The company could use standard costing, but with such a small amount of work in Process and finished goods inventory, it could also use backflushing.. The problem was that the standard m
Trang 1CHAPTER 14
PROCESS COSTING AND THE COST ACCOUNTING CYCLE
14-1 Dell Computer's Costing Methods
Dell almost certainly does not use job-order costing, nor can it use process costing, because units differ The company could use standard
costing, but with such a small amount of work in Process and finished goods inventory, it could also use backflushing
Dell's business model requires low inventories and quick response times.Prices of computer components fall, sometimes rapidly, so buying inventory well in advance of selling it reduces profits We have referred to this situation in several Insights
14-2 Strategic Uses of Overhead Allocation
The benefit is that managers will concentrate on reducing cycle time, which is a highly desirable result The lower the cycle time, the faster theresponse, the more satisfied the customer and the higher the profit
Allocations based on labor or machine time can encourage managers and
engineers to reduce those times, but might not lower overall costs, as the Tektronix example in Chapter 10 described We refer to the Tektronix example
to remind students that reported costs of products play an important role in how managers (and design engineers) approach those products
The 8th edition of this book contained the following material that you might want to use in class
Teijin Seiki Co., Ltd manufactures machines and components for
industries as diverse as textiles, aerospace, and printing Managers at a division that made reduction gears for earthmoving equipment were
dissatisfied with the standard costing system because it applied direct laborand overhead to products based on standard machine times The managers
therefore expected that when they reduced standard machine times, costs should also drop, but results were disappointing The problem was that the standard machine time, which is value-adding time, was much less than the lead time, or total time a component was in process Lead time includes waiting time, which is, of course, not value-adding, but which generates significant amounts of overhead
The division changed its allocation base from standard manufacturing time to lead time, so that managers were motivated to reduce lead time, which
in turn reduced inventories and costs The overhead rate was calculated as
Overhead rate = Total budgeted overhead
Total lead timesThe denominator, total lead times, was the sum of the lead times for all of the parts the division made Reducing machine time still saves costs under the new method, but the new method directs managerial attention to the entireflow of parts through the factory
Source: Makoto Kawada and Daniel F Johnson, "Strategic Management Accounting−Why and How," Management Accounting, August 1993, 32-38.
Trang 214-3 Cost of Accounting Systems
Job-order costing is almost certainly the costliest, requiring that the company track materials and labor, as well as any overhead drivers such as setup time, to specific jobs Even though bar coding and other technologies can reduce costs, job-order costing probably still leads the field
Backflushing is probably the cheapest system because it requires entriesonly at a few points in the production/sale process A single product
factory could probably operate a standard costing or process costing system cheaply as well
The cost of the accounting system depends partly on the complexity of the operation, how many parts/components, how many departments, operations, etc A job-order system is costly partly because job-order operations are probably more complicated than others
14-4 Cost/Benefit of Accounting System
Caterpillar almost certainly needs the more accurate system because its manufacturing costs and inventories are relatively much higher than Intel's Caterpillar's cost of sales is about 77% of sales, while Intel's is about 38% Certainly, Intel cares about costs, but a point or two increase for Intel will not have the same negative effect as will a similar increase for Caterpillar The two companies’ inventories are about the same percentages ofcost of sales about 19% for both), but Intel’s is much smaller as a
percentage of sales \
Intel might still benefit from a sophisticated, costly system,
particularly an ABC system, for evaluating profitability of individual
products, but Caterpillar would probably benefit more
