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Process Costing

CHAPTER PREVIEW

As the Feature Story describes, the cost accounting system used by companies such as Jones Soda is process cost accounting. In contrast to job order cost accounting, which focuses on the individual job, process cost accounting focuses on the processes involved in mass‐producing products that are identical or very similar in nature. The primary objective of this chapter is to explain and illustrate process costing.

The Little Guy Who Could

It isn't easy for a small company to get a foothold in the bottled beverage business. The giants, The Coca‐Cola Company and PepsiCo Inc., vigilantly defend their turf, constantly watching for new trends and opportunities. It is nearly impossible to get shelf space in stores, and consumer tastes can change faster than a bottle of soda can lose its fizz. But Jones Soda Co., headquartered in Seattle, has overcome these and other obstacles to make a name for itself. Its corporate motto is, “Run with the little guy … create some change.”

The company started as a Canadian distributor of other companies' beverages. Soon, it decided to make its own products under the corporate name Urban Juice and Soda Company. Eventually, its name changed to Jones Soda—the name of its most popular product. From the very start, Jones Soda was different. It sold soda from machines placed in tattoo parlors and piercing shops, and it sponsored a punk rock band as well as surfers and snowboarders. At one time, the company's product was the official drink at the Seattle Seahawks' stadium and was served on Alaskan Airlines.

Today, Jones Soda makes a wide variety of products: soda‐flavored candy, energy drinks, and product‐promoting gear that includes t‐shirts, sweatshirts, caps, shorts, and calendars. Its most profitable product is still its multi‐flavored, pure cane soda with its creative labeling. If you've seen Jones Soda on a store shelf, then you know that it appears to have an infinite variety of labels. The bottle labels are actually created by customers and submitted on the company's website. (To see some of the best labels from the past, see the Gallery at www.jonessoda.com.) If you would like some soda with a custom label of your own, you can design and submit a label and order a 12‐pack.

Because Jones Soda has a dizzying array of product variations, keeping track of costs is of vital importance. Recently, management developed a reorganization plan that involved cost‐cutting from top to bottom and eliminating unprofitable products. No matter how good your products are, if you don't keep your costs under control, you are likely to fail. Jones Soda's managers need accurate cost information regarding each primary product and each variation to ensure profitability. So while its marketing approach differs dramatically from the giants, Jones Soda needs the same kind of cost information as the big guys.

LEARNING OBJECTIVE 1

Discuss the uses of a process cost system and how it compares to a job order system.

USES OF PROCESS COST SYSTEMS

Companies use process cost systems to apply costs to similar products that are mass‐produced in a continuous fashion. Jones Soda Co. uses a process cost system: Production of the soda, once it begins, continues until the soda emerges. The processing is the same for the entire run—with precisely the same amount of materials, labor, and overhead. Each finished bottle of soda is indistinguishable from another.

A company such as USX uses process costing in the manufacturing of steel. Kellogg and General Mills use process costing for cereal production; ExxonMobil uses process costing for its oil refining. Sherwin Williams uses process costing for its paint products. At a bottling company like Jones Soda, the manufacturing process begins with the blending of ingredients. Next, automated machinery moves the bottles into position and fills them. The production process then caps, packages, and forwards the bottles to the finished goods warehouse. Illustration 16-1 shows this process.

An illustration shows manufacturing processes as ‘blending’, to ‘filling’, to ‘labeling’. ILLUSTRATION 16-1 Manufacturing processes

For Jones Soda, as well as the other companies just mentioned, once production begins, it continues until the finished product emerges. Each unit of finished product is like every other unit.

In comparison, a job order cost system assigns costs to a specific job. Examples are the construction of a customized home, the making of a movie, or the manufacturing of a specialized machine. Illustration 16-2 provides examples of companies that primarily use either a process cost system or a job order cost system.

Image described by surrounding text ILLUSTRATION 16-2 Process cost and job order cost companies and products

PROCESS COSTING FOR SERVICE COMPANIES

When considering service companies, you might initially think of specific, nonroutine tasks, such as rebuilding an automobile engine, consulting on a business acquisition, or defending a major lawsuit. However, many service companies perform repetitive, routine work. For example, Jiffy Luberegularly performs oil changes. H&R Block focuses on the routine aspects of basic tax practice. Service companies that perform individualized, nonroutine services will probably benefit from using a job order cost system. Those that perform routine, repetitive services will probably be better off with a process cost system.

SIMILARITIES AND DIFFERENCES BETWEEN JOB ORDER COST AND PROCESS COST SYSTEMS

In a job order cost system, companies assign costs to each job. In a process cost system, companies track costs through a series of connected manufacturing processes or departments, rather than by individual jobs. Thus, companies use process cost systems when they produce a large volume of uniform or relatively homogeneous products. Illustration 16-3 shows the basic flow of costs in these two systems.

ILLUSTRATION 16-3 Job order cost and process cost flow

The following analysis highlights the basic similarities and differences between these two systems.

Similarities

Job order cost and process cost systems are similar in three ways:

1. The manufacturing cost elements. Both costing systems track three manufacturing cost elements—direct materials, direct labor, and manufacturing overhead.

2. The accumulation of the costs of materials, labor, and overhead. Both costing systems debit raw materials to Raw Materials Inventory, factory labor to Factory Labor, and manufacturing overhead costs to Manufacturing Overhead.

3. The flow of costs. As noted above, both systems accumulate all manufacturing costs by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. Both systems then assign these costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold. The methods of assigning costs, however, differ significantly. These differences are explained and illustrated later in the chapter.

Differences

The differences between a job order cost and a process cost system are as follows.

1. The number of work in process accounts used. A job order cost system uses only one work in process account. A process cost system uses multiple work in process accounts.

2. Documents used to track costs. A job order cost system charges costs to individual jobs and summarizes them in a job cost sheet. A process cost system summarizes costs in a production cost report for each department.

3. The point at which costs are totaled. A job order cost system totals costs when the job is completed. A process cost system totals costs at the end of a period of time.

4. Unit cost computations. In a job order cost system, the unit cost is the total cost per job divided by the units produced. In a process cost system, the unit cost is total manufacturing costs for the period divided by the equivalent units produced during the period.

Illustration 16-4 summarizes the major differences between a job order cost and a process cost system.

Feature	Job Order Cost System	Process Cost System
Work in process accounts	One work in process account	Multiple work in process accounts
Documents used	Job cost sheets	Production cost reports
Determination of total manufacturing costs	Each job	Each period
Unit-cost computations	Cost of each job ÷ Units produced for the job	Total manufacturing costs ÷ Equivalent units produced during the period

ILLUSTRATION 16-4 Job order versus process cost systems

DO IT! 1

Compare Job Order and Process Cost Systems

Indicate whether each of the following statements is true or false.

1. A law firm is likely to use process costing for major lawsuits.

2. A manufacturer of paintballs is likely to use process costing.

3. Both job order and process costing determine product costs at the end of a period of time, rather than when a product is completed.

4. Process costing does not keep track of manufacturing overhead.

Action Plan

✓ Use job order costing in situations where unit costs are high, unit volume is low, and products are unique.

✓ Use process costing when there is a large volume of relatively homogeneous products.

SOLUTION

1. False.

2. True.

3. False.

4. False.

Related exercise material: E16-1 and DO IT! 16-1.

LEARNING OBJECTIVE 2

Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs.

PROCESS COST FLOW

Illustration 16-5 shows the flow of costs in the process cost system for Tyler Company. Tyler manufactures roller blade and skateboard wheels that it sells to manufacturers and retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining Department shapes, hones, and drills the raw materials. The Assembly Department assembles and packages the parts.

image described by surrounding text. ILLUSTRATION 16-5 Flow of costs in process cost system

As the flow of costs indicates, the company can add materials, labor, and manufacturing overhead in both the Machining and Assembly Departments. When it finishes its work, the Machining Department transfers the partially completed units to the Assembly Department. The Assembly Department finishes the goods and then transfers them to the finished goods inventory. Upon sale, Tyler removes the goods from the finished goods inventory. Within each department, a similar set of activities is performed on each unit processed.

ASSIGNING MANUFACTURING COSTS—JOURNAL ENTRIES

As indicated, the accumulation of the costs of materials, labor, and manufacturing overhead is the same in a process cost system as in a job order cost system. That is, both systems follow these procedures:

· Companies debit all raw materials to Raw Materials Inventory at the time of purchase.

· They debit all factory labor to Factory Labor as the labor costs are incurred.

· They debit overhead costs to Manufacturing Overhead as these costs are incurred.

