F2 - Focus on Process Costing
Focus on Process Costing
Learning Objectives
1.Identify the kinds of companies that use process costing systems.
2.Explain how costs flow through the inventory accounts in a process costing system.
3.Calculate and explain equivalent units of production.
4.Assign costs to completed units and ending work-in-process inventory.
Summary of End of Chapter Material by Learning Objective and Bloom’s Taxonomy
Puzzle Clues / Exercises / Problems / CasesItem / L.O. / Bloom / Item / L.O. / Bloom / Item / L.O. / Bloom / Item / L.O. / Bloom
1 / 1 / F2-1 / 1 / F2-8 / 2 / F2-11 / 2, 3, 4
2 / 2 / F2-2 / 2 / F2-9 / 3, 4
3 / 3 / F2-3 / 2 / F2-10 / 3, 4
4 / 3 / F2-4 / 3
5 / 4 / F2-5 / 3
6 / 4 / F2-6 / 4
F2-7 / 4
SOLUTIONS TO PUZZLE CLUES
1.Similarities: Both are costing systems with the objective of accumulating and assigning product costs (materials, labor, and overhead) to cost objects; costs flow through inventory accounts in a similar manner.
Differences: Process costing is used for products that are mass-produced, whereas job-order costing is used for products or batches of products that are unique; process costing accumulates costs by processing department via a departmental production report; job-order costing accumulates costs by job via a job-cost sheet.
2.Conversion costs are the costs of direct labor and overhead needed to convert raw materials into products.
3.Equivalent units (EU) are “as if” the work-in-process was converted to complete units. For example, if 100 tennis balls were 40% complete, then it is as if 40 tennis balls were completed. Calculating EU is necessary to equate units that are finished in a process to units that are still in process at the end of a period. Otherwise, there is no way that costs could be assigned to both.
4.Sometimes work in process is further along with respect to the materials that are added in a process than the conversion that is required to complete the process. For example, in the cookie illustration, the cookie dough was 100% complete for materials because all materials were added at the beginning of the process. However, labor and overhead (conversion) were still required to turn the dough into cookies.
5.The total cost assigned to the units transferred out of work in process and to the units in ending work in process equals the total of beginning work in process inventory plus the materials and overhead costs added during the period.
6.Costs assigned to ending work in process = Cost per EU EU in ending work in process
Costs assigned to units transferred out = Cost per EU units transferred
SOLUTIONS TO EXERCISES
Exercise F2-1
Product/Service / Process Costing / Job Order CostingA completed tax return / x
A box of Kellogg’s Frosted Flakes® / x
A gallon of gasoline / x
Legal representation / x
Knee surgery / x
A bottle of Coca-Cola® / x
A roll of newsprint paper / x
A custom-built home / x
A bottle of Robitussin® cough syrup / x
Exercise F2-2
Raw Materials InventoryBeginning balance / 150,000
Materials purchased / 805,000
Direct materials used / $800,000
Ending balance / (a) 155,000
WIP-Department 1
Beginning balance / 60,000
Direct materials used / 630,000
Conversion costs incurred / 516,000
Transfers of completed units / 1,100,000
Ending balance / (b) 106,000
WIP-Department 2
Beginning balance / 51,000
Direct materials used / (c)* 170,000
Conversion costs incurred / 180,000
Transfers of completed units / (d) 1,100,000 / 1,470,000 (e)
Ending balance / 31,000
*Direct materials used in Department 2 is calculated as total direct materials used less direct materials used in Department 1 ($800,000 – 630,000)
Finished Goods InventoryBeginning balance / 250,000
Transfers of completed units / (f) 1,470,000 / 1,570,000 (g)
Ending balance / 150,000
Exercise F2-3
Raw Materials InventoryBeginning balance / (a) 46,000
Materials purchased / 250,000
Direct materials used / $280,000 (b)
Ending balance / 16,000
WIP-Department 1
Beginning balance / 36,000
Direct materials used / 200,000
Conversion costs incurred / 85,000
Transfers of completed units / 300,000 (d)
Ending balance / (c) 21,000
WIP-Department 2
Beginning balance / 13,000
Direct materials used / 80,000
Conversion costs incurred / (e) 105,000
Transfers of completed units / 300,000 / 490,000 (f)
Ending balance / 8,000
Finished Goods Inventory
Beginning balance / 63,000
Transfers of completed units / (g) 490,000 / 512,000
Ending balance / 41,000
NOTE: First solve for amount transferred into finished goods (part (g)). Substitute this amount in Department 2 WIP and solve for conversion costs. Then solve WIP Department 1 and Raw Materials Inventory.
