Chapter 4

Systems Design: Process Costing

Solutions to Questions
4-1
A process costing system is
appropriate when a homogeneous product
is produced on a continuous basis.
4-2
Process costing and job-order
costing are similar in the following ways:
1. Both systems have the same basic
purposes, which are to assign
materials, labor, and overhead cost to
products and to provide a mechanism
for computing unit costs.
2. Both systems use the same basic
accounts.
3. Cost flows through the accounts in
basically the same way in both
systems.
4-3
Costs are accumulated by
department in a process costing system.
4-4
Cost accumulation is simpler under
process costing because costs only need
to be identified by departmentnot by
separate job. Usually a company has only
a few departments, whereas there can be
hundreds or even thousands of jobs in a
job-order costing system.
4-5
A Work in Process account is
maintained for each separate processing
department in a process costing system.
4-6
The journal entry to transfer the
costs of partially completed goods from
the Mixing Department to the Firing
Department would be:

XXXX
Work in Process, Mixing.........................
4-7
The costs that might be added to
the Firing Departments Work in Process
account would include: (1) cost transferred
in from the Mixing Department, (2)
materials cost, (3) labor cost, and (4)
overhead cost.
4-8
Under the weighted-average
method, the equivalent units of production
consist of units transferred to the next
department (or to finished goods) during
the period plus the equivalent units in the
departments ending Work in Process
inventory.
4-9
A quantity schedule shows the
physical flow of units through a
department during a period. It serves
several purposes. First, it provides the
manager with information about activity in
his or her department and also shows the
manager the stage of completion of any
in-process units. Second, it provides data
for computing the equivalent units and for
preparing the other parts of the production
report.
4-10 A unit of product accumulates cost
in each department that it passes through,
with the costs of one department added to
the costs of the preceding department in a
snowballing fashion.

XXXX
Work in Process, Firing................................

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137

Brief Exercise 4-1 (30 minutes)

a. To record issuing raw materials for use in production:
Work in ProcessMolding Department. . $28,000
Work in ProcessFiring Department......
$5,000
Raw Materials..................................
$33,000
b. To record direct labor costs incurred:
Work in ProcessMolding Department. .
Work in ProcessFiring Department......
Wages Payable................................

$18,000
$5,000

c. To record applying manufacturing overhead:

Work in ProcessMolding Department. . $24,000
Work in ProcessFiring Department...... $37,000
Manufacturing Overhead.................

$23,000

$61,000

d. To record transfer of unfired, molded bricks from the Molding

Department to the Firing Department:
Work in ProcessFiring Department...... $67,000
Work in ProcessMolding Department
$67,000
e. To record transfer of finished bricks from the Firing Department
to the finished goods warehouse:
Finished Goods...................................... $108,000
Work in ProcessFiring Department
$108,000
f. To record Cost of Goods Sold:
Cost of Goods Sold................................ $106,000
Finished Goods................................
$106,000

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Introduction to Managerial Accounting, 2nd Edition

Brief Exercise 4-2 (10 minutes)

Weighted-Average Method

Units transferred to the next

department
Work in process, October 31:
30,000 units 70%
30,000 units 50%
Equivalent units

Equivalent Units
Conversio
Materials
n
410,000
21,000
431,000

410,000
15,000
425,000

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139

Brief Exercise 4-3 (15 minutes)

Weighted-Average Method
1. Work in process, May 1...............................................
80,000
Started into production during May............................. 300,000
Total kilograms in process........................................... 380,000
Deduct work in process, May 31.................................
50,000
Completed and transferred out during May................. 330,000
2. Kilograms to be accounted for:
Work in process, May 1 (materials 80% complete;
conversion 20% complete).....................................
Started into production during the month.................
Total kilograms to be accounted for............................
Kilograms accounted for as follows:
Transferred out during the month.............................
Work in process, May 31 (materials 40% complete;
conversion 10% complete).....................................
Total kilograms accounted for.....................................

80,000
300,000
380,000
330,000
50,000
380,000

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Brief Exercise 4-4 (15 minutes)

1.

Material
Overhea
s
Labor
d
$ 14,550 $23,620 $118,100
88,350 14,330
71,650
$102,900 $37,950 $189,750

Work in process, May 1

Cost added during May
Total cost (a)
Equivalent units of production
(b)
Cost per equivalent unit (a)
(b)
2.

Cost per EU for materials

Cost per EU for labor
Cost per EU for overhead
Total cost per EU

1,200

1,100

1,100

$85.75

$34.50

$172.50

$ 85.75
34.50
172.50
$292.7
5

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141

Brief Exercise 4-5 (30 minutes)

1. Computation of the total cost per EU:
Cost per EU for materials
Cost per EU for labor
Cost per EU for overhead
Total cost per EU

$24.00
7.00
14.00
$45.00

2. Computation of equivalent units in ending inventory:

Units in ending inventory

Percentage completed
Equivalent units of
production

Materials
1,500
90%
1,350

Labor
1,500
40%
600

Overhea
d
1,500
40%
600

3. Cost Reconciliation

Cost accounted for as

follows:
Transferred to the next
department: 18,000 units
at $45.00 per unit
Work in process, ending:
Materials, at $24.00 per
EU
Labor, at $7.00 per EU
Overhead, at $14.00 per
EU
Total work in process
Total cost

Total
Cost

$810,00
0
32,400
4,200

Material
s
Labor

Overhead

18,000 18,000 18,000

1,350

8,400
45,000
$855,00
0

600
600

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Exercise 4-6 (15 minutes)

Work in ProcessMixing..........................................
330,000
Raw Materials Inventory.....................................