However, the assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system. Here we'll look at how companies assign these manufacturing cost elements in a process cost system.

Materials Costs

All raw materials issued for production are a materials cost to the producing department. A process cost system may use materials requisition slips, but it generally requires fewer requisitions than in a job order cost system. The materials are used for processes rather than for specific jobs and therefore typically are for larger quantities.

At the beginning of the first process, a company usually adds most of the materials needed for production. However, other materials may be added at various points. For example, in the manufacture of Hershey candy bars, the chocolate and other ingredients are added at the beginning of the first process, and the wrappers and cartons are added at the end of the packaging process. Tyler Company adds materials at the beginning of each process. Tyler makes the following entry to record the materials used.

Work in Process—Machining	XXXX
Work in Process—Assembly	XXXX
Raw Materials Inventory		XXXX
(To record materials used)

Ice cream maker Ben & Jerry's adds materials in three departments: milk and flavoring in the mixing department, extras such as cherries and dark chocolate in the prepping department, and cardboard containers in the pinting (packaging) department.

Factory Labor Costs

In a process cost system, as in a job order cost system, companies may use time tickets to determine the cost of labor assignable to production departments. Since they assign labor costs to a process rather than a job, they can obtain, from the payroll register or departmental payroll summaries, the labor cost chargeable to a process.

Labor costs for the Machining Department include the wages of employees who shape, hone, and drill the raw materials. The entry to assign labor costs to machining and assembly for Tyler Company is:

Work in Process—Machining	XXXX
Work in Process—Assembly	XXXX
Factory Labor		XXXX
(To assign factory labor to production)

Manufacturing Overhead Costs

The objective in assigning overhead in a process cost system is to allocate the overhead costs to the production departments on an objective and equitable basis. That basis is the activity that “drives” or causes the costs. A primary driver of overhead costs in continuous manufacturing operations is machine time used, not direct labor. Thus, companies widely use machine hours in allocating manufacturing overhead costs using predetermined overhead rates. Tyler Company's entry to allocate overhead to the two processes is:

Work in Process—Machining	XXXX
Work in Process—Assembly	XXXX
Manufacturing Overhead		XXXX
(To assign overhead to production)

MANAGEMENT INSIGHT

Caterpillar

Choosing a Cost Driver

In one of its automated cost centers, Caterpillar feeds work into the cost center, where robotic machines process it and transfer the finished job to the next cost center without human intervention. One person tends all of the machines and spends more time maintaining machines than operating them. In such cases, overhead rates based on direct labor hours may be misleading. Surprisingly, some companies continue to assign manufacturing overhead on the basis of direct labor despite the fact that there is no cause‐and‐effect relationship between labor and overhead.

What is the result if a company uses the wrong “cost driver” to assign manufacturing overhead? (Go to WileyPLUS for this answer and additional questions.)

Transfer to Next Department

At the end of the month, Tyler Company needs an entry to record the cost of the goods transferred out of the Machining Department. In this case, the transfer is to the Assembly Department, and Tyler makes the following entry.

Work in Process—Assembly	XXXXX
Work in Process—Machining		XXXXX
(To record transfer of units to the Assembly Department)

Transfer to Finished Goods

When the Assembly Department completes the units, it transfers them to the finished goods warehouse. The entry for this transfer is as follows.

Finished Goods Inventory	XXXXX
Work in Process—Assembly		XXXXX
(To record transfer of units to finished goods)

Transfer to Cost of Goods Sold

When Tyler Company sells the finished goods, it records the cost of goods sold as follows.

Cost of Goods Sold	XXXXX
Finished Goods Inventory		XXXXX
(To record cost of units sold)

DO IT! 2

Manufacturing Costs in Process Costing

Ruth Company manufactures ZEBO through two processes: blending and bottling. In June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending $6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in the Blending Department to the Bottling Department. The Bottling Department transfers units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.

Action Plan

✓ In process cost accounting, keep separate work in process accounts for each process.

✓ When the costs are assigned to production, debit the separate work in process accounts.

✓ Transfer cost of completed units to the next process or to Finished Goods.

SOLUTION

The entries are:

Work in Process—Blending	18,000
Work in Process—Bottling	4,000
Raw Materials Inventory		22,000
(To record materials used)
Work in Process—Blending	12,000
Work in Process—Bottling	5,000
Factory Labor		17,000
(To assign factory labor to production)
Work in Process—Blending	6,000
Work in Process—Bottling	2,500
Manufacturing Overhead		8,500
(To assign overhead to production)
Work in Process—Bottling	19,000
Work in Process—Blending		19,000
(To record transfer of units to the Bottling Department)
Finished Goods Inventory	11,000
Work in Process—Bottling		11,000
(To record transfer of units to finished goods)

Related exercise material: BE16-1, BE16-2, BE16-3, E16-2, E16-4, and DO IT! 16-2.

LEARNING OBJECTIVE 3

Compute equivalent units.

Suppose you have a work‐study job in the office of your college's president, and she asks you to compute the cost of instruction per full‐time equivalent student at your college. The college's vice president for finance provides the following information.

Costs:
Total cost of instruction	$9,000,000
Student population:
Full-time students	900
Part-time students	1,000

ILLUSTRATION 16-6 Information for full‐time student example

Part‐time students take 60% of the classes of a full‐time student during the year. To compute the number of full‐time equivalent students per year, you would make the following computation.

Full‐Time Students+Equivalent Units of Part‐Time Students=Full‐Time Equivalent Students900+(1,000×60%)=1,500Full‐Time Students+Equivalent Units of Part‐Time Students=Full‐Time Equivalent Students900+(1,000×60%)=1,500ILLUSTRATION 16-7 Full‐time equivalent unit computation

The cost of instruction per full‐time equivalent student is therefore the total cost of instruction ($9,000,000) divided by the number of full‐time equivalent students (1,500), which is $6,000 ($9,000,000÷1,500)$6,000 ($9,000,000÷1,500).

A process cost system uses the same idea, called equivalent units of production. Equivalent units of production measure the work done during the period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product.

WEIGHTED‐AVERAGE METHOD

The formula to compute equivalent units of production is as follows.

Units Completed and Transferred Out+Equivalent Units of Ending Work in Process=Equivalent Units of ProductionUnits Completed and Transferred Out+Equivalent Units of Ending Work in Process=Equivalent Units of Production ILLUSTRATION 16-8 Equivalent units of production formula

To better understand this concept of equivalent units, consider the following two separate examples.

· Example 1. In a specific period, the entire output of Sullivan Company's Blending Department consists of ending work in process of 4,000 units which are 60% complete as to materials, labor, and overhead. The equivalent units of production for the Blending Department are therefore 2,400 units (4,000×60%)(4,000×60%).

· Example 2. The output of Kori Company's Packaging Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending work in process which are 70% completed. The equivalent units of production are therefore 13,500 [10,000+(5,000×70%)]13,500 [10,000+(5,000×70%)].

This method of computing equivalent units is referred to as the weighted‐average method . It considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process.

REFINEMENTS ON THE WEIGHTED‐AVERAGE METHOD

Kellogg Company has produced Eggo® Waffles since 1970. Three departments produce these waffles: Mixing, Baking, and Freezing/Packaging. The Mixing Department combines dry ingredients, including flour, salt, and baking powder, with liquid ingredients, including eggs and vegetable oil, to make waffle batter. Illustration 16-9 provides information related to the Mixing Department at the end of June.

MIXING DEPARTMENT
		Percentage Complete
	Physical Units	Materials	Conversion Costs
Work in process, June 1	100,000	100%	70%
Started into production	800,000
Total units	900,000
Units transferred out	700,000
Work in process, June 30	200,000	100%	60%
Total units	900,000

ILLUSTRATION 16-9 Information for Mixing Department

▼ HELPFUL HINT

Separate unit cost computations are needed for materials and conversion costs whenever the two types of costs do not occur in the process at the same time.

ETHICS NOTE

An unethical manager might use incorrect completion percentages when determining equivalent units. This results in either raising or lowering costs. Since completion percentages are somewhat subjective, this form of income manipulation can be difficult to detect.

Illustration 16-9 indicates that the beginning work in process is 100% complete as to materials cost and 70% complete as to conversion costs. Conversion costs are the sum of labor costs and overhead costs. In other words, Kellogg adds both the dry and liquid ingredients (materials) at the beginning of the waffle‐making process, and the conversion costs (labor and overhead) related to the mixing of these ingredients are incurred uniformly and are 70% complete. The ending work in process is 100% complete as to materials cost and 60% complete as to conversion costs.