14-5 Basic Process Costing (15 minutes)
1 33,000
Units completed 30,000
Equivalent units in ending inventory (5,000 x 60%) 3,000
Equivalent unit production 33,000
Transferred to finished goods 42,000
Finished Goods Inventory $42,000
Work in Process Inventory $42,000
Trang 314-6 Job-Order Costing Journal Entries (20 minutes)
a Work in Process Inventory $5,120
Equivalent units in ending inventory (15,000 x 60%) 9,000
Equivalent unit production 74,000
Trang 4Units completed 65,000
Equivalent units in ending inventory (15,000 x 60%) 9,000
Total 74,000
Less beginning inventory (8,000 x 80%) 6,400
Equivalent unit production 67,600
2 $3.70, $250,120/67,700
3 $33,300, $3.70 x 9,000
4 $225,700
Cost of beginning inventory $ 8,880
Cost to complete BI* (1,600 x $3.70) 5,920
Cost to start and complete 57,000 units** at $3.70 210,900
Total costs transferred $225,700
* The 1,600 units is 20% x 8,000 units
14-9 Journal Entries (Continuation of 14-7) (14-20 minutes)
Materials Inventory $ 81,000
Cash and Accounts Payable $ 81,000
To record purchases of materials
Work in Process Inventory 68,000 Raw Materials Inventory 68,000
To record cost of materials put into process
Direct Labor 52,040
Cash or Accrued Payroll 52,040
Work in Process Inventory 52,040
Direct Labor 52,040
To charge direct labor cost to work in process
Manufacturing Overhead 130,080
Various Credits 130,080
To record overhead costs
Work in Process Inventory 130,080
Manufacturing Overhead 130,080
To apply manufacturing overhead to work in process Finished Goods Inventory 227,500
Work in Process Inventory 227,500
To transfer costs of goods completed to finished goods
Work in Process Inventory
Trang 5Beginning balance $ 8,880 | Materials 68,000 |
Materials Inventory $ 81,000
Cash and Accounts Payable $ 81,000
To record purchases of materials
Work in Process Inventory 68,000 Raw Materials Inventory 68,000
To record cost of materials put into process
Direct Labor 52,040
Cash or Accrued Payroll 52,040
Work in Process Inventory 52,040
Direct Labor 52,040
To charge direct labor cost to work in process
Manufacturing Overhead 130,080
Various Credits 130,080
To record overhead costs
Work in Process Inventory 130,080
Manufacturing Overhead 130,080
To apply manufacturing overhead to work in process Finished Goods Inventory 225,700
Work in Process Inventory 225,700
To transfer costs of goods completed to finished goods
Work in Process Inventory Beginning balance $ 8,880 | Materials 68,000 |
Standard gross profit 280,000
Standard cost of sales (all fixed) $320,000
2 $16,000 favorable
An intuitive approach to this part is to prepare an income statement, leavingthe volume variance blank
Trang 6Sales $600,000
Standard cost of sales, all fixed 320,000
Standard gross profit 280,000
Volume variance ?
Selling and administrative expenses 90,000
Income $174,000
3 24,000 units
Production level used to set standard
fixed cost ($400,000/$16 standard fixed cost) 25,000
Favorable volume variance, units ($16,000/$16) 1,000
Fixed cost per unit $16
Fixed cost carried to following year 64,000 Equals variable costing income $110,00014-12 Process Costing− T-account (15 minutes)
1 $20.80 ($23,700 + $766,700)/38,000 = $790,400/38,000
Units completed 35,000
Equivalent units in ending inventory (5,000 x 60%) 3,000
Equivalent unit production weighted-average 38,000
Less beginning inventory (3,000 x 20%) 600
Equivalent unit production FIFO 37,400
2 Ending inventory ($20.50 x 3,000) $ 61,500 Transfers:
Beginning inventory $ 23,700
Trang 7Materials and In-Process Inventory $410,000
Cash, Accounts Payable $410,000Conversion Costs 350,000
Cash, Accounts Payable, Accumulated Depreciation 350,000Cost of Sales 684,000
Finished Goods Inventory 76,000
Materials and In-Process Inventory 410,000 Conversion Costs 350,00014-16 Backflush Costing with Standards (Continuation of 14-14) (10
minutes)
The use of standard costs with backflushing does not appear in the text, but the principle should be clear Show inventories at standard cost and variances as adjustments to standard cost of sales
Trang 81 $0.30 for Mixing ($25,620/85,400); $0.75 for Distilling ($60,000/80,000) Mixing Distilling
The reconciliation of total costs follows
Ending inventory of work in Process (requirement 2) $ 1,620
Transferred to finished goods (80,000 x $1.05) 84,000
Total production costs ($25,620 + $60,000) $85,620
14-18 Relationships− Income, Sales, and Volume Variance (15 minutes)
Standard cost of sales (102,000 x [$6 + $8]) 1,428,000
Standard gross profit ?
