Solution manual accounting 25th edition warren chapter 20

Drawing Department Whole Units Equivalent Units Direct Inventory in process, September 1 Inventory in process, September 30 Equivalent Units Direct Inventory in process, September 1 Inve

CHAPTER 20 PROCESS COST SYSTEMS

DISCUSSION QUESTIONS

1 a An assembly-type industry using mass production methods, such as TV assembly, would

use the process cost system because the products are somewhat standard and lose their identities as individual items In such industries, it is neither practical nor necessary to identify output by jobs

b A job order cost system would be used by a building contractor to accumulate the costs

for each individual building because the costs can be identified with each job without great difficulty

c A job order cost system is best suited for an automobile repair shop because costs can

be reasonably identified with each job

d A process cost system would be best suited for a paper manufacturer because the

processes are continuous and the products are homogeneous

e A job order cost system is best suited for a custom jewelry manufacturer because most of the production consists of job orders, and costs can be reasonably identified with each job

2 Since all goods produced in a process cost system are identical units, it is not necessary to

classify production costs into job orders

3 In a process cost system, the direct labor and factory overhead applied are debited to the

work in process accounts of the individual production departments in which they occur The reason is that all products produced by the department are similar Thus, there is no need to charge these costs to individual jobs For the process manufacturer, the direct materials and the conversion costs are charged to the department and divided by the completed production

of the department to determine a cost per unit

4 The cost per equivalent unit is frequently determined separately for direct materials and

conversion costs because these two costs are frequently added at different rates in the

production process For example, materials may be incurred entirely at the beginning of the process, while conversion costs are typically incurred evenly throughout the process

5 The cost per equivalent unit is used to allocate direct materials and conversion costs between

completed and partially completed units

6 The transferred-in cost from Blending to Filling includes the materials costs, direct labor, and

applied factory overhead incurred to complete units in Blending

7 The most important purpose of the cost of production report is to assist in the control of

costs This is accomplished by holding each department head responsible for the costs

incurred in the department

8 Cost of production reports can provide detailed data about the process The reports can

provide information on the department by individual cost elements This can enable

management to investigate problems and opportunities

20-1

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DISCUSSION QUESTIONS (Continued)

9 Yield is a measure of the materials usage efficiency of a process manufacturer It is

determined by dividing the output volume of product by the input volume of product.For example, if 950 tons of aluminum were rolled from 1,000 tons of ingot, then the yield would be said to be 95% Five percent of the ingot was scrapped during the rolling process

10 Just-in-time processing emphasizes combining process functions into manufacturing cells,

involving employees in process improvement efforts, eliminating wasteful activities, and reducing the amount of work in process inventory required to fulfill production targets

CHAPTER 20 Process Cost Systems

PRACTICE EXERCISES

PE 20–1A

PE 20–1B

Computer chip manufacturing Process

Designer clothes manufacturing Job order

PE 20–3A

Percent Total Materials Equivalent Whole Added In Units for Units Period Materials Inventory in process, beginning of period……… 3,000 0% 0 Started and completed during the period……… 37,400 * 100% 37,400 Transferred out of Filling (completed)……… 40,400 37,400 Inventory in process, end of period……… 600 100% 600

* 40,400 – 3,000

PE 20–3B

Percent Total Materials Equivalent Whole Added In Units for Units Period Materials

Started and completed during the period……… 7,500 * 100% 7,500

Inventory in process, end of period……… 1,000 100% 1,000

* 7,900 – 400

PE 20–4A

Percent Total Conversion Equivalent Whole Completed Units for Units in Period Conversion Inventory in process, beginning of period……… 3,000 40% 1,200 Started and completed during the period……… 37,400 * 100% 37,400 Transferred out of Filling (completed)……… 40,400 38,600 Inventory in process, end of period……… 600 25% 150

* 40,400 – 3,000

PE 20–4B

Percent Total Conversion Equivalent Whole Completed Units for Units in Period Conversion Inventory in process, beginning of period……… 400 80% 320 Started and completed during the period……… 7,500 * 100% 7,500

Inventory in process, end of period……… 1,000 30% 300

* 7,900 – 400

PE 20–5A

Equivalent units of direct materials:

Equivalent units of conversion:

$13,300 38,000

$3,100 38,750

= $0.35 per ounce

= $0.08 per ounce

PE 20–5B

Equivalent units of direct materials:

Equivalent units of conversion:

$510,000 8,500

$81,200 8,120

= $60 per ton

= $10 per ton

CHAPTER 20 Process Cost Systems

PE 20–6A

Direct

Inventory in process, beginning of period……… 0 + 1,200 × $0.08 96

Started and completed during the period……… 37,400 × $0.35 + 37,400 × $0.08 16,082

