Test bank managerial accounting by kieso weygandt 5e ch003

CHAPTER Process Costing ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems Understand who uses process cost systems 1, 2 Explain the similarities and differences between job order cost and process cost systems 2, 3, 4, Explain the flow of costs in a process cost system 3A 3B Make the journal entries to assign manufacturing costs in a process cost system 6, 1, 2, 2, 3A 3B Compute equivalent units 10, 11, 12, 13 5, 10 3, 5, 6, 7, 8, 1A, 2A, 4A, 9, 10, 11, 13, 5A, 6A 14, 15, 16, 1B, 2B, 4B, 5B, 6B Explain the four steps necessary to prepare a production cost report 8, 9, 14, 15, 18 4, 6, 7, 8, 3, 5, 6, 7, 8, 1A, 2A, 4A, 9, 10, 11, 13, 5A 14, 15, 16, 17, 18, 19 1B, 2B, 4B, 5B Prepare a production cost report 16, 17, 19, 20 7, 12, 13 1A, 2A, 4A, 5A, 6A 1B, 2B, 4B, 5B, 6B 16, 17, 18, 19, 20 7A 7B *8 Compute equivalent units using the FIFO method 21, 22 11, 12, 13 *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix*to the chapter 3-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Complete four steps necessary to prepare a production cost report Simple 30–40 2A Complete four steps necessary to prepare a production cost report Simple 30–40 3A Journalize transactions Moderate 20–30 4A Assign costs and prepare production cost report Moderate 20–30 5A Determine equivalent units and unit costs and assign costs Moderate 20–30 6A Compute equivalent units and complete production cost report Moderate 15–25 Determine equivalent units and unit costs and assign costs for processes; prepare production cost report Moderate 30–40 *7A* 1B Complete four steps necessary to prepare a production cost report Simple 30–40 2B Complete four steps necessary to prepare a production cost report Simple 30–40 3B Journalize transactions Moderate 20–30 4B Assign costs and prepare production cost report Moderate 20–30 5B Determine equivalent units and unit costs and assign costs Moderate 20–30 6B Compute equivalent units and complete production cost report Moderate 15–25 *7B Determine equivalent units and unit costs and assign costs for processes; prepare production cost report Moderate 30–40 3-2 3-3 Q3-16 Q3-17 Q3-19 *7 Prepare a production cost report Broadening Your Perspective *8 Compute equivalent units using the FIFO method Q3-8 Q3-10 Q3-11 Q3-6 Q3-6 Real-World Focus Exploring the Web Q3-16 Q3-20 Q3-9 Q3-4 Q3-5 E3-1 E3-1 Knowledge Comprehension Q3-1 Q3-2 Q3-2 Q3-3 *6 Explain the four steps necessary to prepare a production cost report *1 Understand who uses process cost systems *2 Explain the similarities and differences between job order cost and process cost systems *3 Explain the flow of costs in a process cost system *4 Make the journal entries to assign manufacturing costs in a process cost system *5 Compute equivalent units Study Objective E3-3 P3-3B P3-3A BE3-3 Q3-7 E3-2 BE3-1 E3-4 BE3-2 E3-10 Q3-12 E3-11 Q3-13 E3-13 BE3-5 E3-14 BE3-10 E3-15 E3-3 E3-16 E3-5 E3-17 E3-6 E3-18 E3-7 E3-19 E3-8 P3-1A E3-9 E3-7 Q3-14 E3-8 Q3-15 E3-9 Q3-18 E3-10 BE3-4 E3-11 BE3-6 E3-13 BE3-7 E3-14 BE3-8 E3-15 BE3-9 E3-16 E3-3 E3-17 E3-5 E3-18 E3-6 P3-4A E3-7 P3-5A E3-12 P3-6A E3-13 P3-1B P3-1A P3-2B P3-2A BE3-13 Q3-21 E3-16 Q3-22 E3-17 BE3-11 E3-18 BE3-12 All About You Application E3-19 E3-20 P3-7A P3-7B P3-4B P3-5B P3-6B E3-19 P3-1A P3-2A P3-4A P3-5A P3-1B P3-2B P3-4B P3-5B P3-2A P3-4A P3-5A P3-6A P3-1B P3-2B P3-4B P3-5B P3-6B P3-3A P3-3B Synthesis Managerial Analysis Decision Making Across the Decision Making Organization Across the Real-World Focus Organization Communication P3-1A P3-2A P3-1B P3-2B P3-1A P3-2A P3-1B P3-2B P3-3A P3-3B P3-3A P3-3B Analysis Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems Ethics Case Evaluation BLOOM’S TAXONOMY TABLE STUDY OBJECTIVES UNDERSTAND WHO USES PROCESS COST SYSTEMS EXPLAIN THE SIMILARITIES AND DIFFERENCES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS EXPLAIN THE FLOW OF COSTS IN A PROCESS COST SYSTEM MAKE THE JOURNAL ENTRIES TO ASSIGN MANUFACTURING COSTS IN A PROCESS COST SYSTEM COMPUTE EQUIVALENT UNITS EXPLAIN THE FOUR STEPS NECESSARY TO PREPARE A PRODUCTION COST REPORT PREPARE A PRODUCTION COST REPORT *8 COMPUTE EQUIVALENT UNITS USING THE FIFO METHOD 3-4 CHAPTER REVIEW Process Manufacturing and Accounting (S.O 1) Process cost systems are used to