Chapter 6 Process Costing

Transcription

1 Chapter 6: Process Costing 239 Chapter 6 Process Costing LEARNING OBJECTIVES Chapter 6 addresses the following questions: LO1 LO2 LO3 LO4 LO5 Assign costs to mass-produced products using equivalent units to the production process. Apply and compare FIFO and weighted average methods in process costing. Apply alternative methods in mass production for multiple departments Describe how spoilage costs are handled in process costing. Explain how process costing information affects managers incentives and decisions These learning questions (LO1 through LO5) are cross-referenced in the textbook to individual exercises and problems. 212 John Wiley and Sons Canada, Ltd.

2 24 Cost Management 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 1% 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 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 212 John Wiley and Sons Canada, Ltd.

3 Chapter 6: Process Costing 241 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 labour, it is impossible to trace costs to mass-produced units. Job order costing is used for custom products. Direct material and labour costs are traced to each product and overhead costs are allocated using some allocation base that is labour or machine related. For mass-production, process costing is used. Equivalent units are calculated to account for units that are partially complete. costs are allocated separately. Direct labour 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. d units imply that the units have been transferred to the next department or to finished goods, which is not the case with these units. 6.1 This is what is referred to as "continuous processing." 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 5% complete as to conversion The cost of spoiled units is added to the total cost of goods transferred and increases the cost per unit 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 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 Three factors that managers consider are :1) saving the cost of the spoiled units,2)being able to sell those units therebyincreasing the contribution margin and 3) 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 The Lake Wobegon effect occurs when managers or employees overrate their own performance. Managers may believe that their operations are above average even though 212 John Wiley and Sons Canada, Ltd.

4 242 Cost Management they may not have benchmark information about competitors operations or other manufacturing plant benchmarks. If managers believe their operations are better than average, they may not emphasize improvements. It is also possible that their operations are below average and they do not realize this. 212 John Wiley and Sons Canada, Ltd.

5 Chapter 6: Process Costing 243 MULTIPLE CHOICE In process costing, if the units in beginning inventory are at less than 1% completion, what will be the cost of production per equivalent unit for the period under weighted-average costing during periods of rising prices? a) b) c) d) The same as the cost per equivalent unit under FIFO Higher than the cost per equivalent unit under FIFO The relationship is indeterminate Lower than the cost per equivalent unit under FIFO Ans: D In process costing, the journal entry to record factory overhead applied would include which of the following? a) b) c) d) A debit to work in process A credit to work in process A debit to cost of goods sold A credit to cost of goods sold Ans: A Use the following information to answer Question 6.18 to 6.2. The information below pertains to production activities in the refining department of Burn Corporation. All units in work in process (WIP) were costed using the FIFO cost flow assumption. Refining Department WIP, February 1 started and cost incurred during February completed and transferred to the mixing department WIP, February , 135, 1,? Percentage of Completion 8% Conversion Costs $ 22, $ 143, 5% $? What were the conversion costs per equivalent unit of production last period and this period, respectively? a) b) c) d) $1.1 and $1.3 $1.1 and $1.45 $1.3 and $1.3 $1.3 and $1.43 Ans: A (25, *.8 2, EU; $22, / 2, $1.1) (25,+135,-1, 6,; 6, * 5% 3, EU) (3, + 1, 13, EU; $143, + $22, $165,) ($165, / 13, EU round to 1.3) 212 John Wiley and Sons Canada, Ltd.

6 Cost Management What was the conversion cost in the work in process inventory account at February 28? a) b) c) d) $39, $39,6 $42,5 $45, Ans: A (from 6.18: 3, EU * $1.3 $39,) 6.2. What was the per-unit conversion cost of the units started last period and completed this period? a) b) c) d) $.86 $1.14 $1.25 $1.3 Ans: B [(8% * $1.1) + (2% * $1.3) $1.14] 212 John Wiley and Sons Canada, Ltd.

7 Chapter 6: Process Costing 245 EXERCISES 6.21 Equivalent, No -- Carina Medical Supplies A. With no beginning WIP and all units started and completed, the total cost is divided by number of units started and completed to calculate equivalent unit costs. equivalent unit cost $36,/2, units $1.8 per unit Conversion equivalent unit cost $38,/2, units $1.9 per unit B. 18, units started and completed; 2, in ending WIP are added at the beginning of processing, so all units started (2, units) were 1% complete with respect to direct materials. Direct materials equivalent unit cost $36,/2, units $1.8 per unit Conversion equivalent units: ed and completed 18, units Ending WIP (2, 5% complete) 1, units Total 19, units Conversion equivalent unit cost $38,/19, units $2. per unit C. The direct materials equivalent unit costs were the same in Parts A and B because the units in ending WIP were 1% complete with respect to direct materials. However, for conversion costs, the ending WIP was only 5% complete so the 2, units in ending WIP counted as only 1, equivalent units. Because the denominator was smaller in Part A than in Part B, the conversion cost per unit was larger in Part B compared to Part A Equivalent Under Weighted Average - Francisco s Assumptions: Work performed in May: % complete direct materials % complete conversion costs started completed and transferred out Ending WIP % complete direct materials % complete conversion costs 212 John Wiley and Sons Canada, Ltd. 9, 1% 4% 5, 47, 12, 1% 3%