We then use the Mixing Department information to determine equivalent units. In computing equivalent units, the beginning work in process is not part of the equivalent‐units‐of‐production formula. The units transferred out to the Baking Department are fully complete as to both materials and conversion costs. The ending work in process is fully complete as to materials, but only 60% complete as to conversion costs. We therefore need to make two equivalent unit computations: one for materials, and the other for conversion costs. Illustration 16-10 shows these computations.

MIXING DEPARTMENT
	Equivalent Units
	Materials	Conversion Costs
Units transferred out	700,000	700,000
Work in process, June 30
200,000 × 100%	200,000
200,000 × 60%		120,000
Total equivalent units	900,000	820,000

ILLUSTRATION 16-10 Computation of equivalent units—Mixing Department

We can refine the earlier formula used to compute equivalent units of production ( Illustration 16-8 , page 796) to show the computations for materials and for conversion costs, as follows.

Units Completed andTransferred Out—Materials+Equivalent Units ofEnding Work inProcess—Materials=Equivalent Units ofProduction—MaterialsUnits Completed andTransferred Out—Conversion Costs+Equivalent Units ofEnding Work inProcess—ConversionCosts=Equivalent Units ofProduction—Conversion CostsUnits Completed andTransferred Out—Materials+Equivalent Units ofEnding Work inProcess—Materials=Equivalent Units ofProduction—MaterialsUnits Completed andTransferred Out—Conversion Costs+Equivalent Units ofEnding Work inProcess—ConversionCosts=Equivalent Units ofProduction—Conversion CostsILLUSTRATION 16-11 Refined equivalent units of production formula

PEOPLE, PLANET, AND PROFIT INSIGHT

General Electric

Haven't I Seen That Before?

For a variety of reasons, many companies, including General Electric, are making a big push to remanufacture goods that have been thrown away. Items getting a second chance include cell phones, computers, home appliances, car parts, vacuum cleaners, and medical equipment. Businesses have figured out that profit margins on remanufactured goods are significantly higher than on new goods. As commodity prices such as copper and steel increase, reusing parts makes more sense. Also, as more local governments initiate laws requiring that electronics and appliances be recycled rather than thrown away, the cost of remanufacturing declines because the gathering of used goods becomes far more efficient. Besides benefitting the manufacturer, remanufacturing provides goods at a much lower price to consumers, reduces waste going to landfills, saves energy, reuses scarce resources, and reduces emissions. For example, it was estimated that a remanufactured car starter results in about 50% less carbon dioxide emissions than making a new one.

Source: James R. Hagerty and Paul Glader, “From Trash Heap to Store Shelf,” Wall Street Journal Online (January 24, 2011).

In what ways might the relative composition (materials, labor, and overhead) of a remanufactured product's cost differ from that of a newly made product? (Go to WileyPLUS for this answer and additional questions.)

DO IT! 3

Equivalent Units

The Fabricating Department for Outdoor Essentials has the following production and cost data for the current month.

Beginning Work in Process	Units Transferred Out	Ending Work in Process
–0–	15,000	10,000

Materials are entered at the beginning of the process. The ending work in process units are 30% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.

Action Plan

✓ To measure the work done during the period, expressed in fully completed units, compute equivalent units of production.

✓ Use the appropriate formula: Units completed and transferred out + Equivalent units of ending work in process = Equivalent units of production.

SOLUTION

(a) Since materials are entered at the beginning of the process, the equivalent units of ending work in process are 10,000. Thus, 15,000 units+10,000 units=25,00015,000 units+10,000 units=25,000 equivalent units of production for materials.

(b) Since ending work in process is only 30% complete as to conversion costs, the equivalent units of ending work in process are 3,000 (10,000 units×30%)3,000 (10,000 units×30%). Thus, 15,000 units+3,000 units=18,00015,000 units+3,000 units=18,000 equivalent units of production for conversion costs.

Related exercise material: BE16-4, BE16-5, E16-5, E16-6, E16-8, E16-9, E16-10, E16-11, E16-13, E16-14, E16-15, and DO IT! 16-3.

LEARNING OBJECTIVE 4

Complete the four steps to prepare a production cost report.

As mentioned earlier, companies prepare a production cost report for each department. A production cost report is the key document that management uses to understand the activities in a department; it shows the production quantity and cost data related to that department. For example, in producing Eggo® Waffles, Kellogg Company uses three production cost reports: Mixing, Baking, and Freezing/Packaging. Illustration 16-12 shows the flow of costs to make an Eggo® Waffle and the related production cost reports for each department.

ILLUSTRATION 16-12 Flow of costs in making Eggo® Waffles

In order to complete a production cost report, the company must perform four steps, which as a whole make up the process cost system.

1. Compute the physical unit flow.

2. Compute the equivalent units of production.

3. Compute unit production costs.

4. Prepare a cost reconciliation schedule.

Illustration 16-13 shows assumed data for the Mixing Department at Kellogg Company for the month of June. We will use this information to complete a production cost report for the Mixing Department.

MIXING DEPARTMENT
Units
Work in process, June 1	100,000
Direct materials: 100% complete
Conversion costs: 70% complete
Units started into production during June	800,000
Units completed and transferred out to Baking Department	700,000
Work in process, June 30	200,000
Direct materials: 100% complete
Conversion costs: 60% complete
Costs
Work in process, June 1
Direct materials: 100% complete	$ 50,000
Conversion costs: 70% complete	35,000
Cost of work in process, June 1	$ 85,000
Costs incurred during production in June
Direct materials	$400,000
Conversion costs	170,000
Costs incurred in June	$570,000

ILLUSTRATION 16-13 Unit and cost data—Mixing Department

COMPUTE THE PHYSICAL UNIT FLOW (STEP 1)

Physical units are the actual units to be accounted for during a period, irrespective of any work performed. To keep track of these units, add the units started (or transferred) into production during the period to the units in process at the beginning of the period. This amount is referred to as the total units to be accounted for .

The total units then are accounted for by the output of the period. The output consists of units transferred out during the period and any units in process at the end of the period. This amount is referred to as the total units accounted for . Illustration 16-14 shows the flow of physical units for Kellogg's Mixing Department for the month of June.

MIXING DEPARTMENT
	Physical Units
Units to be accounted for
Work in process, June 1	100,000
Started (transferred) into production	800,000
Total units	900,000
Units accounted for
Completed and transferred out	700,000
Work in process, June 30	200,000
Total units	900,000

ILLUSTRATION 16-14 Physical unit flow—Mixing Department

The records indicate that the Mixing Department must account for 900,000 units. Of this sum, 700,000 units were transferred to the Baking Department and 200,000 units were still in process.

COMPUTE THE EQUIVALENT UNITS OF PRODUCTION (STEP 2)

Once the physical flow of the units is established, Kellogg must measure the Mixing Department's productivity in terms of equivalent units of production. The Mixing Department adds materials at the beginning of the process, and it incurs conversion costs uniformly during the process. Thus, we need two computations of equivalent units: one for materials and one for conversion costs. The equivalent unit computation is as follows.

▼ HELPFUL HINT

Materials are not always added at the beginning of the process. For example, materials are sometimes added uniformly during the process.

	Equivalent Units
	Materials	Conversion Costs
Units transferred out	700,000	700,000
Work in process, June 30
200,000 × 100%	200,000
200,000 × 60%		120,000
Total equivalent units	900,000	820,000

ILLUSTRATION 16-15 Computation of equivalent units—Mixing Department

▼ HELPFUL HINT

Remember that we ignore the beginning work in process in this computation.

COMPUTE UNIT PRODUCTION COSTS (STEP 3)

Armed with the knowledge of the equivalent units of production, we can now compute the unit production costs. Unit production costs are costs expressed in terms of equivalent units of production. When equivalent units of production are different for materials and conversion costs, we compute three unit costs: (1) materials, (2) conversion, and (3) total manufacturing.

The computation of total materials cost related to Eggo® Waffles is as follows.

Work in process, June 1
Direct materials cost	$ 50,000
Costs added to production during June
Direct materials cost	400,000
Total materials cost	$450,000

ILLUSTRATION 16-16 Total materials cost computation

The computation of unit materials cost is as follows.

Total Materials Cost÷Equivalent Units of Materials=Unit Materials Cost$450,000÷900,000=$0.50Total Materials Cost÷Equivalent Units of Materials=Unit Materials Cost$450,000÷900,000=$0.50ILLUSTRATION 16-17 Unit materials cost computation

Work in process, June 1
Conversion costs	$ 35,000
Costs added to production during June
Conversion costs	170,000
Total conversion costs	$205,000

ILLUSTRATION 16-18 Total conversion costs computation

The computation of unit conversion cost is as follows.