apply costs to similar products that are mass produced in a continuous fashion, such as the production of ice cream, steel or soft drinks In comparison, costs in a job order cost system are assigned to a specific job, such as the construction of a customized home, the making of a motion picture, or the manufacturing of a specialized machine (S.O 2) Job order cost and process cost systems are similar in that (a) both use the same three manufacturing cost elements of direct materials, direct labor, and manufacturing overhead; (b) both accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor by debiting Factory Labor, and manufacturing overhead costs by debiting Manufacturing Overhead; and (c) both flow costs to the same accounts of Work in Process, Finished Goods Inventory, and Cost of Goods Sold The major differences between a job order cost system and a process cost system are as follows: Job Order Cost System One for each job Process Cost System One for each process Documents used Job cost sheets Production cost reports Determination of total manufacturing costs Each job Each period Unit-cost computations Cost of each job ÷ Units produced for the job Total manufacturing costs ÷ Equivalent Units produced during the period Feature Work in process accounts Process Cost Flow (S.O 3) In the Tyler Company example in the text book, manufacturing consists of two processes: machining and assembly In the Machining Department, the raw materials are shaped, honed, and drilled In the Assembly Department, the parts are assembled and packaged Materials, labor, and manufacturing overhead can be added in both the Machining and Assembly Departments When the Machining Department finishes its work, the partially completed units are transferred to the Assembly Department In the Assembly Department, the goods are finished and are then transferred to the finished goods inventory Upon sale, the goods are removed from the finished goods inventory 3-5 Assignment of Manufacturing Costs (S.O 4) All raw materials issued for production are a materials cost to the producing department Materials requisition slips may be used in a process cost system, but fewer requisitions are generally required than in a job order cost system, because the materials are used for processes rather than for specific jobs The entry to record the materials used is: Work in Process—Machining Work in Process—Assembly Raw Materials Inventory XXXX XXXX XXXX The basis for allocating the overhead costs to the production departments in an objective and equitable manner is the activity that “drives” or causes the costs A primary driver of overhead costs in continuous manufacturing operations is machine time used, not direct labor Thus, machine hours are widely used in allocating manufacturing overhead costs The entry to allocate overhead is: Work in Process—Machining Work in Process—Assembly Manufacturing Overhead XXXX Time tickets may be used in determining the cost of labor assignable to the production departments The labor cost chargeable to a process can be obtained from the payroll register or departmental payroll summaries All labor costs incurred within a producing department are a cost of processing the raw materials The entry to assign the labor costs is: Work in Process—Machining Work in Process—Assembly Factory Labor XXXX XXXX XXXX XXXX XXXX At the end of the period, the following transfer entries are needed: Work in Process—Assembly Work in Process—Machining XXXX Finished Goods Inventory Work in Process—Assembly XXXX Cost of Goods Sold Finished Goods Inventory XXXX XXXX XXXX XXXX Equivalent Units 10 (S.O 5) A major step in process cost accounting is the calculation of equivalent units Equivalent units of production measure the work done during the period, expressed in fully completed units This concept is used to determine the cost per unit of completed product 3-6 11 The formula to compute equivalent units of production under the weighted average method is as follows: Units Completed and + Transferred Out Equivalent Units of Ending Work in Process = Equivalent Units of Production 12 The method of computing equivalent units here is referred to as the weighted-average method It considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process A lesser used method, called