Mod 03

Management Accounting Fundamentals [MA1]
Module 3: Process costing

Required reading
Chapter 4, pages 146-171

Reading 3-1: "Comparing the weighted-average and the FIFO methods of costing"
Reading 3-2: "Spoilage"
Overview
From Module 2 you should have developed a good understanding of job-order costing. In Module 3, you will
gain a perspective of process cost flows by working through a detailed example of process costing. The
weighted-average and FIFO methods of accounting for cost flows are explained and evaluated in the context
of the production report.
This module also describes how to deal with shrinkage, spoilage, and lost units in a process costing system.
It will then look briefly at innovations in costing systems in the ever-changing business environment.
The Computer illustration in Topic 3.8 shows how you can use a spreadsheet program to prepare a
production report and cost reconciliation based on both methods described in the module.
Learning objectives
3.1 Identify the major similarities and differences between job-order and process costing.(Level 2)
3.2 Prepare journal entries to record the flow of materials, labour, and overhead through a process
costing system. (Level 1)
3.3 Explain and compute the equivalent units of production for both the weighted-average method and
the FIFO method. (Level 1)
3.4 Prepare a production report using the weighted-average method. (Level 1)
3.5 Prepare a production report using the FIFO method. (Level 1)
3.6 Compute the cost of lost units or shrinkage. (Level 1)
3.7 State the conditions under which operation costing is useful to management, and explain the impact
of a flexible manufacturing system on job-order and process costing. (Level 2)
3.8 Design a worksheet that calculates and prepares a production report and cost reconciliation for both
weighted-average and FIFO methods and compare the two methods. (Level 1)
3.1 Comparison of job-order and process costing

LEVEL 2
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The distinction between job-order and process costing does not mean that they are mutually exclusive. In
terms of an entire production operation, both approaches to product costing are possible depending on the
nature of various parts of the manufacturing operation. It may also appear that job-order costing is easier
than process costing. In reality, the reverse is true because the supporting requirements for process costing
(for example, lack of need to trace material and labour to the product) make process costing easier to apply.
Review Exhibit 4-1, which lists the differences between job-order and process costing.
3.2 A perspective of process cost flows

LEVEL 1
A department can be viewed as one stage of completion in the production process. The use of a department
as a costing object simplifies process costing. From an accounting perspective, a department is an
organizational unit, which is easier to deal with than the units produced.
Study carefully the flow description in Exhibit 4-4. Notice the transferred-in costs from the previous
department.
The journal entries on pages 150-151 associated with material costs, labour costs, and overhead costs should
also be reviewed. Predetermined overhead may not be needed but can be used if production or costs
fluctuate. If necessary, review predetermined overhead.
Activity 3-1 Comparison of job-order and process costing
This activity reinforces your understanding of the similarities and differences between job and process
costing and allow you to review the elements of WIP.
3.3 Equivalent units of production

LEVEL 1
The concept of equivalent units is very important. It can also be used to determine production quantity for
job costing if partially completed production is present.
Notice the following fundamental inventory relationship:
Beginning inventory + Transferred in = Transferred out + Ending inventory
For simple problems, this equation is not needed, but for situations where shrinkages, evaporation, or other
losses occur, it is necessary. The data for Double Diamond at the top of page 154 illustrates the analysis.
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Here, "units" means the number of items that were finished.
"Units to account for" and "units accounted for" will be equal unless units are lost. Any difference between
the two totals represents the "lost units" that will be accounted for in later illustrations.
3.4 Production report — Weighted-average method

LEVEL 1
Exhibit 4-10 presents a production report using weighted-average costing. The costs of the beginning work
in process are broken down and added to the cost of raw materials used, direct labour used, and factory
overhead applied during the period. These totals are used as the numerator in the unit cost calculation.
The costs accounted for is a simple calculation under weighted-average costing for completed units. This
analysis of costs is different for FIFO. There is a need for the equivalent percentages for each of the cost
elements when costing the ending work in process because the percentage completions tend to differ for the
various elements.
Transferred-in costs require separate treatment in the production report when there are multiple production
departments.
The easiest way to approach transferred-in costs is to view them as a direct material cost of the department
receiving the transfer. As such, the second department production report will contain an additional column to
the left to detail the equivalent units and unit costs of transferred-in costs. These costs are combined with that
department's own materials, labour, and overhead costs, producing a total unit cost, which in turn is
transferred out to another production department or to finished goods.
3.5 Production report — FIFO method

LEVEL 1
Using FIFO, the equivalent units are calculated differently because the equivalent work done on the opening
work in process last period is excluded from the computation. The resulting equivalent units of production of
4,850 for materials and 4,840 for conversion give the measure of work done for each cost category in the
current period. The numerator for the unit cost calculation is therefore the cost added during the current
period for materials and conversion. The opening work in process costs are ignored for the unit cost
calculation.
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The costs accounted for calculation for FIFO is complex. You must first cost the completion of the opening
work in process. This is 45% for materials and 70% for conversion costs because the materials and
conversion costs were 55% and 30%, respectively, completed at the beginning of the period. Units both
started and completed in the period have to be calculated before they can be costed. Ending work in process
is costed the same way as for the weighted-average method.
Exhibit 4-14 compares the weighted-average method and the FIFO method.
Reading 3-1 (To view the content from this link go to end of document.) provides a more detailed comparison
of the two methods.
3.6 Shrinkage, spoilage, and lost units

LEVEL 1
Shrinkage and lost units are briefly discussed in Supplement B (SB-1) of the textbook. In many industries,
the loss of units is an unavoidable aspect of their manufacturing operations. Consequently, shrinkage and lost
units are necessary components in the study of process costing. Also, management would need to know what
has been lost in order to control its production process. A machine breakdown, operator error, or an accident
can result in units being lost. Evaporation or simply machine tolerances can result in fewer good units being
finished than were started.
Carefully study Reading 3-2 (To view the content from this link go to end of document.), which explains and
illustrates alternative ways of dealing with spoilage and lost units.
Note: On page 4 of Reading 3-2, standard costing methods are mentioned. This material is not examinable
in this course and its detailed discussion has therefore been removed from the reading.
3.7 Operation costing