8 246 Cost Management Summarize Physical and Equivalent Physical Beginning WIP 9, Beginning WIP 9, 3,6 5,4 Equivalent : Direct Materials Conversion Costs Work This Period and Ending WIP 38, 12, 38, 38, 12, 3,6 Performed This Period 5, Total to Account for 59, 5, 47, 59, 5,6 Weighted average equivalent units for direct materials is 59, (total work this period) because the ending units get 1% credit for direct materials, since direct materials are added at the beginning of processing. Equivalent units for conversion costs are 5,6 (total work this period) because ending inventory units are only 3% complete and, hence, have only 3% of the conversion costs (since conversion costs are incurred evenly during production) Equivalent, FIFO - Francisco s Assumptions: Work performed in May: % complete direct materials % complete conversion costs started completed and transferred out Ending WIP % complete direct materials % complete conversion costs 9, 1% 4% 5, 47, 12, 1% 3% Summarize Physical and Equivalent Physical Equivalent : Direct Materials Conversion Costs Beginning WIP 9, Beginning WIP 9, 3,6 5,4 Work This Period and Ending WIP 38, 12, 38, 38, 12, 3,6 Performed This Period 5, Total to Account for 59, 5, 47, 59, 5,6 FIFO equivalent units are found under Performed This Period. Therefore direct materials equivalent units are 5, (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, (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. 212 John Wiley and Sons Canada, Ltd.

9 Chapter 6: Process Costing Equivalent Unit Cost Under Weighted Average - Fine Fans Assumptions for October: Work performed: Costs: % complete direct materials % complete conversion costs started completed and transferred out Ending WIP % complete direct materials % complete conversion costs 9, 1% 2% 1, 94, 15, 1% 6% NT$ 18, 36, Total beginning WIP costs 54, Costs added this month 1, 2, Total costs added 3, Total costs to account for NT$354, Summarize Physical and Equivalent Physical Beginning WIP (2%) 9, Beginning WIP (8%) 9, 1,8 7,2 Equivalent : Direct Materials Conversion Costs Work This Period and Ending Performed WIP (6%) This Period 85, 15, 1, 85, 85, 15, 9, 1, 11,2 Total to Account for 19, 19, 13, Calculate Actual Cost per Equivalent Unit Weighted Average: : + cost Equivalent units for total work : + Conversion cost Equivalent units for total work Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd. $118, 19, $ 1.8 $236, 13, 2.29 $3.37

10 248 Cost Management 6.25 Equivalent Unit Cost, FIFO - Fine Fans Assumptions for October: Work performed: Costs: % complete direct materials % complete conversion costs started completed and transferred out Ending WIP % complete direct materials % complete conversion costs 9, 1% 2% 1, 94, 15, 1% 6% (FIFO and Weighted Average) Total beginning WIP costs Costs added this month Total costs added Total costs to account for $ 18, 36, 54, 1, 2, 3, $354, Summarize Physical and Equivalent Physical Beginning WIP (2%) 9, Beginning WIP (8%) 9, 1,8 7,2 Equivalent : Direct Materials Conversion Costs Work This Period and Ending Performed WIP (6%) This Period 85, 15, 1, 85, 85, 15, 9, 1, 11,2 Total to Account for 19, 19, 13, Calculate Actual Cost Per Equivalent Unit First-in, First-out: : cost Equivalent units for total work performed this period $1, 1, $ 1. : Equivalent units for total work performed this period $2, 11,2 Total cost per equivalent unit: $2.98 Cumulative Exercise (Chapter 5): Abnormal Spoilage Calculation [Note: This exercise requires application of knowledge from Chapter 5.] When spoiled units are sold, the net realizable value offsets the cost. In this case the total cost of spoiled units is $16, (8 $2). However, $2, is recovered by selling the spoiled units for their net realizable value. So the total cost for abnormal spoilage is $14, ($16, - $2,) 212 John Wiley and Sons Canada, Ltd.

11 Chapter 6: Process Costing Abnormal Spoilage Journal Entry [Note: This problem requires students to extend concepts about journal entries for spoilage from Chapter 5 to Chapter 6.] A) When spoiled units are sold, the net realizable value offsets the cost. In this case the total cost of spoiled units is $16, (8*$2). However, $2, is recovered by selling the spoiled units for their net realizable value. The journal entry for normal spoilage follows: Finished Goods Inventory Cash Work-in-Process inventory 14, 2, $16, B) The journal entry for abnormal spoilage follows. Loss from Abnormal Spoilage Cash Work-in-Process inventory 6.28 $14, 2, $16, Normal and Abnormal Spoilage, Solve for Unknown Number of spoiled units 1, 8, 2, Cost of spoiled units 2,*$5 $1, 6.29 Journal Entry for Normal and Abnormal Spoilage A. When all spoilage is normal, the total cost of units (good and spoiled) is transferred into finished goods. That cost is $5, (1,*$5). The journal entries follow. Finished Goods Inventory Work-in-Process Inventory $5, $5, B 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 $4, (8,*$5). Finished Goods Inventory Loss from Abnormal Spoilage Work-in-Process Inventory 212 John Wiley and Sons Canada, Ltd. $4, 1, $5,