the FIFO method, is discussed in the appendix to this chapter 13 To illustrate the computation of equivalent units using the weighted-average method, assume that materials are entered at the beginning of the process and the following information is provided for the Processing Department of the Silva Company: Work in process, Beg Started into production Total units Units transferred out Work in process, End Total units 14 Percentage Complete Materials Conversion Costs 100% 80% Physical Units 2,500 4,500 7,000 6,000 1,000 7,000 100% 60% The two equivalent unit computations are as follows: Equivalent Units Conversion Materials Costs 6,000 6,000 Units transferred out Work in process, End 1,000 X 100% 1,000 X 60% Total equivalent units 1,000 7,000 600 6,600 Production Cost Report 15 (S.O 6) A production cost report is the key document used by management to understand the activities in a department because it shows the production quantity and cost data related to that department In order to be ready to complete a production cost report, the company must perform four steps: a Compute the physical unit flow b Compute the equivalent units of production c Compute unit production costs d Prepare a cost reconciliation schedule 3-7 16 The computation of physical units involves: a adding the units started (or transferred) into production during the period to the units in process at the beginning of the period to determine the total units to be accounted for; and b accounting for these units by determining the output for the periodwhich consists of units transferred out during the period and units in process at the end of the period In the example above, the total units to be accounted for and the units accounted for are both equal to 7,000 units for the Silva Company 17 In computing unit costs, production costs are expressed in terms of equivalent units of production When equivalent units are different for materials and conversion costs, the formulas for computing unit costs are as follows: Total Materials Cost 18 ÷ Equivalent Units of Materials = Unit Materials Cost Total Conversion Costs ÷ Equivalent Units of Conversion Costs = Unit Conversion Cost Unit Materials Cost ÷ Unit Conversion Cost = Total Manufacturing Cost per Unit The cost reconciliation schedule shows that the total costs accounted for equal the total costs to be accounted for as follows: Costs to be accounted for Transferred out Work in process, End Materials Conversion costs Total costs 19 $XXXX $XXXX XXXX XXXX $XXXX (S.O 7) Assume the Processing Department of the Silva Company has the following additional cost information: Work in process, Beg Direct materials: 100% complete Conversion costs: 80% complete Cost of work in process, Beg $ 24,000 19,620 $ 43,620 Costs incurred during production Direct materials Conversion costs Costs incurred $200,000 150,000 $350,000 3-8 20 The Silva Company’s Processing Department Production Cost Report at the end of the period is as follows: Processing Department Production Cost Report For the Period Ended Physical Units QUANTITIES Units to be accounted for Work in process, Beg Started into production Total units Units accounted for Transferred out Work in process, End Total units Equivalent Units Conversion Materials Costs 2,500 4,500 7,000 6,000 1,000 7,000 6,000 1,000 7,000 Materials COSTS Unit costs Costs during the period Equivalent units Unit costs [(a) ÷ (b)] (a) $224,000 (b) 7,000 $32.00 6,000 600 (1,000 X 60%) 6,600 Conversion Costs $169,620 6,600 $25.70 Costs to be accounted for Work in process, Beg Started into production Total costs Total $393,620 $57.70 $ 43,620 350,000 $393,620 Cost Reconciliation Schedule Costs accounted for Transferred out (6,000 X $57.70) Work in process, End Materials (1,000 X $32.00) Conversion costs (600 X $25.70) Total costs $346,200 $32,000 15,420 47,420 $393,620 Operations Costing 21 Companies often use a combination of a process cost and a job order cost system, called operations costing Operations costing is similar to process costing in that standardized methods are used to manufacture the product At the same time, the product may have some customized, individual features that require the use of a job order cost system 3-9 Equivalent Units Using the FIFO Method *22 (S.O 8) To illustrate the computation