LEVEL 2
Job-order costing is a costing system used for products that are made to the customer's specifications.
Process costing is used for products that are identical. Some products may have part of their operations
costed using the job-order costing system and other parts costed using the process costing system. This
mixed accounting system is called operation costing. The cost of the product is the total of some costs
applied on an average or FIFO basis and other costs accumulated specifically for that product.
For example, consider the cost of a pizza. All crusts have the same per unit cost for the dough and the labour.
The cost of one layer of cheese may be added to the basic cost. These costs may be tracked by a process
costing system. The cost of the toppings are recorded by a job cost system because the toppings' cost
depends on the type of pizza prepared.
In the previous two modules and this module, you learned about manufacturing innovations (JIT, FMS) that
are making operations more efficient. Flexible manufacturing systems streamline operations so that costs
become more generalized rather than specific to each job. When costs are generalized, process costing may
be used. Therefore, FMS not only streamlines the physical process but leads to efficiency in the accounting
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process.
Online chapter summary
This topic marks the end of the textbook coverage of process costing. To ensure you understand this material
and the corresponding terminology, read the summary on pages 162 work through the review problem on
pages 162-165, and go to the Online Learning Centre, click Contents, choose Chapter 4, select Chapter
Summary and review the material thoroughly. If you are unclear on how to access or use this site, refer to the
Online Learning Centre (OLC) Guide in the course navigation pane.
Note:
1. There is an error in the solution to Review Problem 1 in the textbook on page 163. In the T-accounts
for journal entry e, the entry to Finished Goods should be a debit.
2. There is an error in the solution to Review Problem 2 on page 165. For part 1, the Conversion units for
Total units accounted for should be 542,500.
For part 2, the conversion cost per equivalent unit = $939,675 ÷ 542,500 = $1.73.
3.8 Computer illustration 3-1: Production report — Weighted-

average method and FIFO method
LEVEL 1
In Chapter 4 of the textbook, the preparation of a production report using the weighted-average method and
the FIFO method is explained in detail. The reconciliation of costs charged to production under FIFO is also
explained well in the textbook reading (Appendix 4A). This computer illustration contrasts the two methods
and demonstrates how you can use a spreadsheet program to prepare a production report and a cost
reconciliation for both methods.
Material provided
A prebuilt worksheet M3P1, which you will complete

A completed solution worksheet M3P1S, to which you can compare your work
Description
Problems P4-15 and P4-16 in your textbook require you to prepare a production report for the mixing
department for the month of June 2005 using the weighted-average method and the FIFO method,
respectively.
Required
Complete the worksheet M3P1 by entering the required formulas.
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Procedure
First familiarize yourself with the information in Exhibits 4-10 and 4-13. Note how the various costs are
calculated and recorded. Then perform the following steps.
1. Open the file MA1M3P1 and click the sheet tab M3P1.
2. Study the layout of the worksheet. Cells A6 to E14 contain the data table with the information
provided in Problem P4-15 (page 176-177).
Move to cell B12 and observe the formula displayed:
=IF (C8+C9<>C10+C11, "******ERROR IN DATA TABLE******, "COSTS")

This formula can be analyzed as follows: if beginning WIP (C8) plus units started into production (C9)
do not equal (<>) units completed and transferred out (C10) plus ending WIP (C11), then the error
message
******ERROR IN DATA TABLE******
is displayed in B12. If C8+C9=C10+C11, then B12 displays the label COSTS. (You can test this by
entering 60,000 in C8. The error message should appear.) The purpose of this formula is to reduce the
chance of data entry errors that will carry down through the production report.
3. Display rows 16 to 29. Notice the way the worksheet is set up. Columns A to C contain the quantity
schedule for the weighted-average method. Columns F to I contain the quantity schedule for the FIFO
method.
4. Display rows 24 to 29. Observe the difference in presentation of the units accounted for between the
weighted-average method and the FIFO method. The FIFO method separates the units in beginning
inventory from the units started and completed in the current month while the weighted-average
method does not.
5. Move down rows 30 to 70, which contain a partially completed production report for both methods of
calculating unit costs. The production report for the weighted-average method appears in columns A to
E. The production report for the FIFO method appears in columns F to J. Notice that some cells show a
value of 0. These cells contain formulas that have been pre-entered to save you time. When you have
completed the equivalent unit calculations, these cells will show the correct values.
6. Enter in cells B39 to C40 the required formulas to calculate the equivalent units of production under
the weighted-average method.
7. Enter in cells G38 to H40 the required formulas to calculate the equivalent units of production under
the FIFO method. Note the difference in presentation from the weighted-average method. As discussed
in the textbook, when calculating equivalent units under the FIFO method, the amount of work to be
completed on the units of beginning inventory must be shown. Then the number of units started and
completed are shown, followed by the amount of work completed on units in process at the end.
8. Enter in row 48 the required formulas to calculate the unit cost of production under both methods.
9. Complete the worksheet by entering the necessary formulas in the following cells.
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10. After you have completed the worksheet, save a copy.
11. Print a copy of your sheet.
12. Next, click the M3P1S tab for the solution. Compare the solution with your printout from step 11. If
you do not have the same results, go to step 13.
13. Print a copy of the formulas of your worksheet, and compare them with the formulas of the solution
worksheet. Correct any errors.
Conclusion
The only difference between the weighted-average method and the FIFO method is the treatment of the
beginning inventory. The FIFO method separates the transferred units into units from the beginning
inventory and units started and completed during the current period. The FIFO method is therefore more
complex than the weighted-average method; however, it more accurately reflects the production costs
incurred during the current period.
Audio lectures
Audio lectures are available for this module. System requirements and instructions on how to access the
online lectures are included.
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Module 3 summary
Homogeneous products or services produced on a continuous basis are the major features of the applicability
of process costing.
Topic 3.1 shows that what distinguishes process costing from the job-order system is the accumulation of
costs by department rather than by job.
Topic 3.2 tracks the flow of costs in the process costing system.
Topic 3.3 introduces the concept of equivalent units. These equivalent units must be determined in order to
compute unit costs in a given department.
Two methods are usually used to prepare a production report that summarizes the activity in a department:
weighted average and FIFO. Respectively, Topic 3.4 and Topic 3.5 deal with the issues as a result of the
application of each of these methods.
Because of the nature of manufacturing operations, shrinkage, spoilage (normal and abnormal), and lost units
cannot be avoided. Topic 3.6 explores the way to account for and dispose of their costs.
Topic 3.7 introduces a hybrid cost system — operation costing — which combines accounting treatment
borrowed partly from job-order and partly from process costing. Also, this topic discusses the impact of the
flexible manufacturing system.
Finally, Topic 3.8 concludes the module with the production report and cost reconciliation under the
weighted average and FIFO methods.
Module 3 self-test
Question 1
Computer question
Before you attempt this question, you should work through Computer illustration 3-1.
Description
Walton Company uses process costing. After three months of intensive effort, the company has converted its
Midvale plant to an FMS layout and has installed necessary automated equipment in the various cells. As of
the first of last month (May) the company also initiated a JIT system on inventory control. In the past, work
in process inventories have been a problem in that partially completed materials have accumulated in work
areas and impeded the efficiency of operations. But during the last month, the company's new JIT system, in
conjunction with the FMS layout, has allowed the company to clear out its in-process items and maintain a
smooth flow of goods to meet current demand. Production data for May are as follows:
Units Materials Conversion
Work in process, May 1 110,000 $ 65,000 $ 45,000
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Started into production 550,000