Total Conversion Costs÷Equivalent Units of Conversion Costs=Unit Conversion Cost$205,000÷820,000=$0.25Total Conversion Costs÷Equivalent Units of Conversion Costs=Unit Conversion Cost$205,000÷820,000=$0.25ILLUSTRATION 16-19 Unit conversion cost computation

Total manufacturing cost per unit is therefore computed as shown in Illustration 16-20 (page 802).

Unit Materials Cost+Unit Conversion Cost=Total Manufacturing Cost per Unit$0.50+$0.25=$0.75Unit Materials Cost+Unit Conversion Cost=Total Manufacturing Cost per Unit$0.50+$0.25=$0.75 ILLUSTRATION 16-20 Total manufacturing cost per unit

PREPARE A COST RECONCILIATION SCHEDULE (STEP 4)

We are now ready to determine the cost of goods transferred out of the Mixing Department to the Baking Department and the costs in ending work in process. Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as follows.

Costs to be accounted for
Work in process, June 1	$ 85,000
Started into production	570,000
Total costs	$655,000

ILLUSTRATION 16-21 Costs charged to Mixing Department

The company then prepares a cost reconciliation schedule to assign these costs to (a) units transferred out to the Baking Department and (b) ending work in process.

MIXING DEPARTMENT Cost Reconciliation Schedule
Costs accounted for
Transferred out (700,000 × $0.75)		$ 525,000
Work in process, June 30
Materials (200,000 × $0.50)	$100,000
Conversion costs (120,000 × $0.25)	30,000	130,000
Total costs		$655,000

ILLUSTRATION 16-22 Cost reconciliation schedule—Mixing Department

Kellogg uses the total manufacturing cost per unit, $0.75, in costing the units completed and transferred to the Baking Department. In contrast, the unit cost of materials and the unit cost of conversion are needed in costing ending units in process. The cost reconciliation schedule shows that the total costs accounted for ( Illustration 16-22 ) equal the total costs to be accounted for ( Illustration 16-21 ).

PREPARING THE PRODUCTION COST REPORT

At this point, Kellogg is ready to prepare the production cost report for the Mixing Department. As indicated earlier, this report is an internal document for management that shows production quantity and cost data for a production department. Illustration 16-23 shows the completed production cost report for the Mixing Department and identifies the four steps used in preparing it.

Production cost reports provide a basis for evaluating the productivity of a department. In addition, managers can use the cost data to assess whether unit costs and total costs are reasonable. By comparing the quantity and cost data with predetermined goals, top management can also judge whether current performance is meeting planned objectives.

DECISION TOOLS

A production cost report helps managers evaluate overall profitability by comparing costs to previous periods, competitors, and expected selling price.

ILLUSTRATION 16-23 Production cost report

▼ HELPFUL HINT

The four steps in preparing a production cost report:

1. Compute the physical unit flow.

2. Compute the equivalent units of production.

3. Compute unit production costs.

4. Prepare a cost reconciliation schedule.

COSTING SYSTEMS—FINAL COMMENTS

Companies often use a combination of a process cost and a job order cost system. Called operations costing , this hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product. At the same time, the product may have some customized, individual features that require the use of a job order cost system.

DECISION TOOLS

A cost‐benefit trade‐off helps managers determine which costing system to use.

Consider, for example, Ford Motor Company. Each vehicle at a given plant goes through the same assembly line, but Ford uses different materials (such as seat coverings, paint, and tinted glass) for different vehicles. Similarly, Kellogg's Pop‐Tarts® toaster pastries go through numerous standardized processes—mixing, filling, baking, frosting, and packaging. The pastry dough, though, comes in different flavors—plain, chocolate, and graham—and fillings include Smucker's® real fruit, chocolate fudge, vanilla creme, brown sugar cinnamon, and s'mores.

A cost‐benefit trade‐off occurs as a company decides which costing system to use. A job order cost system, for example, provides detailed information related to the cost of the product. Because each job has its own distinguishing characteristics, the system can provide an accurate cost per job. This information is useful in controlling costs and pricing products. However, the cost of implementing a job order cost system is often expensive because of the accounting costs involved.

On the other hand, for a company like Intel, is there a benefit in knowing whether the cost of the one‐hundredth computer chip produced is different from the one‐thousandth chip produced? Probably not. An average cost of the product will suffice for control and pricing purposes.

In summary, when deciding to use one of these systems or a combination system, a company must weigh the costs of implementing the system against the benefits from the additional information provided.

DO IT! 4

Cost Reconciliation Schedule

In March, Rodayo Manufacturing had the following unit production costs: materials $6 and conversion costs $9. On March 1, it had no work in process. During March, Rodayo transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process.

Action Plan

✓ Assign the total manufacturing cost of $15 per unit to the 12,000 units transferred out.

✓ Assign the materials cost and conversion costs based on equivalent units of production to units in ending work in process.

SOLUTION

The assignment of costs is as follows.

Costs accounted for
Transferred out (12,000 × $15)		$180,000
Work in process, March 31
Materials (800 × $6)	$4,800
Conversion costs (200 * × $9)	1,800	6,600
Total costs		$186,600

* 800×25%800×25%

Related exercise material: BE16-6, BE16-7, BE16-8, BE16-9, E16-3, E16-5, E16-6, E16-7, E16-8, E16-9, E16-10, E16-11, E16-13, E16-14, E16-15,and DO IT! 16-4.

USING DECISION TOOLS—JONES SODA

Jones Soda Co. faces many situations where it needs to apply the decision tools learned in this chapter, such as using a production cost report to evaluate profitability. For example, suppose Jones Soda manufactures a high‐end organic fruit soda, called Eternity, in 10‐ounce plastic bottles. Because the market for beverages is highly competitive, the company is very concerned about keeping its costs under control. Eternity is manufactured through three processes: blending, filling, and labeling. Materials are added at the beginning of the process, and labor and overhead are incurred uniformly throughout each process. The company uses a weighted‐average method to cost its product. A partially completed production cost report for the month of May for the Blending Department is shown below.

JONES SODA Blending Department Production Cost Report For the Month Ended May 31, 2017
		Equivalent Units
Quantities	Physical Units	Materials		Conversion Costs
Units to be accounted for	Step 1Step 1	Step 2Step 2
Work in process, May 1	1,000
Started into production	2,000
Total units	3,000
Units accounted for
Transferred out	2,200	?		?
Work in process, May 31	800	?		?
Total units	3,000	?		?
Costs		Materials		Conversion Costs	Total
Unit costs Step 3Step 3
Total cost	(a)	?		?	?
Equivalent units	(b)	?		?
Unit costs [(a)÷(b)][(a)÷(b)]		?		?	?
Costs to be accounted for
Work in process, May 1					$ 56,300
Started into production					119,320
Total costs					$175,620
Cost Reconciliation Schedule Step 4Step 4
Costs accounted for
Transferred out					?
Work in process, May 31
Materials				?
Conversion costs				?	?
Total costs					?
Additional information:
Work in process, May 1, 1000 units
Materials cost, 1,000 units (100% complete)			$49,100
Conversion costs, 1,000 units (70% complete)			7,200	$ 56,300
Materials cost for May, 2,000 units				$100,000
Work in process, May 31, 800 units, 100% complete as to materials and 50% complete as to conversion costs

INSTRUCTIONS

(a) Prepare a production cost report for the Blending Department for the month of May.

(b) Prepare the journal entry to record the transfer of goods from the Blending Department to the Filling Department.

SOLUTION

(a) A completed production cost report for the Blending Department is shown below. Computations to support the amounts reported follow the report.

JONES SODA Blending Department Production Cost Report For the Month Ended May 31, 2017
		Equivalent Units
Quantities	Physical Units	Materials	Conversion Costs
Units to be accounted for	Step 1Step 1	Step 2Step 2
Work in process, May 1	1,000
Started into production	2,000
Total units	3,000
Units accounted for
Transferred out	2,200	2,200	2,200
Work in process, May 31	800	800	400	(800×50%)(800×50%)
Total units	3,000	3,000	2,600
Costs		Materials	Conversion Costs		Total
Unit costs Step 3Step 3
Total cost	(a)	$149,100 *	$26,520 **		$175,620
Equivalent units	(b)	3,000	2,600
Unit costs [(a)÷(b)][(a)÷(b)]		$49.70	$10.20		$59.90
Costs to be accounted for
Work in process, May 1					$ 56,300
Started into production					119,320
Total costs					$175,620
* Materials cost—$49,100+$100,000Materials cost—$49,100+$100,000 ** Conversion costs—$7,200+$19,320 ($119,320−$100,000)Conversion costs—$7,200+$19,320 ($119,320−$100,000)
Cost Reconciliation Schedule Step 4Step 4
Costs accounted for
Transferred out (2,200 × $59.90)					$131,780
Work in process, May 31
Materials (800 × $49.70)			$39,760
Conversion costs (400 × $10.20)			4,080		43,840
Total costs					$175,620

(b)

Work in Process—Filling	131,780
Work in Process—Blending		131,780

(c) Companies use process cost systems to apply costs to similar products that are mass‐produced in a continuous fashion. Jones Soda uses a process cost system because production of the fruit soda, once it begins, continues until the soda emerges. The processing is the same for the entire run—with precisely the same amount of materials, labor, and overhead. Each bottle of Eternity soda is indistinguishable from another.

