Chapter 4

Systems Design: Process Costing

Solutions to Questions
4-1 A process costing system should be used in situations where a homogeneous product is produced on a continuous basis. 4-2 1. Job-order costing and process costing have the same basic purposesto assign mate-rials, labour, and overhead cost to products and to provide a mechanism for computing unit product costs. 2. Both systems use the same basic manufacturing accounts. 3. Costs flow through the accounts in basically the same way in both systems. 4-3 Cost accumulation is simpler under process costing because costs only need to be assigned to departmentsnot separate jobs. A company usually has a small number of processing departments, whereas a job-order costing system often must keep track of the costs of hundreds or even thousands of jobs. 4-4 In a process costing system, a Work in Process account is maintained for each separate processing department. 4-5 The journal entry would be: Work in Process, Firing........ XXXX Work in Process, Mixing ... XXXX 4-6 The costs that might be added in the Firing Department include: (1) costs transferred in from the Mixing Department; (2) materials costs added in the Firing Department; (3) labour costs added in the Firing Department; and (4) overhead costs added in the Firing Department. 4-7 Under the weighted-average method, equivalent units of production consist of units transferred to the next department (or to finished goods) during the period plus the equivalent units in the departments ending work in process inventory. 4-8 The company will want to distinguish between the costs of the metals used to make the medallions, but the medals are otherwise iden-tical and go through the same production processes. Thus, operation costing is ideally suited for the companys needs. 4-9 Under the JIT concept, raw materials and work in process inventories are either eliminated or reduced to nominal levels. Since the difference between the FIFO and weightedaverage methods centres on how costs are handled in work in process inventories, the elimination of these inventories through JIT automatically eli-minates the distinction between these two costing methods. With no work in process inventories both methods will compute unit costs on a basis of costs incurred during the current period. 4-10 (Appendix 4A) Under the weightedaverage method, each unit transferred out of the department is counted as one equivalent unitregardless of in what period the work was done to complete the units. Under the FIFO method, only the work done in the current period is counted. Units transferred out are divided into two parts. One part consists of the units in the beginning inventory. Only the work needed to complete these units is shown as part of the equivalent units for the current period. The other part of the units transferred out consists of the units started and completed during the current period. 4-11 (Appendix A) The weighted-average method mixes costs from the current period with costs from the prior period. Thus, under the McGraw-Hill Ryerson Ltd. 2009. All rights reserved. Solutions Manual, Chapter 4 1

weighted-average method, the departments apparent performance in the current period is influenced to some extent by what happened in a prior period. In contrast, the FIFO method cleanly separates the costs and work of the current period from those of the prior period. This makes the FIFO method superior to the weighted-average method for cost control because current performance should be measured in relation to costs of the current period only. 4-12 (Appendix 4B) Operating departments are the units in an organization within which the central purposes of the organization are carried out; these departments usually generate revenue. By contrast, service departments provide support or assistance to the operating departments. Examples of service departments include laundry services in a hotel or hospital, internal auditing, airport maintenance services (ground crews), cafeteria, personnel, cost accounting, and so on. 4-13 (Appendix 4B) Service department costs are allocated to products and services in two stages. Service department costs are first allocated to the operating departments. These allocated costs are then included in the operating departments overhead rates, which are used to cost products and services.

4-14 ( Appendix 4B) Interdepartmental services exist whenever two service departments provide services to each other. 4-15 (Appendix 4B) Under the direct method, interdepartmental services are ignored; service department costs are allocated directly to operating departments. 4-16 (Appendix 4B) Under the step-down method, the costs of the service department performing the greatest amount of service for the other service departments are allocated first, the costs of the service department performing the next greatest amount of service are allocated next, and so forth through all the service departments. Once a service departments costs have been allocated, costs are not reallocated back to it under the stepdown method. 4-17 (Appendix 4B) The reciprocal method allocates interdepartment services by simultaneous-ly assigning costs of one department to another and vice versa. It differs from the step method in that the step method allocates services from the larger provider to the smaller but not vice versa. The step method allocates interservice department work in one direction only and thus does not account for work done in the other direction.

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Exercise 4-1 (20 minutes) a. To record issuing raw materials for use in production: Work in ProcessMolding Department......... 28,000 Work in ProcessFiring Department............. 5,000 Raw Materials....................................... b. To record direct labour costs incurred: Work in ProcessMolding Department......... Work in ProcessFiring Department............. Wages Payable..................................... c. To record applying manufacturing overhead: Work in ProcessMolding Department......... Work in ProcessFiring Department............. Manufacturing Overhead....................... 18,000 5,000 23,000 24,000 37,000 61,000

33,000

d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department: Work in ProcessFiring Department............. 67,000 Work in ProcessMolding Department...

67,000

e. To record transfer of finished bricks from the Firing Department to the finished goods warehouse: Finished Goods............................................ 108,000 Work in ProcessFiring Department...... 108,000 f. To record Cost of Goods Sold: Cost of Goods Sold...................................... Finished Goods..................................... 106,000 106,000

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Exercise 4-2 (10 minutes) Weighted-Average Method

Units transferred to the next department........ Ending work in process: Materials: 30,000 units 70% complete...... Conversion: 30,000 units 50% complete... Equivalent units of production........................

Equivalent Units Materials Conversion 410,000 410,000

21,000 431,000 15,000 425,000

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Exercise 4-3 (10 minutes) Weighted-Average Method Work in process, May 1........ Cost added during May........ Total cost (a)...................... Equivalent units of production (b)................... Cost per equivalent unit (a) (b)..........................

Materials $ 14,550 88,350 $102,900

1,200 $85.75

Labour Overhead $23,620 $118,100 14,330 71,650 $37,950 $189,750

1,100 $34.50 1,100

Total

$172.50 $292.75

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Exercise 4-4 (10 minutes) Weighted-Average Method

Ending work in process inventory: Equivalent units of production.................. Cost per equivalent unit........................... Cost of ending work in process inventory. . Units completed and transferred out: Units transferred to the next department. . Cost per equivalent unit........................... Cost of units completed and transferred out.....................................................

Material s
300 $31.56 $9,468 1,300 $31.56 $41,028

Conversio n
100 $9.32 $932 1,300 $9.32 $12,116

Total

$10,40 0

$53,14 4

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Exercise 4-5 (Appendix 4A) (10 minutes) FIFO Method

To complete beginning work in process: Materials: 400 units (100% 75%)................. Conversion: 400 units (100% 25%).............. Units started and completed during the period (42,600 units started 500 units in ending inventory)......................................................... Ending work in process Materials: 500 units 80% complete................. Conversion: 500 units 30% complete.............. Equivalent units of production................................