12 25 Cost Management 6.3 Solving for Unknowns, Equivalent, FIFO -- Reliable Fittings A. Use physical units to determine the number of units started: units + started completed Ending WIP units 6, + started 2, 8, started 8, + 2, 6, 22, units B Equivalent units under the FIFO method include only work performed during the current period; equivalent units in beginning WIP are excluded: are added at the beginning of processing, so equivalent units number of units started 22, units : beginning WIP inventory: 6, units (1 6%) ed and completed: 22, units completed 6, units beg. WIP ending WIP inventory: 8, units 4% Total equivalent units ,4 units 16, units 3,2 units 21,6 units Solving for Unknowns, Equivalent, Weighted Average -- Reliable Fittings A. Use physical units to determine the number of units started: units + ed d Ending WIP units 6, + ed 2, 8, started 8, + 2, 6, 22, units (Same as 6.3) B Equivalent units under the weighted average method include both beginning WIP and work performed during the current period: : completed ending WIP inventory: 8, units 1% Total equivalent units 2, units 8, units 28, units : completed ending WIP inventory: 8, units 4% Total equivalent units 2, units 3,2 units 23,2 units 212 John Wiley and Sons Canada, Ltd.

13 Chapter 6: Process Costing through 6.35 Cost per Equivalent Unit and Account for Costs Under Weighted Average and FIFO -- Felix and Sons Assumptions for December: Work performed: Costs: % complete direct materials % complete conversion costs started (12, 8, + 6,) completed and transferred out Ending WIP % complete direct materials % complete conversion costs 8, 1% 75% 1, 12, 6, 1% 5% (FIFO and Weighted Average) Total beginning WIP costs Costs added this month Total costs added Total costs to account for $ 19,2 7,2 26,4 31,2 21,6 52,8 $79,2 Summarize Physical and Equivalent Physical Beginning WIP (25%) 8, Beginning WIP (75%) 8, 6, 2, Equivalent : Direct Materials Conversion Costs Work This Period and Ending Performed WIP (5%) This Period 4, 6, 1, 4, 4, 6, 3, 1, 9, Total to Account for 18, 18, 15, Calculate Actual Cost Per Equivalent Unit Weighted Average: : + cost Equivalent units for total work : + Conversion cost Equivalent units for total work $5,4 18, $ 2.8 $28,8 15, Total cost per equivalent unit: 1.92 $4.72 First-in, First-out: : cost Equivalent units for total work performed this period $31,2 1, $ 3.12 : Equivalent units for total work performed this period $21,6 9, Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd. 2.4 $5.52

14 252 Cost Management Process Cost Reports for December 31 Costs to complete beginning WIP: Total costs added this period First-in, First-Out Computation From November cost report 8, x$3.12 2,x$2.4 Total cost of beginning WIP transferred out New units started, completed, and transferred out 4,x$5.52 Total units completed and transferred out Ending WIP: Total ending WIP cost Weighted Average Computation $26,4 4,8 8, 31,2 4, 22,8 12, 53,28 (12,)x$4.72 6,x$2.8 3,x$ ,72 7,2 25,92 18, $79,2 6, 12, 16,8 5,76 22,56 18, $79,2 A. Summary of physical units: Year 1 45, (1,) 44, Year 2 1, 5, (1,) 5, Year 3 1, 25, (1,) 25, B. Equivalent units under the weighted average method Direct Materials: completed Ending inventory (1%) Equivalent units Year 1 44, 1, 45, Year 2 5, 1, 51, Year 3 25, 1, 26, Conversion Costs: completed Ending inventory (5%) Total equivalent units Year 1 44, 5 44,5 Year 2 5, 5 5,5 Year 3 25, 5 25,5 212 John Wiley and Sons Canada, Ltd. $56,64 6, Equivalent, Weighted Average, Production Pattern -- Wilson Company Beginning inventory started Ending inventory completed Costs 4,8 6,x$3.12 3,x$2.4 Total Accounted For 6.36 Costs

15 Chapter 6: Process Costing 253 C. Once every slot on the assembly line is full, units completed will be the same as units started (assuming no spoilage) Cost Report, No A sample spreadsheet showing the solutions for this problem is available on the Instructor s web site for the textbook (available at This exercise does not specify whether the process cost report should be prepared using the FIFO or the weighted average method. However, with no beginning inventory, the two methods are the same. Following are the calculations. 212 John Wiley and Sons Canada, Ltd.

