CHAPTER 14 COVERAGE OF LEARNING OBJECTIVES

FUNDAMENTAL ASSIGNMENT MATERIAL A1,B1 CRITICAL THINKING EXERCISES AND EXERCISES 16,18,20,29 22,25 CASES, NIKE 10K, EXCEL, COLLAB. & INTERNET EXERCISES 49,51,52

LEARNING OBJECTIVE LO1: Distinguish between job-order costing and process costing. LO2: Prepare summary journal entries for the typical transactions of a jobcosting system. LO3: Use an activity-basedcosting system in a joborder environment. LO4: Show how service organizations use job costing. LO5: Explain the basic ideas underlying process costing and how they differ from job costing. LO6: Compute output in terms of equivalent units. LO7: Compute costs and prepare journal entries for the principal transactions in a process-costing system. LO8: Demonstrate how the presence of beginning inventories affects the computation of unit costs under the weighted-average method. LO9: Use backflush costing with a JIT production system.

PROBLEMS

41

17,23 30

42 52

A2,B2 A2,B2

31,32,33,36 32,33,34,35,3 7,38

44,45,46,47 43,45,46,47

A3,B3

48

50

A4,B4

19

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JOB-COSTING AND PROCESS-COSTING SYSTEMS 14-A1 (15-20 min.) Answers are in thousands. 1. a. b. c. d. Direct materials inventory Cash Work in process inventory Direct materials inventory Work in process inventory Accrued payroll Factory department overhead control Various accounts (80 + 55 + 40 = 175) Work in process inventory Factory department overhead control (180% x 125) Finished goods inventory Work in process inventory Cost of goods sold Finished goods inventory 360 360 330 330 125 125 175 175 225 225 625 625 400 400

e.

f. g.

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2. Direct Materials Inventory _ Finished Goods Inventory ___ a. 360 b. 330 f. 625 g. 400 * Bal. 30 * Bal. 225 Work in Process Inventory b. 330 f. 625 c. 125 e. 225 680 * Bal. 55 d. * 12/31/X7 Balance Cost of Goods Sold____ g. 400 Factory Department Overhead Control _____ 175 e. 225

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14-A2 (10-15 min.) 1. (Step 1) (Step 2) Equivalent Units

Physical Direct Conversion Flow of Production Units Materials Costs Started and completed 17,000 17,000 17,000 Work in process, ending inventory 2,000 Direct materials added: 2,000 x 1 2,000 Conversion costs added: 2,000 x .5 1,000 Total accounted for 19,000 Total work done 19,000 18,000 Total costs to account for (Step 3): $150,800 $60,800 $90,000 Divide by equivalent units (Step 4) 19,000 18,000 Unit costs $ 8.20 $ 3.20 $ 5.00 2. Totals Details

Application of costs (Step 5): To units completed and transferred to Testing, 17,000 units ($8.20) $139,400 To units not completed and still in process, Feb. 28, 2,000 units: Direct materials $ 6,400 Conversion costs 5,000 Work in process, Jan. 31 $ 11,400 Total costs accounted for $150,800

2,000($3.20) 1,000($5.00)

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14-A3

(25-30 min.)
(Step 2) (Step 1) _ Equivalent Units___ Physical Direct Conversion Flow of Production Units Materials Costs Work in process, beg. inv. 10,000 (25%)* Started 80,000 To account for 90,000 Completed and transferred out during current period 70,000 70,000 70,000 Work in process, end. inv. 20,000 (50%)*20,000 10,000 Units accounted for 90,000 Work done to date 90,000 80,000
___ _Details __ Direct Conversion Totals Materials Costs $ 175,500 $138,000 $ 37,500 1,486,500 852,000 634,500 $1,662,000 $990,000 $672,000 $ 90,000 80,000 19.40 $ 11.00 $ 8.40

Costs Work in process, beg. inv. Costs added currently (Step 3) Total costs to account for (Step 4) Divisor, equivalent units for work done to date Cost per equivalent unit (Step 5) Application of Costs Completed and transferred (70,000 units) Work in process, ending inv. (20,000 units): Direct materials Conversion costs Total work in process Total costs accounted for

$1,358,000

70,000 ($19.40)

$ 220,000 20,000($11.00) 84,000 10,000($8.40) $ 304,000 $1,662,000

*Degree of completion for conversion costs.

