Solution manual cost management measuring monitoring and motivating performance 1st by wolcott ch06

QUESTIONS 6.1 Weighted average and FIFO process costing produce similar equivalent unit costs whenever the unit cost of production does not change or whenever there are no beginning or

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Chapter 6 Process Costing

LEARNING OBJECTIVES

Chapter 6 addresses the following questions:

Q1 How are costs assigned to mass-produced products?

Q2 What are equivalent units, and how do they relate to the production process?

Q3 How is the weighted average method used in process costing?

Q4 How is the FIFO method used in process costing?

Q5 What alternative methods are used for mass production?

Q6 How is process costing performed for multiple production departments?

Q7 How are spoilage costs handled in process costing?

Q8 What are the uses and limitations of process cost information?

These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual exercises and problems

COMPLEXITY SYMBOLS

The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems

Questions Having a Single Correct Answer:

No Symbol This question requires students to recall or apply knowledge as shown in the

textbook

e This question requires students to extend knowledge beyond the applications

shown in the textbook

Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10):

 Step 1 skills (Identifying)

 Step 2 skills (Exploring)

 Step 3 skills (Prioritizing)

 Step 4 skills (Envisioning)

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QUESTIONS

6.1 Weighted average and FIFO process costing produce similar equivalent unit costs

whenever the unit cost of production does not change or whenever there are no beginning

or ending work-in-process inventories In addition, the equivalent unit costs will be similar if the number of equivalent units produced during the period is large relative to inventories

6.2 A process would complete more units during the period than it started when there are

more units in beginning inventory than in ending inventory

6.3 This approach would overstate the cost of spoiled units because partially complete units

would be treated as if they had received 100% of direct materials and conversion costs, regardless of the amount actually allocated to those units

6.4 If the beginning and ending inventories are the same from one period to the next, the

number of units started is equal to the number of units completed and transferred out This means that WIP inventory can be ignored when calculating equivalent units

However, if costs change from one period to the next, then the cost allocated to ending WIP will not be the same as the cost allocated to beginning WIP

6.5 Judgment is needed to determine the percentage complete that is used in process costing

calculations Each unit or batch of units is complete to a different degree than other units

or batches because the process is continuous The percent complete is an average

completion percentage that is estimated using judgment

6.6 If the percent completion in year 1 is overestimated, then the equivalent units for those

units will be too high in year 1 In turn, this will cause the cost per equivalent unit in year

1 to be understated In year 2, this misstatement will cause the equivalent units for

completion of beginning WIP to be too low The understatement of equivalent units will cause the cost per equivalent unit to be overstated in year 2

6.7 The weighted average method ignores the period in which product is started In addition,

costs from beginning inventories are added to costs of this period All products

completed are then given an average cost, regardless of when they were started The FIFO method, on the other hand, tracks work completed and costs from the prior period separately from work completed and costs incurred during the current period Under FIFO, beginning WIP consists of last period’s costs and work valued separately At the end of the accounting period, this period’s costs to complete these units are added Then the total costs for beginning WIP from last period and this period are summed and

attached to the beginning inventory units that were completed this period Then the units started and completed this period are valued using this period’s costs If an

organization’s costs fluctuate regularly, the FIFO method will reflect the most current

costs so that managers can investigate changes in cost more quickly

6.8 Goods that are mass-produced have uniform specifications and are made in large batches

or on a continuous assembly line Services that are mass-produced are performed using

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the same skills and time and each task is very similar Goods that are custom produced come in many variations and are made to specifications that vary with each order Many services are custom, such as accounting, health care, and law services because each customer requires different inputs to match their needs While it is relatively easy to track costs for custom made goods by attaching tags or using individual records to log costs of materials and labor, it is impossible to trace costs to mass-produced units Job order costing is used for custom products Direct material and labor costs are traced to each product and overhead costs are allocated using some allocation base that is labor or machine related For mass-production, process costing is used Equivalent units are calculated to account for units that are partially complete Direct materials costs are allocated separately Direct labor and overhead are combined and called conversion

costs These are allocated to complete and partially completed units

6.9 They should be counted as ending WIP inventory in the department Completed units

imply that the units have been transferred to the next department or to finished goods, which is not the case with these units