Volume variance 16,000F
Actual gross margin ($200,000 + $224,000) 424,000
Selling and administrative expenses 200,000
Income $ 224,000
We can see that actual gross margin is $424,000 ($200,000 + $224,000) and standard gross margin must then be $408,000 because of the $16,000 favorable volume variance Sales are then $1,836,000 ($408,000 + $1,428,000)
2 100,000 The volume variance was $16,000 favorable, which means that production of 102,000 (inventories were unchanged per the assignment) was 2,000 units ($16,000/$8) above the volume used to set the $8 standard fixed cost
Divided by equivalent production 210,000 204,000
Equals unit cost $ 0.22 $ 0.67
Trang 9Total unit cost = $0.89 ($0.22 + $0.67)
3 Finished Goods Inventory (180,000 x $0.89) $160,200
Work in Process Inventory $160,200
Materials Conversion Costs
Equivalent units in inventory 30,000 24,000
Cost per unit $0.22 $0.67
Inventory cost $ 6,600 $16,080
Total inventory cost = $22,680
14-20 Equivalent Production and Unit Costs (20-25 minutes)
Divided by equivalent production 170,000 162,000
Equals unit cost $ 2.24 $ 3.65
Total unit cost = $5.89 ($2.24 + $3.65)
3 $88,600 ending inventory, $883,500 transferred
Materials Conversion Costs
Equivalent units in inventory 20,000 12,000
Cost per unit $2.24 $3.65
Inventory cost $44,800 $43,800
Total inventory cost = $88,600
Units transferred 150,000
Total unit cost $5.89
Total cost transferred $883,500
The components of the transfer are:
Materials (150,000 x $2.24) $336,000
Conversion costs (150,000 x $3.65) 547,500
Total transfer $883,500
Note to the Instructor: You might wish to do a reconciliation of costs
to reinforce the point that it is a good idea
Materials Conversion Costs
Total costs from above $380,800 $591,300
Trang 10Less ending inventory 44,800 43,800
Transferred $336,000 $547,500
14-21 Equivalent Units and Standard Costs (Appendix) (14-20 minutes)
1 2,300 units
Trang 11Units started and completed in June
(2,000 units completed - 300 units
started in prior month) 1,700
Work done on units started in prior month
1 The sales manager will find that he is on a circular path, sometimes called "the death spiral." If he sets the price at $32, volume will be less than the volume on which he based the price and fixed costs per unit will be higher At $32, volume will be 18,000 units, giving unit fixed costs of
$8.89 ($160,000/18,000) Total cost per unit will be $16.89 and the desired margin will not be earned The price required at that volume is $33.78 But
at that price it is likely that volume will be less than 18,000 units, and sothe vicious circle will continue
The sales manager is starting with volume, then deriving a price, instead
of considering volume and price simultaneously He also fails to recognize that a fixed cost per unit figure holds at only one volume
2 $28
Price Options
1 2 3 Selling price $28 $30 $32Variable cost 8 8 8 Contribution margin $20 $22 $24Volume expected at that price 24,000 20,000 18,000Total contribution margin $480,000 $440,000 $432,000There is no need to consider fixed costs because they will be the same under all three prices
14-23 Overhead Rates, Standard Cost Income Statement (14-20 minutes)
Dickson Company
Income Statement for 20X5
Sales (80,000 units) $1,600,000Standard cost of sales (80,000 x $12) (a) 960,000Standard gross profit 640,000Manufacturing variances (b):
Materials $10,000F
Direct labor 10,000U
Variable overhead 10,000U
Fixed overhead budget 20,000U
Volume variance (c) 30,000U 60,000UActual gross profit 580,000Administrative expenses 400,000
Trang 12Income $ 180,000 (a) Computation of standard cost
Budgeted / Budgeted Production = Standard
Cost 100,000 Units Cost
Materials $ 400,000 100,000 $ 4
Direct labor 300,000 100,000 3
Variable overhead 200,000 100,000 2
Fixed overhead 300,000 100,000 3
Totals $1,200,000 $12
(b) Computation of variances
Flexible Budget Actual
for 90,000 Units Cost Variance Materials $360,000 $350,000 $10,000F Direct labor 270,000 280,000 10,000U Variable overhead 180,000 190,000 10,000U Fixed overhead budget 300,000 320,000 20,000U (c) Fixed overhead volume variance is budgeted cost of $300,000 less overhead
applied of $270,000 (90,000 units x $3 per unit)
14-24 Standard Cost System Journal Entries (35-40 minutes)
1 Journal entries
(a) Material Inventory (120,000 x $4) $ 480,000
Material Price Variance $ 25,000 Cash or Accounts Payable 455,000
To record purchases of materials, charging inventory at
standard cost
(b-1) Direct Labor (151,000 x $10) 1,510,000
Direct Labor Rate Variance 20,000 Cash, Accrued Payroll 1,490,000