330,000

Work in ProcessMixing..........................................
260,000
Work in ProcessBaking.........................................
120,000
Wages Payable...................................................

380,000

Work in ProcessMixing..........................................
190,000
Work in ProcessBaking.........................................
90,000
Manufacturing Overhead....................................

280,000

Work in ProcessBaking.........................................
760,000
Work in ProcessMixing.....................................

760,000

Finished Goods........................................................
980,000
Work in ProcessBaking....................................

980,000

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143

Exercise 4-7 (20 minutes)

Weighted-Average Method

Pounds to be accounted for:

Work in process, May 1
(materials 100% complete,
labor and overhead 55%
complete)
Started into production during
May
Total pounds to be accounted for

Quantit
y
Schedul
e

30,000
480,000
510,000

Pounds accounted for as follows:

Transferred to Packing
Department during May*
Work in process, May 31
(materials 100% complete,
labor and overhead 90%
complete)
Total pounds accounted for

Equivalent Units
Labor &
Material Overhea
s
d
490,000

490,000

490,000

20,000
510,000

20,000
510,000

18,000
508,000

*30,000 + 480,000 20,000 = 490,000.

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Exercise 4-8 (30 minutes)

Weighted-Average Method
1. For the sake of brevity, only the portion of the quantity schedule from which the
equivalent units are computed is shown below.

Units accounted for as follows:

Transferred to the next process
Work in process, June 30
(materials 50% complete,
conversion 25% complete)
Total units accounted for
2.
Cost to be accounted for:
Work in process, June 1
Cost added by the department
Total cost to be accounted for (a)
Equivalent units (b)
Cost per equivalent unit (a) (b)

Quantit
y
Schedul
e

Equivalent Units (EU)

Conversio
Materials
n

300,000

300,000

300,000

40,000
340,000

20,000
320,000

10,000
310,000

Total
Cost

Material
s

$ 71,50
0
599,500
$671,00
0

Conversio
n

$ 56,60
0
$ 14,900
385,000
214,500
$441,60
0
$229,400
320,000
310,000
$1.38 +
$0.74 =

Whole
Unit

$2.12

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Introduction to Managerial Accounting, 2nd Edition

Exercise 4-9 (20 minutes)

Weighted-Average Method
Total
Cost accounted for as follows:
Transferred to the next
process:
300,000 units at $2.12 each
Work in process, June 30:
Materials, at $1.38 per EU
Conversion, at $0.74 per EU
Total work in process
Total cost accounted for

Cost

Equivalent Units
(EU)
Material Conversio
s
n

$636,00
0 300,000
27,600
7,400
35,000
$671,00
0

300,000

20,000
10,000

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147

Exercise 4-10 (30 minutes)

Weighted-Average Method
1.

Gallons to be accounted
for:
Work in process, May
1 (materials 80%
complete, labor and
overhead 75%
complete)
Started into
production
Total gallons accounted
for

Quantit
y
Schedul
e

80,000
760,000
840,000
Equivalent Units
Material
Overhea
s
Labor
d

Gallons accounted for as

follows:
Transferred to the next
department
790,000 790,000 790,000
Work in process, May
31 (materials 60%
complete, labor and
overhead 20%
complete)
50,000 30,000 10,000
Total gallons accounted
for
840,000 820,000 800,000

790,000

10,000
800,000

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Introduction to Managerial Accounting, 2nd Edition

Exercise 4-10 (continued)

2.

Total
Costs

Cost to be accounted
for:
Work in process, May
$ 146,60
1
0
Cost added during the
1,869,20
month
0
Total cost to be
$2,015,80
accounted for (a)
0
Equivalent units (b)

Cost per equivalent unit

(a) (b)

Material
s

Labor

Overhea
d

$ 68,600

$
30,000

$ 48,000

907,200
$975,80
0
820,000

370,000
$400,00
0
800,000

$1.19 +

$0.50 +

Whole
Unit

592,000
$640,000
800,000
$0.80 =

$2.49

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Problem 4-11 (30 minutes)

Weighted-Average Method
1. The computation of equivalent units would be:

Units accounted for as

follows:
Transferred to the next
department
Work in process, April 30
(materials 80%
complete, labor and
overhead 60%
complete)
Total units and equivalent
units of production

Quantit
y
Equivalent Units (EU)
Schedul Material
Overhea
e
s
Labor
d

35,600

7,400
43,000

35,600 35,600 35,600

5,920

4,440

4,440

41,520 40,040 40,040

2. The cost reconciliation follows:

Total
Cost accounted for as
follows:
Transferred to the next
department: 35,600
units $2.90 per unit
Work in process, April 30:
Materials, at $0.50 per
EU
Labor, at $1.10 per EU
Overhead, at $1.30 per
EU
Total work in process
Total cost

Cost

$103,24
0
2,960
4,884

Equivalent Units (EU)

Material
Overhea
s
Labor
d

35,600 35,600
5,920

5,772
13,616
$116,85
6

35,600

4,440
4,440

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Problem 4-12 (45 minutes)

Weighted-Average Method
1. The equivalent units for the month would be:

Units accounted for as follows:

Transferred to next
department
Work in process, May 30
(materials 75% complete;
conversion 50% complete)
Total units and equivalent
units of production
2.