LEARNING OBJECTIVE *5

APPENDIX 16A: Compute equivalent units using the FIFO method.

In this chapter, we demonstrated the weighted‐average method of computing equivalent units. Some companies use a different method, referred to as the first‐in, first‐out (FIFO) method, to compute equivalent units. The purpose of this appendix is to illustrate how companies use the FIFO method to prepare a production cost report.

EQUIVALENT UNITS UNDER FIFO

Under the FIFO method, companies compute equivalent units on a first‐in, first‐out basis. Some companies favor the FIFO method because the FIFO cost assumption usually corresponds to the actual physical flow of the goods. Under the FIFO method, companies therefore assume that the beginning work in process is completed before new work is started.

Using the FIFO method, equivalent units are the sum of the work performed to:

1. Finish the units of beginning work in process inventory.

2. Complete the units started into production during the period (referred to as the units started and completed).

3. Start, but only partially complete, the units in ending work in process inventory.

Normally, in a process cost system, some units will always be in process at both the beginning and end of the period.

Illustration

Illustration 16A-1 shows the physical flow of units for the Assembly Department of Shutters Inc. In addition, it indicates the degree of completion of the work in process accounts in regard to conversion costs.

ASSEMBLY DEPARTMENT
	Physical Units
Units to be accounted for
Work in process, June 1 (40% complete)	500
Started (transferred) into production	8,000
Total units	8,500
Units accounted for
Completed and transferred out	8,100
Work in process, June 30 (75% complete)	400
Total units	8,500

ILLUSTRATION 16A-1 Physical unit flow—Assembly Department

In Illustration 16A-1 , the units completed and transferred out (8,100) plus the units in ending work in process (400) equal the total units to be accounted for (8,500). Using FIFO, we then compute equivalent units as follows.

1. The 500 units of beginning work in process were 40% complete. Thus, 300 equivalent units (500 units×60%)(500 units×60%) were required to complete the beginning inventory.

2. The units started and completed during the current month are the units transferred out minus the units in beginning work in process.For the Assembly Department, units started and completed are 7,600 (8,100−500)7,600 (8,100−500).

3. The 400 units of ending work in process were 75% complete. Thus, equivalent units were 300 (400×75%)300 (400×75%).

Equivalent units for the Assembly Department are 8,200, computed as follows.

ASSEMBLY DEPARTMENT
Production Data	Work Added Physical Units	Equivalent This Period	Units
Work in process, June 1	500	60%	300
Started and completed	7,600	100%	7,600
Work in process, June 30	400	75%	300
Total	8,500		8,200

ILLUSTRATION 16A-2 Computation of equivalent units—FIFO method

COMPREHENSIVE EXAMPLE

To provide a complete illustration of the FIFO method, we will use the data for the Mixing Department at Kellogg Company for the month of June, as shown in Illustration 16A-3 (page 808).

MIXING DEPARTMENT
Units
Work in process, June 1	100,000
Direct materials: 100% complete
Conversion costs: 70% complete
Units started into production during June	800,000
Units completed and transferred out to Baking Department	700,000
Work in process, June 30	200,000
Direct materials: 100% complete
Conversion costs: 60% complete
Costs
Work in process, June 1
Direct materials: 100% complete	$ 50,000
Conversion costs: 70% complete	35,000
Cost of work in process, June 1	$ 85,000
Costs incurred during production in June
Direct materials	$400,000
Conversion costs	170,000
Costs incurred in June	$570,000

ILLUSTRATION 16A-3 Unit and cost data—Mixing Department

Compute the Physical Unit Flow (Step 1)

Illustration 16A-4 shows the physical flow of units for Kellogg's Mixing Department for the month of June.

MIXING DEPARTMENT
	Physical Units
Units to be accounted for
Work in process, June 1	100,000
Started (transferred) into production	800,000
Total units	900,000
Units accounted for
Completed and transferred out	700,000
Work in process, June 30	200,000
Total units	900,000

ILLUSTRATION 16A-4 Physical unit flow—Mixing Department

Under the FIFO method, companies often expand the physical units schedule, as shown in Illustration 16A-5 , to explain the transferred‐out section. As a result, this section reports the beginning work in process and the units started and completed. These two items further explain the completed and transferred‐out section.

MIXING DEPARTMENT
	Physical Units
Units to be accounted for
Work in process, June 1	100,000
Started (transferred) into production	800,000
Total units	900,000
Units accounted for
Completed and transferred out
Work in process, June 1	100,000
Started and completed	600,000
	700,000
Work in process, June 30	200,000
Total units	900,000

ILLUSTRATION 16A-5 Physical unit flow (FIFO)—Mixing Department

The records indicate that the Mixing Department must account for 900,000 units. Of this sum, 700,000 units were transferred to the Baking Department and 200,000 units were still in process.

Compute Equivalent Units of Production (Step 2)

As with the method presented in the chapter, once it determines the physical flow of the units, a company needs to determine equivalent units of production. The Mixing Department adds materials at the beginning of the process, and it incurs conversion costs uniformly during the process. Thus, Kellogg must make two computations of equivalent units: one for materials and one for conversion costs.

▼ HELPFUL HINT

As noted earlier, materials are not always added at the beginning of the process. For example, companies sometimes add materials uniformly during the process.

EQUIVALENT UNITS FOR MATERIALS

Since Kellogg adds materials at the beginning of the process, no additional materials costs are required to complete the beginning work in process. In addition, 100% of the materials costs has been incurred on the ending work in process. Thus, the computation of equivalent units for materials is as follows.

MIXING DEPARTMENT—MATERIALS
Production Data	Physical Units	Materials Added This Period	Equivalent Units
Work in process, June 1	100,000	–0–	–0–
Started and finished	600,000	100%	600,000
Work in process, June 30	200,000	100%	200,000
Total	900,000		800,000

ILLUSTRATION 16A-6 Computation of equivalent units—materials

EQUIVALENT UNITS FOR CONVERSION COSTS

The 100,000 units of beginning work in process were 70% complete in terms of conversion costs. Thus, the Mixing Department required 30,000 equivalent units (100,000 units×30%)(100,000 units×30%) of conversion costs to complete the beginning inventory. In addition, the 200,000 units of ending work in process were 60% complete in terms of conversion costs. Thus, the equivalent units for conversion costs is 750,000, computed as follows.

MIXING DEPARTMENT—CONVERSION COSTS
Production Data	Physical Units	Work Added This Period	Equivalent Units
Work in process, June 1	100,000	30%	30,000
Started and finished	600,000	100%	600,000
Work in process, June 30	200,000	60%	120,000
Total	900,000		750,000

ILLUSTRATION 16A-7 Computation of equivalent units—conversion costs

Compute Unit Production Costs (Step 3)

Armed with the knowledge of the equivalent units of production, Kellogg can now compute the unit production costs. Unit production costs are costs expressed in terms of equivalent units of production. When equivalent units of production are different for materials and conversion costs, companies compute three unit costs: (1) materials, (2) conversion, and (3) total manufacturing.

Under the FIFO method, the unit costs of production are based entirely on the production costs incurred during the month. Thus, the costs in the beginning work in process are not relevant, because they were incurred on work done in the preceding month. As Illustration 16A-3 (page 808)indicated, the costs incurred during production in June were as follows.

Direct materials	$400,000
Conversion costs	170,000
Total costs	$570,000

ILLUSTRATION 16A-8 Costs incurred during production in June

Illustration 16A-9 shows the computation of unit materials cost, unit conversion costs, and total unit cost related to Eggo® Waffles.

