Chapter 16
Process Costing and Analysis
QUESTIONS
1. The main deciding factor in choosing between a job order costing system or a process costing system is the type of product or service. Examples where a process costing system is likely appropriate include chemicals, cleaning fluids, mail processing, and oil refinement. Examples where a job order costing system is likely appropriate include home building, tax return preparation, financial planning, legal services, and consulting. (Hybrid systems are also common.)
2. The main focus in process costing is the production department (process).
3. Yes, services can be delivered by processes. For example, Federal Express delivers parcels by (a) picking them up from the sender, (b) transporting them to Memphis, (c) sorting them for rerouting, (d) transporting them to their destination cities, and (e) delivering them to the recipient.
4. The journal entries to match cost flows with product flows are primarily the same for both process costing and job order costing. In process costing, the materials flow into production and direct labor is applied to the product. Also, factory overhead is measured and applied to each production department. This similarly compares to each job in job order costing.
5. A materials consumption report is an alternative control document.
6. The computation of equivalent units of production focuses on converting partially completed units to a measure in terms of completed units. We need to use EUP because some units of the production process are partially completed at the end of the accounting period (for example, mail that must still be processed into additional categories) and we desire some measure of the stage of completion. The stage of completed units is typically different for direct materials, direct labor, and factory overhead. For example, toys must still be assembled once all the parts are completed.
7. The two main methods of process costing are the weighted-average and the first-in, first-out (FIFO) methods. The weighted-average method considers “average flow” of the beginning inventory costs along with the current activity for a period, whereas the FIFO method considers the explicit flow of costs and activity for a period.
8. A process cost accounting system treats labor that is used entirely within one production department as direct labor. The labor may include the software engineer to control the equipment and the maintenance by persons who work entirely within that department. The key is that the cost object is the process and not the job.
9. Direct labor costs flow first from the Factory Payroll account to the Goods in Process Inventory. Then the direct labor costs in the Goods in Process Inventory account flows to the Finished Goods Inventory and then on to Cost of Goods Sold.
10. After all labor costs have been allocated to Goods in Process Inventory accounts and/or Factory Overhead, the Factory Payroll account should have a zero balance.
11. Yes, it is possible to have either underapplied or overapplied overhead in a process cost accounting system. Since the overhead allocation rate is based on predictions of overhead and other variables such as direct labor, the predicted amounts are not likely to be exactly equal to the actual amounts incurred.
12. Equivalent units for direct materials differ from that for direct labor (and overhead) if direct materials and direct labor (and overhead) are added at different stages in the production process. Equivalent units are the same when direct materials, direct labor, and factory overhead are added at the same stage of the production process. (Also, equivalent units for both direct labor and overhead are the same when overhead costs are applied based on direct labor.)
13. The four steps in accounting for production activity (for process operations) are: 1) determine the physical flow of units, 2) compute equivalent units of production, 3) compute cost per equivalent unit, and 4) assign and reconcile costs.
14. The process cost summary serves at least three purposes: (a) to help department managers control their departments; (b) to help factory managers evaluate department managers’ performances; and (c) to provide cost information for the financial statements. To accomplish these objectives, a process cost summary describes the costs charged to the department, the equivalent units of production achieved by the department, and the costs assigned to the output.
15. Yes. Polaris might use process costing to determine the cost of manufacturing a snowmobile. Manufacturing a snowmobile might go through several departments such as framing, assembly, painting, and finishing.
16. Likely processing steps for the snowmobiles include making the frame, assembly, painting, and finishing. Additional processing departments would include testing, quality inspection, and preparing the snowmobiles for shipping.
QUICK STUDIES
Quick Study 16-1 (5 minutes)
1. Job order operation / 2. Process operation3. Process operation / 4. Job order operation
Quick Study 16-2 (10 minutes)
1. / Raw Materials Inventory / 62,000Cash / 62,000
Purchase of raw materials inventory.
2. / Goods in Process Inventory / 50,000
Raw Materials Inventory / 50,000
Direct materials used in production.
Quick Study 16-3 (10 minutes)
1. / Factory Payroll / 135,000Cash / 135,000
To record factory payroll costs.
2. / Goods in Process Inventory / 125,000
Factory payroll / 125,000
Direct labor used in production.
Quick Study 16-4 (15 minutes)
Raw Materials Inventory / 9,000
To record indirect materials used in production.
2. / Factory Overhead / 10,000
Factory Payroll / 10,000
To record indirect labor used in production.
3. / Factory Overhead / 156,000
Other accounts / 156,000
To record other overhead costs.
4. / Goods in Process Inventory / 175,000
Factory Overhead / 175,000
To record overhead applied ($125,000 x 140%).
