Unit Weighted Average: Direct materials: Beginning WIP + Direct materials cost = Equivalent units for total work $77,500 48,000 =$ 1.6146 Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work $44,625 42,000 = Total cost per equivalent unit: 1.0625 $2.6771 First-in, First-out: Direct materials: _Direct materials cost _ Equivalent units for total work performed this period = $70,000 42,000 =$1.6667 Conversion costs: Conversion costs Equivalent units for total work performed this period = $42,500 39,600 = Total cost per equivalent unit: 1.0732 $2.7399 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-10 Cost Management Process Cost Reports for April Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period First-in, First-Out Computation Units Costs From March cost report 6,000 $ 9,625 0x$1.6667 3,600x$1.0732 Total cost of beginning WIP transferred out New units started, completed, and transferred out 34,000x$2.7399 Total units completed and transferred out Ending WIP: Direct materials Conversion costs Total ending WIP cost Total Accounted For Weighted Average Computation Units Costs 3,864 _ 3,864 6,000 13,489 34,000 93,157 40,000 106,646 40,000x$2.6771 8,000x$1.6146 2,000x$1.0625 _ 13,336 2,146 15,482 48,000 $122,128 8,000 8,000x$1.667 2,000x1.073 40,000 $107,084 8,000 _ 12,917 2,125 15,042 48,000 $122,126 Differences in total costs are due to rounding errors If a spreadsheet is used to make these calculations, the totals will have fewer rounding errors C Journal entries for weighted average method for April: Work in process inventory $70,000 Raw materials inventory To record the cost of raw materials used in production during April $70,000 Work in process inventory $42,500 Wages and accounts payable To record the conversion costs incurred in production during April $42,500 Finished goods $107,084 Work in process inventory $107,084 To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-28 Cost Management C There are many possible answers to this question Here are some issues that students might have considered as they developed their own answers (These issues are organized using Steps for Better Thinking.) Uncertainties: Ideally, the goal for companies should be to achieve perfect health and safety However, this goal might not be attainable because it is not possible to identify all possible health and safety problems or to perfectly control worker actions For example, researchers continue to investigate the association between various types of work and ergonomic problems such as discomfort, fatigue, and musculoskeletal disorders It is not always easy to identify the types of actions or work arrangements that cause specific problems A chemical believed to be safe may be found to cause previously-unforeseen medical problems To complicate matters, workers may be unwilling to comply with health and safety practices For example, employees may object to ergonomic seating or to an ergonomic computer keyboard Or, they may fail to use safety equipment such as helmets or masks Exploring Perspectives: Who are the major stakeholders in this issue? Worker health and safety obviously affects the well-being of individual workers and their families It also has social implications Injured or ill workers are less productive and may require greater social services than other people From the company’s point of view, economic concerns exist It might be very expensive to make a small improvement in worker health and safety In addition, a company with high health and safety standards may be unprofitable if it sells goods and services in an industry where competitors adopt lower standards Prioritizing: There are many questions to ask when choosing values and making tradeoffs for deciding on a company goal Is it appropriate to weigh only the company’s cost and benefit? What are the company’s obligations to shareholders, workers, and society? How can the company attempt to meet all of its obligations in a morally acceptable way? Envisioning: It is always possible to improve worker health and safety New practices can be adopted as research provides new information about the causes of problems and ways to prevent them Thus, an important aspect of a company’s goal should be to continuously improve How can the company’s goal be worded to encourage continuous improvement? To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-29 6.35 Cellular Advantage A sample spreadsheet for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg) A Weighted Average Method Summarize Total Costs to Account For Direct Materials Conversion Costs $ 440,000 $ 60,000 2,960,000 1,884,000 $3,400,000 $1,944,000 