Materials
100

Conversion
300 42,100 150 42,550

42,100 400 42,600

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Exercise 4-6 (Appendix 4A) (10 minutes) FIFO method

Materials Labour Overhead Cost added during May (a)... $82,560 $52,920 $132,300 Equivalent units of production (b)................... 16,000 14,000 14,000 Cost per equivalent unit (a) (b).......................... $5.16 $3.78 $9.45

Total

$18.39

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Exercise 4-7 (Appendix 4A) (15 minutes) FIFO Method

Ending work in process inventory: Equivalent units of production................ Cost per equivalent unit......................... Cost of ending work in process inventory

Materials
800 $4.40 $3,520

Conversion
200 $1.30 $260

Total

$3,780

Units transferred out: Cost in beginning work in process inventory.......................................... $2,700 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory 400 Cost per equivalent unit....................... $4.40 Cost to complete the units in beginning inventory........................................ $1,760 Cost of units started and completed this period: Units started and completed this period (8,000 units completed and transferred to the next department 1,000 units in beginning work in process inventory).......................... 7,000 Cost per equivalent unit....................... $4.40 Cost of units started and completed this period...................................... $30,800 Total cost of units transferred out..........

$380

$3,080

700 $1.30 $910 $2,670

7,000 $1.30 $9,100

$39,90 0 $45,65 0

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Exercise 4-8 (Appendix 4B)(15 minutes)

Departmental costs before allocations..................... Allocations: Administration costs (40/45, 5/45)............. Physical Plant costs (25/30, 5/30)*........... Total costs after allocation

Service Departments Physical AdminiPlant stration Services

$2,070,000 (2,070,000) (720,000) $ 0 $ 0 $720,000

Operating Departments Undergraduate Programs

$23,650,000 1,840,000 600,000 $26,090,000

Graduate Programs
$2,980,000 230,000 120,000 $3,330,000

Total $29,420,00 0

$29,420,00 0

*Based on the space occupied by the two operating departments, which is 30,000 square metres.

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Exercise 4-9 (Appendix 4B) (15 minutes)

Departmental costs before allocations... Allocations: Administration costs (320/3,200, 2,720/3,200, 160/3,200)*.............. Building Services costs (9,500/10,000, 500/10,000)......... Total costs after allocation...................

Service Departments AdminiBuilding stration Services

$200,000 (200,000) $60,000 20,000 (80,000) $ 0 $ 0

Operating Departments Coffee Groceries Shop $3,860,00 0 $340,000

170,000 76,000 $4,106,00 0 10,000 4,000 $354,00 0

Total $4,460,00 0

$4,460,00 0

*Based on employee hours in the other three departments, 320 + 2,720 + 160 = 3,200. Based on space occupied by the two operating departments, 9,500 + 500 = 10,000. Both the Building Services Department costs of $60,000 and the Administration costs of $20,000 that have been allocated to the Building Services Department are allocated to the two operating departments.

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Exercise 4-10 (10 minutes) Work in ProcessMixing................................. Raw Materials Inventory............................. Work in ProcessMixing................................. Work in ProcessBaking................................. Wages Payable.......................................... Work in ProcessMixing................................. Work in ProcessBaking................................. Manufacturing Overhead............................ Work in ProcessBaking................................. Work in ProcessMixing............................ Finished Goods............................................... Work in ProcessBaking............................ 330,000 260,000 120,000 190,000 90,000 760,000 980,000 330,000

380,000

280,000 760,000 980,000

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Exercise 4-11 (20 minutes) Weighted-Average Method 1.

Units transferred to the next department................................... Ending work in process: Materials: 50,000 units 60% complete.................................... Labour: 50,000 units 20% complete.................................... Overhead: 50,000 units 20% complete.................................... Equivalent units of production.......... 2.

Materials

Labour

Overhead
790,000

790,000 790,000 30,000 10,000 820,000 800,000

10,000 800,000

Materials Labour Overhead Cost of beginning work in process..... $ 68,600 $30,000 $ 48,000 Costs added during the period........... 907,200 370,000 592,000 Total cost (a)................................... $975,800 $400,000 $640,000 Equivalent units of production (b)...... 820,000 800,000 800,000 Cost per equivalent unit (a) (b)...... $1.19 $0.50 $0.80

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Exercise 4-12 (Appendix 4A) (20 minutes) FIFO Method 1. To complete beginning work in process: Materials: 80,000 litres (100% 80%)............................... Labour: 80,000 litres (100% 75%)............................... Overhead: 80,000 litres (100% 75%)............................... Units started and completed during the period (790,000 80,000)......... Ending work in process: Materials: 50,000 litres 60%........... Labour: 50,000 litres 20%.............. Overhead: 50,000 litres 20%.......... Equivalent units of production............... 2.

Materials Labour
16,000 20,000

Overhead

20,000 710,000 710,000 30,000 10,000 710,000

756,000 740,000

10,000 740,000

MateriOverals Labour head Cost added during the period (a)............ $907,200 $370,000 $592,000 Equivalent units of production (b)........... 756,000 740,000 740,000 Cost per equivalent unit (a) (b).........` $1.20 $0.50 $0.80

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Exercise 4-13 (Appendix 4A) (45 minutes) FIFO method 1. Computation of the total cost per equivalent unit of production: Cost per equivalent unit of production for material............. Cost per equivalent unit of production for conversion.......... Total cost per equivalent unit of production....................... 2. Computation of equivalent units in ending inventory: Units in ending inventory........ Percentage completed............ Equivalent units of production. $18.20 23.25 $41.45

Materials 300 80% 240

Conversion 300 40% 120

3. Computation of equivalent units required to complete the beginning inventory: Units in beginning inventory. . . Percentage uncompleted........ Equivalent units of production.

Materials 400 30% 120

Conversion 400 70% 280

4,400 400 4,000

4. Units transferred to the next department........... Less units from the beginning inventory............. Units started and completed during the period. . .

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Exercise 4-13 (continued) 5. Ending work in process inventory: Equivalent units of production................................................... Cost per equivalent unit............................................................ Cost of ending work in process inventory................................... Units transferred out: Cost from the beginning work in process inventory..................... Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the units in beginning inventory....................................................... Cost per equivalent unit....................................................... Cost to complete the units in beginning inventory.................. Cost of units started and completed this period: Units started and completed this period................................. Cost per equivalent unit....................................................... Cost of units started and completed this period..................... Total cost of units transferred out.............................................