16 254 Cost Management 6.38 Transferred In, No Direct Material, No A sample spreadsheet showing the solutions for this problem is available on the Instructor s web site for the textbook (available at This exercise does not specify whether costs should be calculated using the FIFO or weighted average method. However, with no beginning inventory, the two methods are the same. Although the exercise does not request a cost report, the easiest way to answer Parts A and B is to first prepare a cost report: Note: in ending WIP transferred in completed 6, 5, 1, A. Cost for equivalent units completed during the period $23, B. Cost for ending WIP $3,5 212 John Wiley and Sons Canada, Ltd.

17 Chapter 6: Process Costing Weighted Average, Cost Report, Labour and Overhead Allocated Separately -Germain Company A sample spreadsheet showing the solutions for this problem is available on the Instructor s web site for the textbook (available at Note: In this exercise, the conversion costs must be separated into two cost pools because labour costs are incurred when units are one-half complete, while overhead costs are incurred evenly throughout production. Note: Number of units completed and transferred out 8, + 7, 12, 66, 212 John Wiley and Sons Canada, Ltd.

18 Cost Management FIFO, Cost Report -- Yellow Crate Company A sample spreadsheet showing the solutions for this problem is available on the Instructor s web site for the textbook (available at Note: started and completed started in ending WIP 98, 1, 88, 212 John Wiley and Sons Canada, Ltd.

19 Chapter 6: Process Costing Weighted Average, Cost Report -- Red Dog Products A sample spreadsheet showing the solutions for this problem is available on the Instructor s web site for the textbook (available at John Wiley and Sons Canada, Ltd.

20 Cost Management FIFO, Cost Report -- Red Dog Products A sample spreadsheet showing the solutions for this problem is available on the Instructor s web site for the textbook (available at Note: in beginning WIP completed started and completed 88, 68, 2, 212 John Wiley and Sons Canada, Ltd.

21 Chapter 6: Process Costing 259 PROBLEMS 6.43 Costs and Journal Entries Under Weighted Average and FIFO - Humphrey Manufacturing A and B Assumptions for April: Work performed: Costs: % complete direct materials % complete conversion costs started completed and transferred out Ending WIP % complete direct materials % complete conversion costs 6, 1% 4% 42, 4, 8, 1% 25% (FIFO and Weighted Average) Total beginning WIP costs Costs added this month Total costs added Total costs to account for $ $ 7,5 2,125 9,625 $ 7, 42,5 $112,5 $122,125 Summarize Physical and Equivalent Physical Beginning WIP (4%) 6, Beginning WIP (6%) 6, 2,4 3,6 Equivalent : Direct Materials Conversion Costs Work This Period and Ending Performed WIP (25%) This Period 34, 8, 42, 34, 34, 8, 2, 42, 39,6 Total to Account for 48, 48, 42, started and completed 4, 6, 34, Calculate Actual Cost Per Equivalent Unit Weighted Average: : + cost Equivalent units for total work : + Conversion cost Equivalent units for total work Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd. $77,5 48, $ $44,625 42, $2.6771

22 26 Cost Management First-in, First-out: : cost Equivalent units for total work performed this period $7, 42, $ : Equivalent units for total work performed this period $42,5 39, Total cost per equivalent unit: $ Process Cost Reports for April Costs to complete beginning WIP: Total costs added this period First-in, First-Out Computation Costs From March cost report 6, $ 9,625 x$ ,6x$1.732 Total cost of beginning WIP transferred out New units started, completed, and transferred out 34,x$ Total units completed and transferred out Ending WIP: Total ending WIP cost Weighted Average Computation Costs 3,864 3,864 6, 13,489 34, 93,157 4, 16,646 4,x$ , 8,x$ ,x1.73 Total Accounted For 4, $17,84 8, 13,336 2,146 15,482 48, $122,128 8,x$ ,x$ ,917 2,125 15,42 48, $122,126 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: Work in process inventory $7, Raw materials inventory $7, To record the cost of raw materials used in production during April. Work in process inventory $42,5 Wages and accounts payable $42,5 To record the conversion costs incurred in production during April. 212 John Wiley and Sons Canada, Ltd.

23 Chapter 6: Process Costing 261 Finished goods $17,84 Work in process inventory $17,84 To record the cost of 4, units transferred to finished goods during April (includes the cost of normal spoilage). Journal entries for FIFO method for April: Work in process inventory $7, Raw materials inventory $7, To record the cost of raw materials used in production during April. Work in process inventory $42,5 Wages and accounts payable $42,5 To record the conversion costs incurred in production during April. Finished goods $16,646 Work in process inventory $16,646 To record the cost of 4, units transferred to finished goods during April (includes the cost of normal spoilage) Process Costing for a Service - 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 approximatenumber 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 3 and this organization s clients are likely to file by the due date rather than request extensions. 212 John Wiley and Sons Canada, Ltd.