6.10 This is what is referred to as "continuous processing." Units just entering the process

have had little done to them, while units just about to leave the process have had all or most of the conversion done On average, the units in process are 50% complete as to conversion

6.11 The cost of spoiled units is added to the total cost of goods transferred and increases the

cost per unit

6.12 Job costing is often used when products are manufactured in batches In this firm, a

single batch would have a specific sized wire and specific length of nail The cost of each type of nail will depend primarily on the cost of the type of wire used and the time required for each type Therefore job costing is the most appropriate method This information would be lost if process cost techniques were employed

6.13 Here are three factors 1 If inspection costs are high and the cost to produce a single

unit is very low, managers may decide to reduce the number of time units are inspected

In this case, inspection might occur only when units are completed 2 If production costs are high and units go through several different departments, inspection may take place earlier in the manufacturing process so that spoiled units are caught when they are relatively incomplete 3 If a firm is developing a strategy of high quality products, inspection may take place more often to insure that products are free of defects

6.14 Advantages of reducing spoilage include saving the cost of the spoiled units and being

able to sell those units and increasing the contribution margin In addition, in some industries all firms need to compete on quality, and increased spoilage may lead to

increased defects in units sold, harming the reputation of the company resulting in a loss

of market share Disadvantages might be that the costs incurred do not guarantee that spoilage will be significantly reduced, or that the benefits in improved quality will be worth the costs

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Units completed and transferred out 47,000

Summarize Physical and Equivalent Units

Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP WIP Complete WIP This Period Account for

B FIFO equivalent units are found under Total Work Performed This Period Therefore direct materials equivalent units are 50,000 (excludes beginning inventory because direct materials were added last period and includes ending inventory because materials were added this period), and equivalent units for conversion costs are 47,000 (excluding work done on beginning WIP but including this period’s work to complete those units and including the portion of work completed on ending WIP

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6.16 Fine Fans

A and B

Assumptions for October:

Beginning WIP (FIFO and Weighted Average)

% complete direct materials 100% Direct materials $ 18,000

% complete conversion costs 20% Conversion costs 36,000

Units started 100,000 Total beginning WIP costs 54,000

Units completed and transferred out 94,000 Costs added this month

% complete direct materials 100% Conversion costs 200,000

% complete conversion costs 60% Total costs added 300,000

Total costs to account for $354,000

Work This Period Complete Start Start Total Work Total Beginning Beginning and Ending Performed Units to WIP (20%) WIP (80%) Complete WIP (60%) This Period Account for

Direct materials: Beginning WIP + Direct materials cost = $118,000 =$ 1.08

Equivalent units for total work 109,000 Conversion costs: Beginning WIP + Direct materials cost = $236,000 = 2.29

Equivalent units for total work 103,000

First-in, First-out:

Direct materials: _Direct materials cost _ = $100,000 =$ 1.00

Equivalent units for total work performed this period 100,000 Conversion costs: Conversion costs = $200,000 = 1.98

Equivalent units for total work performed this period 101,200

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6.17 Journal Entry for Abnormal Spoilage

[Note: This problem requires students to extend concepts about journal entries for spoilage from

Chapter 5 to Chapter 6.]