Beginning WIP Current period costs Total costs to account for Total Cost $ 500,000 4,844,000 $5,344,000 Summarize Physical and Equivalent Units Physical Units Complete Beginning Beginning WIP (30%) WIP (70%) 22,000 Equivalent Units: Direct Materials Conversion Costs 22,000 6,600 15,400 116,000 112,000* Physical Units 16,000 13,200 2,800 Total Spoilage Less Normal Spoilage Abnormal Spoilage * Work Performed This Period Start Start Total Work and Ending Performed Complete WIP (60%) This Period 116,000 32,000 148,000 32,000 19,200 148,000 146,600 Total Spoiled Units to Units Account for (75%) 170,000 (16,000) Total Work 170,000 (16,000) 153,200 (12,000) Equivalent Units Direct Conversion Materials Costs (100%) (75%) 13,200 2,800 9,900 2,100 Because inspection takes place when units are 75% complete, spoiled units are removed when units are 100% complete with respect to direct materials and 75% complete with respect to conversion costs This also means that 25% of the conversion cost work is never performed on spoiled units Therefore, the number of equivalent units started and completed for conversion costs is calculated as: Total physical units started and completed Less spoiled units not completed [16,000 x (1-75%)] Equivalent units started and completed for conversion costs 116,000 (4,000) 112,000 Calculate Cost per Equivalent Unit: Weighted Average Direct materials: Beginning WIP + Direct materials cost = Equivalent units for total work $3,400,000 170,000 =$20.0000 Conversion costs: Beginning WIP + Direct materials cost = Equivalent units for total work $1,944,000 153,200 = 12.6893 Total cost per equivalent unit: $32.6893 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-30 Cost Management Weighted Average Process Cost Report Computation Units Total units completed and transferred out: Good units (22,000+116,000–16,000)x$32.6893 122,000 Normal spoilage: Direct materials 13,200 x $20 Conversion costs 9,900 x $12.6893 _ Total transferred out 122,000 Abnormal spoilage Direct materials Conversion costs Total abnormal spoilage 2,800 x $20 2,100 x $12.6893 Ending WIP: Direct materials Conversion costs Total ending WIP cost 32,000 x $20 19,200 x $12.6893 Total Good Units Accounted For Total Accounted For Costs $3,988,094 264,000 125,624 4,377,718 56,000 26,648 82,648 32,000 640,000 243,634 883,634 _ 170,000 – 16,000 154,000 $5,344,000 B: FIFO Method The summary of physical and equivalent units and the summary of costs to account for are the same as those shown above for the weighted average method Thus, the solution below shows only steps and Calculate Cost per Equivalent Unit: FIFO Direct materials: _Direct materials cost _ = Equivalent units for total work performed this period $2,960,000 148,000 =$20.0000 Conversion costs: Conversion costs = Equivalent units for total work performed this period $1,884,000 146,600 = 12.8513 Total cost per equivalent unit: $32.8513 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-31 FIFO Process Cost Report Computation Beginning WIP Costs to complete beginning WIP: Direct materials Conversion costs Total costs added this period 0x$20 15,400 x $12.8513 Total cost of beginning WIP transferred out 22,000 New units started, completed, and transferred out 100,000 x $32.8513 Normal spoilage Direct materials Conversion costs 13,200 x $20 9,900 x $12.8513 Units completed and transferred out 100,000 122,000 Abnormal spoilage Direct materials Conversion costs Total abnormal spoilage 2,800 x $20 2,100 x $12.8513 Ending WIP: Direct materials Conversion costs Total ending WIP cost 32,000 x $20 19,200 x $12.8513 Total Good Units Accounted For Total Costs Accounted For Units 22,000 Costs $ 500,000 197,910 197,910 697,910 3,285,130 264,000 127,228 4,374,267 56,000 26,988 82,988 32,000 170,000-16,000 640,000 246,745 886,745 154,000 $5,344,000 C Because spoilage increases the cost of good units, most organizations want to minimize the number of units spoiled By setting limits on normal spoilage, incentive is provided for managers and operations employees to keep spoilage under the limit The accounting system combines the cost of normal spoilage with good units, so the amount of cost incurred for normal spoilage is not obvious Many organizations view spoilage as part of the cost of producing good units However, when spoilage amounts become large, abnormal spoilage is recorded and these amounts are more obvious to managers, so that quality problems can be investigated D Rework costs are hidden in the accounting system because units reworked go through the manufacturing process twice, but are counted only once Therefore, it is difficult to track rework