Quantit
y
Schedul
e

Equivalent Units
(EU)
Material Conversio
s
n

92,000

92,000

92,000

14,000

10,500

7,000

106,000

102,500

99,000

Total
Cost
Work in process, May $ 16,40
1
0
Cost added during
the month
431,200
$447,60
Total cost (a)
0

Material
s

Conversio
n

$ 5,900
194,20
0
$200,10
0

$ 10,500

Equivalent units of
production (b)
Cost per EU (a) (b)

102,500
$1.95 +

Whol
e Unit

237,000
$247,500
99,000
$2.50 = $4.45

3. Total units transferred.............................................

92,000
Less units in the beginning inventory......................
6,000
Units started and completed during
May.......................................................................
86,000
4. No, the manager should not be rewarded for good cost control.
The reason for the Mixing Departments low unit cost for May is
traceable to the fact that costs of the prior month have been
averaged in with Mays costs in computing the lower, $1.95 per
unit figure. This is a major criticism of the weighted-average
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Introduction to Managerial Accounting, 2nd Edition

method in that the figures computed for product costing

purposes cant be used to evaluate cost control or measure
performance for the current period.

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Problem 4-13 (60 minutes)

Weighted-Average Method
Quantity Schedule and Equivalent Units
Quantit
y
Schedul
e

Units to be accounted for:

Work in process, April 1
(materials 85% complete;
conversion 60% complete)
Started into production
Total units

7,000
88,000
95,000

Units accounted for as follows:

Transferred to bottling:
Work in process, April 30
(materials 60% complete,
conversion 20% complete)
Total units and equivalent
units of production
5

Equivalent Units
(EU)
Material Conversio
s
n
82,000

82,000

82,000

13,000

7,800

2,600

95,000

89,800

84,600

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Introduction to Managerial Accounting, 2nd Edition

Problem 4-13 (continued)

Costs per Equivalent Unit
Cost to be accounted for:
Work in process, April 1
Cost added during April
Total cost (a)

Total
Cost

Materials

Conversio
n

$14,800 $ 6,800
249,730 105,450
$264,530 $112,250

$ 8,000
144,280
$152,280

89,800

84,600

Equivalent units of production (b)

Cost per EU (a) (b)
Cost Reconciliation

Cost accounted for as follows:

Transferred to bottling:
82,000 units $3.05 per unit
Work in process, April 30:
Materials, at $1.25 per EU
Conversion, at $1.80 per EU
Total work in process
Total cost

$1.25 +
Total

$1.80

Whole
Unit

= $3.05

Equivalent Units (EU)

Conversio
Materials
n

Cost
$250,100

82,000

9,750
4,680
14,430
$264,530

7,800

82,000
2,600

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Problem 4-14 (60 minutes)

Weighted-Average Method
1. 2., and 3.
Quantity Schedule and Equivalent Units

Units to be accounted
for:
Work in process, July 1
(materials 100%
complete; labor and
overhead 90%
complete)
Started into production
Total units

Quantit
y
Schedul
e

15,000
160,000
175,000
Equivalent Units (EU)
Material
Overhea
s
Labor
d

Units accounted for as follows:

Transferred out
155,000 155,000 155,000 155,000
Work in process, July 31
(materials 40%
complete; labor and
overhead 10%
complete)
20,000
8,000
2,000
2,000
Total units and
equivalent units of
production
175,000 163,000 157,000 157,000

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Problem 4-14 (continued)

Cost per Equivalent Unit

Cost to be accounted for:

Work in process, July 1
Cost added during the
month
Total cost (a)
Equivalent units of production
(b)

Total
Cost

Material
s

Labor

Overhea
d

$
53,120

$ 14,100

$22,680

$16,340

142,380

237,940

178,340

$156,480

$260,620

$194,680

163,000

157,000

157,000

558,660
$611,78
0

Cost per EU (a) (b)

$0.96 +

Cost Reconciliation

Cost accounted for as follows:

Transferred out:
155,000 units $3.86 per
unit
Work in process, July 31:
Materials, at $0.96 per EU

Total
Cost

$1.66 +

Whol
e
Unit

$1.24 = $3.86

Equivalent Units (EU)

Material
Overhea
s
Labor
d

$598,30
0

155,000

7,680

8,000

155,000

155,000

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Labor, at $1.66 per EU

Overhead, at $1.24 per EU
Total work in process
Total cost

3,320
2,480
13,480
$611,78
0

2,000
2,000

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Problem 4-15 (75 minutes)

Weighted-Average Method
1. A completed production report follows:
Quantity Schedule and Equivalent Units