When spoiled units are sold, the net realizable value offsets the cost In this case the total cost of spoiled units is $16,000 (80*$200) However, $2,000 is recovered by selling the spoiled units for their net realizable value The journal entry follows

6.18 Journal Entry for Normal and Abnormal Spoilage

A Number of spoiled units = 10,000 – 8,000 = 2,000

Cost of spoiled units = 2,000*$5 = $10,000

B When all spoilage is normal, the total cost of units (good and spoiled) is transferred into finished goods That cost is $50,000 (10,000*$5) The journal entries follow

C For abnormal spoilage, only the cost of good units is transferred to finished goods The cost of spoiled units is recorded as a separate loss The cost of good units is $40,000 (8,000*$5)

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6.19 through 6.22 Felix and Sons

Assumptions for December:

Units started (12,000 – 8,000 + 6,000) 10,000 Total beginning WIP costs 26,400

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Process Cost Reports for December 31

First-in, First-Out Weighted Average Computation Units Costs Computation Units Costs Beginning WIP

From November cost report 8,000 $26,400 Costs to complete

New units started,

completed, and transferred

Total units completed and

Assumptions for April:

Units started (8,000+40,000-6,000) 42,000 Total beginning WIP costs 9,625

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Direct materials: _Direct materials cost _ = $70,000 =$1.6667

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Process Cost Reports for April

From March cost report 6,000 $ 9,625 Costs to complete beginning

New units started,

completed, and transferred

34,000 93,157

Differences in total costs are due to rounding errors If a spreadsheet is used to make these

calculations, the totals will have fewer rounding errors

C Journal entries for weighted average method for April:

To record the cost of raw materials used in production during April

To record the conversion costs incurred in production during April

To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage)

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Journal entries for FIFO method for April:

To record the cost of raw materials used in production during April

To record the conversion costs incurred in production during April

To record the cost of 40,000 units transferred to finished goods during April (includes the cost of normal spoilage)

6.24 For Seniors Only

A Process costing is appropriate in this situation because the returns are very similar in the amount of time and therefore cost to complete each one If the returns were more

complex or extra research was needed on certain ones, process costing would no longer

be appropriate because there would be too much variation between different returns

B To determine the costs for April, last year’s cost data is needed as well as data from previous months Additional information required is the approximate number of returns will be done, the salary paid to the employees, overhead costs, the number of employees that will be hired for the month, the amount of time each will work, and the amount of time it takes for each return Also, an estimate is needed for the number of returns that are likely to be in progress at the beginning of April

C The first step in determining the cost for April returns is to find the total units in progress and their percent completion In addition, the number of returns to be completed in April needs to be estimated Last year’s data will be useful in estimating this year’s volume Using data mentioned in part B, costs are categorized as direct materials or conversion costs An equivalent cost per unit for the tax returns can then be estimated Once the number of returns for the month of April has been predicted, the equivalent costs can be estimated and a total cost for that month can be predicted It is likely that there will be no ending WIP inventory, because tax returns are due April 15 and this organization’s

clients are likely to file by the due date rather than request extensions

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2 Summarize Physical and Equivalent Units

Work This Period Complete Start Start Total Work Beginning Beginning and Ending Performed Total to WIP (33%) WIP (67%) Complete WIP (40%) This Period Account for

3 Calculate First-in, First-out Cost Per Equivalent Unit

Transferred-in: _Transferred-in costs _ = $224,130 =$ 2.41

Equivalent units for total work performed this period 93,000 Direct materials: _Direct materials cost _ = $166,840 = 1.72

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4 Process cost report for the year

First-in, First-Out Computation Units Costs

Costs to complete beginning WIP:

Total cost of beginning WIP transferred out 15,000 113,292 New units started, completed, and transferred out 82,000*$7.40 82,000 606,800 Total units completed and transferred out 97,000 720,092

Notice that the total costs summarized above ($760,990) are equal to the costs accounted for in the cost report

6.26 Victoria’s Closet-A

A Preparation of process cost report using the weighted average method

Summary of unit information given in the problem:

Beginning (25% complete) 11,000

completed

Normal spoilage 6,600 8,000 Spoiled Abnormal spoilage ???