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14-A4 (15-20 min.) 1. Materials inventories Accounts payable Conversion costs Accrued payroll Miscellaneous accounts Finished goods inventories (2,000 x $37) Materials inventories (2,000 x $22) Conversion costs (2,000 x $15) Cost of goods sold (1,980 x $37) Finished goods inventories 2. 45,000 45,000 30,000 11,000 19,000 74,000 44,000 30,000 73,260 73,260 3,000

Cost of goods sold 3,000 Conversion costs To recognize actual conversion costs that were $3,000 greater than the amount applied to the products.

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14-B1 1. a. b. c. d.

(20-25 min.) Entries are in British pounds (). Direct materials inventory Accounts payable Work in process inventory Direct materials inventory Work in process inventory Accrued payroll Factory department overhead control Various accounts, such as cash or accounts payable 109 109 95 95 105 105 90 90 84 280 350 350 600 600

e. f. g. h.

Work in process inventory 84 Factory department overhead control Finished goods inventory Work in process inventory Cost of goods sold Finished goods inventory Accounts receivable Sales 280

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2. Direct Materials Inventory * Bal. 18 b. 95 a. 109 * Bal. 32 Work in Process Inventory * Bal. 25 f. 280 b. 95 c. 105 e. 84 309 * Bal. 29 * 12/31/X7 Balance Finished Goods Inventory_ * Bal. 100 g. 350 f. 280 * Bal. 30 Cost of Goods Sold g. 350 Factory Department Overhead Control d. 90 e. 84

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14-B2 1.

(10-15 min.) (Step 2) Equivalent Units

(Step 1) Flow of Production Physical Units Direct Conversion Materials Costs

Started and completed 600,000 600,000 600,000 Work in process, ending inv. 300,000 300,000 150,000* Units accounted for 900,000 Units work done to date 900,000 750,000 Total costs to account for (Step 3) $2,295,000 $1,620,000 $675,000 Divide by equivalent units (Step 4) 900,000 750,000 Unit costs $2.70 $1.80 $ .90
*300,000 x .5

2. Application of costs (Step 5): Totals To units completed and transferred to Finishing, 600,000 units ($2.70) $1,620,000 To units not completed and still in process, end, 300,000 units: Direct materials $ 540,000 Conversion costs 135,000 Work in process, end $ 675,000 Total costs accounted for $2,295,000

Details

300,000 ($1.80) 150,000($.90)

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14-B3

(25-35 min.) (Step 1) (Step 2) ____Equivalent Units____ Physical Direct Conversion Units Materials Costs 550 (40%)* 7,150 7,700 7,300 400 (20%)* 7,700 7,300 400 7,700 7,300 80 7,380

Flow of Production Work in process, beg. inv. Started To account for Completed and transferred out during current period, 550 + 7,150 400 Work in process, end. inv. Units accounted for Work done to date

Costs

__Details _____ Direct Conversion __Totals_ Materials Costs

Work in process, beg. inv. Costs added currently (Step 3) Total costs to account for (Step 4) Divisor, equivalent units For work done to date Cost per equivalent unit

$ 5,104 101,064 $106,168 $14.00

$ 3,190 65,340 $68,530 7,700 $8.90

$ 1,914 35,724 $37,638 7,380 $5.10

(Step 5) Application of Costs Completed, (7,300 units) $102,200 Work in process, ending inventory (400 units): Direct materials (400) $ 3,560 Conversion costs (80) 408 Total work in process $ 3,968 Total costs accounted for $106,168
*Degree of completion for conversion costs.
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7,300 ($14.00) 400($8.90) 80($5.10)

14-B4 1.

(15 min.) 15,500 15,500 6,300 6,300 14,700 6,300 300

Materials inventories Accounts payable Conversion costs Accrued payroll and mscellaneous accounts

Cost of goods sold (1,500 x $14) 21,000 Materials inventories (1,500 x $9.80) Conversion costs (1,500 x $4.20) 2. Conversion costs 300 Cost of goods sold To recognize actual conversion costs that were $300 less than the amount applied to the products.