Units to be accounted for:

Work in process, March 1
(materials 100% complete;
labor and overhead 60%
complete)
Started into production
Total Units

Units accounted for as follows:

Transferred to mixing
Work in process, March 31
(materials 100% complete;
labor and overhead 70%
complete)
Total Units and equivalent
units of production

Quantity
Schedul
e

4,500
56,800
61,300
Equivalent Units
(EU)
Labor &
Material Overhea
s
d
58,400

58,400

58,400

2,900

2,900

2,030

61,300

61,300

60,430

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159

Problem 4-15 (continued)

Cost per Equivalent Unit

Cost to be accounted for:

Work in process, March 1
Cost added during March
Total cost (a)

Total
Cost

Material
s

$12,365
188,794
$201,15
9

$ 9,125
113,475
$122,60
0

Equivalent units of production (b)

Cost per EU (a) (b)
Cost Reconciliation

Cost accounted for as follows:

Transferred to mixing: 58,400 units
$3.30 per unit
Work in process, March 31:
Materials, at $2.00 per EU
Labor and overhead, at $1.30 per
EU
Total work in process
Total cost

61,300
$2.00 +

Labor &
Overhea
d

Whole
Unit

$ 3,240
75,319
$78,559
60,430
$1.30 = $3.30

Equivalent Units (EU)

Labor &
Total
Material
Overhea
Cost
s
d
$192,72
0

58,400

5,800

2,900

2,639
8,439
$201,15

58,400

2,030

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161

Problem 4-15 (continued)

2. In computing unit costs, the weighted-average method mixes
costs of the prior period in with current period costs. Thus,
under the weighted-average method, unit costs are influenced
to some extent by what happened in a prior period. This
problem becomes particularly significant when attempting to
measure performance in the current period. Good cost control
in the current period might be concealed to some degree by
the unit costs that have been brought forward in the beginning
inventory. The reverse could also be true in that poor cost
control during a period might be concealed somewhat (or
entirely) by the costs of the prior period that have been
brought forward and added in with current period costs.

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Problem 4-16 (90 minutes)

Weighted-Average Method
1. The equivalent units would be:
Units
completed
during the
year
Work in
process,
December
31:
30,000 units
100%
30,000 units
80%
Total
equivalent
units (a)

Materials

635,000

Labor

Overhead

635,000

635,000

24,000

24,000

659,000

659,000

30,000

665,000

The costs per equivalent unit would be:

Work in
process,
January 1
Cost added
during the
year
Total costs (b)

Materials

Labor

$ 18,000

$ 9,555

979,500
$997,500

616,495
$626,050

Cost per EU
(b) (a)

$1.50 +

$0.95 +

Overhead

Whol
e
Unit

$ 7,644 *
493,196 **
$500,840
$0.76 = $3.21

* $9,555 80% = $7,644

** $616,495 80% = $493,196

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163

Problem 4-16 (continued)

2. The amount of cost that should be assigned to the ending
inventories is:

Work in process:
Materials:
30,000 units $1.50 per
unit
Labor:
24,000 EU $0.95 per EU
Overhead:
24,000 EU $0.76 per EU
Finished goods:
12,000 units $3.21 per
unit
Total cost that should be
assigned to inventories

Work in
Process

Finished
Goods

Total

$45,000

$ 45,000

22,800

22,800

18,240

18,240

$86,040

$38,520

38,520

$38,520

$124,560

3. The necessary adjustments would be:

Cost that should be assigned

to inventories (above)
Year-end balances in the
accounts
Difference
Work in Process Inventory
Cost of Goods Sold
Finished Goods

Work in
Process

Finished
Goods

Total

$86,040

$ 38,520

$ 124,560

85,000
60,000
145,000
$ 1,040 $(21,480) $(20,440)
Debit
Credit
1,040
20,440
21,480

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Problem 4-16 (continued)

4. The simplest computation of the cost of goods sold would be:
Beginning finished goods inventory........................
0
Units completed during the year.............................
635,000
Units available for sale............................................
635,000
Less units in ending finished goods
inventory..............................................................
12,000
Units sold during the year.......................................
623,000
Cost per equivalent unit (from part 1).....................
$3.21
$1,999,83
Cost of goods sold...................................................
0
Alternative computation:
Total manufacturing cost incurred:

$ 997,50
Materials (part 1)..................................................
0
Labor (part 1)........................................................
626,050
Overhead (part 1).................................................
500,840
Total manufacturing cost.........................................
2,124,390
Less cost assigned to inventories (part 2)...............
124,560
$1,999,83
Cost of goods sold...................................................
0

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165

Problem 4-17 (120 minutes)

Weighted-Average Method
1. a. Work in ProcessBending Department...................
394,210
Work in ProcessDrilling Department.....................
100,800
Raw Materials..................................................... 495,010
b. Work in ProcessBending Department...................
638,144
Work in ProcessDrilling Department.....................
250,600
Salaries and Wages Payable............................... 888,744
c. Manufacturing Overhead.........................................
685,000
Accounts Payable............................................... 685,000
d. Work in ProcessBending Department...................
493,584
Manufacturing Overhead.................................... 493,584
Work in ProcessDrilling Department.....................
189,000
Manufacturing Overhead.................................... 189,000
1,536,99
e. Work in ProcessDrilling Department.....................
0
Work in ProcessBending
1,536,99
Department.....................................................
0
1,650,00
f. Finished Goods........................................................
0
Work in ProcessDrilling
1,650,00
Department.....................................................
0
2,700,00
g. Accounts Receivable...............................................
0

2,700,00
Sales..................................................................
0

1,600,00
Cost of Goods Sold..................................................
0

1,600,00
Finished Goods...................................................
0

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Problem 4-17 (continued)

2.
(g)

Accounts Receivable
2,700,00
0

Bal.
Bal.