Completed and transferred out 660,000 ? ?
Work in process, May 31 —
Cost added during the month 512,000 714,000
The May 1 Work in process inventory was 60% complete as to materials and 40% complete as to conversion
costs. The company uses the FIFO method to account for cost flows.
Required
1. Use the procedure described after the "Required" to electronically prepare a production report for May.
From this report, answer the following questions:
a. What was the total cost of one unit of production for the month of May?
b. What was the total cost of goods transferred to finished goods inventory during the month of
May?
2. Use the procedure described and these additional data to electronically prepare a production report for
June:
During the following month (June), the company is able to increase its efficiency in the Midvale plant
so that 720,000 units are started into production. Also, through JIT the company is able to keep work
in process inventories from accumulating in the plant. The company incurs $586,000 in cost for
materials and $602,000 in conversion cost for the month.
From this report, answer the following questions:
a. What was the total cost of goods transferred to finished goods inventory during the month of
June?
b. How (if at all) would the report you just prepared differ if the company was using the weighted-
average method to account for cost flows?
Source: Ray H. Garrison, Managerial Accounting, Third Canadian Edition, Problem P4-31, page 194.
Copyright © 1996, by McGraw-Hill Ryerson Limited. Adapted with permission.
Procedure
1. Open the file MA1M3Q1.
2. Examine the layout of the worksheet.
3. Display rows 19 to 29, and observe that the formulas in the quantity schedule have been pre-entered to
save you time.
4. Move to row 32. Rows 32 to 65 contain a partially completed production report. Notice again that
some of the formulas have been pre-entered.
To complete requirement 1
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5. Following the example of Computer illustration 3-1 and, using the information given above, complete
the data table in rows 7 to 15.
6. Complete the production report in rows 37 to 65 by entering the required formulas.
7. After you have completed the worksheet, save it.
To complete requirement 2
8. Retrieve your solution to requirement 1 and modify the data table in accordance with requirement 2 in
the problem. Modify the statement title in cell A34.
9. Observe the modified quantity schedule and production report.
10. Save the worksheet under a different name than the name used for your solution to requirement 1.
Solution
Question 2
Computer question
Before you attempt this question, you should work through Computer illustration 3-1.
Description
Durall Company manufactures a plastic gasket that is used in automobile engines. The gaskets go through
three processing departments: mixing, forming, and stamping. The company's accountant (who is very
inexperienced) has prepared a summary of production and costs for the mixing department for October 2005,
as follows:
Mixing department costs:

Work in process inventory, October 1, 5,000 units,
1/10 complete as to labour and overhead $ 27,620 *
Material A added during the month
(added at the start of work in the mixing department) 92,400
Material B added during the month (added when
processing is 30% complete in the mixing department) 36,200
Conversion costs added during the month 126,200
Total departmental costs $282,420
Mixing department costs assigned to:

Units completed and transferred to the forming
department, 105,000 units at $2.6897 each $282,420
Work in process inventory, October 31, 10,000 units,
3/8 complete as to labour and overhead —
Total departmental costs assigned $282,420
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* Consists of material A, $12,700; material B, $8,070; and labour and overhead, $6,850.
Labour and overhead costs are incurred evenly during processing in the mixing department.
After mulling over the data above, Durall's president commented, "I can't understand what's happening here.
Despite a concentrated effort at cost reduction, our unit cost actually went up in the mixing department last
month. With that kind of performance, year-end bonuses are out of the question for the people in that
department."
The company uses the weighted-average method to account for units and costs.
Required
1. Use the procedure described below to electronically prepare a production report for October. From this
report, answer the following questions.
a. What was the total cost of one unit of production for the month of October?
b. What was the total cost of goods transferred to the forming department during the month of
October?
2. Assume that in order to remain competitive, the company undertook a major cost-cutting program
during October. Would the effects of this cost-cutting program tend to show up more under the
weighted-average method or under the FIFO method? Explain your answer.
3. Explain to the president why the $2.6897 unit cost figure appearing on the report prepared by the
accountant is so high.
Source: Ray H. Garrison, Managerial Accounting, Third Canadian Edition, Case C4-27, pages 202-203.
Note: Answer requirement 1 using the following procedure, then answer requirements 2 and 3 manually.
Procedure
1. Open the file MA1M3Q2.
2. Examine the layout of the worksheet. The worksheet resembles the one used in Computer illustration
3-1. Note the error message displayed in cell B13. This message should disappear after you enter the
correct formula in cell B9.
3. Enter in cell B9 the formula to calculate the number of units started into production.
4. Complete the data table by entering, for the WIP inventory, the percentage of completion for labour
and overhead, and for Materials A and B. Cells C8 to E8 are for the beginning WIP inventory, and
cells C11 to E11 are for the ending WIP inventory.
5. Using Computer illustration 3-1 as an example, complete the production report beginning in row 37.
Note that cells B52, D52, B55, B56, B61, and D61 already contain formulas. These formulas have
been pre-entered for you.
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6. After you have completed all requirements, save the worksheet.
7. Manually answer the rest of the question.
Solution
Question 3
Multiple choice
a. Which of the following is least likely to be produced in a process costing system?
1. Custom furniture manufacturer