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14-1 Three purposes of product costing are to satisfy differing demands for (a) inventory valuation and income determination in accordance with generally accepted accounting principles, (b) income tax reporting, and (c) guiding strategic and operational decision-making. 14-2 The distinction between the job cost and the process cost methods centers largely around how product costing is accomplished. Unlike process costing, which deals with broad averages and great masses of like units, the essential feature of the job-cost method is the attempt to apply costs to specific jobs that may consist of either a single physical unit (a custom sofa) or a few like units (a dozen tables) in a distinct batch or job lot. 14-3 The basic record for the accumulation of job costs is the jobcost sheet or job-cost record. Exhibit 14-1 shows a Job-Cost Sheet, and it also shows the related source documents. A file of current job-cost sheets becomes the supporting details for the Work-inProcess Inventory account. 14-4 Source documents include materials requisitions and labor time tickets (time cards). 14-5 Examples of service industries that use the job-costing approach include repairing, consulting, legal, accounting, painting, dentistry, and income tax preparation. 14-6 No, the amount of value-chain activity not captured in either job-cost or process-cost systems is independent of the type of operating system used. 14-7 Examples of process costing include flour, glass, paint, and beer.

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14-8 Examples of process costing include handling of mail, income tax returns, automobile registrations, and drivers license examinations. 14-9 Five key steps in process cost accounting are Step 1: Summarize the flow of physical units Step 2: Calculate output in terms of equivalent units Step 3: Summarize the total costs to account for, which are the total debits in Work in Process (that is, the costs applied to Work in Process) Step 4: Calculate unit costs Step 5: Apply costs to units completed and to units in ending work in process 14-10 The first two steps concentrate on what is occurring in physical or engineering terms. The financial impact of the production process is measured in the final three steps. 14-11 (1 x 10,000) + (.5 x 5,000) = 12,500 full-time-equivalent students. 14-12 Beginning inventories + Units started = Units transferred out + Ending inventories. 14-13 Transferred-in costs are accounted for operationally the same as direct materials added at the beginning of a production process. They differ from direct material costs because they are a combination of direct material and conversion costs from a previous department; thus, calling them a direct-material cost is inappropriate. 14-14 When actual conversion costs exceed the amount applied, the excess in the conversion cost account is charged directly to cost of goods sold; the treatment is similar to accounting for underapplied overhead.
85

14-15 In addition to inventory valuation and income determination, managers want accurate job costs as guides to pricing and to allocating effort among particular products, services, or customers. They are also necessary in contracts that reimburse the cost of a product or service. 14-16 The most important point is that product costing is an averaging process. The unit cost used for inventory purposes is the result of taking some accumulated cost and dividing it by some measure of production. The basic distinction between job order costing and process costing is the breadth of the denominator: in job order costing, it is small (for example, one painting, 100 advertising circulars, or one special packaging machine); but in process costing, it is large (for example, thousands of pounds, gallons, or board feet). 14-17 No. Some service firms trace only direct-labor costs to individual jobs. However, with advances in computer technology and needs for better job-cost information because of competition, more service firms are tracing additional costs to jobs. The more costs that are traced to jobs instead of being allocated, the more accurate are the job costs. 14-18 The central product costing problem in process costing is how each department should compute the cost of goods transferred out and the cost of goods remaining in the department. 14-19 No, but they are especially appropriate for companies with just-in-time systems. Any company with small inventories might find backflush costing appealing. 14-20 (5 min.) a. and d. are service-sector companies b. is merchandising
86

c. is manufacturing 14-21 (10-15 min.) You may wish to use T-accounts. Amounts are in millions of dollars. You can also use the expression: ending balance (of any account) equals the beginning balance plus additions less subtractions or EB = BB + A - S. In this case Purchased is additions and Used is subtractions. 1. 2. 3. 4. 8 + 5 - 7 = 6 (BB + A - S = EB) 8 + 9 - 6 = 11 (BB + A - EB = S) 5 + Purchases - 7 = 8. Purchases = 10 Beginning inventory = 2

Beginning inventory + 8 - 3 = 7.

14-22 (10-15 min.) Amounts are in thousands of dollars. 1. Finished goods inventory Work in process inventory Finished goods = 72 + 56 = 128 Debits: 12 + 50 + 25 + 55 = Credits: 72 + 56 = Balance, April 30 Accounts receivable Sales Sale of Job A13 Cost of goods sold Finished goods inventory Cost of Job A13 sold 142 128 14 101 101 72 72 128 128

2.

3.

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14-23 (10-15 min.) Cancer Research Project Medical School Unit

Reference Date Quantity Cost Amount Summary $ 925 780 Direct Materials: Var. medical supplies Jan. 5 Various chemicals Jan. 7 Direct Labor: Research associates Research assistants Project overhead applied Total costs

$ 1,705

Jan. 5-12 120 hrs. $32 $3,840 Jan. 7-12 180 hrs. $19 3,420 Jan. 12 $7,260 x .70 $5,082

7,260 5,082 $14,047

14-24 (10 min.) 1. 2. 3. $6,500 + $3,900 = $10,400 $8,100 $3,200 + $8,800 = $12,000

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14-25 (15 min.) Answers are in thousands of dollars.