Bal
.
(a)
(b)
(d)
Bal
.

Work in Process
Bending Department
45,369 1,536,99
0
394,210
638,144
493,584
34,317

(e)

Bal
.
(a)
(b)
(d)
(e)
Bal
.

Bal
.
(f)
Bal
.

Finished Goods
110,000 1,600,00
0
1,650,00
0
160,000
Accounts Payable
685,000
Sales
2,700,00
0

(g)

(c)

(g)

Raw Materials
500,00 495,010
0
4,990
Work in Process
Drilling Department
10,000 1,650,00
0
100,800
250,600
189,000
1,536,9
90
437,390

(a)

(f)

Manufacturing Overhead
(c)
685,00 682,584 (d)
0
Bal.
2,416

Salaries and Wages Payable

888,744 (b)

(g)

Cost of Goods Sold

1,600,0
00

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Problem 4-17 (continued)

3. The production report for the Bending Department follows:
Quantity Schedule and Equivalent Units
Quantit
y
Schedul
e

Units to be accounted for:

Work in process, May 1 (materials 80%
complete, labor and overhead 60%
complete)...........................................................
12,000
Started into production.........................................
270,000
Total units.............................................................
282,000
Equivalent Units (EU)
Material
Overhea
s
Labor
d

Units accounted for as follows:

Transferred to Drilling:
273,000 * 273,000 273,000 273,000
Work in process, May 31 (materials 90%
complete, labor and overhead 60%
complete)...........................................................9,000
8,100
5,400
5,400
Total units and equivalent units of
production..........................................................
282,000 281,100 278,400 278,400
* 282,000 units 9,000 units = 273,000 units
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Introduction to Managerial Accounting, 2nd Edition

Problem 4-17 (continued)

Costs per Equivalent Unit

Cost to be accounted for:

Total Cost

Material
s

Labor

Work in process, May 1

$ 45,369

$13,385

$18,880

Cost added during May

1,525,938

394,210

638,144

$1,571,307

$407,595

$657,024

Total cost (a)

Equivalent units of production
(b)
Cost per EU (a) (b)

Overhea
d

Whol
e
Unit

$
13,104
493,58
4
$506,68
8

281,100
278,400 278,400
$1.45 +
$2.36 +
$1.82 = $5.63

Cost Reconciliation
Total
Cost accounted for as follows:
Transferred to Drilling:
273,000; $5.63 per unit
Work in process, May 31:
Materials, at $1.45 per EU
Labor, at $2.36 per EU
Overhead, at $1.82 per EU

Cost

Equivalent Units (EU)

Overhea
Materials
Labor
d

$1,536,990

273,000

11,745
12,744
9,828

8,100

273,000
5,400

273,000

5,400

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Total work in process

Total cost

34,317
$1,571,307

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Problem 4-18 (120 minutes)

Weighted-Average Method
1. a. Work in ProcessDrying Department......................
540,460
Work in ProcessSalting Department.....................
295,000
Raw Materials..................................................... 835,460
b. Work in ProcessDrying Department......................
397,970
Work in ProcessSalting Department.....................
201,000
Salaries and Wages Payable............................... 598,970
c. Manufacturing Overhead.........................................
542,000
Accounts Payable............................................... 542,000
d. Work in ProcessDrying Department......................
208,170
Work in ProcessSalting Department.....................
340,000
Manufacturing Overhead.................................... 548,170
1,200,00
e. Work in ProcessSalting Department.....................
0
Work in ProcessDrying
1,200,00
Department.....................................................
0
1,980,00
f. Finished Goods........................................................
0
Work in ProcessSalting
1,980,00
Department.....................................................
0
2,500,00
g. Accounts Receivable...............................................
0

2,500,00
Sales..................................................................
0

1,930,00
Cost of Goods Sold..................................................
0

1,930,00
Finished Goods...................................................
0
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Problem 4-18 (continued)

2.
(g)

Accounts Receivable
2,500,00
0

Bal.
Bal.

Bal
.
(a)
(b)
(d)
Bal
.

Work in Process
Drying Department
97,400 1,200,00
0
540,460
397,970
208,170
44,000

(e)

Bal
.
(a)
(b)
(d)
(e)
Bal
.

Bal
.
(f)
Bal
.