Materials
240 $18.20 $4,368 $4,897 120 $18.20 $2,184 4,000 $18.20 $72,800

Conversion
120 $23.25 $2,790 $2,989 280 $23.25 $6,510 4,000 $23.25 $93,000

Total

$7,158 $7,886

$8,694

$165,80 0 $182,38 0

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Exercise 4-14 (10 minutes) Weighted-Average Method

Kilograms transferred to the Packing Department during May*...................................................... Work in process, May 31: Materials: 10,000 kilograms 100% complete.... Labour and overhead: 10,000 kilograms 90% complete........................................................ Equivalent units of production...............................

Labour & Materials Overhead

245,000 10,000 255,000 9,000 254,000 245,000

* Beginning win P 15,000 + Started 240,000 Ending win P 10,000 = 245,000 kilograms.

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Exercise 4-15 (Appendix 4A) (15 minutes) FIFO Method

To complete the beginning work in process: Materials: 15,000 kilograms (100% 100%). . Labour and overhead: 15,000 kilograms (100% 55%)................. Kilograms started and completed during May (240,000 kilograms started 10,000 kilograms in ending inventory).......................................... Ending work in process: Materials: 10,000 kilograms 100% complete. . . Labour and overhead: 10,000 kilograms 90% complete........................................................ Equivalent units of production..............................

Labour & Materials Overhead

0 6,750 230,000 10,000 240,000 9,000 245,750 230,000

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Exercise 14-16 (Appendix 4B)(20 minutes)

Service Operating Departments Departments Admini- JaniMaintestrative torial nance Prep Finishing Costs before allocation......................... $84,000 $67,800 $36,000 $256,100 $498,600 Allocation: Administrative: (60/1,200; 240/1,200; 600/1,200; 300/1,200).................... (84,000) 4,200 16,800 42,000 21,000 Janitorial: (1,000/10,000; 2,000/10,000; 7,000/10,000)........... (72,000) 7,200 14,400 50,400 Maintenance: (10,000/40,000; 30,000/40,000)............................... (60,000) 15,000 45,000 Total cost after allocations.................... $ 0 $ 0 $ 0 $327,500 $615,000

Total $942,500

$942,500

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Exercise 14-17 (Appendix 4B) (20 minutes)

Equipment AdminiJaniMaintestrative torial nance Costs before allocation...................... $84,000 $67,800 $36,000 Allocation: Administrative: (600/900; 300/900) (84,000) Janitorial: (2,000/9,000; 7,000/9,000).......... (67,800) Equipment Maintenance: (10,000/40,000; 30,000/40,000). . (36,000) Total cost after allocations................. $ 0 $ 0 $ 0

Service Departments

Operating Departments

Prep Finishing $256,100 $498,600

56,000 15,067 28,000 52,733

Total $942,500

9,000 27,000 $336,167 $606,333

$942,500

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Exercise 4-18 (30 minutes) Weighted-Average Method 1.

Materials Conversion Units transferred to the next process.......... 300,000 300,000 Ending work in process: Materials: 40,000 units 50% complete. . 20,000 Conversion: 40,000 units 25% complete. 10,000 Equivalent units of production.................... 320,000 310,000
Cost of beginning work in process.............. Cost added during the period..................... Total cost (a)............................................ Equivalent units of production (b)............... Cost per equivalent unit (a) (b)...............

2.

Materials Conversion $ 56,600 $ 14,900 385,000 214,500 $441,600 $229,400 320,000 310,000 $1.38 $0.74 Conversio n
10,000 $0.74 $7,400 $35,000

3.

Materials Ending work in process inventory: Equivalent units of production (see above)......................... 20,000 Cost per equivalent unit (see above)................................ $1.38 Cost of ending work in process inventory............................ $27,600 Units completed and transferred out: Units transferred to the next department......................... 300,000 Cost per equivalent unit (see previous exercise)........ $1.38 Cost of units completed and transferred out.................... $414,000

Total

300,000 $0.74 $222,000 $636,000

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Problem 4-19 (45 minutes) Weighted-Average Method 1. Equivalent Units of Production Transferred to next department....................... Ending work in process: Materials: 80,000 units 75% complete....... Conversion: 80,000 units 25% complete.... Equivalent units of production......................... 2. Cost per Equivalent Unit Cost of beginning work in process................. Cost added during the period........................ Total cost (a)............................................... Equivalent units of production (b)................. Cost per equivalent unit, (a) (b)................ 3. Applying Costs to Units

Materials

Conversio n 450,000 450,000

60,000 510,000 20,000 470,000

Materials
$ 36,550 391,850 $428,400 510,000 $0.84

Conversio n $ 13,500 287,300 $300,800 470,000 $0.64 Total

Materials

Ending work in process inventory: Equivalent units of production (materials: 80,000 units 75% complete; conversion: 80,000 units 25% complete)....... 60,000 Cost per equivalent unit........ $0.84 Cost of ending work in process inventory........................... $50,400 Units completed and transferred out: Units transferred to the next department........................ 450,000 Cost per equivalent unit........ $0.84 Cost of units completed and transferred out................... $378,000
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Conversio n

20,000 $0.64 $12,800 450,000 $0.64 $288,000 $666,000 $63,200

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Problem 4-19 (continued) 4 . Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ($36,550 + $13,500).................................. Costs added to production during the period ($391,850 + $287,300).............................. Total cost to be accounted for....................... Costs accounted for as follows: Cost of ending work in process inventory....... Cost of units completed and transferred out. . Total cost accounted for...............................

$ 50,050 679,150 $729,200 $ 63,200 666,000 $729,200

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Problem 4-20 (Appendix 4A) (45 minutes) FIFO method 1. Equivalent Units of Production To complete beginning work in process: Materials: 70,000 units (100% 70%)...... Conversion: 70,000 units (100% 40%)... Units started and completed during the period (460,000 units started 80,000 units in ending inventory)............................................... Ending work in process: Materials: 80,000 units 75% complete....... Conversion: 80,000 units 25% complete.... Equivalent units of production........................... 2. Cost per Equivalent Unit Cost added during the period (a).............. Equivalent units of production (b)............. Cost per equivalent unit (a) (b)............. 3. See the next page. 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ($36,550 + $13,500).......................................... Costs added to production during the period ($391,850 + $287,300)....................................... Total cost to be accounted for................................. Costs accounted for as follows: Cost of ending work in process inventory................ Costs of units transferred out................................. Total cost accounted for.........................................