costs, and the financial affects of rework To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-32 Cost Management 6.36 Rausher Industries A FIFO process costing report and calculations for the current year and the budget for next year: FIFO CURRENT YEAR Physical Flow of Units: Current Period Department 12,000 12,000 3,000 9,000 WIP beginning Started Transferred in Total to account for Ending WIP Completed and transferred out Department 0 9,000 9,000 2,000 7,000 Summarize Total Costs to Account For (Current Year) Transferred-in Department 1: Beginning WIP Current period costs Total costs to account for Direct Materials not applicable not applicable not applicable Department 2: Beginning WIP Current period costs Total costs to account for $ $ Conversion Costs Total Cost 36,000 $36,000 not applicable 38,700 not applicable $38,700 not applicable $ 14,040 $14,040 $ 50,040 $50,040 $ 32,760 $32,760 $ 71,460 $71,460 Summarize Physical and Equivalent Units (Current Year) Department 1: Physical Units Equivalent Units: Direct Materials Conversion Costs Department 2: Physical Units Equivalent Units: Transferred-In Conversion Costs Beginning WIP (0%) Complete Beginning WIP (0%) Work This Period Start Start Total Work Total and Ending Performed Units to Complete WIP This Period Account for (60%) 9,000 3,000 12,000 15,000 0 0 9,000 9,000 3,000 1,800 12,000 10,800 Total Work 12,000 10,800 (0%) (0%) 7,000 (40%) 2,000 12,000 15,000 0 0 7,000 7,000 2,000 800 9,000 7,800 Total Work 9,000 7,800 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-33 FIFO Cost Per Equivalent Unit (Current Year) Department 1: Direct materials: _Current Period Direct materials cost _ Equivalent units for total work performed this period = $36,000 12,000 = $3.00 Conversion costs: Current Period Conversion costs Equivalent units for total work performed this period = $14,040 10,800 = 1.30 Total cost per equivalent unit: $4.30 Department 2: Transferred-in costs: _Current Period Transferred-in cost _ Equivalent units for total work performed this period = $38,700 9,000 = $4.30 Conversion costs: Current Period Conversion costs Equivalent units for total work performed this period = $32,760 7,800 = 4.20 Total cost per equivalent unit: $8.50 FIFO Process Cost Report (Current Year) Beginning WIP Costs to complete beginning WIP: Transferred-in Direct materials Conversion costs Total costs added this period Department Computation Units 9,000x$4.30 Total units completed and transferred out Ending WIP: Transferred in Direct materials Conversion costs Total ending WIP cost Total Accounted For Department Computation Units Costs $ n/a 0 Total cost of beginning WIP transferred out New units started, completed, and transferred out Costs $ 0 n/a _ _ 0 0 9,000 38,700 7,000 59,500 9,000 38,700 7,000 56,640 7,000x$8.50 3,000 2,000 _ n/a 9,000 2,340 11,340 12,000 $50,040 3,000x$3 1,800x$1.30 2,000x$4.30 _ 8,600 n/a 3,360 11,960 9,000 $71,460 800x$4.20 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-34 Cost Management FIFO BUDGET FOR NEXT YEAR Physical Flow of Units: Next Period Department 3,000 15,000 18,000 5,000 13,000 WIP beginning Started Transferred in Total to account for Ending WIP Completed and transferred out Department 2,000 13,000 15,000 1,000 14,000 Summarize Total Costs to Account For (Next Year) Transferred-in Department 1: Beginning WIP Current period costs Total costs to account for Direct Materials not applicable not applicable not applicable Department 2: Beginning WIP Current period costs Total costs to account for Conversion Costs Total Cost $ 9,000 48,600 $57,600 $ 8,600 not applicable 55,631 not applicable $64,231 not applicable $ 2,340 14,545 $16,885 $11,340 63,145 $74,485 $ 3,360 59,075 $62,435 $ 11,960 114,706 $126,666 Summarize Physical and Equivalent Units (Next Year) Department 1: Physical Units Beginning WIP (60%) 3,000 Equivalent Units: Direct Materials Conversion Costs Department 2: Physical Units Equivalent Units: Transferred-In Conversion Costs 3,000 3,000 (40%) 2,000 2,000 800 Complete Beginning WIP (40%) Work This Period Start Start Total Work Total and Ending Performed Units to Complete WIP This Period Account for (50%) 10,000 5,000 15,000 18,000 1,200 (60%) 0 1,200 10,000 10,000 5,000 2,500 15,000 13,700 Total Work 18,000 15,500 12,000 (70%) 1,000 13,000 15,000 12,000 12,000 1,000 700 13,000 13,900 Total Work 15,000 14,700 FIFO Cost Per Equivalent Unit (Next Year) Department 1: Direct materials: _Current Period Direct materials cost _ Equivalent units for total work performed this period = $48,600 15,000 =$3.2400 Conversion costs: Current Period Conversion costs Equivalent units