Finished Goods
57,000 1,930,00
0
1,980,00
0
107,000
Accounts Payable
542,000
Sales
2,500,00
0

(g)

(c)

(g)

Raw Materials
850,00 835,460
0
14,540
Work in Process
Salting Department
33,000 1,980,00
0
295,000
201,000
340,000
1,200,0
00
89,000

(a)

(f)

Manufacturing Overhead
(c)
542,00 548,170 (d)
0
6,170 Bal
.

Salaries and Wages Payable

598,970 (b)

(g)

Cost of Goods Sold

1,930,0
00

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Introduction to Managerial Accounting, 2nd Edition

Problem 4-18 (continued)

3. The production report for the Drying Department follows:
Quantity Schedule and Equivalent Units
Quantit
y
Schedul
e

Pounds to be accounted for:

Work in process, December 1 (materials
90% complete, labor and overhead 80%
complete)...........................................................
19,000
Started into production.........................................
191,000 *
Total pounds.........................................................
210,000

Pounds accounted for as follows:

Transferred to Salting:...........................................
200,000
Work in process, December 31 (materials
100% complete, labor and overhead 50%
complete)...........................................................
10,000
Total pounds and equivalent units of
production..........................................................
210,000

Equivalent Units (EU)

Material
s
Labor
Overhead
200,000

200,000

200,000

10,000

5,000

5,000

210,000

205,000

205,000

* (200,000 pounds + 10,000 pounds) 19,000 pounds = 191,000 pounds started

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Problem 4-18 (continued)

Cost per Equivalent Unit
Material
Total Cost
s

Cost to be accounted for:

Work in process, December 1 $ 97,400 $47,540
1,146,60
Cost added during December
0 540,460
$1,244,00 $588,00
Total cost (a)
0
0
Equivalent units of production
(b)
Cost per EU (a) (b)
Cost Reconciliation

Cost accounted for as follows:

Transferred to Salting:
200,000 pounds at $6.00
per pound
Work in process, December
31:
Materials, at $2.80 per EU
Labor, at $2.10 per EU

Labor

Overhea
d

$ 32,530

$17,330

397,970
$430,50
0

208,170

Whol
e
Unit

$225,500

210,000
205,000
205,000
$2.80 +
$2.10 +
$1.10 = $6.00
Equivalent Units (EU)
Material
Overhea
Total Cost
s
Labor
d
$1,200,00
0 200,000
28,000
10,500

10,000

200,000

200,000

5,000

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Overhead, at $1.10 per EU

Total work in process
Total cost

5,500
44,000
$1,244,00
0

5,000

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Analytical Thinking (90 minutes)

Weighted-Average Method
1. The revised production report follows:
Quantity Schedule and Equivalent Units

Units to be accounted
for:
Work in process,
October 1 (material
100% complete,
conversion 7/8
complete)
Received from the
preceding
department*
Total units to be
accounted for

Units accounted for as

follows:
Transferred to
Stamping
Work in process,
October 31
(material 0%
complete,
conversion 2/5
complete) month
Total units accounted
for

Quantity
Schedul
e

8,000
97,000
105,000
Equivalent Units (EU)
Transferre Material Converd In
s
sion
100,00
0

5,000
105,00
0

100,000

5,000
105,000

100,000 100,000

2,000

100,000 102,000

*100,000 + 5,000 8,000 = 97,000.

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Managerial Accounting, 10th Edition

Analytical Thinking (continued)

Costs per Equivalent Unit
Cost to be accounted for:
Work in process, October 1
Cost transferred in or added
during the month
Total cost to be accounted for
(a)
Equivalent units (b)
Cost per equivalent unit (a)
(b)
Cost Reconciliation
Cost accounted for as follows:
Transferred to Stamping:

Total
Cost

Transferre
d In

Material
s

Conversio
n

$8,820

$3,400

$10,200

81,480

27,600
$
31,000
100,000

96,900

$
22,420
205,980
$228,40
0

$90,300
105,000
$0.86 +

Total
Cost

Whole
Unit

$107,100
102,000

$0.31 +

$1.05 = $2.22

Equivalent Units (EU)

Transferred
Conversio
In
Materials
n

$222,00
100,000 units $2.22 per unit...........................
0
100,000
Work in process, October 31:
Transferred in cost, at $0.86 per
EU....................................................................
4,300
5,000
Conversion, at $1.05 per EU...............................
2,100
Total work in process.............................................
6,400
$228,40
Total cost accounted for..........................................
0

100,000

100,000

2,000

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2. The unit cost figure on the report prepared by the accountant is high because none of
the cost incurred during the month was assigned to the units in the ending work in
process inventory.