2. Compact disc manufacturer
3. Automobile windshield manufacturer
4. Electronics manufacturer
b. Which of the following is true regarding process costing?
1. It applies only to the manufacture of products.

2. It applies only to the provision of services.
3. It applies to the manufacturing and service industries.
4. It involves only heterogeneous products.
c. Equivalent units of production are equal to which of the following?
1. The number of units actually finished

2. The number of units that could have been completed if 100% of materials and conversion costs
were applied to units started and completed in that period
3. The number of units actually finished plus the unfinished units in work in process at the end of
the period
4. The number of units started in the period less the unfinished units in ending work in process for
the same period
d. Beginning work in process includes 20,000 units that are 60% complete. Which of the following
describes the meaning of this statement?
1. 40% of these units will be transferred out this period.

2. 12,000 of the 20,000 units are incomplete.
3. Each of the 20,000 units are 40% incomplete.
4. 8,000 of the 20,000 units are incomplete.
e. On a production report, what is true about the total units and costs to account for and how they are
accounted for?
1. They are seldom identical in amount because of normal/abnormal spoilage.

2. The totals should be identical if all the units and costs are accurately reported.
3. They are different in amount by the amount of current costs assigned to work in process.
4. They are different in amount according to the difference in overhead applied and actual
overhead incurred.
f. In order to calculate the equivalent units of production, what must you be able to reasonably estimate?
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1. Units completed
2. The percentage of completion
3. Units started and completed
4. Spoiled units
g. Assuming that materials are added at the beginning of the process and conversion costs are added
equally throughout the process, what are the materials and conversion costs that must be added in 2005
to complete 2004 ending work in process that is 60% complete?
1. 100% materials; 60% conversion costs

2. 100% materials; 40% conversion costs
3. 0 materials; 60% conversion costs
4. 0 materials; 40% conversion costs
h. Assuming no spoilage and that there are 5,000 units in work in process on October 31 and 45,000 units
were started into production during October, how many units were in work in process on October 1 if
43,000 units were completed during October?
1. 0
2. 3,000
3. 5,000
4. 7,000
i. Assuming there were 20,000 units in beginning work in process; 61,000 good units completed during
the period; 6,000 units in ending work in process; and 3,000 units spoiled, how many units were
started during the accounting period?
1. 41,000
2. 47,000
3. 50,000
4. 55,000
Solution
Question 4
Multiple choice
a. Assuming no beginning work in process, what is the number of equivalent units if 20,000 units were
started during the period and there are 4,000 units in ending working in process that are 30%
complete?
1. 15,200
2. 17,200
3. 18,800
4. 21,200
b. There are 8,000 units in beginning inventory that are 80% complete, and 20,000 units were started
during the period. If ending work in process consists of 4,000 units that are 40% complete, what is the
number of equivalent units assuming FIFO?
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1. 19,200
2. 20,000
3. 24,000
4. 24,800
c. Assume the following information under FIFO:
Beginning work in process ? units; 70% complete

Units started 36,000 units
Ending work in process 9,000 units; 40% complete
How many units were in beginning work in process if the equivalent units of production are 32,400?
1. 1,260
2. 1,800
3. 3,600
4. 6,000
d. Assume the following information under FIFO:
Beginning work in process 4,000 units; 70% complete

Units started ?
Ending work in process 7,000 units; 20% complete
How many units were started into production during the period if the equivalent units of production
are 15,000?
1. 17,800
2. 19,400
3. 20,600
4. 22,200
e. Assume the following information under FIFO:
Beginning work in process 20,000 units; 60% complete

Units started & completed 48,000 units
Ending work in process ? units; 20% complete
How many units were in ending work in process if the equivalent units of production are 60,000?
1. 0
2. 5,000
3. 10,000
4. 20,000
f. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in
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process of 8,000 units 40% complete. If materials are added at the beginning of the process and
conversion costs occur uniformly during processing, what are the equivalent units for material and
conversion costs respectively under a FIFO assumption?
1. 40,000; 37,200
2. 40,000; 43,200
3. 50,000; 47,200
4. 50,000; 53,200
g. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in
process of 8,000 units 40% complete. If materials are added halfway during the process and
conversion costs respectively under a FIFO assumption?
1. 42,000; 37,200
2. 42,000; 43,200
3. 52,000; 37,200
4. 52,000; 43,200
h. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in
process of 8,000 units 40% complete. If materials are added at the beginning of the process and
conversion costs respectively under a weighted average assumption?
1. 40,000; 43,200
2. 40,000; 45,200
3. 50,000; 45,200
4. 50,000; 50,000
i. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in
process of 8,000 units 40% complete. If materials are added halfway during the process and
conversion costs respectively under a weighted average assumption?
1. 42,000; 43,200
2. 42,000; 45,200
3. 50,000; 45,200
4. 50,000; 50,000
j. How many units were completed and transferred out if beginning work in process consisted of 400
units, units started during the period were 6,400, and ending work in process showed a balance of
1,200 units?
1. 5,600
2. 6,000
3. 6,800
4. 7,600
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k. Consider the following information:
Direct materials $8/unit