(1)	Total Materials Cost	÷	Equivalent Units of Materials	=	Unit Materials Cost
	$400,000	÷	800,000	=	$0.50
(2)	Total Conversion Costs	÷	Equivalent Units of Conversion Costs	=	Unit Conversion Cost
	$170,000	÷	750,000	=	$0.227 (rounded) *
(3)	Unit Materials Cost	+	Unit Conversion Cost	=	Total Manufacturing Cost per Unit
	$0.50	+	$0.227	=	$0.727
* For homework problems, round unit costs to three decimal places.

ILLUSTRATION 16A-9 Unit cost formulas and computations—Mixing Department

As shown, the unit costs are $0.50 for materials, $0.227 for conversion costs, and $0.727 for total manufacturing costs.

Prepare a Cost Reconciliation Schedule (Step 4)

Kellogg is now ready to determine the cost of goods transferred out of the Mixing Department to the Baking Department and the costs in ending work in process. The total costs charged to the Mixing Department in June are $655,000, calculated as follows.

Costs to be accounted for
Work in process, June 1	$ 85,000
Started into production	570,000
Total costs	$655,000

ILLUSTRATION 16A-10 Costs charged to Mixing Department

Kellogg next prepares a cost reconciliation to assign these costs to (1) units transferred out to the Baking Department and (2) ending work in process. Under the FIFO method, the first goods to be completed during the period are the units in beginning work in process. Thus, the cost of the beginning work in process is always assigned to the goods transferred to the next department (or finished goods, if processing is complete). Under the FIFO method, ending work in process also will be assigned only the production costs incurred in the current period. Illustration 16A-11 shows a cost reconciliation schedule for the Mixing Department.

MIXING DEPARTMENT Cost Reconciliation Schedule
Costs accounted for
Transferred out
Work in process, June 1		$ 85,000
Costs to complete beginning work in process
Conversion costs (30,000 × $0.227)		6,810
Total costs		91,810
Units started and completed (600,000 × $0.727)		435,950 *
Total costs transferred out		527,760
Work in process, June 30
Materials (200,000 × $0.50)	$100,000
Conversion costs (120,000 × $0.227)	27,240	127,240
Total costs		$655,000
* Any rounding errors should be adjusted in the “Units started and completed” calculation.

ILLUSTRATION 16A-11 Cost reconciliation report

As you can see, the total costs accounted for ($655,000 from Illustration 16A-11 ) equal the total costs to be accounted for ($655,000 from Illustration 16A-10 ).

Preparing the Production Cost Report

At this point, Kellogg is ready to prepare the production cost report for the Mixing Department. This report is an internal document for management that shows production quantity and cost data for a production department.

As discussed on page 799, there are four steps in preparing a production cost report:

1. Compute the physical unit flow.

2. Compute the equivalent units of production.

3. Compute unit production costs.

4. Prepare a cost reconciliation schedule.

Illustration 16A-12 shows the production cost report for the Mixing Department, with the four steps identified in the report.

▼ HELPFUL HINT

The two self‐checks in the report are (1) total physical units accounted for must equal the total units to be accounted for, and (2) total costs accounted for must equal the total costs to be accounted for.

As indicated in the chapter, production cost reports provide a basis for evaluating the productivity of a department. In addition, managers can use the cost data to assess whether unit costs and total costs are reasonable. By comparing the quantity and cost data with predetermined goals, top management can also judge whether current performance is meeting planned objectives.

FIFO AND WEIGHTED‐AVERAGE

The weighted‐average method of computing equivalent units has one major advantage: It is simple to understand and apply. In cases where prices do not fluctuate significantly from period to period, the weighted‐average method will be very similar to the FIFO method. In addition, companies that have been using just‐in‐time procedures effectively for inventory control purposes will have minimal inventory balances. Therefore, differences between the weighted‐average and the FIFO methods will not be material.

Conceptually, the FIFO method is superior to the weighted‐average method because it measures current performance using only costs incurred in the current period. Managers are, therefore, not held responsible for costs from prior periods over which they may not have had control. In addition, the FIFO method provides current cost information, which the company can use to establish more accurate pricing strategiesfor goods manufactured and sold in the current period.

▼ HELPFUL HINT

The four steps in preparing a production cost report:

1. Compute the physical unit flow.

2. Compute the equivalent units of production.

3. Compute unit production costs.

4. Prepare a cost reconciliation schedule.

ILLUSTRATION 16A-12 Production cost report—FIFO method

REVIEW AND PRACTICE

LEARNING OBJECTIVES REVIEW

1 Discuss the uses of a process cost system and how it compares to a job order system. Companies that mass‐produce similar products in a continuous fashion use process cost systems. Once production begins, it continues until the finished product emerges. Each unit of finished product is indistinguishable from every other unit.

Job order cost systems are similar to process cost systems in three ways. (1) Both systems track the same cost elements—direct materials, direct labor, and manufacturing overhead. (2) Both accumulate costs in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3) Both assign accumulated costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold. However, the method of assigning costs differs significantly.

There are four main differences between the two cost systems. (1) A process cost system uses separate accounts for each department or manufacturing process, rather than only one work in process account used in a job order cost system. (2) A process cost system summarizes costs in a production cost report for each department. A job order cost system charges costs to individual jobs and summarizes them in a job cost sheet. (3) Costs are totaled at the end of a time period in a process cost system but at the completion of a job in a job order cost system. (4) A process cost system calculates unit cost as Total manufacturing costs for the period ÷ Units produced during the period. A job order cost system calculates unit cost as Total cost per job ÷ Units produced.

2 Explain the flow of costs in a process cost system and the journal entries to assign manufacturing costs. A process cost system assigns manufacturing costs for raw materials, labor, and overhead to work in process accounts for various departments or manufacturing processes. It transfers the costs of partially completed units from one department to another as those units move through the manufacturing process. The system transfers the costs of completed work to Finished Goods Inventory. Finally, when inventory is sold, the system transfers the costs to Cost of Goods Sold.

Entries to assign the costs of raw materials, labor, and overhead consist of a credit to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead, and a debit to Work in Process for each department. Entries to record the cost of goods transferred to another department are a credit to Work in Process for the department whose work is finished and a debit to the department to which the goods are transferred. The entry to record units completed and transferred to the warehouse is a credit to Work in Process for the department whose work is finished and a debit to Finished Goods Inventory. The entry to record the sale of goods is a credit to Finished Goods Inventory and a debit to Cost of Goods Sold.

3 Compute equivalent units. Equivalent units of production measure work done during a period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product. Equivalent units are the sum of units completed and transferred out plus equivalent units of ending work in process.

4 Complete the four steps to prepare a production cost report. The four steps to complete a production cost report are as follows. (1) Compute the physical unit flow—that is, the total units to be accounted for. (2) Compute the equivalent units of production. (3) Compute the unit production costs, expressed in terms of equivalent units of production. (4) Prepare a cost reconciliation schedule, which shows that the total costs accounted for equal the total costs to be accounted for.

The production cost report contains both quantity and cost data for a production department. There are four sections in the report: (1) number of physical units, (2) equivalent units determination, (3) unit costs, and (4) cost reconciliation schedule.

*5 Compute equivalent units using the FIFO method. Equivalent units under the FIFO method are the sum of the work performed to (1) finish the units of beginning work in process inventory, if any; (2) complete the units started into production during the period; and (3) start, but only partially complete, the units in ending work in process inventory.

DECISION TOOLS REVIEW

DECISION CHECKPOINTS	INFO NEEDED FOR DECISION	TOOL TO USE FOR DECISION	HOW TO EVALUATE RESULTS
What is the cost of a product?	Cost of materials, labor, and overhead assigned to processes used to make the product	Production cost report	Compare costs to previous periods, to competitors, and to expected selling price to evaluate overall profitability.
What costing method should be used?	Type of good produced or service performed	Cost of accounting system; benefits of additional information	The benefits of providing the additional information should exceed the costs of the accounting system needed to develop the information.

GLOSSARY REVIEW

· Conversion costs The sum of labor costs and overhead costs.

· Cost reconciliation schedule A schedule that shows that the total costs accounted for equal the total costs to be accounted for.

· Equivalent units of production A measure of the work done during the period, expressed in fully completed units.

· Operations costing A combination of a process cost and a job order cost system in which products are manufactured primarily by standardized methods, with some customization.

· Physical units Actual units to be accounted for during a period, irrespective of any work performed.

· Process cost system An accounting system used to apply costs to similar products that are mass-produced in a continuous fashion.

· Production cost report An internal report for management that shows both production quantity and cost data for a production department.

· Total units (costs) accounted for The sum of the units (costs) transferred out during the period plus the units (costs) in process at the end of the period.

· Total units (costs) to be accounted for The sum of the units (costs) started (or transferred) into production during the period plus the units (costs) in process at the beginning of the period.