Inventory in process, end of period……… 600 × $0.35 + 150 × $0.08 222

Completed and transferred-out production………… $17,378

Inventory in process, ending……… $222

PE 20–6B

Direct

Inventory in process, balance……… $ 25,000

Inventory in process, beginning of period……… 0 + 320 × $10 3,200

Started and completed during the period……… 7,500 × $60 + 7,500 × $10 525,000

Inventory in process, end of period……… 1,000 × $60 + 300 × $10 63,000

Completed and transferred-out production………… $553,200

Inventory in process, ending……… $63,000

PE 20–8A

Energy cost per pound, June:

Energy cost per pound, July:

$14,875 42,500

$14,615 39,500

= $0.35

= $0.37

The cost of energy has increased by 2 cents per pound between June and

July, indicating inefficiency in the use of energy.

PE 20–8B

Material cost per ton, September:

Material cost per ton, October:

$76,000 800

$77,350 850

= $95

= $91

The cost of materials has decreased by $4 per ton between September and October, indicating an improvement in the cost of materials.

CHAPTER 20 Process Cost Systems

Ex 20–2

Equivalent Units Direct

Materials Conversion Inventory in process, beginning

Inventory in process, ending

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$6,300 × 130% = $8,190

CHAPTER 20 Process Cost Systems

Ex 20–6

a Drawing Department

Whole Units

Equivalent Units Direct

Inventory in process, September 1

Inventory in process, September 30

Equivalent Units Direct

Inventory in process, September 1

Inventory in process, September 30

Note: Of the 85,000 units transferred in from Drawing, 82,800 units were started and

completed in Winding and 2,200 units are in Winding ending work in process.

20-12

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CHAPTER 20 Process Cost Systems

Ex 20–7

Units placed into production for July……… 162,000 Less units finished during July……… (157,400) Units in process, July 31……… 12,600 b.

Equivalent Units Direct

Materials Conversion Inventory in process, July 1

Transferred to finished goods in July 157,400 149,400 154,200 Inventory in process, July 31

4 $343,620 [($1.90 + $0.40) × 149,400 units]

Note to Instructors: The cost of the beginning work in process completed

during July, $18,496 (a 3), plus the cost of the units started and completed

during July, $343,620 (a 4), equals the cost of the units finished during July,

$362,116.

5 $26,964, determined as follows:

Direct materials ($1.90 × 12,600 units)……… $23,940 Conversion costs ($0.40 × 7,560 equivalent units)……… 3,024 Cost of ending work in process……… $26,964

Note: The cost of the ending work in process is also the balance of Work in

Process—Baking Department as of July 31.

b The conversion costs in July decreased by $0.03 per equivalent unit,

determined as follows:

Work in Process—Baking Department balance, July 1……… $16,576 Deduct direct materials cost incurred in June

($1.90 × 8,000 units, same cost per unit as July)……… 15,200

June conversion cost per equivalent unit

[$1,376 ÷ (8,000 units × 2/5)]……… $ 0.43 July conversion cost per equivalent unit……… $ 0.40 Less June conversion cost per equivalent unit……… 0.43 Decrease in conversion cost per equivalent unit……… $(0.03)

Ex 20–9

Equivalent units of production:

Conversion

(in pounds) (in boxes) (in boxes)

Started and completed in March………… 75,300 50,200 50,200 Transferred to finished goods

in March.

The product started and completed in March includes 50,200 boxes (50,800 boxes completed less the 600 in the carousel on March 1) These boxes represent 75,300 pounds of cereal [50,200 × (24 oz ÷ 16 oz.)], since there are 16 ounces to a pound The inventory in process on March 31 includes the remaining pounds of cereal in the hopper and boxes in the carousel that are properly included in the equivalent unit computation for March (since the costs were incurred in the department in March) No conversion costs have been applied to these boxes, since they

remain unfilled.

Note to Instructors: An actual cereal-filling line begins with the empty box

carousel The box carousel holds flattened boxes that are fed into a high-speed line that opens the box up and places it on a conveyor The conveyor brings the opened box under a filler head The cereal pours from the hopper through the filler head into the open box (actually into the inner sealer bag) The box then moves down the line to be boxed into a large shipping carton, which is then moved to the

warehouse.