Exercise F2-4
a.3,000 units 40% = 1,200 EU
b.Completed and transferred out12,000
Ending work-in-process inventory (EU) 1,200
Total equivalent units13,200
Exercise F2-5
a.
UnitsBeginning Inventory, April 1 / 8,000
Added to production / + 45,000
Completed and transferred out / - x / = 48,000
Ending inventory, April 30 / = 5,000
b.Completed and transferred out48,000
Ending work-in-process inventory (5,000 100%) 5,000
Total equivalent units, materials53,000
c.Completed and transferred out48,000
Ending work-in-process inventory (5,000 80%) 4,000
Total equivalent units, conversion52,000
Exercise F2-6
a.
MaterialsBeginning inventory, April 1 / $11,000
Added to production / 66,380
Total materials cost / $77,380
Equivalent units / 53,000
Materials cost per EU / $1.46
b.
ConversionBeginning inventory, April 1 / $ 17,160
Added to production / 104,000
Total materials cost / $121,160
Equivalent units / 52,000
Conversion cost per EU / $2.33
c.48,000 units ($1.46 + 2.33) = $181,920
d.Materials (5,000 EU $1.46) $7,300
Conversion (4,000 EU $2.33) 9,320
Total$16,620
Exercise F2-7
a.Work backwards from the cost per equivalent unit to determine units completed and transferred out:
Materials / ConversionBeginning inventory / $5,900 / $15,000
Added to production / 47,300 / 65,000
Total materials cost / $53,200 / $80,000
Materials cost per EU / $.40 / $.64
Equivalent units / 133,000 / 125,000
Less: Ending WIP EU
Materials (40,000 60%) / (24,000)
Conversion (40,000 40%) / (16,000)
Units completed & transferred / 109,000 / 109,000
Notice the result was the same using the $.40 materials EU cost or the $.64 conversion EU cost. It wasn’t necessary to calculate both, but you know that the answer is probably correct if you get the same answer both ways.
b.109,000 ($.40 + .64) = $113,360
c.Materials: 24,000 $.40 = $9,600
Conversion: 16,000 $.64 = 10,240
Total$19,840
SOLUTIONS TO PROBLEMS
Problem F2-8
a.
Raw materials$115,000 / 60,000 (1)
8,000 (4)
$47,000
WIP – Grinding / WIP – Mixing / WIP – Finishing
$25,000 / $7,000 / $10,000
(1) 60,000 / 150,000 (3) / (3) 150,000 / 178,000 (6) / (6) 178,000 / 206,000 (8)
(2) 82,000 / (4) 8,000 / (7) 41,000
$17,000 / (5) 33,000 / $23,000
$20,000
Finished Goods
$41,000 / 230,000 (9)
(8) 206,000
$17,000
b.1.Finishing
2.Grinding requires the greatest amount of material and conversion cost. Even though the costs of the products completed in Mixing and Finishing are higher than those in Grinding, the majority of the costs is incurred in the Grinding Department and is carried through to the other departments.
3.
Problem F2-9
a.