for total work performed this period = $14,545 13,700 = 1.0617 Total cost per equivalent unit: $4.3017 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-35 Department 2: Transferred-in costs: _Current Period Transferred-in cost _ Equivalent units for total work performed this period = $55,631 13,000 = $4.28 Conversion costs: Current Period Conversion costs Equivalent units for total work performed this period = $59,075 13,900 = 4.25 Total cost per equivalent unit: $8.53 FIFO Process Cost Report (Next Year) Beginning WIP Costs to complete beginning WIP: Transferred-in Direct materials Conversion costs Total costs added this period Department Computation Units Current year cost report 3,000 New units started, completed, and transferred out 10,000x$4.3017 Total units completed and transferred out Ending WIP: Transferred in Direct materials Conversion costs Total ending WIP cost Total Accounted For $11,340 n/a 1,274 0x$3.24 1,200x$1,0617 Total cost of beginning WIP transferred out Costs Computation Current year cost report Department Units 2,000 Costs $ 11,960 0x$4.28 n/a 5,100 1,200x$4.25 _ 1,274 _ 5,100 3,000 12,614 2,000 17,060 10,000 43,017 12,000 102,352 13,000 55,631 14,000 119,412 12,000x$8.53 5,000 1,000 _ n/a 16,200 2,654 18,854 18,000 $74,485 5,000x$3.24 2,500x$1.0617 1,000x$4.28 _ 4,279 n/a 2,975 7,254 15,000 $126,666 700x$4.25 B Weighted average process costing report and calculations for the current year and the budget for next year WEIGHTED AVERAGE CURRENT YEAR Because there are no beginning inventories in period one, the cost reports for FIFO and weighted-average are the same See the preceding FIFO report To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-36 Cost Management WEIGHTED AVERAGE BUDGET FOR NEXT YEAR Summarize Total Costs to Account For (Next Year—Weighted Average) Transferred-in Department 1: Beginning WIP Current period costs Total costs to account for Direct Materials not applicable not applicable not applicable Department 2: Beginning WIP Current period costs Total costs to account for Conversion Costs Total Cost $ 9,000 48,600 $57,600 $ 8,600 not applicable 55,762 not applicable $64,362 not applicable $ 2,340 14,545 $16,885 $11,340 63,145 $74,485 $ 3,360 59,075 $62,435 $ 11,960 114,837 $126,797 Summarize Physical and Equivalent Units (Next Year) Department 1: Physical Units Beginning WIP (60%) 3,000 Equivalent Units: Direct Materials Conversion Costs Department 2: Physical Units Equivalent Units: Transferred-In Conversion Costs 3,000 3,000 (40%) 2,000 2,000 800 Complete Beginning WIP (40%) 0 1,200 (60%) 0 1,200 Work This Period Start Start Total Work Total and Ending Performed Units to Complete WIP This Period Account for (50%) 10,000 5,000 15,000 18,000 10,000 10,000 5,000 2,500 15,000 13,700 Total Work 18,000 15,500 12,000 (70%) 1,000 13,000 15,000 12,000 12,000 1,000 700 13,000 13,900 Total Work 15,000 14,700 Weighted Average Cost Per Equivalent Unit (Next Year) Department 1: Direct materials: Beginning WIP + Current Period Direct materials cost Equivalent units for total work performed this period = $57,600 18,000 =$3.2000 Conversion costs: Beginning WIP + Current Period Conversion costs Equivalent units for total work performed this period = $16,885 15,500 = 1.0894 Total cost per equivalent unit: $4.2894 Department 2: Transferred-in costs: Beginning WIP + Current Period Transferred-in cost Equivalent units for total work performed this period = $64,362 15,000 =$4.2908 Conversion costs: = $62,435 14,700 = 4.2473 Beginning WIP + Current Period Conversion costs Equivalent units for total work performed this period Total cost per equivalent unit: $8.5381 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-37 Weighted Average Process Cost Report (Next Year) Department Computation Units Total units completed and transferred out Ending WIP: Transferred in Direct materials Conversion costs Total ending WIP cost 13,000x$4.2894 13,000 Costs Computation 55,762 14,000x$8.5381 1,000x$4.2908 _ n/a 16,000 2,723 18,723 18,000 $74,485 5,000 5,000x$3.20 2,500x$1.0894 Total Accounted For Department Units 14,000 Costs 119,533 1,000 _ 4,291 n/a 2,973 7,264 15,000 $126,797 700x$4.2473 C If she better understands the flow of resources, she can more accurately determine percentage completed This seems like a way to improve accuracy More accurately estimating percentage completed would mean that cost per unit would better reflect the use of resources In addition, the costs for each period would be more accurately identified with the units of that period If it takes a lot of time to develop a more accurate estimate and if ending work in process