· Unit production costs Costs expressed in terms of equivalent units of production.

· Weighted-average method Method of computing equivalent units of production which considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process.

PRACTICE MULTIPLE-CHOICE QUESTIONS

(LO 1)

1. Which of the following items is not characteristic of a process cost system?

(a) Once production begins, it continues until the finished product emerges.

(b) The products produced are heterogeneous in nature.

(d) When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.

(LO 1)

2. Indicate which of the following statements is not correct.

(a) Both a job order and a process cost system track the same three manufacturing cost elements—direct materials, direct labor, and manufacturing overhead.

(b) A job order cost system uses only one work in process account, whereas a process cost system uses multiple work in process accounts.

(d) Manufacturing costs are assigned the same way in a job order and in a process cost system.

(LO 2)

3. In a process cost system, the flow of costs is:

(a) work in process, cost of goods sold, finished goods.

(b) finished goods, work in process, cost of goods sold.

(d) work in process, finished goods, cost of goods sold.

(LO 2)

4. In making journal entries to assign raw materials costs, a company using process costing:

(a) debits Finished Goods Inventory.

(b) often debits two or more work in process accounts.

(d) credits Finished Goods Inventory.

(LO 2)

5. In a process cost system, manufacturing overhead:

(a) is assigned to finished goods at the end of each accounting period.

(b) is assigned to a work in process account for each job as the job is completed.

(c) is assigned to a work in process account for each production department on the basis of a predetermined overhead rate.

(d) is assigned to a work in process account for each production department as overhead costs are incurred.

(LO 3)

6. Conversion costs are the sum of:

(a) fixed and variable overhead costs.

(b) labor costs and overhead costs.

(d) direct labor and indirect labor costs.

(LO 3)

7. The Mixing Department's output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversion costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are:

(a) 22,600.

(b) 23,000.

(d) 25,000.

(LO 4)

8. In RYZ Company, there are zero units in beginning work in process, 7,000 units started into production, and 500 units in ending work in process 20% completed. The physical units to be accounted for are:

(a) 7,000.

(b) 7,360.

(d) 7,340.

(LO 4)

9. Mora Company has 2,000 units in beginning work in process, 20% complete as to conversion costs, 23,000 units transferred out to finished goods, and 3,000 units in ending work in process 3313%3313% complete as to conversion costs.

The beginning and ending inventory is fully complete as to materials costs. Equivalent units for materials and conversion costs are, respectively:

(a) 22,000, 24,000.

(b) 24,000, 26,000.

(d) 26,000, 26,000.

(LO 4)

10. Fortner Company has no beginning work in process; 9,000 units are transferred out and 3,000 units in ending work in process are one‐third finished as to conversion costs and fully complete as to materials cost. If total materials cost is $60,000, the unit materials cost is:

(a) $5.00.

(b) $5.45 rounded.

(d) No correct answer is given.

(LO 4)

11. Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs, and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is:

(a) $45,000.

(b) $55,000.

(d) $100,000.

(LO 4)

12. A production cost report:

(a) is an external report.

(b) shows both the production quantity and cost data related to a department.

(d) contains six sections.

(LO 4)

13. In a production cost report, units to be accounted for are calculated as:

(a) Units started into production+Units in ending work in processUnits started into production+Units in ending work in process.

(b) Units started into production−Units in beginning work in processUnits started into production−Units in beginning work in process.

(d) Units started into production+Units in beginning work in processUnits started into production+Units in beginning work in process.

(LO 5)

*14. Hollins Company uses the FIFO method to compute equivalent units. It has 2,000 units in beginning work in process, 20% complete as to conversion costs, 25,000 units started and completed, and 3,000 units in ending work in process, 30% complete as to conversion costs. All units are 100% complete as to materials. Equivalent units for materials and conversion costs are, respectively:

(a) 28,000 and 26,600.

(b) 28,000 and 27,500.

(d) 27,000 and 29,600.

(LO 5)

*15. KLM Company uses the FIFO method to compute equivalent units. It has no beginning work in process; 9,000 units are started and completed and 3,000 units in ending work in process are one‐third completed. All material is added at the beginning of the process. If total materials cost is $60,000, the unit materials cost is:

(a) $5.00.

(b) $6.00.

(d) No correct answer is given.

(LO 5)

*16. Toney Company uses the FIFO method to compute equivalent units. It has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 100% complete as to materials and 40% complete as to conversion costs, the total cost assignable to the ending work in process inventory is:

(a) $45,000.

(b) $55,000.

(d) $100,000.

SOLUTIONS

1. (b) In a process cost system, the products produced are homogeneous, not heterogeneous, in nature. Choices (a), (c), and (d) are incorrect because they all represent characteristics of a process cost system.

2. (d) Manufacturing costs are not assigned the same way in a job order and in a process cost system. Choices (a), (b), and (c) are true statements.

3. (d) In a process cost system, the flow of costs is work in process, finished goods, cost of goods sold. Therefore, choices (a), (b), and (c) are incorrect.

4. (b) The debit is often to two or more work in process accounts, not (a) a debit to Finished Goods Inventory, (c) credits to two or more work in process accounts, or (d) a credit to Finished Goods Inventory.

5. (c) In a process cost system, manufacturing overhead is assigned to a work in process account for each production department on the basis of a predetermined overhead rate, not (a) a finished goods account, (b) as the job is completed, or (d) as overhead costs are incurred.

6. (b) Conversion costs are the sum of labor costs and overhead costs, not the sum of (a) fixed and variable overhead costs, (c) direct material costs and overhead costs, or (d) direct labor and indirect labor costs.

7. (b) The equivalent units of production is the sum of units completed and transferred out (20,000) and the equivalent units of ending work in process inventory (5,000 units×60%)(5,000 units×60%), or 20,000+3,000=23,000 units20,000+3,000=23,000 units, not (a) 22,600 units, (c) 24,000 units, or (d) 25,000 units.

8. (a) There are 7,000 physical units to be accounted for (0 units in beginning inventory + 7,000 units started), not (b) 7,360, (c) 7,500, or (d) 7,340.

9. (c) The equivalent units for materials are 26,000 (23,000 units transferred out plus 3,000 in ending work in process inventory). The equivalent units for conversion costs are 24,000 (23,000 transferred out plus 331/3%3313% of the ending work in process inventory or 1,000). Therefore, choices (a) 22,000, 24,000; (b) 24,000, 26,000; and (d) 26,000, 26,000 are incorrect.

10. (a) $60,000÷(9,000+3,000 units)=$5.00 per unit$60,000÷(9,000+3,000 units)=$5.00 per unit, not (b) $5.45 (rounded), (c) $6.00, or (d) no correct answer is given.

11. (b) [(2,500 units×100% complete)×$10]+[(2,500 units×40% complete)×$30] or $25,000+$30,000=$55,000[(2,500 units×100% complete)×$10]+[(2,500 units×40% complete)×$30] or $25,000+$30,000=$55,000, not (a) $45,000, (c) $75,000, or (d) $100,000.

12. (b) A production cost report shows costs charged to a department and costs accounted for. The other choices are incorrect because a production cost report (a) is an internal, not external, report; (c) does show physical units; and (d) is prepared in four steps and does not contain six sections.

13. (d) In a production cost report, units to be accounted for are calculated as Units started in production + Units in beginning work in process, not (a) Units in ending work in process, (b) minus Units in beginning work in process, or (c) Units transferred out.

*14. (b) The equivalent units for materials are 28,000 [25,000 started and completed+(3,000×100%)]28,000 [25,000 started and completed+(3,000×100%)]. The equivalent units for conversion costs are 27,500 [(2,000×80%)+25,000+(3,000×30%)]27,500 [(2,000×80%)+25,000+(3,000×30%)]. Therefore, choices (a) 28,000, 26,600; (c) 27,000, 26,200; and (d) 27,000, 29,600 are incorrect.

*15. (a) Unit materials cost is $5.00 [$60,000÷(9,000+3,000)]$5.00 [$60,000÷(9,000+3,000)]. Therefore, choices (b) $6.00, (c) $6.67 (rounded), and (d) no correct answer are incorrect.

*16. (b) The total cost assignable to the ending work in process is $55,000 [($10×2,500)+($30×2,500×40%)]$55,000 [($10×2,500)+($30×2,500×40%)]. Therefore, choices (a) $45,000, (c) $75,000, and (d) $100,000 are incorrect.

PRACTICE EXERCISES

Journalize transactions.

(LO 2)

1. Armando Company manufactures pizza sauce through two production departments: Cooking and Canning. In each process, materials and conversion costs are incurred evenly throughout the process. For the month of April, the work in process accounts show the following debits.