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Introduction to Managerial Accounting, 2nd Edition

Ethics Case (120 minutes)

This case is difficultparticularly part 3, which requires
analytical skills.
Since there are no beginning inventories, it makes no
difference whether the weighted-average or FIFO method is
used by the company. You may choose to assign the problem
specifying that the FIFO method be used rather than the
weighted-average method.
1. The computation of the cost of goods sold follows:
Transferred
In
Conversion
100%
25%

Estimated completion
Computation of equivalent
units:
Completed and transferred
out
Work in process, ending:
Transferred in,
20,000 units 100%
Conversion,
20,000 units 25%
Total equivalent units

Cost to be accounted for:

Work in process

250,000
20,000

5,000
255,000

270,000

Transferred
In
Conversion

0
$49,221,00
Cost added during the month
0
Total cost to be accounted for $49,221,00
(a)
0
Equivalent units (above) (b)
Cost per equivalent unit (a)
(b)

250,000

Whole
Unit

0
$16,320,00
0
$16,320,00
0

270,000
$182.30 +

255,000
$64.00

=
$246.30

Cost of goods sold = 250,000 units $246.30 per unit =

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$61,575,000

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Managerial Accounting, 10th Edition

Ethics Case (continued)

2. The estimate of the percentage completion of ending work in
process inventories affects the unit costs of finished goods and
therefore of the cost of goods sold. Thad Kostowski would like
the estimated percentage completion figures to be increased
for the ending work in process. The higher the percentage of
completion of ending work in process, the higher the equivalent
units for the period and the lower the unit costs.
3. Increasing the percentage of completion can increase net
operating income by reducing the cost of goods sold. To
increase net operating income by $62,500, the cost of goods
sold would have to be decreased by $62,500 from $61,575,000
down to $61,512,500.
The percentage of completion, X, affects the cost of goods
sold by its effect on the unit cost, which can be determined as
follows:
Unit cost = $182.30 +

$16,320,000
250,000+20,000X

And the cost of goods sold can be computed as follows:

Cost of goods sold = 250,000 Unit cost
Since cost of goods sold must be reduced down to
$61,512,500, the unit cost must be $246.05 ($61,512,500
250,000 units). Thus, the required percentage completion, X, to
obtain the $62,500 reduction in cost of goods sold can be found
by solving the following equation:
$182.30+

$16,320,000
=$246.05
250,000+20,000X

$16,320,000
=$246.05-$182.30
250,000+20,000X
$16,320,000
=$63.75
250,000+20,000X

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250,000+20,000X
1
=
$16,320,000
$63.75

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Introduction to Managerial Accounting, 2nd Edition

Ethics Case (continued)

250,000+20,000X=

$16,320,000
$63.75

250,000+20,000X=256,000
20,000X=256,000-250,000
20,000X=6,000
X=

6,000
=30%
20,000

Thus, changing the percentage completion to 30% will

decrease cost of goods sold and increase net operating income
by $62,500 as verified on the next page.

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183

Ethics Case (continued)

3. (continued)
Estimated completion
Computation of equivalent units:
Completed and transferred out
Work in process, ending:
Transferred in, 20,000 units
100%
Conversion, 20,000 units 30%
Total equivalent units

Cost to be accounted for:

Work in process

Transferred In Conversion
100%
30%
250,000

250,000

20,000

6,000
256,000

270,000

Transferred In Conversion
0

Cost added during the month

$49,221,000

Total cost to be accounted for (a)

Equivalent units (above) (b)

$49,221,000
270,000

Cost per equivalent unit (a) (b)

$182.30

Whole
Unit

0
$16,320,00
0
$16,320,00
0
256,000
+

=$246.0
$63.75
5

Cost of goods sold = 250,000 units $246.05 per unit = $61,512,500

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Managerial Accounting, 10th Edition

Ethics Case (continued)

4. Carol is in a very difficult position. Collaborating with Thad
Kostowski in subverting the integrity of the accounting system
is unethical by almost any standard. To put the situation in its
starkest light, Kostowski is suggesting that the production
managers lie in order to get their bonus. Having said that, the
peer pressure to go along in this situation may be intense. It is
difficult on a personal level to ignore such peer pressure.
Moreover, Carol probably prefers not to risk alienating people
she might need to rely on in the future. On the other hand,
Carol should be careful not to accept at face value Kostowskis
assertion that all of the other managers are doing as much as
they can to pull this bonus out of the hat. Those who engage
in unethical or illegal acts often rationalize their own behavior
by exaggerating the extent to which others engage in the same
kind of behavior. Other managers may actually be very
uncomfortable pulling strings to make the target profit for the
year.
From a broader perspective, if the net profit figures reported by
the managers in a division cannot be trusted, then the
company would be foolish to base bonuses on the net profit
figures. A bonus system based on divisional net profits
presupposes the integrity of the accounting system. However,
the company should perhaps reconsider how it determines the
bonus. It is quite common for companies to pay an all or
nothing bonus contingent on making a particular target. This
inevitably creates powerful incentives to bend the rules when
the target has not quite been attained. It might be better to
have a bonus without this all or nothing feature. For example,
managers could be paid a bonus of x% of profits above target
profits rather than a bonus that is a preset percentage of their
base salary. Under such a policy, the effect of adding that last
dollar of profits that just pushes the divisional net profits over
the target profit will add a few pennies to the managers
compensation rather than thousands of dollars. Therefore, the
incentives to misstate the net operating income are reduced.
Why tempt people unnecessarily?

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Communicating in Practice (30 minutes)

Date:
To:
From:
Subject:

Current Date
Minesh Patel
Students Name
Production Report

Referring to the Production Report for the Shaping and Milling

Department, please perform the following steps:
1. Ensure that the current balance in the Shaping and Milling
Department Work in Process account is currently $734,675,
which is the total cost to be accounted for in the Cost
Reconciliation section of the Production Report.
2. Prepare the following journal entry for the 4,800 units that were
transferred during the month from the Shaping and Milling
Department to the Graphics Application Department:
Work in Process, Graphics Application.....................
715,200
Work in Process, Shaping and Milling..................