Materials
21,000

Conversion
42,000 380,000 20,000 442,000

380,000 60,000 461,000

Materials
$391,850 461,000 $0.85

Conversion $287,300 442,000 $0.65

$ 50,050 679,150 $729,200 $ 64,000 665,200 $729,200

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Problem 4-20 (continued) 3. Costs of Ending Work in Process Inventory and Units Transferred Out Materials Ending work in process inventory: Equivalent units of production................................................. Cost per equivalent unit.......................................................... Cost of ending work in process inventory................................. 60,000 $0.85 $51,000

Conversion
20,000 $0.65 $13,000 $13,500 42,000 $0.65 $27,300

Total

$64,000 $50,050

Units transferred out: Cost in beginning work in process inventory............................ $36,550 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory............................................................ 21,000 Cost per equivalent unit..................................................... $0.85 Cost to complete the units in beginning inventory................ $17,850 Cost of units started and completed this period: Units started and completed this period.............................. 380,000 Cost per equivalent unit..................................................... $0.85 Cost of units started and completed this period................... $323,000 Cost of units transferred out...................................................

$45,150

380,000 $0.65 $247,000 $570,000 $665,20 0

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Problem 4-21 (45 minutes) Weighted-Average Method 1. Equivalent Units of Production

Material Conversio s n Transferred to next department*...................... 380,000 380,000 Ending work in process: Materials: 40,000 units 75% complete........ 30,000 Conversion: 40,000 units 25% complete..... 10,000 Equivalent units of production.......................... 410,000 390,000

*Units transferred to the next department = Units in beginning work in process + Units started into production Units in ending work in process = 70,000 + 350,000 40,000 = 380,000 2. Cost per Equivalent Unit Cost of beginning work in process................. Cost added during the period........................ Total cost (a)............................................... Equivalent units of production (b)................. Cost per equivalent unit, (a) (b)................

Materials
$ 86,000 447,000 $533,000 410,000 $1.30

Conversio n $ 36,000 198,000 $234,000 390,000 $0.60

3. Cost of Ending Work in Process Inventory and Units Transferred Out Materials Conversio Total n Ending work in process inventory: Equivalent units of production (materials: 40,000 units 75% complete; conversion: 40,000 units 25% complete)....... 30,000 10,000 Cost per equivalent unit........ $1.30 $0.60 Cost of ending work in process inventory........................... $39,000 $6,000 $45,000 Units completed and transferred out: Units transferred to the next department........................ 380,000 380,000 Cost per equivalent unit........ $1.30 $0.60
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Cost of units completed and transferred out...................

$494,000

$228,000

$722,000

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Problem 4-21 (continued) 4 . Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ($86,000 + $36,000).................................. Costs added to production during the period ($447,000 + $198,000).............................. Total cost to be accounted for....................... Costs accounted for as follows: Cost of ending work in process inventory....... Cost of units completed and transferred out. . Total cost accounted for...............................

$122,000 645,000 $767,000 $ 45,000 722,000 $767,000

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Problem 4-22 (Appendix 4A) (45 minutes) FIFO Method 1. Equivalent Units of Production To complete beginning work in process: Materials: 60,000 units (100% 60%)...... Conversion: 60,000 units (100% 30%)... Units started and completed during the period (510,000 units started 70,000 units in ending inventory)............................................... Ending work in process: Materials: 70,000 units 80% complete....... Conversion: 70,000 units 40% complete.... Equivalent units of production........................... 2. Cost per Equivalent Unit Cost added during the period (a).............. Equivalent units of production (b)............. Cost per equivalent unit (a) (b)............. 3. See the next page. 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ($27,000 + $13,000)........................................... Costs added to production during the period ($468,000 + $357,000)....................................... Total cost to be accounted for................................. Costs accounted for as follows: Cost of ending work in process inventory................ Costs of units transferred out................................. Total cost accounted for.........................................

Materials
24,000

Conversion
42,000 440,000 28,000 510,000

440,000 56,000 520,000

Materials
$468,000 520,000 $0.90

Conversion $357,000 510,000 $0.70

$ 40,000 825,000 $865,000 $ 70,000 795,000 $865,000

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Problem 4-22 (continued) 3. Costs of Ending Work in Process Inventory and Units Transferred Out Materials Ending work in process inventory: Equivalent units of production................................................. Cost per equivalent unit.......................................................... Cost of ending work in process inventory................................. 56,000 $0.90 $50,400

Conversion
28,000 $0.70 $19,600 $13,000 42,000 $0.70 $29,400 440,000 $0.70

Total

$70,000 $40,000

Units transferred out: Cost in beginning work in process inventory............................ $27,000 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory............................................................ 24,000 Cost per equivalent unit..................................................... $0.90 Cost to complete the units in beginning inventory................ $21,600 Cost of units started and completed this period: Units started and completed this period.............................. 440,000 Cost per equivalent unit..................................................... $0.90 Cost of units started and completed this period................... $396,00 0 Cost of units transferred out...................................................

$51,000

$308,000 $704,000 $795,00 0

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Problem 4-23 (Appendix 4B) (45 minutes)

Variable costs Food Services allocation: $1.90 per meal 1,000 meals $1.90 per meal 500 meals $1.90 per meal 7,000 meals $1.90 per meal 30,000 meals Admin. Services $0.50 per file $0.50 per file $0.50 per file $0.50 per file allocation: 1,500 files 3,000 files 900 files 12,000 files

Out-paFood Admin. X-Ray tient OB General Services Services Services Clinic Care Clinic $73,150 $6,800 $38,100 $11,700 $14,850 $53,400
(1,900) (950) (13,300) (57,000) 1,900 950

13,300

57,000

(750) (1,500) (450) (6,000)

750

1,500

450

6,000

X-Ray Services allocation: $4 per X-ray 1,200 X-rays $4 per X-ray 350 X-rays $4 per X-ray 8,400 X-rays Total variable costs

(4,800) 4,800 (1,400) 1,400 (33,600) 33,600 $ 0 $18,000 $30,000 $150,000

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Problem 4-23 (continued)

Fixed costs Food Services allocation: 2% $48,000 1% $48,000 17% $48,000 80% $48,000 Admin. Services allocation: 10% $34,000 20% $34,000 30% $34,000 40% $34,000 X-Ray Services allocation: 13% $63,400 3% $63,400 84% $63,400 Total fixed costs Total overhead costs

Out-paFood Admin. X-Ray tient OB General Services Services Services Clinic Care Clinic $48,000 $33,040 $59,520 $26,958 $99,738 $344,744
(960) (480) (8,160) (38,400) 960

480

8,160

38,400

(3,400) (6,800) (10,200) (13,600)

3,400

6,800

10,200

13,600

$ $

0 0

$ $

0 0

(8,242) 8,242 (1,902) 1,902 (53,256) 53,256 $ 0 $42,000 $120,000 $450,000 $ 0 $60,000 $150,000 $600,000