inventory is relatively immaterial, the cost could be greater than the benefit 6.37 Computer Components A Here are several possible answers to this question; students may think of others Actual costs can differ from standards because of changes in prices, as described in the problem Differences can also result from deviations from standards in the efficiency with which raw materials or labor hours are used For example, an equipment malfunction might slow production or spoil some units Employees can work faster or slower than expected The quality of materials can be better or worse than expected, causing deviations from the expected amount of spoilage or scrap A new labor contract could be negotiated, increasing direct labor costs Overhead costs can also be higher or lower than expected There could be an increase in electricity rates or insurance costs Equipment maintenance could be higher or lower than expected B Kevin might or might not make the same argument if the supplier’s price had decreased However, it appears that he might have been making his argument to avoid responsibility From the information presented, Kevin has at least some control over the purchase price He stated that he does not want to consider changing suppliers at this time, and a division manager often has control over the purchasing function for the division If he was making his argument primarily to avoid responsibility, then he would probably make a different argument if the price had decreased In that case, he would probably want to be rewarded for good performance To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-38 Cost Management C Changing vendors could have many benefits, such as reducing costs, enhancing quality, improving delivery timeliness, etc Changing vendors could also the opposite— increase costs, decrease quality, and result in delivery delays The relationship with the vendor may also be important It may not be in the company’s best interests to drop a long-term and beneficial relationship At the same time, it might be in the company’s interests to develop a relationship with a new supplier D The practice of giving managers bonuses based on comparisons of actual to standard costs can motivate managers to achieve or exceed standards In turn, achieving the standards can help the company meet profitability and other goals E As discussed more completely in Chapter 10, employees are most likely to be motivated by a standard that is achievable Vendor price increases or decreases should be reflected in the standard if they are not in the manager’s control This improves the fairness and achievability of the standard However, the standard should not be adjusted for vendor price changes that the manager can influence In this case, the adjustment would reduce the manager’s motivation to control costs F There is no one answer to this part Sample solutions and a discussion of typical student responses will be included in assessment guidance on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-39 BUILD YOUR PROFESSIONAL COMPETENCIES 6.38 Focus on Professional Competency: Reporting A Information used in process costing reports: Departments in the production process for which process accounting is performed Cost flow assumption (e.g., FIFO, weighted average) or standard costs Beginning WIP: units, percent complete, costs (direct materials, conversion costs, transferred-in costs) Costs incurred during the period (direct materials used, conversion costs incurred) Ending WIP: units, percent complete Spoilage: units, normal amount of spoilage Number of units started and transferred out Information required to perform calculations needed for a process costing report: Flow of costs in the production process o Point at which direct materials are added o Pattern in which conversion costs are incurred o Point(s) at which inspection occurs Assignment of costs in the accounting system for direct materials and conversion (this could include computation of depreciation, allocation of physical space costs, estimates for costs incurred but not yet paid, and so on) B Chapter introduced three methods for preparing a process costing report: FIFO, weighted average, and standard costs Each method has pros and cons and results in different information for users C Objectivity is needed to avoid bias in the measurement of costs and other factors such as percent completion Conciseness and clarity are needed to enhance communication Managers are more likely to use the information in a process cost report if the report contains only important information that is easy to understand D There is no one answer to this