715,200

3. After this entry is posted to the ledger, the Shaping and Milling
Department account should have an ending account balance of
$19,475, which is the total Work in Process, May 31 amount
reflected in the Cost Reconciliation section of the Production
Report.
If you have any questions, please do not hesitate to contact me.

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Introduction to Managerial Accounting, 2nd Edition

Teamwork In Action
Reports similar to the following should be prepared by the Expert
Teams and shared with the Learning Teams:
a. Quantity Schedule and Equivalent Units
The Quantity Schedule and Equivalent Units section of the
production report: (1) accounts for all of the units that were in
production during the period, and (2) computes the equivalent
units of production. Imagine that you are the manager of a
department in a factory. You are responsible for the units that
pass through your department during the month. This section of
the report summarizes that activity. In addition, it converts the
information to equivalent units.
The work in process, beginning of the period represents the
number of units that are sitting in your department when you
arrive at work on the first day of the month. These units were
started last month. During the month, the department just before
yours in the production process will transfer units into your
department (or, if you are the first department in the process, raw
materials will be transferred into your department during the
month). These units are started into production. Also, during the
month, your department will work on (or process) units. The units
that have been completely processed are transferred to the next
department. It is important to note that the units on hand at the
beginning of the month plus the units that were transferred in
must equal the units that were transferred out plus the units that
were still on hand at the end of the period.
To determine the departments output for the period, the
equivalent units of production are computed for both materials
and conversion (labor and overhead). The equivalent units of
production are determined by adding the number of completed
units that were transferred to the next department and the
equivalent units that are in the ending work in process inventory.
The number of equivalent units in the ending work in process
inventory is computed by multiplying the number of units on hand
times the percent complete.

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Teamwork In Action, continued

b. Costs per Equivalent Unit
The Costs per Equivalent Unit section of the production report: (1)
summarizes the total costs that must be accounted for, and (2)
documents the cost per equivalent unit.
The costs to be accounted for section represents the costs
added to the departments Work in Process account during the
period. The work in process, beginning of period is the
beginning balance in the inventory account for this department.
Note that this balance is broken out into its two components:
materials and conversion. The costs added represent the
materials and conversion costs that were debited to the work in
process account during the period. Materials requisitions generate
the amount used in the entry to record the material costs. The
conversion costs are comprised of: (1) the direct labor wages paid
to the employees who worked in the department during the
period and (2) the overhead that was applied (using the
departments predetermined overhead rate) to the units that
passed through the department during the period.
The materials cost per equivalent unit is determined by dividing
the total materials costs (the total of materials in the beginning
inventory and the costs that were added during the period) by the
number of equivalent units of production for materials (which is
calculated in the Quantity Schedule and Equivalent Units section
of the report). The conversion cost per equivalent unit is
determined by dividing the total conversion costs (the total of
conversion costs in the beginning inventory and the labor and
overhead that were added during the period) by the number of
equivalent units of production for conversion (which is calculated
in the Quantity Schedule and Equivalent Units section of the
report). The whole unit cost per equivalent unit is the total of
the material cost per equivalent unit and the conversion cost
per equivalent unit.
c. Cost Reconciliation
The Cost Reconciliation section of the production report
summarizes the total costs that have been accounted for. This
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Introduction to Managerial Accounting, 2nd Edition

section determines the amount that will be used in the entry to

transfer units from this departments work in process account to
the next. This is referred to as

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Teamwork In Action, continued

transferred to the next department in this section of the report.
Also, in addition to showing the components (materials and
conversion) of the ending balance in this departments work in
process account (for use in preparing next months Production
Report), this section proves that ending balance.
The amount that is transferred to the next department is
determined by multiplying the number of units transferred to the
next department (which appears in the Quantity Schedule and
Equivalent Units section of the report) by the whole unit cost per
equivalent unit (which is calculated in the Costs per Equivalent
Unit section of the report).
The amount of materials in the ending work in process
inventory for this department is determined by multiplying the
number of equivalent units (for materials) that are in the ending
work in process (which appears in the Quantity Schedule and
Equivalent Units section of the report) by the materials cost per
equivalent unit (which is calculated in the Costs per Equivalent
Unit section of the report).
The amount of conversion in the ending work in process
inventory for this department is determined by multiplying the
number of equivalent units (for conversion) that are in the ending
work in process (which appears in the Quantity Schedule and
Equivalent Units section of the report) by the conversion cost per
equivalent unit (which is calculated in the Costs per Equivalent
Unit section of the report).
The total work in process is the sum of the amounts just
calculated for materials and conversion. After all journal
entries are made, this amount should appear as the ending
balance in this departments Work in Process account.
Finally, the total cost is the sum of the costs transferred to the
next department and the ending Work in Process inventory for
this department. Note that this total must equal the total of the
costs to be accounted for that appears in the Costs per
Equivalent Unit section of the report.

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