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Problem 4-23 (continued) Computation of allocation rates: Variable Food Services: Variable food service cost $73,150 = =$1.90 per meal Total meals served 38,500 meals Variable Admin. Services: Variable administrative cost $6,800+$1,900 = =$0.50 per file Files processed 17,400 files Variable X-Ray Services: Variable X-ray cost $38,100+$950+$750 = =$4.00 per X-ray X-rays taken 9,950 X-rays

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Problem 4-24 (30 minutes) Weighted-Average Method 1. Total units transferred to the next department... Less units in the May 1 inventory...................... Units started and completed in May................... 2. The equivalent units were: 30,000 5,000 25,000

Material Conversio s n Transferred to next department.................. 30,000 30,000 Ending work in process: Materials: 4,000 units 75% complete..... 3,000 Conversion: 4,000 units 50% complete.. 2,000 Equivalent units of production.................... 33,000 32,000 Materials
9,000 57,000 66,000 33,000 2.00

3. The costs per equivalent unit were: Cost of beginning work in process................. Cost added during the period........................ Total cost (a)............................................... Equivalent units of production (b)................. Cost per equivalent unit, (a) (b)................

Conversio n 4,400 30,800 35,200 32,000 1.10

4 The ending work in process figure is verified as follows: . Material Conversio Total s n Ending work in process inventory: Equivalent units of production (see above).................................. 3,000 2,000 Cost per equivalent unit.................. 2.00 1.10 Cost of ending work in process inventory..................................... 6,000 2,200 8,200 5. Multiplying the unit cost figure of 3.10 per unit by 1,000 units does not provide a valid estimate of the incremental cost of processing an additional 1,000 units through the department. If there is sufficient idle
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capacity to process an additional 1,000 units, the incremental cost per unit is almost certainly less than 3.10 per unit because the conversion costs are likely to include fixed costs.

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Problem 4-25 (45 minutes) Weighted-Average Method 1. Equivalent Units of Production

Material s Transferred to next department*...................... 270,000 Ending work in process: Materials: 45,000 kilograms 100% complete 45,000 2 Conversion: 45,000 kilograms /3 complete.. Equivalent units of production.......................... 315,000 *35,000 + 280,000 45,000 = 270,000. Materials
$43,400 397,600 $441,000 315,000 $1.40

Conversio n 270,000
30,000 300,000

2. Cost per Equivalent Unit Cost of beginning work in process................. Cost added during the period........................ Total cost (a)............................................... Equivalent units of production (b)................. Cost per equivalent unit, (a) (b)................

Conversio n $20,300 189,700 $210,000 300,000 $0.70

3. Cost of Ending Work in Process Inventory and Units Transferred Out Materials Conversio Total n Ending work in process inventory: Equivalent units of production (see above)........................ 45,000 30,000 Cost per equivalent unit........ $1.40 $0.70 Cost of ending work in process inventory........................... $63,000 $21,000 $84,000 Units completed and transferred out: Units transferred to the next department........................ 270,000 270,000 Cost per equivalent unit........ $1.40 $0.70 Cost of units completed and transferred out................... $378,000 $189,000 $567,000

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Problem 4-25 (continued) 4. In computing unit costs, the weighted-average method mixes costs of the prior period with current period costs. Thus, under the weightedaverage method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant when attempting to measure performance in the current period. Good (or bad) cost control in the current period might be concealed by the costs that have been brought forward in the beginning inventory.

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Problem 4-26 (60 minutes) Weighted-Average Method 1. The equivalent units are: Units completed during the year..................... Work in process, Dec. 31: Materials: 30,000 units 100% complete.... Conversion: 30,000 units 50% complete... Equivalent units of production........................ The costs per equivalent unit are: Work in process, Jan. 1.................................. Cost added during the year............................ Total cost (a)................................................ Equivalent units of production (b)................... Cost per equivalent unit (a) (b)...................

Materials 790,000
30,000 820,000

Conversion 790,000
15,000 805,000

Materials Conversion $22,000 $ 48,000 880,000 2,367,000 $902,000 $2,415,000 820,000 805,000 $1.10 $3.00

2. The amount of cost that should be assigned to the ending inventories is:

Materials
Ending work in process inventory: Equivalent units of production (see above)........................ Cost per equivalent unit........ Cost of ending work in process inventory........................... Finished goods inventory: Equivalent units.................... Cost per equivalent unit........ Cost of units completed and transferred out...................

Conversio n
15,000 $3.00 $45,000 50,000 $3.00 $150,000

Total

30,000 $1.10 $33,000 50,000 $1.10 $55,000

$78,000

$205,000

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Problem 4-26 (continued) 3. The necessary adjustments would be:

Total cost that should be assigned to inventories (see above) Year-end balances in the accounts Error Finished Goods Inventory Cost of Goods Sold Work in Process Inventory

Work in Process

Finished Goods

Total

$ 78,000 $205,000 $283,000 95,000 201,000 296,000 $(17,000) $ 4,000 $(13,000) 4,000 13,000

17,000

4. The cost of goods sold can be determined as follows: Beginning finished goods inventory...................... Units completed during the year........................... Units available for sale......................................... Less units in ending finished goods inventory........ Units sold during the year.................................... Cost per whole unit ($1.10 + $3.00)..................... Cost of goods sold............................................... Alternative computation: Total manufacturing cost incurred: Materials (part 1. above)................................... Conversion (part 1. above)................................ Total manufacturing cost..................................... Less cost assigned to inventories (part 3. above). . Cost of goods sold............................................... 0 790,000 790,000 50,000 740,000 $4.10 $3,034,000

$ 902,000 2,415,000 3,317,000 283,000 $3,034,000

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Problem 4-27 (90 minutes) Weighted-Average Method 1. a. Work in ProcessBlending................. Work in ProcessBottling................... Raw Materials............................... Work in ProcessBlending................. Work in ProcessBottling................... Salaries and Wages Payable.......... Manufacturing Overhead.................... Accounts Payable.......................... Work in ProcessBlending................. Manufacturing Overhead............... Work in ProcessBottling................... Manufacturing Overhead............... Work in ProcessBottling................... Work in ProcessBlending............ Finished Goods.................................. Work in ProcessBottling.............. g. Accounts Receivable........................... Sales............................................ Cost of Goods Sold............................. Finished Goods............................. 147,600 45,000 73,200 17,000 596,000 481,000 108,000 722,000 920,000 1,400,000 890,000

192,600

b.

90,200 596,000 481,000 108,000 722,000 920,000 1,400,000 890,000

c. d.

e.