Ex 20–10

a Direct labor……… $36,705 Factory overhead applied……… 18,600 Total conversion cost……… $55,305

b Equivalent units of production for conversion costs:

Beginning inventory……… 0 Started and completed……… 72,000 Ending inventory (3/5 × 2,900 units)……… 1,740 Total equivalent units for conversion costs……… 73,740 Conversion cost per equivalent unit:

$55,305

73,740

= $0.75 conversion cost per equivalent unit

c Equivalent units of production for direct materials costs:

Beginning inventory……… 0 Started and completed……… 72,000 Ending inventory (all units completed as to direct materials)……… 2,900 Total equivalent units for direct materials costs……… 74,900 Direct materials cost per equivalent unit:

$202,230

74,900

= $2.70 direct materials cost per equivalent unit

Ex 20–11

Whole Units

Equivalent Units Direct

Materials Conversion Inventory in process, beginning

Inventory in process, ending

Costs Direct

Materials Conversion Total costs for period in Assembly Department $336,000 $194,796 * Total equivalent units (from above) ÷ 16,000 ÷ 16,233

2 Cost of beginning work in process……… $ 29,470 Cost of units started and completed during period*……… 506,880 Cost of units transferred to finished goods during period……… $536,350

* ($21.00 + $12.00) × 15,360 units

3 $16,896; determined as follows:

Direct materials ($21.00 × 640 units)……… $ 13,440 Conversion costs ($12.00 × 288 equivalent units)……… 3,456 Cost of ending work in process inventory……… $ 16,896

Note: The cost of the ending work in process is also the ending balance of

Work in Process—Assembly Department.

4 $32.74 rounded ($29,470 ÷ 900 units)

b Yes The production costs per unit increased during the current period The

cost per unit of the units started and completed during the period is $33 ($21

+ $12) Since the cost per unit of the beginning work in process is

$32.74 [see part (4) above], the production costs during the current period

must have increased.

c The conversion cost in the current period increased by $0.73 per equivalent

unit, determined as follows:

Deduct direct materials cost incurred in prior period

($21.00 × 900 units, cost per unit unchanged)……… 18,900 Conversion costs incurred in prior period……… $ 3,550 Current-period conversion cost per equivalent unit……… $12.00 Less prior-period conversion cost per equivalent unit

[$3,550 ÷ (900 units × $0.35)]……… 11.27 Increase in conversion cost per equivalent unit during

2 In computing the equivalent units for conversion costs for units started and

completed in June, the June 1 inventory of 6,400 units, rather than the June 30 inventory of 5,200 units, was subtracted from 55,000 units started in the

department during June Therefore, the equivalent units started and completed should be 49,800 instead of 48,600.

3 The correct equivalent units for conversion costs should be 53,400, determined

Materials Conversion

Total costs for November in Forging Department $124,500 $39,146 * Total equivalent units (from above) ÷ 8,300 ÷ 8,510 Cost per equivalent unit $ 15.00 $ 4.60

* $18,950 + $20,196

c $145,040 [7,400 units × ($15.00 + $4.60)]

Whole Units

Equivalent Units Direct

Inventory in process, November 30

CHAPTER 20 Process Cost Systems

Ex 20–14

Note: The cost of the ending work in process is also the ending balance of the

Work in Process—Forging Department as of November 30.

d Direct materials cost per equivalent unit: $14.50 ($17,400 ÷ 1,200 units)

Conversion cost per equivalent unit: $4.80 ($3,456* ÷ 720 units**)

e Direct materials: Increase of $0.50 ($15.00 – $14.50)

Conversion: Decrease of $0.20 ($4.60 – $4.80)

a $23,064; determined as follows:

Beginning work in process balance……… $ 20,856 Conversion costs incurred during November

Cost of beginning work in process completed during November……… $ 23,064

b Cost of beginning work in process……… $ 23,064 Cost of units started and completed during November*……… 145,040 Cost of units transferred to finished goods during period……… $168,104

CHAPTER 20 Process Cost Systems

Ex 20–16

MORNING BREW COFFEE COMPANY Cost of Production Report—Roasting Department For the Month Ended August 31, 2014

UNITS

Whole Units

Equivalent Units Direct

Materials (1)

Conversion (1) Units charged to production:

Total units accounted for by the

Units to be assigned costs:

Inventory in process, August 1

Transferred to finished goods in August 14,600 13,900 14,460 Inventory in process, August 31

Ex 20–16 (Concluded)

COSTS

Costs Direct

Materials Conversion Total Costs per equivalent unit:

Total costs for August in Roasting

Costs assigned to production:

Total costs accounted for by the

Costs allocated to completed and

partially completed units:

To complete inventory in process,

Cost of completed August 1 work in

Total costs assigned by the Roasting

b Materials: From current period……… $ 4.60

From beginning inventory……… 4.70

From beginning inventory……… 1.35

The cost per equivalent unit of materials decreased by $0.10 per pound, and the cost per equivalent unit of conversion cost increased by $0.15 per pound Management may wish to investigate the causes for the increase in the conversion cost.