To record direct labor cost incurred and isolate
direct labor rate variance
(b-2) Work in Process (48,000 x $30) 1,440,000
Direct Labor Efficiency variance 70,000
Direct Labor 1,510,000
To charge work in process with standard direct labor
cost and isolate efficiency variance
(c-1) Variable Overhead (151,000 x $6) 906,000
Variable Overhead Spending Variance 11,000 Cash, etc 895,000
To record variable overhead costs and spending variance
(c-2) Work in Process (48,000 x $18) 864,000
Variable Overhead Efficiency Variance 42,000
Variable Overhead 906,000
To charge work in process with standard variable cost
and record efficiency variance
(d-1) Fixed Overhead (budgeted) 500,000
Fixed Overhead Budget Variance 10,000
Trang 13To charge work in process with standard fixed overhead
and record volume variance
(e) Work in Process (48,000 x $8) 384,000
Material Use Variance 4,000
Material Inventory 380,000
To record cost of materials put into process and
material use variance
To record sales of 45,000 units
(g-2) Cost of Goods Sold (45,000 x $66) 2,970,000
Finished Goods 2,970,000
To record cost of goods sold at standard cost
14-25 Process Costing− Journal Entries (25-35 minutes)
1 Raw Material Inventory $ 286,000
Cash and Accounts Payable $ 286,000
To record purchases of materials
To charge direct labor cost to work in process
3 Work in Process Inventory 271,000 Raw Materials Inventory 271,000
To record cost of materials put into process
4 Indirect Labor 46,000
Supervision and Other Salaries 182,000
Utilities and Insurance 23,500
Depreciation expense 72,000
Other Miscellaneous Costs 112,000
Accumulated Depreciation 72,000 Cash and Accrued Expenses 363,500 Manufacturing Overhead 435,500
Indirect Labor 46,000 Supervision and Other Salaries 182,000 Utilities and Insurance 23,500 Depreciation expense 72,000 Other Miscellaneous Costs 112,000
Trang 14To accumulate overhead costs in one account.
Work in Process Inventory 420,000
Manufacturing Overhead (35,000 x $12) 420,000
To apply manufacturing overhead to work in process
5 Finished Goods Inventory 863,000
Work in Process Inventory 863,000
To transfer costs of goods completed to finished goods
6 Cash and Accounts Receivable 1,314,000
Sales 1,314,000
To record sales for the year
7 Cost of Goods Sold 818,000
Finished Goods Inventory 818,000
To record cost of goods sold during year
8 Selling and Administrative Expenses 387,000
Cash and Accrued Expenses 387,000
To record other expenses incurred during the year
Adjusted gross profit 480,500
Selling and administrative expenses 387,000
Income $ 93,500
14-26 Product Costing and CVP Analysis (20-25 minutes)
The results are caused by the changes in fixed costs in the inventories.The cost of goods sold figures can be computed as follows
April May June Beginning inventory $ 0 $ 76,800 $ 87,500Production costs:
Variable* 200,000 160,000 128,000 Fixed 120,000 120,000 120,000 Cost of goods available 320,000 356,800 335,500
Trang 15Ending inventory** 76,800 87,500 19,375Cost of goods sold $243,200 $269,300 $316,125
*50,000 x $4; 40,000 x $4; 32,000 x $4
** April May June Production costs for month $320,000 $280,000 $248,000Divided by units produced 50,000 40,000 32,000Equals cost per unit $6.40 $7.00 $7.75Inventory in units
50,000 - 38,000 12,000
12,000 + 40,000 - 39,500 12,500
12,500 + 32,000 - 42,000 2,500Ending inventory $ 76,800 $ 87,500 $ 19,375 One can hardly blame the president for being puzzled In one month sales were just above the break-even point and profits were $30,800, which ismuch more than he would have expected at sales of 42,000 units, the highest month experienced Income under variable costing in June would have been
$18,000 [(42,000 x $4) - fixed costs of $150,000] In May, when sales were such as to give the target profit of $8,000, actual profits were over twice the expected amount And in June, when sales were well above those needed toprovide the $8,000 target profit, a loss was sustained
The explanation that changes in the volume of production, differences between sales and production volumes, caused the differences between expectedprofits and actual profits might not be convincing to the president One alternative is to provide income statements based on variable costing
Income Statements Variable Costing April May June Sales $380,000 $395,000 $420,000Variable cost of sales at $4 152,000 158,000 168,000Gross profit 228,000 237,000 252,000Variable selling and administrative
expenses at $2 76,000 79,000 84,000Contribution margin 152,000 158,000 168,000Fixed costs ($120,000 + $30,000) 150,000 150,000 150,000Profit before taxes $ 2,000 $ 8,000 $ 18,00014-27 Process Costing (30-35 minutes)