Direct labour $6/unit
Beginning work in process 5,000 units
What was the total cost to complete the beginning work in process units assuming the units were 90%
complete as to materials and 40% complete in terms of conversion costs and overhead is applied at the
rate of 150% of direct labour cost?
1. 22,000
2. 48,000
3. 49,000
4. 66,000
l. Consider the following information in the Finished Goods Inventory account:
$64,000 ending balance

$90,000 beginning balance
$460,000 for costs transferred in
The journal entry to record the cost of goods sold would include which of the following?
1. Credit to Finished goods inventory of $460,000

2. Debit to Cost of goods sold for $460,000
Solution
Question 5
Textbook, Problem 4-23, Requirement 1 only, pages 180-181.
Solution
Question 6
Textbook, Problem 4-17, page 177.
Solution
Question 7
Textbook, Problem 4-25, pages 182-183.
Solution
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Self-test - Content Links
Solution 1
Computer solution
Requirement 1
a. The total cost of one unit of production for the month of May was $2.02.
b. The total cost of goods transferred to finished goods inventory during the month of May was
$1,336,000.
Requirement 2
a. The total cost of goods transferred to finished goods inventory during the month of June was
$1,188,000.
b. As long as the work in process inventories are maintained at a zero level, there will be no difference
between the production report prepared under the FIFO and weighted-average methods.
Source: Ray H. Garrison, Solutions Manual to accompany Managerial Accounting, Third Canadian Edition.
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Solution printout
Requirement 1
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Requirement 1
Formula printout
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Solution 2
Computer solution
Requirement 1
a. The total cost of one unit of production for the month of October was $2.52.
b. The total cost of goods transferred to the forming department during the month of October was
$264,843.
Requirement 2
The effects 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 against 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 costs of the current period, which will tend to mask
somewhat the effects of the cost-cutting effort.
Requirement 3
The unit cost figure 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.
Source: Ray H. Garrison, Solutions Manual to accompany Managerial Accounting, Third Canadian Edition,
Case C4-27, pages 202-203. Copyright © 1996, by McGraw-Hill Ryerson Limited. Adapted with
permission.
Page 21 of 32
Solution printout
Page 22 of 32
Page 23 of 32
Formula printout
Page 24 of 32
Solution 3
Multiple choice
a. 1)
Job order costing is most likely used in the production of custom furniture or any custom product.
b. 3)
Process costing is used by both manufacturers and service providers.
c. 2)
Equivalent units of production are the number of units that could have been completed if 100% of
materials and conversion costs had been applied to units started and completed during the period.
d. 3)
e. 2)
Page 25 of 32
f. 2)
You must be able to reasonably estimate the percentage of completion in order to calculate the
equivalent units of production.
g. 4)
Since materials are added at the beginning of the process and the units are 60% complete, no materials
are required to complete these units. In terms of conversion costs, 40% more must be added to
complete these units since 60% of the conversion costs have already been added.
h. 2)
Since there were 43,000 units completed during October and 5,000 units in ending work in process,
there are 48,000 units to account for. 48,000 units less 45,000 units started into production during
October means there must have been 3,000 units in beginning work in process on October 1.
i. 3)
61,000 + 6,000 + 3,000 = 70,000 units to account for; 70,000 – 20,000 = 50,000 units started during
the period
Solution 4
Multiple choice
a. 2)
20,000 – 4,000 = 16,000 units completed; 4,000 × 30% = 1,200; 16,000 + 1,200 = 17,200 equivalent
units.
b. 1)
8,000 × 0.2 = 1,600; 20,000 – 4,000 = 16,000; 4,000 × 0.4 = 1,600; 1,600 + 16,000 + 1,600 = 19,200
equivalent units.
c. 4)
Beginning WIP units + Units started and completed + Ending WIP units = Total; Units Started and
completed + Ending WIP units = Total units started this period; 36,000 – 9,000 = 27,000 units started
and completed; 9,000 × 0.4 = 3,600; 32,400 – (27,000 + 3,600) = 1,800 equivalent units in Beginning
work in process; 1,800 ÷ 0.3 = 6,000 units in Beginning work in process.
d. 2)
(4,000 × 0.3 = 1,200 equivalent beginning WIP units) + X equivalent units started = 15,000 total
equivalent units; X = 13,800; X equivalent units started and completed + (7,000 × 0.2 = 1,400
equivalent ending WIP units) = 13,800 equivalent units started; X = 12,400; 12,400 units started and
completed + 7,000 ending WIP units = 19,400 actual units started.
Page 26 of 32
e. 4)
(20,000 × 0.4 = 8,000 equivalent beginning WIP units) + X equivalent units started = 60,000 total
equivalent units; X = 52,000; 48,000 equivalent units started and completed + X ending inventory
units × 0.2) = 52,000 equivalent units started; X = 20,000 ending inventory units.
f. 2)
Equivalent units
Actual Direct Conversion
units materials costs
10,000 0 8,000
32,000 32,000 32,000
8,000 8,000 3,200
50,000 40,000 43,200
g. 2)
Equivalent units
10,000 10,000 8,000

32,000 32,000 32,000
8,000 0 3,200
50,000 42,000 43,200
h. 3)
Equivalent units
42,000 42,000 42,000

8,000 8,000 3,200
50,000 50,000 45,200
i. 2)
Equivalent units
Page 27 of 32
12,000 42,000 42,000