1. a b c a b c Construction Finished Cost of Construction Finished Cost of in Process Houses, Houses in Process Houses, Houses Job No. Sept. 30 Sept. 30 Sold Sept. Oct. 31 Oct. 31 Sold Oct. 43 180 51 170 52 150 150 53 200 2501 61 115 1352 62 180 2053 71 118 1544 81 106 ___ ___ 1545 ___ ___ 719 150 350 308 135 605
1

200 + 50

115 + 20

180 + 25

118 + 36

106 + 48

2. Finished houses inventory Construction in process Sept.: 180 + 170 + 150 = 500 Oct.: 250 + 135 + 205 = 590 3. Cash Sales To record sale of Job 53 Cost of houses sold Finished houses inventory To record cost of Job 53 sold

Sept. __ Oct.__ 500 590 500 590

345 345 250 250

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14-26 (30 min.) The answers (in millions) are $15, $5, and $240. Step-by-step entries are keyed alphabetically. The sequence depends on where the student prefers to start. You may wish to raise the question of whether the underapplied overhead should be prorated among the affected accounts at the end of the year.
__Direct Materials__ Bal. 15 (a) 210 (b) 225 240 210 Bal. 30 Work in Process Bal. 5 (e) Completed 420 (a) Dir. Materials 210 (c) Dir. Labor 125* (d) Applied overhead 200 ___ 540 420 Bal. 120 Cost of Goods Sold (f) 500

Finished Goods Bal. 240 (f) 500 (e) 420 ___ 660 500 Bal. 160 * $200 160% = $125

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14-27 (30 min.) The answers (in millions) are $25, $22, and $32. Step-by-step entries are keyed alphabetically. The sequence depends on where the student prefers to start. You may wish to raise the question of whether the underapplied overhead should be prorated among the affected accounts at the end of the year. Note the heavy ending Finished Goods.
Direct Materials Bal.* 25 (a) 235 (b) 275 300 235 Bal. 65 Work in Process Bal.* 22 (e) Completed 493 (a) Dir. Materials 235 (c) Dir. Labor 100 (d) Applied overhead 150 507 493 Bal. 14

Finished Goods Cost of Goods Sold Bal.* 32 (f) 350 (f) 350 (e) 493 525 350 Bal. 175 * Let BB = beginning balance Direct materials: BB + 275 235 = 65 BB = 25 Work in process: BB + 235 + 100 + 150 493 = 14 BB = 22 Finished goods: BB + 493 350 = 175 BB = 32

14-28 (5-10 min.) Case A, $3,600,000 $2,000,000 = 180% of direct-labor cost Case B, $5 x 450,000 = $2,250,000 Case C, $1,500,000 250,000 = $6 per machine hour

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14-29 (5 min.) Coca-Cola and Nally and Gibson are manufacturing companies. U. S. Post Office and Mckensey and Co. are service companies. 14-30 (5 min.) (1) The debit to the work in process account when transferring a subcomponent from Process A to the assembly process is a transferred-in cost. (2) The direct materials used in process A and assembly are variable-cost resources. (3) Direct labor costs in process A and assembly are directly traced fixed- cost resources. (4) An example of an indirect resource cost is the indirect material and indirect labor used for process A and the assembly process. 14-31 (5 min.) The direct material is the limestone rock that is delivered to the plant. Because crushing and screening the rock can begin immediately, we assume that direct material is always 100% completed. Thus, the equivalent units of direct material is the entire 400 tons. The 320 tons of rock that have been stocked are 100% complete with respect to both direct labor and overhead. The 80 tons of rock that are in process at the end of March are 40% complete. This is 32 equivalent tons (80 tons x .40). Thus, the total work done during March is 400 tons of direct material and 352 (that is, 320 + 32) equivalent tons of direct labor and overhead.