of equivalent units using the FIFO method, assume that materials are entered at the beginning of the process and the following information is provided for the Processing Department of the Silva Company: Work in process, Beg Started into production Total units Units transferred out Work in process, End Total units Physical Units 2,500 4,500 7,000 6,000 1,000 7,000 Percentage Complete Materials Conversion Costs 100% 80% 100% 60% *23 The equivalent units for material costs of the Processing Department under the FIFO method are computed as follows: Production Data Work in process, Beg Started and finished Work in process, End Total Processing Department Work Added Physical Units This Period 2,500 3,500 100% 1,000 100% 7,000 Equivalent Units 3,500 1,000 4,500 *24 The equivalent units for conversion costs of the Processing Department under the FIFO method are computed as follows: Production Data Work in process, Beg Started and completed Work in process, End Total Processing Department Work Added Physical Units This Period 2,500 20% 3,500 100% 1,000 60% 7,000 Equivalent Units 500 3,500 600 4,600 Production Cost Report Using the FIFO Method *25 Assume the Processing Department of the Silva Company has the following additional cost information: Work in process, Beg Direct materials: 100% complete Conversion costs: 80% complete Cost of work in process, Beg $ 24,000 19,620 $ 43,620 Costs incurred during the production Direct materials Conversion costs Costs incurred $200,000 150,000 $350,000 3-10 c Total manufacturing cost per unit is computed as the sum of unit materials cost + unit conversion cost The fourth step in completing a production cost report requires preparing a cost reconciliation schedule a The company then prepares a cost reconciliation schedule to assign total costs to (1) units transferred out to the next department and (2) ending work in process b The total manufacturing cost per unit is used in costing the units completed and transferred out c The cost reconciliation schedule shows that the total costs accounted for equal the total costs to be accounted for TEACHING TIP ILLUSTRATION 3-7 provides an example of the preparation of a cost reconciliation schedule Point out that the cost reconciliation schedule shows that the total costs accounted for equal the total costs to be accounted for G Preparing the Production Cost Report The production cost report contains both quantity and cost data for a production department a This report is an internal document for management that shows production quantity and cost data for a production department 3-18 TEACHING TIP ILLUSTRATION 3-8 provides an example of a production cost report The calculations made in the examples used in Illustrations 3-4 through 3-7 are used to complete the production cost report b There are four steps in preparing a production cost report: (1) Prepare a physical unit schedule (2) Compute equivalent units (3) Compute unit costs (4) Prepare a cost reconciliation schedule c Production cost reports provide a basis for evaluating the productivity of a department Managers can use the cost data to assess whether unit costs and total costs are reasonable *H Equivalent Units Under FIFO Under the FIFO method, companies compute equivalent units on a firstin, first-out basis Companies assume that the beginning work in process is completed before new work is started under the FIFO method Equivalent units are the sum of the work performed to: a Finish the units of beginning work in process inventory b Complete the units started into production during the period (units started and completed) c Start, but only partially complete, the units in ending work in process inventory 3-19 The units started and completed during the current period are the units transferred out minus the units in beginning work in process Companies often expand the physical units schedule to ensure reporting of the beginning work in process and the units started and completed As with the weighted average method, once companies determine the physical flow of units, they need to compute the equivalent units of production a Since companies add materials at the beginning of the process, no additional materials costs are required to complete the beginning work in process b Equivalent units for materials