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Problem 4-27 (continued) 2. Work in ProcessBottling Bal. 49,000 (f) 920,000 (a) 45,000 (b) 17,000 (d) 108,000 (e) 722,000 Bal. 21,000 Manufacturing Overhead (c) 596,000 (d) 481,000 (d) 108,000 Bal. 7,000 Bal. Bal. Raw Materials 198,600 (a) 192,600 6,000 Work in ProcessBlending Bal. 32,800 (e) 722,000 (a) 147,600 (b) 73,200 (d) 481,000 Bal. Bal. (f) Bal. 12,600 Finished Goods 20,000 (g) 890,000 920,000 50,000 Accounts Payable (c) 596,000 Sales (g) (g)

Salaries and Wages Payable (b) 90,200 (g) Accounts Receivable 1,400,000

1,400,000

Cost of Goods Sold 890,000

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Problem 4-28 (Appendix 4B) (50 minutes) 1.a Direct Method Accounting dept. (AD) to Consulting: to AC 3/4 or $6,000 to LC 1/4 or $2,000 Cal: 3/4 = 60%/(60% + 20%); 1/4 = 20%/(60% + 20%) Legal dept. (LD) to Consulting: to AC 1/5 or $2,000 to LC 4/5 or $8,000 Cal: 1/5 = 10%/(10% + 40%); 4/5 = 40%/(10% + 40%) Income Statements Accounting Consulting Legal Consulting Revenue.............................................................. $30,000 $20,500 Individual costs AC = 30% $20,000, LC = 70% 20,000 (6,000) (14,000) Allocated AD*, LD**............................................ (8,000) (10,000) Net income.......................................................... $16,000 $ (3,500) * ($6,000 + $2,000), ** ($2,000 + $8,000) 1.b Reciprocal/Cross Allocation Method AD = 8,000 + .5LD and LD = 10,000 + .2AD AD = $14,444 and LD = $12,889 Allocating, AD to AC, $8,666; to LC, $2,889 Cal: AD to AC = $14,444 60% = $8,666 AD to LC = $14,444 20% = $2,889 LD to AC, $1,289; to LC, $5,156 Cal: LD to AC = 10% $12,889 = $1,289, LD to LC = $40% $12,889 = $5,156 Income Statements Accounting Consulting Legal Consulting Revenue.............................................................. $30,000 $20,500 Individual costs $20,000 30%; 20,000 70% (6,000) (14,000) Allocated AD, LD.................................................. (9,955)* (8,045)** Net income.......................................................... $14,045 $ (1,545) *$8,666 + $1,289 = $9,955
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**$2,889 + $5,156 = $8,045

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Problem 4-28 (continued) 2.

MEMORANDUM
DATE: TO: FROM: SUBJECT: Date of examination Managing Partner Independent Consultant Performance of Consulting Service

The memorandum should note the following points: i. Only one month of activity has taken place; therefore, results will be very difficult to analyze. No comparisons are possible. Consequently, any analysis will be highly subjective and, recommendations should be handled carefully. ii. The performance of the individual departments is different under the different approaches of cost allocation. iii. The overall performance is satisfactory and since this one-stop shopping arrangement is in a sense a joint product set-up, the overall is more important than the artificial measurement of the parts. iv. Some cost control procedures may be initiated, but these should be handled carefully, since we are dealing with professional staff and we would not want to suppress the creative element in their work. Therefore, the use of standard costing in such an organization may not be warranted. (SMAC Solution, adapted)

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Case 4-29 (120 minutes) This case is difficultparticularly part 3, which requires analytical skills. Because there are no beginning inventories, it makes no difference whether the weighted-average or FIFO method is used by the company. You may choose to specify that the FIFO method be used rather than the weighted-average method. 1. Computation of the Cost of Goods Sold: Units completed and sold....................... Ending work in process: Transferred in: 20,000 units 100% complete.......... Conversion: 20,000 units 25% complete............ Equivalent units of production................

Transferred In 250,000
20,000 270,000

Conversion 250,000

5,000 255,000

Cost of beginning work in process.......... Cost added during the period................. Total cost (a)......................................... Equivalent units of production (b)........... Cost per equivalent unit, (a) (b)..........

Transferred In Conversion $ 0 $ 0 49,221,000 16,320,000 $49,221,000 $16,320,000 270,000 255,000 $182.30 $64.00

Cost of goods sold = 250,000 units ($182.30 + $64.00) per unit = $61,575,000. 2. The estimate of the percentage completion of ending work in process inventories affects the unit costs of finished goods and therefore the cost of goods sold. Thad Kostowski would like the estimated percentage completion of the ending work in process to be increased. The higher the percentage of completion of ending work in process, the higher the equivalent units for the period and the lower the unit costs. 3. Increasing the percentage of completion can increase operating income by reducing the cost of goods sold. To increase operating income by $62,500, the cost of goods sold would have to be decreased by $62,500 from $61,575,000 down to $61,512,500. See the next page for the ne McGraw-Hill Ryerson Ltd. 2009. All rights reserved. Solutions Manual, Chapter 4 45

cessary calculations.

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Case 4-29 (continued) The percentage of completion, X, affects the cost of goods sold by its effect on the unit cost, which can be determined as follows: Unit cost = $182.30 + $16,320,000 250,000 + 20,000X

And the cost of goods sold can be computed as follows: Cost of goods sold = 250,000 Unit cost Since cost of goods sold must be reduced down to $61,512,500, the unit cost must be $246.05 ($61,512,500 250,000 units). Thus, the required percentage completion, X, to obtain the $62,500 reduction in cost of goods sold can be found by solving the following equation: $182.30 + $16,320,000 = $246.05 250,000 + 20,000X

$16,320,000 = $246.05 - $182.30 250,000 + 20,000X $16,320,000 = $63.75 250,000 + 20,000X 250,000 + 20,000X 1 = $16,320,000 $63.75 250,000 + 20,000X = $16,320,000 $63.75

250,000 + 20,000X = 256,000 20,000X = 256,000 - 250,000 20,000X = 6,000 Thus, changing the percentage completion to 30% will decrease cost of goods sold and increase net operating income by $62,500 as verified on the next page. X= 6,000 = 30% 20,000

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Case 4-29 (continued) 3. (continued) Computation of the Cost of Goods Sold: Units completed and sold....................... Ending work in process: Transferred in: 20,000 units 100% complete.......... Conversion: 20,000 units 30% complete............ Equivalent units of production................

Transferred In 250,000
20,000 270,000

Conversion 250,000

6,000 256,000

Cost of beginning work in process.......... Cost added during the period................. Total cost (a)......................................... Equivalent units of production (b)........... Cost per equivalent unit, (a) (b)..........