question The explanation of the cost report should be adapted to the characteristics and needs of the audience—in this case, non-accountant managers It should not include technical accounting terms unless there is reason to believe that the managers know the terms Also, most non-accountant managers are probably are more interested in the results of the report than in details about how it was prepared They should be given details only for items involving judgment that would significantly affect the results For example, it might be appropriate to point out that spoiled units were assumed to be removed at the end of production rather than at a midpoint—but only if the point of inspection for spoilage would be likely to affect the results sufficiently to affect the managers’ decisions E In the Premier Plastics illustrations, the accountant is not serving as a spokesperson to people outside the organization Instead, she is serving as a spokesperson within the To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-40 Cost Management organization; she was choosing a report to communicate the costs of producing products Specific things she did as a spokesperson included: Focusing on the managers’ needs—such as their need to monitor costs for new equipment Choosing a cost flow assumption to provide managers with the most current cost information Gaining consensus by discussing her choice with the managers who will use the information Remaining alert for deviations from expectations—such as the large spoilage identified for July, leading to a revision in the content of the process report to include normal and abnormal spoilage Alerting managers to potential competitor strengths and production problem areas—such as the discoloration quality problem in the plastics department F The methods used to create process cost reports might require monitoring and updating because of changes in production processes or accounting systems In addition, changes may be needed because the information that managers want changes For example, successful competition in recent years has increasingly focused on the ability to control costs Managers are likely to need more precise and timely information to effectively monitor costs Process cost reports can be used to monitor operating performance by allowing managers to observe trends in per-unit costs over time Actual costs can also be compared with standard costs to evaluate whether operations are in control—i.e., are meeting expectations or targeted levels of performance 6.39 Integrating Across the Curriculum: Production Management [Note: This problem assumes knowledge of Chapter (job costing) The problem does NOT assume knowledge of JIT or backflush accounting, but Part B.2 encourages students to think about how process costing might be less complex in the absence of significant work in process inventories.] A Work in process inventories should greatly decrease Currently, whole jobs are waiting to be processed at each department With continuous processing, these will disappear The only in-process inventory will be jobs in process within a cell, most of which will be completed the next day Because individual units are produced one by one, there will be very few individual units in process at any point in time Raw material inventory should almost disappear The company currently carries a parts inventory Under the new system, it would carry parts only for jobs in process To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 6: Process Costing 6-41 Materials handling costs may decrease depending on the trade-off in increased time of delivering parts more frequently to cells and elimination of transfers between departments Finished goods still need to be transported to shipping Machine set ups should all but disappear Since each cell will be dedicated to one product line, machines can be permanently set for the product Nonetheless, some adjustments will likely need to be made for different models, but the adjustments are probably minor There should be a substantial decrease in the number of defects Instead of testing units after an entire batch has been completed, the units will be tested continuously A faulty assembly or soldering operation should be caught (and corrective action taken) after only one or two units have been affected, not the entire order In addition, fewer setting changes will be made to the equipment in assembly and soldering, which should reduce the likelihood that defects are caused by erroneous settings The ratio of units produced to units ordered should decrease Under the current system the firm must estimate the number of