24 262 Cost Management 6.45 FIFO Process Costing, Transferred-In Costs, Direct Materials Added During Process - Benton Industries 1. Summarize Total Costs to Account For FIFO: Transferred-in $ 4,47 224,13 $264,6 Current period costs Total costs to account for Direct Materials Conversion Costs $ $ 14, ,84 315,228 $166,84 $329,55 Total Cost $ 54,792 76,198 $76,99 2. Summarize Physical and Equivalent Physical Beginning WIP (33%) 15, Beginning WIP (67%) Equivalent : Transferred-in 15, Direct Materials (at 6%) Conversion Costs 5, 15, 1, Work This Period and Ending Performed WIP (4%) This Period 82, 11, 93, 82, 82, 82, 11, 4,4 93, 97, 96,4 Total to Account for 18, 18, 97, 11,4 3. Calculate First-in, First-out Cost Per Equivalent Unit Transferred-in: Transferred-in costs Equivalent units for total work performed this period $224,13 93, $ 2.41 : cost Equivalent units for total work performed this period $166,84 97, 1.72 : Equivalent units for total work performed this period $315,228 96, Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd. $7.4

25 Chapter 6: Process Costing Process cost report for the year Costs to complete beginning WIP: Total costs added this period Computation From last year 15, x $1.72 1, x $3.27 Total cost of beginning WIP transferred out New units started, completed, and transferred out 82,*$7.4 Total units completed and transferred out Ending WIP: Transferred-in Total ending WIP cost First-in, First-Out Costs 15, $ 54,792 25,8 32,7 58,5 15, 113,292 82, 66,8 97, 72,92 11, 11, x $2.41 x $1.72 4,4 x $3.27 Total Accounted For 26,51 14,388 4,898 18, $76,99 Notice that the total costs summarized above ($76,99) are equal to the costs accounted for in the cost report Process Costing Under Weighted Average, Spoilage, Journal Entries - Victoria s Closet A. Preparation of process cost report using the weighted average method. Summary of unit information given in the problem: WIP Beginning (25% complete) 11, ed 74, 61, Good completed 8, Spoiled Ending (75% complete) 16, Summary of Spoilage Normal spoilage Abnormal spoilage Total 6,6??? 8, When computing equivalent units, notice that the ending WIP inventory units are considered 1% 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 1% of all costs because spoilage occurs just before inspection, which is at the 1% stage of completion. 212 John Wiley and Sons Canada, Ltd.

26 264 Cost Management 1. Summarize Total Costs to Account For Direct Materials $22, 1,48, $1,7, Current period costs Total costs to account for Conversion Costs $3, 942, $972, Total Cost $ 25, 2,422, $2,672, 2. Summarize Physical and Equivalent Physical Beginning Beginning WIP (25%) WIP (75%) 11, Equivalent : Direct Materials 11, Conversion Costs 2,75 8,25 Work Performed This Period and Ending Performed WIP (75%) This Period 58, 16, 74, 58, 58, 16, 12, Total to Account for 85, Spoiled (1%) (8,) 85, 81, 74, 78,25 (8,) (8,) Total Spoilage Less Normal Spoilage Abnormal Spoilage 8, 6,6 1,4 3. Calculate Cost per Equivalent Unit: Weighted Average : + cost Equivalent units for total work : + Conversion cost Equivalent units for total work $1,7, 85, $972, 81, Total cost per equivalent unit: $2 12 $32 4. Weighted Average Process Cost Report for January Computation Total units completed and transferred out: Good units Normal spoilage Total transferred out (11, + 58, 8,) x$32 6,6 x $32 Abnormal spoilage 1,4 x $32 Ending WIP: Total ending WIP cost 16, x $2 12, x $12 Total Good Accounted For Total Accounted For 61, 61, Costs $1,952, 211,2 $2,163,2 44,8 16, 85, 8, 32, 144, 464, 77, $2,672, B. Journal entries: Work in process inventory $1,48, Raw materials inventory $1,48, To record the cost of raw materials used in production during January. 212 John Wiley and Sons Canada, Ltd.

27 Chapter 6: Process Costing 265 Work in process inventory $942, Wages and accounts payable $942, To record the conversion costs incurred in production during January. Finished goods $2,163,2 Work in process inventory $2,163,2 To record the cost of 61, units transferred to finished goods during January (includes the cost of normal spoilage). Abnormal spoilage loss $44,8 Work in process inventory To record the cost of abnormal spoilage during January $44,8 Process Costing Under FIFO, Spoilage, - Victoria s Closet A. This problem is identical to problem 6.31, 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 : cost Equivalent units for total work performed this period $1,48, 74, $2. : Equivalent units for total work performed this period $942, 78,25 Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd $32.383