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14-32 (10-15 min.) 1. (Step 2) (Step 1) Equivalent Units Physical Direct Conversion Units Materials Costs 650,000 650,000 650,000 220,000 220,000 132,000* 870,000 870,000 782,000 $860,200 782,000 $1.10

Flow of Production Started and completed Work in process, ending inv. Units accounted for Work done to date Total costs to account for (Step 3) $4,514,200 $3,654,000 Divide by equivalent units (Step 4) 870,000 Unit costs $5.30 $4.20
*220,000 x .60

2. Totals Details Application of costs (Step 5): To units completed and transferred, 650,000 units ($5.30) $3,445,000 To units still in process, end, 220,000 units: Direct materials $ 924,000 220,000($4.20) Conversion costs 145,200 132,000($1.10) Work in process, end $1,069,200 Total costs accounted for $4,514,200

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14-33 (15-20 min.) 1. (Step 2) Equivalent Units (Step 1) Physical Direct Conversion Units Materials Costs 68,000 68,000 68,000 6,000 5,400 4,200 74,000 73,400 72,200 Details Direct Conversion Materials Costs $205,520 $397,100 73,400 72,200 $2.80 $5.50

Flow of Production Units started and completed Work in process, end: Materials added: 6,000 x .90 Conversion costs: 6,000 x .70 Units accounted for Work done to date 2.

Total Costs Costs to account for (Step 3) $602,620 Divide by equivalent units (Step 4) Unit costs $8.30 Application of costs (Step 5): To units completed and transferred, 68,000($8.30) To units still in process, end, 6,000 units: Direct materials Conversion costs Work in process, end Total costs accounted for

$564,400 $ 15,120 5,400($2.80) 23,100 4,200($5.50) $ 38,220 $602,620

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14-34 (10-15 min.) 1. Work in process -- Assembly Direct materials inventory Materials added to production in February Work in process -- Assembly Accrued payroll Direct labor in February Work in process -- Assembly Factory overhead Factory overhead applied in February 60,800 60,800 50,000 50,000 40,000 40,000

2.

3.

4.

Work in process -- Testing 139,400 Work in process -- Assembly 139,400 Cost of goods completed and transferred in February from Assembly to Testing The Key T-account would show:

Work in Process -- Assembly 1. Direct materials 60,800 4. Transferred out 2. Direct labor 50,000 to Testing 139,400 3. Factory overhead 40,000 Costs to account for 150,800 Bal. February 28 11,400

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14-35 (10-15 min.) 1. Work in process -- Assembly Direct materials inventory Materials added to production Work in process -- Assembly Accrued payroll Direct labor Work in process -- Assembly Factory overhead Factory overhead applied 1,620,000 1,620,000 415,000 415,000 260,000 260,000

2.

3.

4.

Work in process -- Finishing 1,620,000 Work in process -- Assembly 1,620,000 Cost of goods completed and transferred from Assembly to Finishing The key T-account would show:

Work in Process -- Assembly 1. Direct materials 1,620,000 4. Transferred out 2. Direct labor 415,000 to Finishing 1,620,000 3. Factory overhead 260,000 costs to account for 2,295,000 Balance 675,000

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14-36 (10-15 min.) (Step 2) (Step 1) Equivalent Units Physical Direct Conversion Units Materials Costs 20,000 80,000 100,000 90,000 10,000 100,000 90,000 2,000a 92,000 90,000 1,000a 91,000

Flow of Production Work in process, beg. inventory* Started To account for Completed and transferred out (100,000-10,000) Work in process, ending inventory** Units accounted for Work done to date

*Degree of completion: materials, 80%; conversion costs, 40% **Degree of completion: materials, 20%; conversion costs, 10% a .20 x 10,000 and .10 x 10,000

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14-37 (5-10 min.) 1. 2. 3. Work in process, Department A Direct-materials inventory Work in process, Department A Various accounts Work in process, Department B Work in process, Department A 65,340 65,340 35,724 35,724 102,200 102,200

14-38 (5-10 min.) 1. 2. 3. Work in process, Assembly Department Direct materials inventory Work in process, Assembly Department Various accounts Work in process, Finishing Dept. Work in process, Assembly Dept. 852,000 852,000 634,500 634,500 1,358,000 1,358,000

14-39 (10-15 min.) Dell would most likely use a job-cost system with each order considered a job. Because each order is assembled from a set of common parts, there is a single cost for each part. Most of the parts are purchased, so the cost is the purchase price. If some parts are made, the production cost would be used as the cost of the part. Each order would call for several materials, and each would be added to the order's job-cost sheet. Labor would be incurred in assembly, so the direct-labor cost could be allocated to each order based on the number of hours used for assembly. If assembly is highly automated, it is possible that no labor is considered "direct", and labor becomes one more overhead item.
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Overhead costs would be allocated based on one or more cost drivers. Possible drivers include direct-labor hours or cost (if direct labor is measured separately), hours in assembly, or number of component parts. For a highly automated process, that latter would be a likely cost driver. Testing and quality control costs might be part of overhead. Alternately, costs of testing final computers could be charged directly to the order (job). If different types of computers require different amounts of testing, this is a logical allocation method. 14-40 (15-25 min.) 1. Ending inventory = Beginning inventory + Purchases - Usage 90 = 70 + Purchases - 468 Purchases = 488 Total manufacturing costs = Direct + Direct + Factory charged to production materials labor overhead 864 = 468 + DL + .8 DL 864 - 468 = 1.8 DL 1.8 DL = 396 DL = 220 Cost of goods = Cost of goods available - Beginning finished manufactured for sale goods = 1,004 - 100 = 904 Cost of goods = Cost of goods available sold for sale = 1,004 - 120 = 884 Ending finished goods