UnitsBeginning Inventory, Sep. 1 / 1,000
Added to production / + x / = 10,150
Completed and transferred out / - 9,150
Ending inventory, April 30 / = 2,000
b.Materials:
Completed and transferred out9,150
Ending work-in-process inventory (2,000 100%) 2,000
Total equivalent units11,150
Conversion:
Completed and transferred out9,150
Ending work-in-process inventory (2,000 30%) 600
Total equivalent units9,750
c.
Materials / ConversionBeginning inventory, Sep. 1 / $1,300 / $ 1,250
Added to production / 13,195 / 32,875
Total materials cost / $14,495 / $34,125
Equivalent units / 11,150 / 9,750
Materials cost per EU / $1.30 / $3.50
Materials (2,000 $1.30)$2,600
Conversion (600 $3.50) 2,100
Total$4,700
d.9,150 pennants ($1.30 + 3.50) = $43,920
e.
Units / CostsWIP, Sep. 1 / 1,000 / $2,550
Started into production / 10,150 / 46,070
Total units to be accounted for / 11,150 / $48,620
Transferred to Silk-screening / 9,150 / $43,920
WIP, Sep. 30 / 2,000 / 4,700
Total accounted for / 11,150 / $48,620
Problem F2-10
a.Equivalent units:MaterialsConversion
Completed and transferred8,0008,000
WIP, ending 2,000 100%2,000
2,000 25% 500
Total EU10,0008,500
Cost per EU:MaterialsConversion
Cost to be allocated$33,000$17,000
EU 10,0008,500
Total EU $3.30 $2.00
Cost of units transferred = 8,000 units ($3.30 + 2) = $42,400
b.WIP, ending
Materials (2,000 EU $3.30) $6,600
Conversion (500 EU $2.00) 1,000
Total$7,600
Case F2-11
a.
Assembly / FinishingBeginning balance / 560 / 0
Started/Transferred in / 7,600 / 7,260
Transferred out / (7,260) / (6,960)
Ending balance / 900 / 300
Assembly:
Materials / ConversionTransferred out / 7,260 / 7,260
Ending balance, materials (900 100%) / 900
Ending balance, conversion (900 40%) / 360
Total EU / 8,160 / 7,620
Finishing:
Materials / ConversionTransferred out / 6,960 / 6,960
Ending balance, materials (300 100%) / 300
Ending balance, conversion (300 50%) / 150
Total EU / 7,260 / 7,110
b.
Assembly:
Materials / ConversionBeginning balance / $12,500 / $4,500
Added in / 252,700 / 231,720
Total cost / $265,200 / 236,220
EU / 8,160 / 7,620
Cost per EU / $32.50 / $31
Finishing:
Materials / ConversionBeginning balance / $0 / $0
Added in / 76,230 / 106,650
Total cost / 76,230 / 106,650
EU / 7,260 / 7,110
Cost per EU / $10.50 / $15
c.Assembly—materials$32.50
Assembly—conversion31.00
Finishing—materials10.50
Finishing—conversion 15.00
Total unit cost$89.00
d.markup =
new price = $89 167% = $148.63
e.
To: Al Lovelace
From: Melanie Roberts
Re: Williamsburg plant
I have completed my evaluation of the Williamsburg plant’soperations. As far as I can tell, everything is operating as it should. However, costs have risen since the last complete cost analysis was conducted. We have been operating under the assumption that the cost to make a jacket is $75. Based on the current operations at the Williamsburg plant, it costs $89 to make a jacket. While we thought we were earning a 67% markup on costs, it turns out we have been earning a 40.7% markup on costs. To earn a 67% markup, we would need to price the jackets at $148.63.
Before we increase our prices, I recommend we conduct market surveys to determine what price our customers are willing to pay. We may be pleasantly surprised to learn that our competitors’ prices are in the $150 range, so customers will be willing to pay $148.63. On the other hand, if our customers can purchase jackets of similar quality for less than $148.63, we don’t want to raise our prices that high. If we find that our competitors can deliver the same quality jackets for a lower price, we need to investigate ways to reduce the production cost of our jackets.
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