When computing equivalent units, notice that the ending WIP inventory units are

considered 100% complete with respect to direct materials, since direct materials are added at the beginning of processing However, the ending WIP inventory units are only 75% complete and, hence, have only 75% of the conversion costs (incurred evenly

throughout production) Both normal and abnormal spoilage are assigned 100% of all costs because spoilage occurs just before inspection, which is at the 100% stage of

completion

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1 Summarize Total Costs to Account For

Direct Materials Conversion Costs Total Cost

Total costs to account for $1,700,000 $972,000 $2,672,000

Work Performed This Period Complete Start Start Total Work Total Spoiled Beginning Beginning and Ending Performed Units to Units WIP (25%) WIP (75%) Complete WIP (75%) This Period Account for (100%)

3 Calculate Cost per Equivalent Unit: Weighted Average

Direct materials: Beginning WIP + Direct materials cost = $1,700,000 = $20

Equivalent units for total work 85,000 Conversion costs: Beginning WIP + Direct materials cost = $972,000 = 12

4 Weighted Average Process Cost Report for January

Total units completed and transferred out:

Total Good Units Accounted For 85,000 – 8,000 77,000

B Journal entries:

To record the cost of raw materials used in production during January

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Work in process inventory $942,000

To record the conversion costs incurred in production during January

To record the cost of 61,000 units transferred to finished goods during January (includes the cost of normal spoilage)

To record the cost of abnormal spoilage during January

6.27 Victoria’s Closet-B

A This problem is identical to problem 6.26, except that the FIFO method is used instead of the weighted average method The first two parts of the process cost report are identical under the two methods Therefore, the following solution shows only the last two parts

of the process cost report

3 Calculate Cost per Equivalent Unit: FIFO

Direct materials: _Direct materials cost _ = $1,480,000 =$20.0000

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4 FIFO Process Cost Report for Victoria’s Closet

Costs to complete beginning WIP:

Total cost of beginning WIP transferred out 11,000 349,316 New units started, completed, and transferred out 50,000*$32.0383 50,000 1,601,915

Total Good Units Accounted For 85,000-8,000 77,000

B A standard cost report would be the same as the FIFO cost report from a format

standpoint However, the standard costs would be used instead of equivalent unit costs

That is the only difference

C If Victoria’s Closet wants to set a benchmark for productivity, standard costs are

appropriate A standard cost is an estimate of cost under efficient operations and

therefore acts as a benchmark or budget with which actual costs can be compared The

standards need to be updated regularly, though

6.28 Kim Mills-A

Summary of information given in the problem:

completed

Normal spoilage 3,600 7,000 Spoiled Abnormal spoilage ????

A Abnormal spoilage = 7,000 – 3,600 = 3,400 units

B Spoilage costs = 7,000 x $1,000 = $7,000,000

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C The opportunity costs of spoilage can be measured in several ways First, in addition to the cost of the spoiled units, there is also the contribution margin foregone because the products could not be sold In addition, there are the opportunity costs of bad units that are sold because they pass through inspection without having been detected as spoiled Through word of mouth or services such as Consumer Reports or Good Housekeeping, a company’s reputation may suffer and the organization loses market share These costs can be considerable, especially if competitors have reputations for high quality with similar prices

B Abnormal spoilage for conversion costs = 2,800 (total spoilage per Part A) – 1,800

(normal spoilage) = 1,000 units

C Here are several advantages of inspecting units earlier in their manufacturing process:

Kim saves the rest of the conversion cost that would be added

Units are removed from further handling (storage and control), except to dispose

of them

If the manufacturing process further down the line would tend to hide the defects,

a larger number of defective units are identified, and Kim avoids selling defective units to customers

6.30 Red Dog Products

A and B Weighted average and FIFO process costing reports:

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Calculate Actual Cost Per Equivalent Unit

Weighted Average:

Process Cost Reports for Molding Department: May

From April cost report 20,000 $ 28,000 Costs to complete beginning

New units started, completed, and

transferred out 68,000x$3.59 68,000 244,120

C Factors that would affect the choice of accounting method include:

The stability of input prices

The need for current price information

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Whether managers want to compare a standard cost to actual costs

Whether beginning and ending inventory levels are large or small

6.31 Empire Forging

Summary of information given in the problem:

completed

Normal spoilage 12,600 36,000 Spoiled Abnormal spoilage ??