28 266 Cost Management 4. FIFO Process Cost Report for Victoria s Closet Computation Costs to complete beginning WIP: Total costs added this period Costs $ 25, 99,316 99,316 11, 349,316 x$2 8,25*$ Total cost of beginning WIP transferred out New units started, completed, and transferred out 5,*$ , 1,61,915 Normal spoilage 6,6*$ ,453 61, 2,162,684 completed and transferred out Abnormal spoilage 1,4*$ Ending WIP: Total ending WIP cost 16, x $2 12, x $ Total Good Accounted For Total Costs Accounted For , 44,854 16, 32, 144,46 464,46 85,-8, 77, $2,671,998 Standard Costing, Spoilage, - Victoria s Closet A. 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. B. 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 Cumulative Problem (Chapter 4): Normal and Abnormal Spoilage, Quality Decision, Opportunity Costs - Kim Mills Summary of information given in the problem: Beginning ed Ending WIP 2,???? 9, Good completed 7, Spoiled 17, A. Abnormal spoilage 7, 3,6 3,4 units 212 John Wiley and Sons Canada, Ltd. Summary of Spoilage Normal spoilage Abnormal spoilage Total 3,6???? 7,

29 Chapter 6: Process Costing 267 B. Spoilage costs 7, x $1, $7,, 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. 6.5 Spoilage with Inspection Point Other Than 1% - Kim Mills A. If inspection occurs when units are 4% complete, direct materials have already been added, but conversion costs will only be 4% added. Equivalent units for direct materials 1% x 7, units 7, units Equivalent units for conversion costs 4% x 7, units 2,8 units B. Abnormal spoilage for conversion costs 2,8 (total spoilage per Part A) 1,44(normal spoilage) 1,36units. 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. 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 Normal and Abnormal Spoilage, Quality Improvements - Empire Forging Summary of information given in the problem: Beginning ed Ending WIP 6,???? 42, Good completed 36, Spoiled 68, A. Abnormal spoilage Total spoilage Normal spoilage 36, 12,6 23,4 units 212 John Wiley and Sons Canada, Ltd. Summary of Spoilage Normal spoilage Abnormal spoilage Total 12,6?? 36,

30 268 Cost Management B. started in May: Refer to the above T-Account, and solve for the unknown number of units started 6, + ed 42, 36, 68, ed 68, 6, + 42, + 36, ed 464, C. Percentage of good units allowed for spoilage is 3% (12,6/42,). Total spoiled units as a percentage of good units is 8.6% (36,/42,). 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 this decision. Once the managers have more information, they will better understand the costs and benefits of quality problems and quality initiatives. 212 John Wiley and Sons Canada, Ltd.

31 Chapter 6: Process Costing Process Costing Under Weighted Average and FIFO, Spoilage, Journal Entries 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 A. Weighted average: Following are excerpts from the sample spreadsheet for this problem. Input Area for Assumptions Work Performed: Work in Process: Beg. WIP 2, % complete direct materials 1% % complete conversion costs 8% started completed and transferred out Spoiled : Normal Abnormal End. WIP Ending WIP were not given, so they must be calculated: started Total to account for Transferred out* 1, Normal spoilage 1, Abnormal spoilage Ending WIP 1% 25% 18, 14,8 2, 18, 2, -14,8-1, -1, 3,2 Costs: Beginning Work in Process: Costs Added This Month: * Note: Only good units are transferred out $4, $3,2 $36, $32, 1. Summarize Total Costs to Account For Direct Current period costs Total costs to account for Conversion Total Materials $4, Costs $3,2 Costs $7,2 $36, $4, $32, $35,2 $68, $75,2 2. Summarize Physical and Equivalent Physical Equivalent : Direct Materials Conversion Costs Work Performed This Period Beginning WIP Beg. WIP and End. WIP Performed 8% 2% 25% This Period 2, 14,8 3,2 18, 2, 1,6 Total Spoilage Less Normal Spoilage Abnormal Spoilage 212 John Wiley and Sons Canada, Ltd. 4 14,8 14,8 3,2 8 18, 16, Total to Acct for 2, Spoiled 1% (2,) 2, 17,6 (2,) (2,) 2, 1, 1,

32 27 Cost Management 3. Calculate Cost Per Equivalent Unit Weighted Average: Direct Materials: Total Cost $4, Total 2, $2. Conversion Costs: $35,2 17,6 $2. Total Cost Per Equivalent Unit $4. 4. Weighted Average Process Cost Report for January Cost Per Equivalent Spoiled Good Unit Total Total units completed and transferred out: Good units Normal spoilage $4. $4. 14,8 1, Total transferred out $63,2 Abnormal spoilage $4. Ending WIP: $2. 3,2 $2. 8 Total ending WIP cost Total Good Accounted For $59,2 $4, 1, $4, 3,2 $6,4 (Total to account for - Total spoiled) Total Accounted For $1,6 $8, 18, $75,2 B. Journal entries for weighted average method: Work in process inventory $36, Raw materials inventory $36, To record the cost of raw materials used in production during July. Work in process inventory $32, Wages and accounts payable $32, To record the conversion costs incurred in production during July. Finished goods $63,2 Work in process inventory $63,2 To record the cost of 14,8 units transferred to finished goods during July (includes the cost of normal spoilage). Abnormal spoilage loss $4, Work in process inventory To record the cost of abnormal spoilage during July. 212 John Wiley and Sons Canada, Ltd. $4,