Ex 20–17

a.

KARACHI CARPET COMPANY Cost of Production Report—Cutting Department For the Month Ended January 31, 2014

UNITS

Whole Units

Equivalent Units Direct

Materials Conversion Units charged to production:

Received from Weaving Department 58,000

Total units accounted for by the

Units to be assigned cost:

Inventory in process, January 1

Transferred to finished goods in

Ex 20–17 (Concluded)

COSTS

Costs Direct

Costs per equivalent unit:

Total costs for January in Cutting

Costs assigned to production:

Total costs accounted for by the

Cost allocated to completed and

partially completed units:

To complete inventory in process,

process

Transferred to finished goods in

Total costs assigned by the Cutting

From beginning inventory……… 12.65 Increase………

Conversion: From current period………

From beginning inventory………

Increase………

$ 0.15

$ 5.10 5.00

$ 0.10 The cost per equivalent unit of materials increased by $0.15 per unit, and the cost per equivalent unit of conversion cost increased by $0.10 per unit Management may wish to investigate the causes for these changes in cost.

Cost of 2,530 transferred-out pounds:

Inventory in process, May 1……… $ 32,844 Cost to complete May 1 inventory:

Pounds started and completed in May [2,300 lbs × ($140 + $20)]……… 368,000 Transferred to Machining Department……… $402,684 Supporting equivalent unit and cost per equivalent unit calculations:

Transferred to Machining Department

Cost per equivalent unit of materials:

Cost per equivalent unit of conversion:

$350,000 2,500

$49,600 2,480

Work in Process—Machining Department* 402,684

c Materials: From current period $140

From beginning inventory 132 Increase $ 8 Conversion: From current period $ 20

From beginning inventory 18 Increase $ 2 The cost per equivalent unit of materials increased by $8 per pound, and the cost per equivalent unit of conversion cost increased by $2 per pound Management may wish to investigate the causes for these increases in cost.

Cost of 103,900 transferred-out units:

Cost to complete March 1 inventory:

Pounds started and completed in March

Supporting equivalent unit and cost per equivalent unit calculations:

Transferred to Converting Department

Cost per equivalent unit of materials:

Cost per equivalent unit of conversion:

b $14,319; determined as follows:

$330,750 105,000

$95,355 105,950

Work in Process—Converting Department* 420,925

Ex 20–20

Memo

To: Production Manager

The cost of production report is used to identify the cost per case for each of the four flavors as shown below.

As can be seen, the cost per case of Root Beer is significantly above the cost

per case of the other three flavors A more detailed analysis is necessary to

understand the causes of this difference The individual cost elements that

determine the total cost can be divided by the number of cases This analysis

is provided below.

Cost per Case by Cost Element

The table above indicates that the concentrate per case is actually less for Orange and Root Beer than for Cola and Lemon-Lime This is because the concentrate

supplier charges a higher price for the more popular flavors The costs per case for water, sugar, and bottles are the same for each flavor However, the costs per case for changeover are much greater for Orange and Root Beer than for the other two flavors In addition, the conversion costs per unit for Orange and Root Beer are

$0.30 higher than for Cola and Lemon-Lime These last two cost elements are

sufficient to cause the cost per case of Orange and Root Beer to be greater than Cola and Lemon-Lime.

Although further analysis is necessary, it appears that Orange and Root Beer are either bottled in short production runs, meaning more frequent changeovers, or

that each Orange and Root Beer changeover is very difficult and expensive The conversion cost per case is larger because the bottling line rate appears slower

for Orange and Root Beer, compared to Cola and Lemon-Lime It’s possible that

shorter run sizes are related to the slower line rate because it takes some run time

to work the line rate up to a fast speed after a changeover Root Beer costs more per case than Orange because it may have the shortest run length.

Ex 20–21

The solution to this exercise is to determine if the cost per pound trends in paper

stock, conversion, and coating costs are remaining stable over time The

following table can be developed from the data:

a.

The cost per pound information is determined by dividing the costs by the

pounds transferred out The yield is determined by dividing the pounds

transferred out by the pounds input.

b Operator 1 believes that energy consumption is becoming less efficient The

energy cost is part of the conversion cost The conversion cost per output

pound has remained constant for the six months If the energy efficiency were declining, it would take more energy per pound of output over time Thus, we

would expect to see the conversion rate per pound increasing if Operator 1

six-month period Thus, Operator 2’s hypothesis is not validated The stable

cost of the paper stock per output pound also suggests that the yields are

remaining stable.