Transferred In Conversion $ 0 $ 0 49,221,000 16,320,000 $49,221,000 $16,320,000 270,000 256,000 $182.30 $63.75

Cost of goods sold = 250,000 units ($182.30 per unit + $63.75 per unit) = $61,512,500. 4. Carol is in a very difficult position. Collaborating with Thad Kostowski in subverting the integrity of the accounting system is unethical by almost any standard. To put the situation in its starkest light, Kostowski is suggesting that the production managers lie in order to get their bonus. Having said that, the peer pressure to go along in this situation may be intense. It is difficult on a personal level to ignore such peer pressure. Moreover, Carol probably prefers not to risk alienating people she might need to rely on in the future. On the other hand, Carol should be careful not to accept at face value Kostowskis assertion that all of the other managers are doing as much as they can to pull this bonus out of the hat. Those who engage in unethical or illegal acts often rationalize their own behaviour by exaggerating the extent to which others engage in the same kind of behaviour. Other managers may actually be very uncomfortable pulling strings to make the target profit for the year.
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Case 4-29 (continued) From a broader perspective, if the profit figures reported by the managers in a division cannot be trusted, then the company would be foolish to base bonuses on the net profit figures. A bonus system based on divisional profits presupposes the integrity of the accounting system. The company should perhaps reconsider how it determines the bonus. It is quite common for companies to pay an all or nothing bonus contingent on making a particular target. This inevitably creates powerful incentives to bend the rules when the target has not quite been attained. It might be better to have a bonus without this all or nothing feature. For example, managers could be paid a bonus of x% of profits above target profits rather than a bonus that is a preset percentage of their base salary. Under such a policy, the effect of adding that last dollar of profits that just pushes the divisional net profits over the target profit will add a few pennies to the managers compensation rather than thousands of dollars. Therefore, the incentives to misstate the operating income are reduced. Why tempt people unnecessarily?

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Case 4-30 (45 minutes) Weighted-Average Method 1. The revised computations follow: Equivalent Units of Production

Transferred In Transferred to next department........................ 100,000 Ending work in process: Transferred in: 5,000 units 100% complete. 5,000 Materials: 5,000 units 0% complete............ Conversion: 5,000 units 2/5 complete........... Equivalent units of production.......................... 105,000 Transferred In $8,820 81,480 $90,300 105,000 $0.86

Materials 100,000
0 100,000

Conversio n 100,000

2,000 102,000

Cost of beginning work in process................... Cost added during the period.......................... Total cost (a)................................................. Equivalent units of production (b)................... Cost per equivalent unit, (a) (b)..................

Materials $3,400 27,600 $31,000 100,000 $0.31

Conversio n $10,200 96,900 $107,100 102,000 $1.05

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Case 4-30 (continued)

Ending work in process inventory: Equivalent units of production (see above). . Cost per equivalent unit............................. Cost of ending work in process inventory.... Units completed and transferred out: Units transferred to the next department..... Cost per equivalent unit............................. Cost of units completed and transferred out

Transferred In
5,000 $0.86 $4,300 100,000 $0.86 $86,000

Materials
0 $0.31 $0 100,000 $0.31 $31,000

Conversion
2,000 $1.05 $2,100 100,000 $1.05 $105,000

Total

$6,400

$222,000

2. The unit cost computed above is $2.22 (= $0.86 + $0.31 + $1.05) versus $2.284 on the original report. The unit cost on the report prepared by the accountant is high because none of the cost incurred during the month was assigned to the units in the ending work in process inventory.

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Case 4-31 (Appendix 4A) (60 minutes) FIFO Method 1. To complete beginning work in process: Transferred in: 8,000 units 0%.................................. Materials: 8,000 units 0%......................................... Conversion: 8,000 units (1 7/8).............................. Units completed during the period (100,000 units started 8,000 units in beginning inventory)................................ Ending work in process: Transferred in: 5,000 units x 100% complete Materials: 5,000 units 0% complete........................... Conversion: 5,000 units 2/5 complete........................ Equivalent units of production...........................................

Transferred In
0

Materials
0 92,000 0 92,000

Conversion

1,000 92,000

92,000 5,000 97,000

2,000 95,000

Cost added during the period (a)....................................... Equivalent units of production (b)...................................... Cost per equivalent unit (a) (b)......................................

Transferred In $81,480 97,000 $0.84

Materials $27,600 92,000 $0.30

Conversion $96,900 95,000 $1.02

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Case 4-31 (continued)

Ending work in process inventory: Equivalent units of production.......................... Cost per equivalent unit................................... Cost of ending work in process inventory..........

Transferred In
5,000 $0.84 $4,200

Materials
0 $0.30 $0 $3,400

Conversion
2,000 $1.02 $2,040 $10,200

Total

$6,240 $22,420

Units transferred out: Cost in beginning work in process inventory...... $8,820 Cost to complete units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory (see above).................................................... 0 Cost per equivalent unit............................... $0.84 Cost to complete units in beginning inventory................................................. $0 Cost of units started and completed this period: Units started and completed this period........ 92,000 Cost per equivalent unit............................... $0.84 Cost of units started and completed this period..................................................... $77,280 Cost of units transferred out............................

0 $0.30 $0 92,000 $0.30 $27,600

1,000 $1.02 $1,020 92,000 $1.02 $93,840 $198,720 $222,160 $1,020

2. The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is that the FIFO method keeps the costs of the current period separate from the costs of the prior period. Thus, under the FIFO method, the company will be able to compare unit costs of the current period to those of the prior period to see how effective the cost-cutting program has been. Under the weighted-average method, however, costs carried over from the prior period are averaged in with
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costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort.

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Case 4-32 (Appendix 4B) (90 minutes) 1. Step-down method: Total costs before allocations............... Allocations: Cafeteria (40/500; 60/500; 100/500; 300/500)1...................................... Custodial Services (10,000/70,000; 40,000/70,000; 20,000/70,000)2..... Machinery Maintenance (160,000/200,000; 40,000/200,000)3.......................... Total overhead after allocations...........
1 2

Custodial Machinery Cafeteria Services Maintenance $320,000 $65,400 $93,600

(320,000) 25,600 (91,000) 38,400 13,000 (145,000) $ 0

Milling Finishing $416,000 $166,000

64,000 52,000 192,000 26,000

116,000 29,000 $648,000 $413,000

Based on 40+60+100+300=500 employees Based on 10,000+40,000+20,000=70,000 square metres 3 Based on 160,000+ 40,000 = 200,000 machine-hours Milling predetermined overhead rate Finishing predetermined overhead rate = $648,000 160,000 machine hr. = $4.05 per machine hr.