38,000 0 3,200
50,000 42,000 45,200
j. 1)
400 + 6,400 = 6,800 units to account for; 6,800 – 1,200 = 5,600 units completed and transferred out.
k. 3)
(8 × 5,000 × 10% = 4,000) + (6 × 5,000 × 60% = 18,000) + (18,000 × 150% = 27,000) = 49,000
l. 3)
$90,000 + $460,000 – $64,000 = $486,000
Solution 5
Problem 4-23
Source: Ray H. Garrison, Eric W. Noreen, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to
Page 28 of 32
accompany Managerial Accounting, Sixth Canadian Edition. Copyright © 2004, by McGraw-Hill Ryerson
Limited. Reproduced with permission.
Solution 6
Problem 4-17
Page 29 of 32
Page 30 of 32
Solution 7
Problem 4-25
1.
2.
Page 31 of 32
3. The main advantage of using the weighted average method is that it is usually easier to use, as the
calculations are simpler. However, this method tends to obscure current period costs as the cost per
equivalent unit includes both current costs as well as prior period costs that were in the beginning
inventory. The weighted-average method would be most appropriate when conversion costs, inventory
levels, and raw material prices do not fluctuate considerably from period to period.
Page 32 of 32
READING 3-1
Comparing the weighted-average and the FIFO

methods of costing
As you study the weighted-average and FIFO methods of costing, it is important to keep in
mind the purpose of the production report. In the Double Diamond Skis example (text
pages 152-171), the business owner’s request to the controller was based on her need for cost
information. The production report is a way of determining how much of the costs of
production are charged to the finished goods inventory (or to the inventory transferred out)
and how much of the costs belong to the work in process inventory. So although the examples
and most of the work you do seem to be directed towards determining the equivalent units of
production, this is really only an intermediate step. By itself, equivalent units of production is
just one part of the picture; it is when you apply costs toward those units and allocate total
production costs among the inventories that you have meaningful information.
Compare Exhibit 4-10 on page 159 of the text with Exhibit 4-13 on page 169. Notice that the
total units (5,200) and the total cost ($148,000) are the same. Notice also that the equivalent
units in ending inventory is the same in the weighted-average method as it is in the FIFO
method. What differs is where the costs of the opening inventory are charged. Using the
weighted-average method, these costs are added to the current month’s costs and the unit cost
is an average of the total of these costs. Thus, part of last month’s costs affect the value of this
month’s ending inventory. The FIFO method avoids this by saying, in effect, that the first
units transferred out are those that were begun in a previous period, and that the ending
inventory is made up only of the current month’s costs. In the case of Double Diamond Skis,
the unit cost is lower when the cost of the opening inventory is excluded from the calculation
— $30.014 per unit using the weighted-average method, compared to $29.689 per unit using
the FIFO method.
Look at Exhibits 4-10 and 4-13 again. Compare the cost accounted for as transferred to next
department and cost accounted for as work in process. The difference in the two methods
results in $51 less being charged to work in process when the weighted-average method is
used than when the FIFO method is used. The $51 is part of the costs transferred to the next
department. Thus, the total costs to be accounted for are the same, but the allocation of costs
between work in process inventory and the amount transferred to the next department differs.
In this appendix, you will look at the production reports for a fictional company in
which purchased material prices are stable some months and rise dramatically in other
months. Example A3.1 will contrast and compare the effect of stable and changing prices on
the cost allocations that result, using the weighted-average and the FIFO methods. It will also
demonstrate that a change in the work in process percent complete does not result in a
different cost allocation using the weighted-average than the FIFO method. To simplify the
example, conversion costs and conversion percent complete will remain unchanged.
Management Accounting 1 Reading 3-1 1

EXAMPLE A3.1
Papier Mâché Arts, Inc. produces piñatas and sells them to party-supply stores. The molding
department produces the forms by applying papier mâché in a series of stages. Each
application of papier mâché requires the same amount of material. Conversion time is less in
the later applications because the form becomes set and is easier to work with as successive
layers of papier mâché are applied. From the molding department, the piñatas are transferred
to the painting department. Prices have been steady for several years and the production
report for the molding department has been straightforward. However, a dramatic price
increase in the material used in the molding department has focused management’s attention
on this critical process. As Papier Mâché’s accountant, you want to be sure that costs are
allocated correctly between the work in process inventory and the inventory transferred to the
painting department. The production reports for Papier Mâché Arts Inc. for the months of
March, April, May, and August follow as Exhibits A3-1 through A3-4. Notice that for each
month, a production report is prepared using both the weighted-average and the FIFO
methods. These reports will be compared to illustrate what effect, if any, changing prices and
changes in the percent complete have on the allocation of costs.
Exhibit A3-1 is the production report for March. Material costs are $10 per unit, and
conversion costs are $2 per unit. At the beginning of March, there were 10 units in process in
the molding department — 30% complete as to materials, and 50% complete as to conversion
costs. The cost of the work in process is $40. Per unit material costs and conversion costs are
unchanged during the month. Costs added during the month are $240. At the end of March,
there is no change in the number of units in process or the percent complete; 20 units have
been completed and transferred out, and 10 remain in process. You will notice that both the
weighted-average method and the FIFO method result in the same cost allocation — $40 of
the total costs remain with the work in process inventory, and $240 of the costs are
transferred out to the painting department. Review Exhibit A3-1 to see how the reports differ
and how they are the same. File MA1M3P2 (the four sheets are reproduced as Exhibits A3-1
to A3-4) contains the production data and production reports for Papier Mâché Arts, Inc.
Once you are satisfied that you understand how this worksheet functions, turn to Exhibit 3-2,
the April production report.
In April, the molding department again completed 20 units and 10 remain in process at the
end of the month. The units in process are more complete than those in the opening inventory
— 85% complete as to material, and 90% complete as to conversion costs. Notice that once
again, the allocation of costs between work in process inventory and costs transferred out are
the same using the FIFO method as they are using the weighted-average method. This is
because the costs, which determine the allocation, are unchanged. The change in percentage
complete does not result in a different cost allocation. This would be the case as long as the
per-unit costs remain the same, even if the number of units changed.
2 Reading 3-1 Management Accounting 1