Operator 3 is concerned about coating costs The coating cost per output

pound is increasing over time Thus, we can conclude that the coating

efficiency is declining over time Apparently, twice the coating material was

being spread per pound of output in June than in January The coating

operation may need to be repaired or recalibrated Too much coating is being spread on the paper stock.

Ex 20–22

The Hawkeye Machining managers are displaying typical fears to a just-in-time processing system Just-in-time removes the safety provided by materials, in- process, and finished goods inventory balances Indeed, these types of comments reflect conventional manufacturing philosophy, which views inventory as a

necessary buffer against surprises and other unwelcome events The just-in-time philosophy focuses on removing the causes that require a need for inventory.

In the case of materials inventories, a just-in-time philosophy requires all suppliers

to provide high-quality materials on a daily basis in just the right quantities needed for a day’s production If the supplier has unreliable production schedules or quality, then the sources of unreliability would need to be fixed before moving to just-in-time delivery Only when suppliers are reliable can Hawkeye Machining move

to a just-in-time strategy without exposing the company to significant risk.

The in-process inventories can be reduced significantly if the underlying

manufacturing processes are made reliable The director of manufacturing is correct in his observation, but his solution is wrong The solution is not to

increase inventory but to improve the reliability of the machines so that they do not experience emergency breakdowns Thus, the manufacturing operation must

be improved to produce the right product, in the right quantities, at the right

quality, and at the right time Only with this level of reliability can a plant

responsibly remove in-process inventories from the system.

The finished goods inventory can also be reduced if the manufacturing system can be made responsive to customer demands A company will no longer have to stock warehouses with product based on guesses at what the customer will want many weeks ahead of demand Rather, goods are produced at the time the

customer orders them This is what Dell Inc does It builds a computer to order, rather than stocking the computer and selling it from inventory.

In other words, inventory covers a “multitude of sins.” When the “sins” are

removed, the inventory can be removed.

Appendix Ex 20–23

a and b.

a Whole Units

b Equivalent Units

of Production Units to be accounted for:

Units to be assigned costs:

Inventory in process, ending

Appendix Ex 20–24

a Drawing Department

Whole Units

Equivalent Units

of Production Units to be accounted for:

Units to be assigned costs:

Transferred to Winding Department in July 11,400 11,400 Inventory in process, July 31

Equivalent Units

of Production Units to be accounted for:

Units to be assigned costs:

Inventory in process, July 31

Appendix Ex 20–25

Whole Units

Equivalent Units of Production Units to be accounted for:

Units to be assigned costs:

Inventory in process, May 31

* 30% × 3,100 units

Units placed into production for May……… 23,600 Less units finished during May……… (24,700) Units in process, May 31……… 3,100 b.

Appendix Ex 20–26

a and b.

Whole Units

Equivalent Units of Production

Units to be accounted for:

Beginning work in process 900

Units started during the period 8,400

Units to be assigned costs:

Transferred to finished goods 8,100 8,100 Inventory in process, ending 1,200 720 *

* 60% × 1,200 units

c Cost per Equivalent Unit =

Total Production Costs Total Equivalent Units

Cost per Equivalent Unit =

* $2,466 + $34,500 + $16,200 + $8,574

$61,740*

8,820 units

= $7.00

d Cost of units transferred to Finished Goods: $56,700 (8,100 units × $7.00)

e Cost of units in ending Work in Process: $5,040 (1,200 units × 60% × $7.00)

Appendix Ex 20–27

a.

* 70% × 600 units

Cost per Equivalent Unit = Total Production Costs Total Equivalent Units

Cost per Equivalent Unit =

** $5,000 + $49,200 + $25,200 + $25,120

$104,520**

4,020 units

= $26.00

b Cost of units transferred to Finished Goods: $93,600 (3,600 units × $26.00)

c Cost of units in ending Work in Process: $10,920 (600 units × 70% × $26.00)

Whole Units

Equivalent Units of Production

Units to be accounted for:

Beginning work in process 500

Units started during the period 3,700

Units to be assigned costs:

Transferred to finished goods in June 3,600 3,600 Inventory in process, June 30

Equivalent Units

of Production Units to account for during production:

Total units accounted for by the

Units to be assigned cost:

Inventory in process, May 31

* 80% × 800 units

Costs per equivalent unit:

Costs assigned to production:

Total costs accounted for by the Roasting Department $42,804 Costs allocated to completed and partially completed units:

Transferred to finished goods in May