2.

3.

4.

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14-41 (25-35 min.) 1. Job 412 ($ 9,000 + $4,000 + $8,000) Job 413 ($12,000 + $5,000 + $10,000) Work-in-process inventory, April 30 $21,000 27,000 $48,000

2. 3.

The job-cost records indicate an overhead application rate of $8,000 $4,000 = 200% or $10,000 $5,000 = 200%. a. Work-in-process inventory 15,500 Direct materials inventory 15,500 Job 412 of $2,500 + Job 414 of $13,000 b. Work-in-process inventory Accrued payroll $1,500 + $2,500 + $2,000 6,000 6,000

c. Work-in-process inventory 12,000 Factory department overhead control 12,000 $6,000 x 200% d. Finished goods inventory (Job 412) 28,000 Work-in-process inventory 28,000 $21,000 + $2,500 + $1,500 + 200% of $1,500 e. Cost of goods sold Finished goods inventory The $33,000 amount is given. 33,000 33,000

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Direct Materials Inventory Bal. 19,000 (a) 15,500 Bal. 3,500 Accrued Payroll (b) 6,000 Fact. Dept. Overhead Control (c) 12,000

Work-in-Process Inventory Bal. 48,000 (d) 28,000 (a) 15,500 (b) 6,000 (c) 12,000 81,500 Bal. 53,500 Finished Goods Inventory Bal. 18,000 (e) 33,000 (d) 28,000 Bal. 13,000

Cost of Goods Sold Bal. 450,000 (e) 33,000 Bal. 483,000 4. Job 413 ($27,000 + $2,500 + 200% of $2,500) Job 414 ($13,000 + $2,000 + 200% of $2,000) Work-in-process inventory, May 31 $34,500 19,000 $53,500

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14-42 (20 min.) 1. Overhead Compensation for nonchargeable time, .15 x $3,600,000 Other costs (a) Total overhead (b) Direct labor, .85 x $3,600,000 Overhead application rate, (a) (b) 2. Hourly rate: $60,000 (48 x 40) = $60,000 1,920 $ 540,000 1,449,000 $1,989,000 $3,060,000 65% $31.25

Many students will forget that "his work there" includes an overhead application: Direct labor, 10 x $31.25 Applied overhead, $312.50 x .65 Total costs applied $312.50 203.13 $515.63

We point out that direct-labor time on a job is usually compiled for all classes of engineers and then applied at their different compensation rates. Overhead is usually not applied on the piecemeal basis demonstrated here. Instead, it is applied in one step after all the labor costs of the job have been accumulated.

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14-43 1. 2.

(30-40 min.) See details below.

$265 per ton $2,525

3. This requirement cannot be answered directly from the data using the weighted average process cost method. We must look at the equivalent units of conversion work done in May only: Work done through the end of May 302 tons Work done before May (3/4 x 24 tons) 18 tons Work done in May 284 tons Budget for 284 tons: $16,000 + ($80 x 284) = $38,720 Budget - Actual = $38,720 - $40,670 = $1,950 unfavorable During May, conversion costs were $1,950 (or 5%) above budget. (Step 2) (Step 1) Equivalent Units Physical Direct Conversion Flow of Production Units Materials Costs Work in process, beg. inv. 24 (3/4)* Started 288 To account for 312 Completed and transferred out during current period 297 297 297 Work in process, end. inv. 15 (1/3)* 15 5 Units accounted for 312 Work done to date 312 302
*Degree of completion for conversion costs.
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Costs

Totals Work in process, beg. inv. $ 6,000 Costs added currently 75,230 (Step 3) Total costs to account for $81,230 (Step 4) Divisor, equivalent units for work done to date Cost per equivalent unit $ 265 (Step 5) Application of Costs Completed and transferred (297 tons) $78,705 Work in process, end. inv. (15 tons): Direct materials $ 1,800 Conversion costs 725 Total work in process $ 2,525 Total costs accounted for $81,230
* $120 x 24 = $2,880; $120 x 288 = $34,560.