units that will fail to pass inspection They must produce enough units so that units produced minus defective units still yield enough units to satisfy the customer's order To be highly confident that enough units will be produced to fill an order, an excess number of units is probably produced, on average Under the new system a cell keeps on producing for an order until enough good units are achieved Thus, only the minimum number of units needed will be produced The firm should experience a decrease in the workload for production scheduling Instead of scheduling jobs through several departments, jobs need only be assigned to a single cell Also, the need to expedite replacements for spoiled jobs should disappear as entire jobs should no longer be spoiled Machine utilization rates are likely to fall If there are no orders for a particular product for a period of time, the cells dedicated to that product would be idle In fact, this is the major tradeoff for adopting a job versus process orientation If a firm makes many different products (requiring different kinds of processing on a variety of machines) but none of them in any significant quantity, then it cannot afford to dedicate equipment to each product line However, as the breadth of the product line decreases or manufacturing processes become more similar, management should consider the benefits of switching to a process orientation This depends on the tradeoff between the various costs saved and the additional costs incurred to obtain separate equipment for each cell (if necessary) and the cost of idle equipment However, total costs will probably decrease Presumably, management will not make the change unless they study existing and expected future production patterns and expect the cost savings to be larger than the additional costs To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 6-42 Cost Management The change in system will probably make it more difficult to fill a customer’s rush order No parts inventories are maintained, and it will take approximately one week to receive new parts B With a change from a job orientation to a process orientation, there does not appear to be a need to know the cost for any particular order The company could use process costing to compute the average materials and conversion cost for each type of product For pricing or profitability analysis, the firm could add the cost of materials required for each model to the average conversion cost This manufacturing situation is similar to a fast-food restaurant where managers may wish to track the relative profitability of food versus drinks, but there is no need to capture the cost of hamburgers versus cheeseburgers, nor is there a need to know the profitability of a particular customer's order Under process costing, costs could be measured and monitored to ensure that costs of each process are in control This accounting system would cost less than the current job costing system because detailed data for each job would no longer be tracked First, there would be no need to keep track of raw material inventory The cost of raw material purchases could be added directly to production Second, the absence of significant work in process inventory reduces the need to calculate and track equivalent units Units started would be roughly equal to units completed, so the company could adopt an actual cost system for each product line and simply record all production costs directly in cost of goods sold This would also eliminate the need to choose between the FIFO and weighted average methods The average materials and conversion cost for each type of product could be periodically measured and monitored to ensure that costs are in control But it does not appear necessary to capture this information for units on a continuous basis If desired, the small amount of jobs in process at the end of an accounting period could be handled through end of period adjustments rather than through a system that continuously tracks work in process inventory ... productivity, standard costs are appropriate A standard cost is an estimate of cost under efficient operations and therefore acts as a benchmark or budget with which actual costs can be compared The standards... Beginning WIP (FIFO and Weighted Average) Direct materials Conversion costs Total beginning WIP costs Costs added this month Direct materials Conversion costs Total costs added Total costs to account... 77,000 $2,671,998 B A standard cost report would be the same as the FIFO cost report from a format standpoint However, the standard costs would be used instead of equivalent unit costs That is the