EXHIBIT A3-1
A B C D E F G H I J
1 MA1: PRODUCTION REPORT: Weighted-average method compared to FIFO method
2 CGA-CANADA No change in prices, or usage
3 No change in percent complete
4 Exhibit A3-1
5 DATA TABLE Material cost per unit: opening $10.00
6 Percent complete purchases $10.00
7 Units Materials Conversion Conversion cost per unit: $2.00
8 Work in process, March 1 10 30% 50%
9 Started into production 20
10 Completed and transferred out 20
11 Work in process, ending 10 30% 50%
12 COSTS
13 Work in process, beginning $30 $10
14 Cost added during March $200 $40
15
16 WEIGHTED-AVERAGE METHOD FIFO METHOD
17
18 QUANTITY SCHEDULE QUANTITY SCHEDULE
19 Units to be accounted for: Units Units to be accounted for: Units
20 Units in process, beginning 10 Units in process, beginning 10
21 Units started into production 20 Units started into production 20
22 Total units to account for 30 Total units to account for 30
23
24 Units accounted for: Units accounted for:
25 Units transferred out 20 Units from beginning inventory 10
26 Units in process, ending 10 Units started and completed in March 10
27 Units in process, ending 10
28 Total units accounted for 30 Total units accounted for 30
29
30 PAPIER MACHE ARTS, INC. PAPIER MACHE ARTS, INC.
31 Molding Department Production Report Molding Department Production Report
32 (Weighted-Average Method) (FIFO Method)
33 For the month of March 2001 For the month of March 2001
34
35 Quantity Schedule and Equivalent Units Quantity Schedule and Equivalent Units
36
37 Equivalent units: Materials Conversion Total Equivalent units: Materials Conversion Total
38 W-I-P beginning 7 5
39 Completed 20 20 Started and completed 10 10
40 W-I-P ending 3 5 W-I-P ending 3 5
41 Equiv. units of production 23 25 Equiv. units of production 20 20
42
43 Total and Unit Costs Total and Unit Costs
44 Costs: Costs:
45 W-I-P beginning $30 $10 $40
46 Current 200 40 240 Current $200 $40 $240
47 Total cost $230 $50 $280 Total cost $200 $40 $240
48 Weighted-average unit cost 10.0000 2.0000 12.0000 Unit cost 10.0000 2.0000 12.0000
49
50 Cost reconciliation: Cost reconciliation:
51 Materials Conversion
52 Units Cost Equ.Units Equ.Units Cost
53 Cost to be accounted for: Cost to be accounted for:
54 W-I-P beginning 10 $40 W-I-P beginning 7 5 $40
55 Cost added in period 20 240 Added in period 13 15 240
56 Total cost to account for 30 $280 Total to account for 20 20 $280
57
58 Cost accounted for: Cost accounted for:
59 Transferred out 20 $240 Units from beg. inventory
60 W-I-P ending 10 Work in process, March 1 $40
61 Materials cost $30 Cost to complete 7 5 80
62 Conversion cost 10 Total cost 120
63 Total cost in W-I-P 40 Units started and completed 10 10 120
64 Total cost accounted for 30 $280 Total cost transfered $240
65 Work in process, ending
66 Materials cost 3 $30
67 Conversion cost 5 10
68 Total cost in W-I-P 40
69 Total cost accounted for 20 20 $280
70
71

EXHIBIT A3-2

Now turn to Exhibit A3-3, the May production report. The company’s suppliers announced a
price increase that was effective May 1. As Papier Mâché Arts, Inc. uses a just-in-time
system, all the materials consumed in May were purchased at the higher price. Material costs
doubled from $10 per unit to $20 per unit. The units in process at the end of the month were
at the same stage of completion as those in process at the beginning of the month — 85%
complete as to materials and 90% complete as to conversion costs. In this case, the weighted-
average method results in a different allocation between costs transferred out and work in
process than does the FIFO method. As the percent complete has not changed, you can
conclude that this is due to the change in costs.
Now follow this difference through the worksheet. Look at the different cost allocation that
results from the two methods — $25 more was charged to work in process using the FIFO
cost allocation than was charged using the weighted-average cost allocation. You can see how
the $25 difference is arrived at by analyzing the components of work in process and of the
costs transferred out. The difference is all in the material costs; both methods charge the same
amount of conversion costs to work in process because the conversion costs have not
changed. Using FIFO, the material work in process inventory consists of 10 units that are
85% complete using materials that cost $20 per unit, or $170. Using the weighted-average
method, material costs include both the costs in opening inventory and costs added during the
month, averaged over the equivalent units produced in the month. Using the weighted-
average method, the material work in process inventory consists of 10 units that are 85%
complete using materials that cost an average of $17.0175 per unit, or $145. Thus, the $25
difference can be accounted for and the two methods reconciled.
One more change will further illustrate that it is costs, not the degree of completion, that
affect the allocation of costs between work in process and costs transferred out.
Papier Mâché Arts, Inc. shuts down the plant for the last two weeks of June for staff to take
their annual vacation. All work in the molding department is completed and transferred to the
painting department prior to the shutdown. Thus, there is no work in process inventory at the
end of June or the beginning of July; so for the month of June, both the weighted-average and
the FIFO methods transfer all costs to the painting department. During the June shutdown, the
price of materials returned to $10 per unit and stayed at that level throughout July. However,
as other producers return to work, Papier Mâché Arts, Inc.’s supplier introduces a price
increase that is effective as of August 1, and the price returns to $20 per unit. Now look at
Exhibit A3-4, the August production report, and examine the impact of a change in price as
well as a change in the percent complete of the units in progress.