Details Direct Conversion Materials Costs $ 2,880* $ 3,120 34,560* 40,670 $37,440 $43,790 312 $ 120 302 $ 145

297 ($265) 15($120) 5($145)

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14-44 (15-20 min.) 1. Potato chips are a homogeneous product with low unit cost that must be processed through a sequence of continuous steps (sequential processing). Potato chips are produced continuously rather than to order. As a result, a process-cost system is the most logical cost accounting system to use for product-costing purposes. Activity-based accounting systems are most beneficial when products and/or processes are characterized by diversity. Diversity can be in the volume of product produced or the degree of complexity in the production process across product lines. Since neither of these forms of diversity characterize the potato chip industry, it is doubtful that activity-based accounting would pass the cost-benefit test. It may be that some specialty producers of gourmet potato chips (for example, Saratoga Potato Chip Company in New York) may have sufficient diversity to warrant use of an activity-based accounting system. Frito-Lay produces over 6,000 pounds of potato chips each hour, 24 hours a day. This translates into more than 52 million pounds per year. Since at any point in time the workin-process amounts to no more that one-half an hour (it takes 30 minutes to completely produce the end product), work-inprocess accounts for about 3,000/52,000,000 or .006 percent of total annual production. The implication is that work-inprocess can be ignored for product-costing purposes due to its immaterial amount.

2.

3.

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14-45 (15-20 min.) 1. (Step 1) Physical Units 1,800,000 1,200,000 3,000,000 (Step 2) Equivalent Units MaterialsConversion & Supplies Costs 1,800,000 1,800,000 1,200,000 960,000* 3,000,000 2,760,000

Units started and completed Work in process, end Units accounted for Work done to date
* 1,200,000 x .8

2. Total Costs Cost to account for (Step 3) Divide by equivalent units (Step 4) Unit costs 3.

Details Materials Conversion & Supplies Costs $4,830,000 2,760,000 $1.75 $ 240,000 1,680,000 $1,920,000

$5,430,000 $ 600,000 3,000,000 $1.95 $.20

Ending work in process, 1,200,000 units: Materials and supplies, 1,200,000 x $.20 Conversion costs, 960,000 x $1.75 Cost of 1,200,000 returns not yet completed

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14-46 1.

(20 min.) (Step 2) Equivalent Units Softening Conversion Plastic Compound Costs

(Step 1) Physical Flow of Production Units Work in process, beginning 0 Started 60,000 To account for 60,000 Completed 40,000 40,000 40,000 Work in process, ending 20,000 (40%)20,000 0 Units accounted for 60,000 Work done to date 60,000 40,000

40,000 8,000 48,000

Total Costs Costs Costs to account for (Step 3)$572,000 $300,000 $80,000 $192,000 Divide by equivalent units (Step 4) 60,000 40,000 48,000 Cost per equivalent unit $11.00 $5.00 $2.00 $4.00 2. Application of Costs (Step 5)Totals Details Units completed (40,000 x $11) $440,000 Work in process, ending: Material -- Plastic $100,000 20,000($5) Conversion costs 32,000 8,000($4) Total work in process, ending $132,000 Total costs accounted for $572,000

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14-47 (20-30 min.) 1. Flow of Production Units started and completed Work in process, end Direct materials added: 5,000 x 1.00 Cartons added: none Conversion costs: 5,000 x .95 Units accounted for Work done to date (Step 1) Physical Flow 145,000 5,000 ----150,000 Step 2 Equivalent Units Direct Conversion Materials Cartons Costs 145,000 145,000 145,000 ------5,000 ----150,000 ------145,000 Details Total Costs Costs accounted for (Step 3) Divide by equivalent units (Step 4) Unit costs Direct Conversion Materials Cartons Costs --4,750 --149,750

3,767,000 2,250,000 319,000 1,198,000 25.20 150,000 15.00 145,000 2.20 149,750 8.00

2. Application of costs (Step 5): To units completed, 145,000 (25.20) 3,654,000 Work in process, end, 5,000 units: Direct materials 75,000 5,000(15.00) Conversion costs 38,000 Work in process, end 113,000 Total costs accounted for 3,767,000

4,750(8.00)