are the sum of: (1) Units started and finished (2) Equivalent units of ending work in process c Equivalent units for conversion costs are the sum of: (1) Equivalent units of beginning work in process (2) Units started and finished (3) Equivalent units of ending work in process The unit production costs are based entirely on the production costs incurred during the month The costs in the beginning work in process are ignored because they were incurred on work done in the preceding month In preparing a cost reconciliation schedule under the FIFO method: a The cost of the beginning work in process is always assigned to the goods transferred to the next department (or finished goods, if processing is complete) b The ending work in process also will be assigned only the production costs incurred in the current period 3-20 The weighted-average method of computing equivalent units is simple to understand and apply It will be very similar to the FIFO method when prices not fluctuate significantly from period to period 10 Conceptually, the FIFO method is superior to the weighted-average method because it measures current performance is using only costs incurred in the current period It provides current cost information, which the company can use to establish more accurate pricing strategies for goods manufactured and sold in the current period 3-21 20 MINUTE QUIZ Circle the correct answer True/False Costs are assigned to each specific job in a process cost system True False In a process cost system, total costs are determined at the end of a period of time, such as a month True False In a process cost system, the unit cost is total manufacturing costs divided by the units produced during the period True False The accumulation of the costs of materials, labor, and manufacturing overhead is the same in a process cost system as in a job order cost system True False More materials requisitions are generally required in a process cost system than in a job order cost system True False Equivalent units of production equals units completed and transferred out + units in beginning work in process True False Two equivalent unit computations are necessary—one for materials and the other for conversion costs True False The first step in preparing a production cost report is to compute the equivalent units of production True False The cost reconciliation schedule shows that the total costs accounted for equal the total costs to be accounted for True False *10 Units in work in process at the beginning of the period are included in units “started and completed” under the FIFO method True False 3-22 Multiple Choice Which of the following is not a step in preparing a production cost report? a Prepare a cost reconciliation schedule b Compute equivalent units of production c Compute the physical unit flow d Assign costs to particular jobs A department has no beginning work in process, has started 80,000 units and completed 50,000 units Its ending work in process is 30,000 units, 60% complete as to conversion costs and fully complete as to materials Its equivalent units for conversion costs are a 50,000 b 80,000 c 68,000 d 44,000 In process costing, the computation of unit production costs requires a the accumulation of material and conversion costs in work in process for each department or process b the computation of equivalent units for material and conversion costs c both a and b d neither a nor b Which of the following is not included in a production cost report? a Costs accounted for b Entries to assign cost c Units accounted for d Units to be accounted for Unit costs for materials and conversion costs amount to $4 and $5 respectively The ending work in process costs for 8,000 units (100% complete as to material and 70% complete as to conversion costs) amount to a $60,000 b $72,000 c $44,000 d $40,000 3-23 ANSWERS TO QUIZ True/False False True True True False *10 False True False True False Multiple Choice d c c b a 3-24 ILLUSTRATION 3-1 DIFFERENCES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEM Features Job Order Cost System Process Cost System Work in process accounts One for each job One for each process Documents used Job cost sheets Production cost reports Determination of total manufacturing costs Each job Each period Cost of each job ÷ Units produced for the job Total manufacturing costs ÷ Units produced during the period Unit-cost comparison 3-25 Raw Materials Assigned Factory Labor to Manufacturing Overhead Manufacturing Costs 3-26 Cost of completed work Work In Process Assembly Department B Costs transferred out to Work In Process Machining Department A Cost of Goods Sold Cost of goods sold Finished Goods Inventory ILLUSTRATION 3-2 FLOW OF COSTS IN PROCESS COST SYSTEM ILLUSTRATION 3-3 PRODUCTION COST REPORT (STEPS) Step Prepare a cost reconciliation schedule Step Compute unit production costs Step Compute the equivalent units of production Step Compute the physical unit flow COMPLETE THE STEPS FOR EACH DEPARTMENT 3-27 ILLUSTRATION 3-4 STEP 1: COMPUTE THE PHYSICAL UNIT FLOW Analyze Physical Units Without Regard to Percentages of Completion Units to be accounted for Units in beginning work in process Add: Units started into production Total units Units accounted for Units completed and transferred out Add: Units in ending work in process Total units 3-28 2,000 8,000 10,000 9,000 1,000 10,000 ILLUSTRATION 3-5 STEP 2: COMPUTE EQUIVALENT UNITS OF PRODUCTION Equivalent Units Calculation Given the Physical Units and Percentage(s) of Completion Beginning work in process Units started into production Total units to be accounted for Units transferred out Ending work in process Total units accounted for (75%) (80%) 2,000 8,000 10,000 9,000 1,000 10,000 COMPUTATION OF EQUIVALENT UNITS Units transferred out Ending work in process 1,000 × 100% 1,000 × 80% Total equivalent units Materials* 9,000 Conversion Costs** 9,000 1,000 800 10,000 9,800 * Materials are added at the beginning of the process ** Conversion costs are incurred uniformly throughout the process 3-29 ILLUSTRATION 3-6 STEP 3: COMPUTE UNIT PRODUCTION COST COST INFORMATION Beginning work in process Costs added to production during period Total Materials $16,000 Conversion Costs $9,000 64,000 40,000 $80,000 $49,000 COMPUTATION OF UNIT COSTS TOTAL MATERIALS COST ÷ EQUIVALENT UNITS OF MATERIALS = UNIT MATERIALS COST $80,000 10,000 $8 TOTAL CONVERSION COSTS UNIT CONVERSION COST $49,000 EQUIVALENT UNITS OF CONVERSION COSTS 9,800 UNIT MATERIALS COST UNIT CONVERSION COST $8 ÷ + $5 3-30 = $5 TOTAL = MANUFACTURING COST PER UNIT $13 ILLUSTRATION 3-7 STEP 4: PREPARE A COST RECONCILIATION SCHEDULE Cost Reconciliation Schedule Costs Accounted For Transferred out Ending work in process Materials Conversion costs Equivalent Unit Units Cost 9,000 × $13 1,000 × $8 800 × $5 Total Costs Assigned $117,000 $8,000 4,000 12,000 $129,000 COST INFORMATION Costs to be accounted for Beginning work in process ($16,000 + $9,000) $ 25,000 Started into production ($64,000 + $40,000) 104,000 $129,000 3-31 ILLUSTRATION 3-8 PREPARING THE PRODUCTION COST REPORT Production Cost Report Equivalent Units QUANTITIES Units to be accounted for Work in process, beginning Started into production Total units Units accounted for Transferred out Work in process, ending Total units Physical Units Materials (Step 1) Conversion Costs (Step 2) 2,000 8,000 10,000 9,000 1,000 10,000 9,000 1,000 10,000 9,000 800 (1,000 × 80%) 9,800 Conversion Materials Costs COSTS Unit costs (Step 3) Costs in current period (a) $80,000 Equivalent units (b) 10,000 Unit costs (a) (b) $8 Costs to be accounted for Work in process, beginning ($16,000 + $9,000) Started into production ($64,000 + $40,000) Total costs Cost Reconciliation Schedule (Step 4) Costs accounted for Transferred out (9,000 × $13) Work in process, ending Materials (1,000 × $8) Conversion costs (800 × $5) Total costs 3-32 $49,000 9,800 $5 Total $129,000 $13 $ 25,000 104,000 $129,000 $117,000 $ 8,000 4,000 12,000 $129,000 ... (b) both accumulate costs of raw materials by debiting Raw Materials Inventory, factory labor by debiting Factory Labor, and manufacturing overhead costs by debiting Manufacturing Overhead; and... the beginning of the period to determine the total units to be accounted for; and b accounting for these units by determining the output for the periodwhich consists of units transferred out during... the unit cost is the total cost per job ÷ by the units produced In a process cost system, the unit cost is total manufacturing costs for the period ÷ by the units produced during the period TEACHING