1 Mixing Department
Labor and Materials OverheadUnits completed 75,000 75,000
Equivalent units in ending inventory
Prior department costs (15,000 x 100%) 15,000
Trang 16Labor and overhead (15,000 x 40%) 6,000Equivalent production 83,000 74,000
2 Cost per Unit Mixing Department
Labor and Materials OverheadCosts in beginning inventory $ 1,680 $ 4,020Costs incurred during February 18,480 32,160 Totals $20,160 $36,180Divided by equivalent production 84,000 80,400Equals cost per unit $0.24 $0.45
3 Journal Entry
Work in Process Inventory Boiling Department
($0.24 + $0.45) x 75,000 $51,750
Work in Process Inventory Mixing Department $51,750
To transfer cost of 75,000 gallons from mixing
department to boiling department
4 Cost per Unit Boiling Department
Prior
Department Labor and Costs OverheadCosts in beginning inventory $ 6,350 $ 2,220Costs transferred from mixing department 51,750
Costs incurred during February 25,900Totals $58,100 $28,120Divided by equivalent production 83,000 74,000Equals cost per unit $0.70 $0.38Total unit cost ($0.70 + $0.38) $1.08
5 Finished Goods Inventory (68,000 x $1.08) $73,440
Work in Process Inventory Boiling Department $73,440
To transfer cost of 68,000 completed gallons from boiling department tofinished goods
6 Work in Process Inventory
Mixing Department Beginning balance $ 5,700 |
Costs incurred 50,640 | $51,750 transferred out 56,340 | 51,750
Trang 17Units per Unit Cost
Materials 9,000 $0.24 $2,160
Labor and overhead 5,400 $0.45 2,430
Ending inventory $4,590
Boiling Department
Prior department costs 15,000 $0.70 $10,500
Labor and overhead 6,000 $0.38 2,280
Ending inventory $12,780
14-28 Process Costing, Extension of 14-27 (20-30 minutes)
1 Conversion Materials Costs
Equivalent production, weighted average,
from 14-27 84,000 80,400 Less, equivalent units in beginning inventory:
8,000 x 60% 4,800
8,000 x 70% 5,600 Equivalent production, FIFO 79,200 74,800
Divided into costs incurred this month of $18,480 $32,160 Equals, FIFO unit cost $0.2333 $0.43
Total cost transferred $7,479
Costs transferred for units started and completed this month
Trang 18Department Some instructors might wish to challenge their students with the special problems of the FIFO assumption where prior-department costs are involved.
Trang 19
14-29 Standard Costs Performance Evaluation (20-25 minutes)
1 Arnold Company
Budgeted Income Statement for 20XX
Sales (80,000 x $20) $1,600,000Cost of goods sold:
Variable manufacturing costs (100,000 x $8) $ 800,000
Fixed costs applied (100,000 x $3)* 300,000
1,100,000
Less ending inventory [20,000 x ($8 + $3)] 220,000 880,000Standard gross profit 720,000Volume variance (20,000 x $3) 60,000Gross profit 660,000Selling and administrative expenses 300,000Income $ 360,000
* Budgeted fixed costs of $360,000/120,000 normal capacity = $3 per unit
2 Arnold Company
Income Statement for 20XX
Sales (77,000 x $20) $1,540,000Cost of goods sold:
Variable manufacturing costs (118,000 x $8) $ 944,000
Fixed manufacturing costs applied (118,000 x $3) 354,000
1,298,000
Less ending inventory (41,000 x $11) 451,000
Standard cost of goods sold 847,000 Standard gross profit 693,000Variances:
Variable costs ($954,000 - $944,000) 10,000U
Fixed overhead budget ($370,000 - $360,000) 10,000U
Volume (2,000 x $3) 6,000U 26,000U Gross profit 667,000Selling and administrative expenses 300,000Income $ 367,000
3 Performance appears to be better than budgeted if income is the only criterion examined However, sales were 2,000 fewer units than budgeted, resulting in a loss in contribution margin of $24,000 ($12 per unit)
Variable and fixed production costs were higher than expected for the
production level The only favorable factor, if it can be called that, is the reduction in the volume variance from $60,000 to $6,000 This reduction was caused by producing 18,000 units more than budgeted The critical
question is whether the higher production is good or bad Since sales were below expectations, it might be assumed that the higher production was
unwise That conclusion would not hold true if sales in the second year wereexpected to be higher than the 100,000 originally budgeted
Note to the Instructor: The income statements prepared by students for requirements 1 and 2 may show only the standard cost of goods sold The computations are presented in the statements here to reduce the explanatory notes
14-30 Standard Cost Income Statement Relationships and Variances (35 minutes)
1 $6.50