33 Chapter 6: Process Costing 271 C. FIFO: Following are excerpts from the sample spreadsheet for this problem. The input section and the sections for steps 1 and 2 are identical to the spreadsheet shown in Part A above. Therefore, only the sections for steps 3 and 4 are shown below. 3. Calculate Cost Per Equivalent Unit FIFO: Current Current Direct Materials: Cost $36, 18, $2. Conversion Costs: $32, 16, $2. Total Cost Per Equivalent Unit $4. 4. FIFO Process Cost Report for January Cost Per Unit Costs to complete beginning WIP: Total costs added this period $2. $2. Equivalent Spoiled 4 Total cost of beginning WIP transferred out Good units started, completed, and trans. out $4. Normal spoilage $4. 1, Total units completed and transferred out Abnormal spoilage $4. Total Good Accounted For Total Accounted For Total $7,2 $ $8 $8 2, $8, 12,8 $51,2 14,8 1, Ending WIP: Total ending WIP cost Good 2, $4, $63,2 $4, 3,2 $2. $2. 3,2 8 (Total to account for - Total spoiled) $6,4 $1,6 $8, 18, $75,2 D. Several factors affect accountants choices of costing systems. For process costing, the two main factors are ease of calculations (although with spreadsheets and software programs that currently of little concern) and the usefulness of more current cost information. If costs do not change rapidly and there is no need for the most current cost information, then weighted average is easier to calculate and understand. However, if managers want to monitor current period costs more closely, then FIFO is a better method because it better reflects the most current costs. It appears that Rally s costs did not change from last period to this period. If costs change slowly, the weighted average method would be the easiest report to prepare. 212 John Wiley and Sons Canada, Ltd.

34 272 Cost Management 6.53 Choice of Costing Method, Process Cost Report, Transferred-In, Spoilage Toddler Toys Solutions below are provided first for the weighted average method. Then solutions for the FIFO method are presented. WEIGHTED AVERAGE SOLUTION A. If a student chose the weighted average method, its main advantage is that it is a little less complex to calculate. The disadvantage is that the cost information is not as current as FIFO information. B. Here is a cost report using the weighted average method. 1. Summarize Total Costs to Account For Transferred-in $ 4, 36, $4, Current period costs Total costs to account for Direct Materials $ 2, 18, $2, Conversion Costs Total Cost $ 1,6 $ 7,6 16, 7, $17,6 $77,6 2. Summarize Physical and Equivalent Physical Work Performed This Period Total Beginning Beginning and Ending Performed to WIP (8%) WIP (2%) WIP (25%) This Period Account for 2, 14,8 3,2 18, 2, Equivalent : Transferred in 2, Direct Materials (at 75%) 2, Conversion Costs 1,6 4 14,8 14,8 14,8 3,2 8 18, 14,8 16, 2, 16,8 17,6 Normal spoilage Abnormal Spoilage Total spoilage Spoiled (1%) (2,) (2,) (2,) 1, 1, 2, 3. Calculate Cost Per Equivalent Unit (Weighted Average) Transferred-in: + Transferred-in costs Equivalent units for total work $4, $ 2. 2, : + cost Equivalent units for total work $2, 16, : + Conversion cost Equivalent units for total work $17,6 17,6 1. Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd. $4.195

35 Chapter 6: Process Costing Process Cost Reports for Assembly Department in August (Weighted Average) Computation Costs completed and transferred out 14,8 x $ ,8 $62,19 Normal spoilage 1, x $ ,191 Total cost transferred out 66,21 Abnormal spoilage 1, x $4.195 Ending work in process: Transferred-in Total ending WIP cost 3,2 x $2. x $ x $1. 4,191 3,2 Total Accounted For 6,4 8 7,2 18, $77,61 C. Journal entries: Work in process inventory-assembly Dept. $36, Work in process inventory-plastics Dept. $36, To record the cost of units transferred from the plastics department during August. Work in process inventory-assembly Dept. $18, Raw materials inventory $18, To record the cost of raw materials used in production during August. Work in process inventory-assembly Dept. $16, Wages and accounts payable $16, To record the conversion costs incurred in production during August. Finished goods inventory $66,21 Work in process inventory-assembly Dept. $66,21 To record the cost of 14,8 units transferred to finished goods during August (includes the cost of normal spoilage). Abnormal spoilage loss $4,191 Work in process inventory-assembly Dept. To record the cost of abnormal spoilage during August. 212 John Wiley and Sons Canada, Ltd. $4,191