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14-48 (15-20 min.) 1. Materials and parts inventory Accounts payable or cash Conversion costs Accrued payroll, accounts payable, accumulated depreciation, etc. 287,000 287,000 92,000 92,000 276,000 92,000 368,000

Finished goods inventory (11,500 x $32) 368,000 Materials and parts inventory (11,500 x 24) Conversion costs (11,500 x $8) 2. Cost of goods sold Finished goods inventory 368,000

All costs incurred during April are charged to cost of goods sold in April. This assumes that all altimeters are sold and shipped immediately upon production. Therefore, the balance in Finished Goods Inventory is zero at the end of the month. 3. Because the balance in the Conversion Costs account must be zero at the end of the month, and because only $92,000 was transferred out of the Conversion Costs account while $95,000 was added to the account, the remaining $3,000 must be transferred to Cost of Goods Sold: Cost of goods sold Conversion costs 3 ,000 3,000

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14-49 (20-25 min.) Contract manufacturers make apparel, footware, and equipment products for Nike. Almost all these products would be made through process manufacturing so the costing system would be a process-cost system. Nike distribution centers would probably use a job-order system based on retail account orders. Nike operates 8 distribution centers in the United States. Four centers are located in California, 2 in Oregon, 1 in Tennessee, and 1 in New Hampshire. There are about 27,000 retail accounts (customers) in the United States. The choice of cost-allocation base is a key to accurate costing of products and customers. Managers at the various distribution centers give much thought to the selection of plausible and reliable cost-allocation bases since there are many from which to choose for a specific activity- or cost-resource pool. The suggestions below should serve as a starting point for discussion. The cost of the forklift resource could be allocated to the listed activities using the number of hours the forklift is used for each activity. The ABC system designer would ask a knowledgable manager for a percentage breakdown of the time the forklift is used for each of the activities. Then these percentages would be multiplied times the total cost of operating the forklift to calculate the allocation. Occupancy costs could be allocated using the square feet of space used by each activity. Variable computer costs could be allocated using number of lines entered on the related source document (purchase order for supplies, sales order from customers, and invoices for payment from customers).

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14-50 (30-40 min.) For the solution, see the Prentice Hall Web site, www.prenhall.com/

14-51

(45 min. or more)

The purpose of this exercise is to make students think about the characteristics of real production processes and how to account for them. Depending on the assumptions students make about the type of production process used in each of these examples, they may suggest a different type of accounting system than those listed below. These are just suggestions about what the groups might conclude. a. b. c. Process costing, because there are large volumes of identical product. Process costing. Although each application is unique, it is likely that identifying the differences and trying to account for them is not cost-benefit efficient. Probably job costing. It depends on how many identical couches students think that Ethan Allan makes at one time. If each is unique, or if small batches are produced, a job-costing system is most likely used. Job costing. Major construction projects are generally treated as a single job. Process costing. Refining oil into gasoline is a classic processcosting environment, where there is a single continuous process. Job costing. Each order at Kinkos is unique. The only question is whether it is cost-benefit efficient to determine job costs for each order. Job costing. Each ship built is a single job, although there may be parts that are produced in a process that allows process costing.

d. e. f. g.

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14-52 (30-40 min.) NOTE TO INSTRUCTOR. This solution is based on the Web sites as they were in early 2007. Be sure to examine the current Web sites before assigning this problem, as the information there may have changed. 1. Lands End is mainly a merchandising firm. The main activity of the firm is selling clothing to individuals, although the firm also engages in some corporate sales. Process-costing systems are used to determine the average cost of like products that are produced. Lands End purchased large quantities of finished products but the costs are readily determinable so averaging is not really necessary. 2. La-Z-Boy is a manufacturing firm. Its main activity is manufacturing furniture. The firm states that it has an extensive line of furniture products in many types and designs. The decision by La-Z-Boy to use a job-order cost system or a process-costing system (or some hybrid) depends on the nature of the products and production system. If the company produces large enough quantities of a type of furniture using the same processes, a process-cost system might be best. For small quantities of products that are custom manufactured for a specific customer, a job-order costing system might be best. 3. Tasty Baking Company is a manufacturing firm. The firm makes large volumes of snack cakes in a continuous process. The cakes are moving in a continuous flow through the factory. Because each cake is alike, produced in large volumes with small unit costs, a process-costing system would be ideal. 4. In the 2006 annual report, the types of inventories included finished goods, work-in-process, and raw materials. This information was found in the footnotes to the annual report. From the information in the financial statements and footnotes, it is not possible to determine what type of costing system the company uses.
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