Quick Study 16-5 (10 minutes)
Finished Goods Inventory / 275,000Goods in Process Inventory / 275,000
Transfer of goods from production.
Quick Study 16-6 (10 minutes)
Equivalent units under the weighted-average method
EquivalentEUP for Labor / Units
Units completed and transferred out (340,000 x 100%) / 340,000
Units of ending goods in process
Labor (120,000 x 25%) / 30,000
Equivalent units of production / 370,000
Quick Study 16-7 (5 minutes)
The cost of beginning inventory plus the costs added during the period should equal the cost of units transferred out plus the cost of ending inventory.
Quick Study 16-8 (10 minutes)
The auto garage can use a process cost system for routine, repetitive activities like oil changes. It can use a job order cost system for specialized work on individual cars, including body repair and other repairs that differ across cars. A total cost per car can be computed by combining the outputs from the process and job order systems.
Quick Study 16-9 (15 minutes)
Equivalent units under the FIFO method
EquivalentEUP for Labor / Units
Equivalent units to complete beginning work in process (150,000 x 20%) / 30,000
Equivalent units started and completed* / 190,000
Equivalent units in ending goods in process (120,000 x 25%) / 30,000
Total equivalent units of production / 250,000
* Units completed – Units in beginning work in process = Units started and completed
340,000 – 150,000 = 190,000
Quick Study 16-10 (5 minutes)
A. 1 B. 3 C. 2 D. 4
Quick Study 16-11 (5 minutes)
The process cost summary sections are Costs Charged to Production, Equivalent Units of Production, and Cost Assignment and Reconciliation.
Quick Study 16-12 (5 minutes)
If the company is successful in reducing water usage, its raw materials cost (water) should decline. Likewise, assuming water used in its cleaning and cooling processes is considered overhead, factory overhead costs should decline. These cost reductions would result in lower direct materials cost per equivalent unit and lower factory overhead cost per equivalent unit.
Quick Study 16-13 (5 minutes)
1. T 2. F 3. F 4. T
Quick Study 16-14 (10 minutes)
Equivalent units under the weighted-average method
EquivalentEUP for Labor / Units
Units completed and transferred out (680,000 x 100%) / 680,000
Units of ending goods in process
Direct labor (240,000 x 75%) / 180,000
Equivalent units of production / 860,000
Quick Study 16-15 (15 minutes)
Equivalent units under the FIFO method
EquivalentEUP for Labor / Units
Equivalent units to complete beginning work in process (320,000 x 75%) / 240,000
Equivalent units started and completed* / 360,000
Equivalent units in ending goods in process (240,000 x 75%) / 180,000
Total equivalent units of production / 780,000
* Units completed – Units in beginning work in process = Units started and completed
680,000 – 320,000 = 360,000
EXERCISES
Exercise 16-1 (10 minutes)
1. F 5. G
2. A 6. B
3. D 7. E
4. C
Exercise 16-2 (25 minutes)
1. / Raw Materials Inventory / 80,000Accounts Payable / 80,000
Purchased materials on credit.
2. / Goods in Process Inventory / 42,000
Raw Materials Inventory / 42,000
Used direct materials in production.
3. / Factory Overhead / 22,500
Raw Materials Inventory / 22,500
Used indirect materials.
Exercise 16-3 (10 minutes)
1. / Factory Payroll / 95,000Cash / 95,000
Incurred direct labor costs.
2. / Goods in Process Inventory / 75,000
Factory Payroll / 75,000
Used direct labor in production.
3. / Factory Overhead / 20,000
Factory Payroll / 20,000
Used indirect labor in production.
Exercise 16-4 (5 minutes)
Cash / 38,750
Incurred overhead costs.
2. / Goods in Process Inventory / 82,500
Factory Overhead / 82,500
Applied overhead: $75,000 x 110%
Exercise 16-5 (5 minutes)
1. / Finished Goods Inventory / 135,600Goods in Process Inventory / 135,600
Transfer goods from production to finished goods.
2. / Accounts Receivable / 315,000
Sales / 315,000
Sale of goods on credit.
Cost of Goods Sold / 175,000
Finished Goods Inventory / 175,000
Record cost of goods sold.
Exercise 16-6 (25 minutes)
1.
Oct. 31 / Goods in Process Inventory / 522,000Raw Materials Inventory / 522,000
Direct materials used in production.
2.
Oct. 31 / Goods in Process Inventory / 130,000
Factory Payroll / 130,000
Direct labor used in production.
3.