EXHIBIT A3-3

EXHIBIT A3-4

Look at the different cost allocation that results from the two methods — $21 more was
charged to work in process using the FIFO cost allocation than was charged using the
weighted-average cost allocation. You can see how the $21 difference is arrived at by
analyzing the components of work in process and of the costs transferred out. As will be
demonstrated, the difference is all in the material costs; both methods charge the same
amount of conversion costs to work in process because the per-unit conversion costs have not
changed. Using FIFO, the material work in process inventory consists of 10 units that are
70% complete using materials that cost $20 per unit, or $140. Using the weighted-average
method, material costs include both the costs in opening inventory and costs added during the
month, averaged over the equivalent units produced in the month. Using the weighted-
average method, the material work in process inventory consists of 10 units that are 70%
complete using materials that cost an average of $17.0370 per unit, or $119.
To help you understand the reports, following is a summary of the key events in each month:
In March, the percent complete is the same at the end of the month as it was at the beginning
of the month. Prices remain stable. The cost allocation is the same using the FIFO and the
weighted-average method.
In April, the percent complete is greater at the end of the month than it was at the beginning
of the month. Prices remain stable. The cost allocation is the same using the FIFO and the
weighted-average method.
In May, the percent complete is the same at the end of the month as it was at the beginning of
the month. Prices doubled at the beginning of the month. The FIFO method of cost
allocation charges less to “Costs transferred out” and more to “Work in process” than does
the the weighted-average method of cost allocation.
In August, the percent complete is lower at the end of the month than it was at the beginning
of the month. Prices doubled at the beginning of the month. The FIFO method of cost
allocation charges less to “Costs transferred out” and more to “Work in process” than does
the the weighted-average method of cost allocation.
Although these examples have illustrated the effects using material cost changes and have
ignored the effect of any change in conversion costs, a change in conversion costs would have
the same effect as a change in material costs. You may wish to copy file MA1M3P2 and try
some other changes on your own to see the effect that changes have on the cost allocations.
EXAMPLE A3.2
Turn now to Exercises E4-8 and E4-9 on page 173 of the textbook. The overhead will be
ignored in these exercises to provide one more illustration of the difference between the
weighted-average and the FIFO methods of allocating costs of work in process to inventory.
The FIFO method allocates $299 more to work in process inventory than does the weighted-
average method.
Exhibit A3-5 contains the production reports for this example. By following the exhibit (also
available as MA1M3P3), you can see how the difference of $299 is arrived at. $274 [(1.2000
– 1.1909) × 60% complete × 50,000 work in process units] is in the material costs, and $25
[(0.5000 – 0.4975) × 20% complete × 50,000 work in process units] is in the conversion
costs. Comparing the production reports again demonstrates that it is the change in costs that
results in different cost allocations when the FIFO method is used, compared to the weighted-
average method.

EXHIBIT A3-5

READING 3-2
SPOILAGE
Charles T. Horngren, George Foster, Srikant M. Datar, and Howard D. Teall, Cost Accounting — A Managerial Emphasis,
First Canadian Edition (Scarborough, Ontario: Prentice-Hall Canada, Inc., 1997), pages 644-652. Reproduced with the
permission of Pearson Education Canada, Don Mills, Ontario.

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Management Accounting Fundamentals [MA1]

Module 3: Process costing

Chapter 4, pages 146-171

3.4 Prepare a production report using the weighted-average method. (Level 1)

3.5 Prepare a production report using the FIFO method. (Level 1)

3.6 Compute the cost of lost units or shrinkage. (Level 1)

3.1 Comparison of job-order and process costing

3.2 A perspective of process cost flows

Activity 3-1 Comparison of job-order and process costing

3.3 Equivalent units of production

Notice the following fundamental inventory relationship:

Beginning inventory + Transferred in = Transferred out + Ending inventory

Here, "units" means the number of items that were finished.

3.4 Production report — Weighted-average method

3.5 Production report — FIFO method

3.6 Shrinkage, spoilage, and lost units

3.7 Operation costing

Online chapter summary

3.8 Computer illustration 3-1: Production report — Weighted-

A prebuilt worksheet M3P1, which you will complete

Complete the worksheet M3P1 by entering the required formulas.

Move to cell B12 and observe the formula displayed:

=IF (C8+C9<>C10+C11, "******ERROR IN DATA TABLE******, "COSTS")

******ERROR IN DATA TABLE******

10. After you have completed the worksheet, save a copy.

11. Print a copy of your sheet.

Units Materials Conversion

Work in process, May 1 110,000 $ 65,000 $ 45,000

Started into production 550,000

From this report, answer the following questions:

1. Open the file MA1M3Q1.

2. Examine the layout of the worksheet.

6. Complete the production report in rows 37 to 65 by entering the required formulas.

7. After you have completed the worksheet, save it.

9. Observe the modified quantity schedule and production report.

Mixing department costs:

Mixing department costs assigned to:

1. Open the file MA1M3Q2.

6. After you have completed all requirements, save the worksheet.

7. Manually answer the rest of the question.

a. Which of the following is least likely to be produced in a process costing system?

1. Custom furniture manufacturer

b. Which of the following is true regarding process costing?

1. It applies only to the manufacture of products.

c. Equivalent units of production are equal to which of the following?

1. The number of units actually finished

1. 40% of these units will be transferred out this period.

1. They are seldom identical in amount because of normal/abnormal spoilage.

1. 100% materials; 60% conversion costs

c. Assume the following information under FIFO:

Beginning work in process ? units; 70% complete

d. Assume the following information under FIFO:

Beginning work in process 4,000 units; 70% complete

e. Assume the following information under FIFO:

Beginning work in process 20,000 units; 60% complete

k. Consider the following information:

Direct materials $8/unit

l. Consider the following information in the Finished Goods Inventory account:

$64,000 ending balance

1. Credit to Finished goods inventory of $460,000

Textbook, Problem 4-23, Requirement 1 only, pages 180-181.

Textbook, Problem 4-17, page 177.

Textbook, Problem 4-25, pages 182-183.

=IF (C8+C9<>C10+C11, "ERROR IN DATA TABLE, "COSTS")

ERROR IN DATA TABLE

Management Accounting 1 Reading 3-1 1

2 Reading 3-1 Management Accounting 1

Management Accounting 1 Reading 3-1 3

4 Reading 3-1 Management Accounting 1

Management Accounting 1 Reading 3-1 5

6 Reading 3-1 Management Accounting 1

Management Accounting 1 Reading 3-1 7

8 Reading 3-1 Management Accounting 1

Management Accounting 1 Reading 3-1 9