C Percentage of good units allowed for spoilage is 3% (12,600/420,000) Total spoiled units as a percentage of good units is 8.6% (36,000/420,000) When spoilage rates

increase dramatically, it is likely that more spoiled units are sold as good units because they have been overlooked in the inspection process This leads to more returns and potential loss of market share In addition, the cost of good units increases, and so the contribution margin on those units decreases It is also possible that more units have been reworked, and these could be lower quality than first run units, and rework also increases the cost of good units

D Below are examples of arguments that could be made; students may think of additional arguments

The costs of undetected spoiled units can be quite high Customers are unhappy with defective units and may not purchase the goods again, so market share could be lost In addition, if the defect causes any type of harm, the company could be subject to legal action and may have to pay a settlement or high legal fees These costs are difficult to value It is much easier to determine the cost of quality improvements, such as more frequent inspections, quality circles with employees to elicit suggestions for

improvements, or redesigning the product or manufacturing process to reduce defects

Because of the uncertainty of the costs of spoiled units, the company should analyze costs for returned units and warranty work, develop better tracking systems so that all spoiled units are counted (whether they are reworked or not), and hire a marketing company to identify customers who have quit using its products to determine if quality was a factor in

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this decision Once the managers have more information, they will better understand the costs and benefits of quality problems and quality initiatives

6.32 The Rally Company

A sample spreadsheet showing the solution for this problem is available on the Instructor’s web site for the textbook (available at www.wiley.com/college/eldenburg)

A Weighted average: Following are excerpts from the sample spreadsheet for this problem

Work in Process: Beg WIP End WIP

Units 2,000 Ending WIP Units were not given,

% complete direct materials 100% 100% so they must be calculated:

% complete conversion costs 80% 25% Beginning WIP 2,000 Units started 18,000 Units started 18,000 Units completed and transferred out 14,800 Total to account for 20,000 Spoiled Units: Transferred out* -14,800 Normal 1,000 Normal spoilage -1,000 Abnormal 1,000 Abnormal spoilage -1,000

Ending WIP 3,200

Costs:

Beginning Work in Process: * Note: Only good units

Direct materials $4,000 are transferred out

1 Summarize Total Costs to Account For

Direct Conversion Total Materials Costs Costs Beginning WIP $4,000 $3,200 $7,200

Current period costs $36,000 $32,000 $68,000

Total costs to account for $40,000 $35,200 $75,200

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Beginning Complete Start Start Total Work Total Spoiled WIP Beg WIP and End WIP Performed Units to Units 80% 20% Complete 25% This Period Acct for 100%

Physical Units 2,000 0 14,800 3,200 18,000 20,000 (2,000) Equivalent Units:

Direct Materials 2,000 0 14,800 3,200 18,000 20,000 (2,000) Conversion Costs 1,600 400 14,800 800 16,000 17,600 (2,000)

3 Calculate Cost Per Equivalent Unit

Weighted Average: Total Total

Cost Units Direct Materials: $40,000 20,000 $2.0000 Conversion Costs: $35,200 17,600 $2.0000 Total Cost Per Equivalent Unit $4.0000

4 Weighted Average Process Cost Report for January

Cost Per Equivalent Spoiled Good Unit Units Units Units Total Total units completed and transferred out:

Good units $4.0000 14,800 $59,200 Normal spoilage $4.0000 1,000 $4,000

Total transferred out $63,200

Abnormal spoilage $4.0000 1,000 $4,000

Direct materials $2.0000 3,200 $6,400 Conversion costs $2.0000 800 $1,600

Total ending WIP cost _ $8,000

Total Good Units Accounted For (Total to account for - Total spoiled) 18,000

B Journal entries for weighted average method:

To record the cost of raw materials used in production during July

To record the conversion costs incurred in production during July

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