36 274 Cost Management FIFO SOLUTION A. If a student chose FIFO, its main advantage is that the costs are more current, the disadvantage is that it is a bit more complex to calculate. B. Here is a cost report using the FIFO method. Notice that the first two parts are identical to the report under the weighted average method. 1. Summarize Total Costs to Account For Current period costs Total costs to account for Transferred-in $ 4, 36, $4, Direct Materials $ 2, 18, $2, Conversion Costs Total Cost $ 1,6 $ 7,6 16, 7, $17,6 $77,6 2. Summarize Physical and Equivalent Physical Beginning Beginning WIP (8%) WIP (2%) 2, Equivalent : Transferred in 2, Direct Materials 2, Conversion Costs 1,6 4 Work Performed This Period and Ending Performed WIP (25%) This Period 14,8 3,2 18, 14,8 14,8 14,8 3,2 8 18, 14,8 16, Total to Account for 2, 2, 16,8 17,6 Normal spoilage Abnormal Spoilage Total spoilage Spoiled (1%) (2,) (2,) (2,) 1, 1, 2, 3. Calculate Cost Per Equivalent Unit (FIFO) Transferred-in: Transferred-in costs Equiv. units for work performed this period $36, 18, $2. : cost Equiv. units for work performed this period $18, 14, : Equiv. units for work performed this period $16, 16, 1. Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd. $4.2162

37 Chapter 6: Process Costing Process Cost Reports for Assembly Department: June from May cost report Costs to complete beginning WIP: Transferred in Total costs added this period First-in, First-Out Computation 2, x $2 x $ x $1 Total cost of beginning WIP transferred out New units started, completed, and trans. out 12,8 x $ Normal spoilage 1, x $ Total units completed and transferred out Abnormal spoilage Ending WIP: Transferred-in Total ending WIP cost Total Accounted For Costs $ 7, , 8, 12,8 53,967 4,216 14,8 66,183 1, x $ ,216 3,2 3,2 x $2. x $ x $1 6,4 8 7,2 18, $77,599 C. Journal entries: Work in process inventory-assembly Dept. $36, Work in process inventory-plastics Dept. $36, To record the cost of units transferred from the plastics department during August. Work in process inventory-assembly Dept. $18, Raw materials inventory $18, To record the cost of raw materials used in production during August. Work in process inventory-assembly Dept. $16, Wages and accounts payable $16, To record the conversion costs incurred in production during August. Finished goods inventory $66,183 Work in process inventory-assembly Dept. $66,183 To record the cost of 14,8 units transferred to finished goods during August (includes the cost of normal spoilage). 212 John Wiley and Sons Canada, Ltd.

38 276 Cost Management Abnormal spoilage loss $4,216 Work in process inventory-assembly Dept. To record the cost of abnormal spoilage during August $4,216 Process Costing Under Weighted Average and FIFO, Spoilage, Rework - Cellular Advantage A sample spreadsheet for this problem is available on the Instructor s web site for the textbook (available at A. Weighted Average Method 1. Summarize Total Costs to Account For Current period costs Total costs to account for Direct Materials $ 44, 2,96, $3,4, Conversion Costs $ 6, 1,884, $1,944, Total Cost $ 5, 4,844, $5,344, 2. Summarize Physical and Equivalent Physical Beginning Beginning WIP (3%) WIP (7%) 22, Equivalent : Direct Materials 22, Conversion Costs 6,6 15,4 Total Spoilage Less Normal Spoilage Abnormal Spoilage * Work Performed This Period and Ending Performed WIP (6%) This Period 116, 32, 148, Total to Account for 17, Spoiled (75%) (16,) 116, 112,* 17, 153,2 (16,) (12,) Physical 16, 13,2 2,8 32, 19,2 148, 146,6 Equivalent Direct Conversion Materials Costs (1%) (75%) 13,2 2,8 9,9 2,1 Because inspection takes place when units are 75% complete, spoiled units are removed when units are 1% complete with respect to direct materials and 75% complete with respect to conversion costs. This also means that 25% of the conversion cost work is never performed on spoiled units. Therefore, the number of equivalent units started and completed for conversion costs is calculated as: Total physical units started and completed Less spoiled units not completed [16, x (1-75%)] Equivalent units started and completed for conversion costs 212 John Wiley and Sons Canada, Ltd. 116, (4,) 112,

39 Chapter 6: Process Costing Calculate Cost per Equivalent Unit: Weighted Average : + cost Equivalent units for total work : + Conversion cost Equivalent units for total work $3,4, 17, $2. $1,944, 153, Total cost per equivalent unit: $ Weighted Average Process Cost Report Computation Total units completed and transferred out: Good units (22,+116, 16,)x$ , Normal spoilage: 13,2 x $2 9,9 x $ Total transferred out 122, Abnormal spoilage Total abnormal spoilage 2,8 x $2 2,1 x $ Ending WIP: Total ending WIP cost 32, x $2 19,2 x $ Total Good Accounted For Total Accounted For Costs $3,988,94 264, 125,624 4,377,718 56, 26,648 82,648 32, 64, 243, ,634 17, 16, 154, $5,344, B: FIFO Method The summary of physical and equivalent units and the summary of costs to account for are the same as those shown above for the weighted average method. Thus, the solution below shows only steps 3 and Calculate Cost per Equivalent Unit: FIFO : cost Equivalent units for total work performed this period $2,96, 148, $2. : Equivalent units for total work performed this period $1,884, 146,6 Total cost per equivalent unit: 212 John Wiley and Sons Canada, Ltd $