$413,000 70,000 direct labour hr.

= $5.90 per DLH

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Case 4-32 (continued) 2. Direct method:

Custodial Machinery Cafeteria Services Maintenance Milling Finishing Total costs before allocations................. $320,000 $65,400 $93,600 $416,000 $166,000 Allocations: Cafeteria (100/400; 300/400)1............ (320,000) 80,000 240,000 Custodial Services (40,000/60,000; 20,000/60,000)2.............................. (65,400) 43,600 21,800 Machinery Maintenance (160,000/200,000; 40,000/200,000)3. . (93,600) 74,880 18,720 Total overhead after allocations............. $ 0 $ 0 $ 0 $ 614,480 $446,520 Divide by machine-hours....................... 160,000 Divide by direct labour-hours................. 70,000 Predetermined overhead rate................ $3.84 $6.38
1 2

Based on 100 + 300 = 400 employees. Based on 40,000 + 20,000 = 60,000 square metres. 3 Based on 160,000 + 40,000 = 200,000 machine-hours.

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Case 4-32 (continued) 3. a. The amount of overhead cost assigned to the job would be:

Step-down method: Milling Department: 2,000 machine-hours $4.05 per machine-hour....... Finishing Department: 13,000 DLHs $5.90 per DLH................................. Total overhead cost.................................................... Direct method: Milling Department: 2,000 machine-hours $3.84 per machine-hour....... Finishing Department: 13,000 DLHs $6.38 per DLH................................. Total overhead cost....................................................

$8,100 76,700 $84,800

$7,680 82,940 $90,620

b. The step-down method provides a better basis for computing predetermined overhead rates than the direct method because it gives recognition to services provided between service departments. If this interdepartmental service is not recognized, then either too much or too little of a service departments costs may be allocated to a producing department. The result will be an inaccuracy in the producing departments predetermined overhead rate. For example, notice from the computations in (2) above that using the direct method and ignoring interdepartmental services causes the predetermined overhead rate in the Milling Department to fall to $3.84 per machine-hour (from $4.05 per machine-hour when the step-down method is used), and causes the predetermined overhead rate in the Finishing Department to rise to $6.38 per direct labourhour (from $5.90 per direct labour-hour when the step-down method is used). These inaccuracies in the predetermined overhead rate affect bids for jobs. Since the direct method in this case understates the rate in the Milling Department and overstates the rate in the Finishing Department, it is not surprising that the company tends to bid low on jobs requiring a lot of milling work and tends to bid too high on jobs that require a lot of finishing work.

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Research and Application 4-33 (120 minutes) 1. The processing departments for Anheuser Buschs brewing process are listed below in sequential order. The raw material inputs are listed in parentheses next to the department where they are added to the manufacturing process. The Mashing Department (ground barley malt, water, and milled rice are added to production). The Straining Department (no raw materials are added). The Brew Kettle Department (hops are added to production). The Cooling Department (no raw materials are added). The Primary Fermentation Department (yeast is added to production). The Beechwood Aging Department (beechwood chips are added to production). The Filtering Department (no raw materials are added; brewmasters perform final quality control check at this point). The Filling/Packaging Department (glass bottles or aluminum containers as well as labels are added to production). The Shipping Department (cartons are added to production and then finished goods are shipped) 2. The brewing process consumes fairly large amounts of manufacturing overhead costs. This should be apparent to students based on the photographs that accompany the on-line tour. There are many pictures of large pieces of capital equipment that are used to make beer. Very few employees are shown in the photos contained in the on-line tour, which suggests that beer making is a capital intensive process. The depreciation costs associated with the equipment as well as the utility and maintenance costs incurred to run the equipment are three examples of overhead costs. It is also worth noting that the equipment shown in the photographs is large in size, thereby suggesting that Anheuser Buschs beer-making facilities occupy a large amount of floor spaceall of which needs lighting, heat, insurance, etc. These are additional examples of manufacturing overhead costs

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Research and Application 4-33 (continued) 3. The T-account model is shown below:
Raw Materials

Wages Payable

Manufacturing Overhead

Work in Process: Mashing XXX

Work in Process: Straining XXX XXX

The T-account model shown above assumes that labour cost is incurred at each step of the process to operate and maintain the beer-making equipment. The Shipping Department adds packaging costs in the form of cartons. We also assume that equipment and labour costs are incurred to operate the carton packaging equipment. Once the beer has been packaged into cartons, we continue the flow of costs to finished goods. 4. While the on-line tour does not provide sufficient information to answer this question, it is reasonable to expect students to speculate that operation costing may be appropriate because each brand of beer uses different ingredients. Furthermore, some brands of beer go through a slightly different manufacturing process. These attributes of the brewing process suggest that some material costs and conversion costs may be assigned to particular batches of production rather than being spread over the entire volume of production for a given period of time without regard to the brand of beer being manufactured.

Work in Process:$ $ Filling/Pack.

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Research and Application 4-33 (continued) To enrich this discussion, we recommend that you visit www.anheuserbusch.com/overview/abi.html. This web site requires viewers to be 21 years old, so we do not recommend having your students visit this site directly. Some excerpts from this web site that can be used to demonstrate the applicability of operation costing are as follows: Bud Light is brewed with a malt and hops ratio different from Budweiser. Michelob is brewed with a superior ingredient blendusing all imported hops and a high percentage of two-row barley malt. For Michelob Honey Lager Anheuser-Busch brewmasters combine two-row and caramel barley malt, a blend of imported and domestic hops, and a touch of honey to produce a full-bodied, slightly sweet beer. Michelob Ultra is brewed using the finest pale two-row and six-row barley, select grains, all-imported hops and a pure cultured yeast strain. The special choice of grains, combined with an extended mash process, produces a smooth, refreshing beer with fewer carbohydrates. Note to instructors: The requirements for this problem do not ask students to describe Anheuser Buschs strategy. However, if you wish to broach this subject, Anheuser-Busch provides an interesting example of how a company tailors its business strategy to market segments. Anheuser-Busch succeeds first and foremost because of a product leadership customer value proposition. However, the company segments its market into no fewer than three main segments. The Michelob product family serves the high-priced, premium market segment. The Budweiser product family serves the mid-priced market segment. The Busch product family serves the low-priced market segment. Within each segment of the market, Anheuser-Busch strives to maintain a product leadership position by offering the best tasting beer available given the target price range. While Anheuser-Busch offers more than three product families that serve various niche markets, Michelob, Budweiser, and Busch are its three major brands.

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