Oct. 31 / Goods in Process Inventory / 227,500
Factory Overhead / 227,500
Overhead applied: $130,000 x 175%
Exercise 16-6 (continued)
Oct. 31 / Finished Goods Inventory / 595,000
Goods in Process Inventory / 595,000
Transfer goods from production to finished goods.
5.
Oct. 31 / Accounts Receivable / 950,000
Sales / 950,000
Sales on credit.
Oct. 31 / Cost of Goods Sold / 540,000
Finished Goods Inventory / 540,000
Record cost of sales.
Exercise 16-7 (25 minutes)
a. Purchased raw materials on credit at a cost of $52,000.
b. Used direct materials costing $42,000 in production.
c. Incurred total labor costs of $26,000, all of which is paid in cash.
d. Used direct labor costing $32,000 in production.
e. Incurred overhead costs of $10,000, which is paid in cash.
f. Used indirect materials costing $10,000.
g. Used indirect labor costing $6,000.
h. Applied overhead to production at the rate of 105% ($33,600/$32,000) of direct labor cost.
i. Transferred completed products with a cost of $88,000 to the finished goods inventory from production.
j. Sold products on credit for $250,000. Their accumulated cost is $100,000.
Exercise 16-8 (20 minutes)
Units started and completed / 240,000
Total units transferred to finished goods / 300,000
2. / Equivalent units of production – weighted average
Equivalent Units of Production / Direct / Direct
Materials / Labor
Units completed & transferred out (300,000 x 100%) / 300,000 / 300,000
Units of ending goods in process
Direct materials, 82,000 x 80% / 65,600
Direct labor, 82,000 x 30% / ______ / 24,600
Equivalent units of production / 365,600 / 324,600
Exercise 16-9 (25 minutes)
1.Cost per equivalent unit – Weighted average / Direct Materials / Direct Labor
Costs of beginning goods in process / $118,840 / $ 47,890
Costs incurred this period / 850,000 / 650,000
Total costs / $968,840 / $697,890
÷ Equivalent units of production (from Ex. 16-8) / 365,600 / 324,600
Cost per equivalent unit of production / $2.65 per EUP / $2.15 per EUP
2. Cost Assignment and Reconciliation – weighted average
Costs of units transferred out
Direct materials (300,000 EUP x $2.65 per EUP) / $795,000
Direct labor (300,000 EUP x $2.15 per EUP) / 645,000
Total costs transferred out / $1,440,000
Costs of ending goods in process
Direct materials (65,600 EUP x $2.65 per EUP) / 173,840
Direct labor (24,600 EUP x $2.15 per EUP) / 52,890
Total costs of ending goods in process / 226,730
Total costs accounted for* / $1,666,730
*Equals costs to account for of $1,666,730 ($968,840 + $697,890)
Exercise 16-10 (20 minutes)
Equivalent units of production—FIFO
Direct / DirectEquivalent units of production / Materials / Labor
Units to complete beginning goods in process
Direct materials (60,000 x 40%) / 24,000
Direct labor (60,000 x 60%) / 36,000
Units started and completed / 240,000 / 240,000
Units in ending work in process
Direct materials (82,000 x 80%) / 65,600
Direct labor (82,000 x 30%) / ______ / 24,600
Equivalent units of production / 329,600 / 300,600
Exercise 16-11 (25 minutes)
1. Cost per equivalent unit of direct materials and direct labor—FIFO
Direct / DirectMaterials / Labor
Costs incurred this period / $850,000 / $650,000
÷ Equivalent units of production (from Ex. 16-10) / 329,600 / 300,600
Cost per equivalent unit of production (rounded) / $2.58 per EUP / $2.16 per EUP
2. Assignment of costs to output of department—FIFO
Costs of goods transferred outCost of beginning goods in process inventory
Direct materials / $118,840
Direct labor / 47,890 / $ 166,730
Costs to complete beginning goods in process
Direct materials (24,000 EUP x $2.58 per EUP) / 61,920
Direct labor (36,000 EUP x $2.16 per EUP) / 77,760
Total costs to complete / 139,680
Cost of units started and completed this period
Direct materials (240,000 EUP x $2.58 per EUP) / 619,200
Direct labor (240,000 EUP x $2.16 per EUP) / 518,400
Total cost of units started and completed / 1,137,600
Total costs of goods transferred out / 1,444,010
Cost of ending goods in process inventory
Direct materials (65,600 EUP x $2.58 per EUP) / 169,248
Direct labor (24,600 EUP x $2.16 per EUP) / 53,136
Total costs of ending goods in process / 222,384
Total costs accounted for / $1,666,394
*Equals costs to account for of $1,666,730 after a rounding difference of $336.
Exercise 16-12 (30 minutes)