	Cooking	Canning
Beginning work in process	$ –0–	$ 4,000
Materials	25,000	8,000
Labor	8,500	7,500
Overhead	29,000	25,800
Costs transferred in		55,000

INSTRUCTIONS

Journalize the April transactions.

SOLUTION

April 30	Work in Process—Cooking	25,000
	Work in Process—Canning	8,000
	Raw Materials Inventory		33,000

30	Work in Process—Cooking	8,500
	Work in Process—Canning	7,500
	Factory Labor		16,000

30	Work in Process—Cooking	29,000
	Work in Process—Canning	25,800
	Manufacturing Overhead		54,800

30	Work in Process—Canning	55,000
	Work in Process—Cooking		55,000

Prepare a production cost report.

(LO 3, 4)

2. The Sanding Department of Jo Furniture Company has the following production and manufacturing cost data for March 2017, the first month of operation.

Production: 11,000 units finished and transferred out; 4,000 units started that are 100% complete as to materials and 25% complete as to conversion costs.

Manufacturing costs: Materials $48,000; labor $42,000; and overhead $36,000.

INSTRUCTIONS

Prepare a production cost report.

SOLUTION

JO FURNITURE COMPANY Sanding Department Production Cost Report For the Month Ended March 31, 2017
		Equivalent Units
Quantities	Physical Units	Materials	Conversion Costs
Units to be accounted for
Work in process, March 1	0
Started into production	15,000
Total units	15,000
Units accounted for
Transferred out	11,000	11,000	11,000
Work in process, March 31	4,000	4,000	1,000	(4,000 × 25%)
Total units	15,000	15,000	12,000
Costs		Materials	Conversion Costs	Total
Unit costs
Cost in March		$48,000	$78,000 *	$126,000
Equivalent units		15,000	12,200
Unit costs [(a) + (b)]		$3.20	$6.50	$9.70
Costs to be accounted for
Work in process, March 1				$ 0
Started into production				126,000
Total costs				$126,000
Cost Reconciliation Schedule
Costs accounted for
Transferred out (11,000 × $9.70)				$106,700
Work in process, March 31
Materials (4,000 × $3.20)			$12,800
Conversion costs (1,000 × $6.50)			6,500	19,300
Total costs				$126,000

* $42,000 + $36,000

PRACTICE PROBLEM

Prepare a production cost report and journalize.

(LO 3, 4)

Karlene Industries produces plastic ice cube trays in two processes: heating and stamping. All materials are added at the beginning of the Heating Department process. Karlene uses the weighted‐average method to compute equivalent units.

On November 1, the Heating Department had in process 1,000 trays that were 70% complete. During November, it started into production 12,000 trays. On November 30, 2017, 2,000 trays that were 60% complete were in process.

The following cost information for the Heating Department was also available.

Work in process, November 1:		Costs incurred in November:
Materials	$ 640	Material	$3,000
Conversion costs	360	Labor	2,300
Cost of work in process, Nov. 1	$1,000	Overhead	4,050

INSTRUCTIONS

(a) Prepare a production cost report for the Heating Department for the month of November 2017, using the weighted‐average method.

(b) Journalize the transfer of costs to the Stamping Department.

SOLUTION

(a)

KARLENE INDUSTRIES Heating Department Production Cost Report For the Month Ended November 30, 2017
		Equivalent Units
	Physical Units		Materials	Conversion Costs
Quantities	step 1		step 2
Units to be accounted for
Work in process, November 1	1,000
Started into production	12,000
Total units	13,000
Units accounted for
Transferred out	11,000		11,000	11,000
Work in process, November 30	2,000		2,000	1,200
Total units	13,000		13,000	12,200
Costs			Materials	Conversion Costs	Total
Unit costs Step 3Step 3
Total cost	(a)		$ 3,640 *	$ 6,710 **	$10,350
Equivalent units	(b)		13,000	12,200
Unit costs [(a) ÷ (b)]			$0.28	$0.55	$0.83
Costs to be accounted for
Work in process, November 1					$ 1,000
Started into production					9,350
Total costs					$10,350
* $640+$3,000$640+$3,000 ** $360+$2,300+$4,050$360+$2,300+$4,050
Cost Reconciliation Schedule Step 4Step 4
Costs accounted for
Transferred out (11,000 × $0.83)					$ 9,130
Work in process, November 30
Materials (2,000 × $0.28)				$560
Conversion costs (1,200 × $0.55)				660	1,220
Total costs					$10,350

(b) Work in Process—Stamping				9,130
Work in Process—Heating					9,130
(To record transfer of units to the Stamping Department)

WileyPLUS

Brief Exercises, DO IT! Exercises, Exercises, Problems, and many additional resources are available for practice in WileyPLUS.

NOTE: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.

QUESTIONS

1. Identify which costing system—job order or process cost—the following companies would primarily use: (a) Quaker Oats, (b) Jif Peanut Butter, (c) Gulf Craft (luxury yachts), and (d) Warner Bros. Motion Pictures.

2. Contrast the primary focus of job order cost accounting and of process cost accounting.

3. What are the similarities between a job order and a process cost system?

4. Your roommate is confused about the features of process cost accounting. Identify and explain the distinctive features for your roommate.

5. Sam Bowyer believes there are no significant differences in the flow of costs between job order cost accounting and process cost accounting. Is Bowyer correct? Explain.

6. (a) What source documents are used in assigning (1) materials and (2) labor to production in a process cost system?

(b) What criterion and basis are commonly used in allocating overhead to processes?

7. At Ely Company, overhead is assigned to production departments at the rate of $5 per machine hour. In July, machine hours were 3,000 in the Machining Department and 2,400 in the Assembly Department. Prepare the entry to assign overhead to production.

8. Mark Haley is uncertain about the steps used to prepare a production cost report. State the procedures that are required in the sequence in which they are performed.

9. John Harbeck is confused about computing physical units. Explain to John how physical units to be accounted for and physical units accounted for are determined.

10. What is meant by the term “equivalent units of production”?

11. How are equivalent units of production computed?

12. Coats Company had zero units of beginning work in process. During the period, 9,000 units were completed, and there were 600 units of ending work in process. What were the units started into production?

13. Sanchez Co. has zero units of beginning work in process. During the period, 12,000 units were completed, and there were 500 units of ending work in process one‐fifth complete as to conversion cost and 100% complete as to materials cost. What were the equivalent units of production for (a) materials and (b) conversion costs?

14. Hindi Co. started 3,000 units during the period. Its beginning inventory is 500 units one‐fourth complete as to conversion costs and 100% complete as to materials costs. Its ending inventory is 300 units one‐fifth complete as to conversion costs and 100% complete as to materials costs. How many units were transferred out this period?

15. Clauss Company transfers out 14,000 units and has 2,000 units of ending work in process that are 25% complete. Materials are entered at the beginning of the process and there is no beginning work in process. Assuming unit materials costs of $3 and unit conversion costs of $5, what are the costs to be assigned to units (a) transferred out and (b) in ending work in process?

16. (a) Ann Quinn believes the production cost report is an external report for stockholders. Is Ann correct? Explain.

(b) Identify the sections in a production cost report.

17. What purposes are served by a production cost report?

18. At Trent Company, there are 800 units of ending work in process that are 100% complete as to materials and 40% complete as to conversion costs. If the unit cost of materials is $3 and the total costs assigned to the 800 units is $6,000, what is the per unit conversion cost?

19. What is the difference between operations costing and a process cost system?

20. How does a company decide whether to use a job order or a process cost system?

*21. Soria Co. started and completed 2,000 units for the period. Its beginning inventory is 800 units 25% complete and its ending inventory is 400 units 20% complete. Soria uses the FIFO method to compute equivalent units. How many units were transferred out this period?

*22. Reyes Company transfers out 12,000 units and has 2,000 units of ending work in process that are 25% complete. Materials are entered at the beginning of the process and there is no beginning work in process. Reyes uses the FIFO method to compute equivalent units. Assuming unit materials costs of $3 and unit conversion costs of $7, what are the costs to be assigned to units (a) transferred out and (b) in ending work in process?

BRIEF EXERCISES

Journalize entries for accumulating costs.

(LO 2), AP

BE16-1 Warner Company purchases $50,000 of raw materials on account, and it incurs $60,000 of factory labor costs. Journalize the two transactions on March 31, assuming the labor costs are not paid until April.

Journalize the assignment of materials and labor costs.

(LO 2), AP

BE16-2 Data for Warner Company are given in BE16-1. Supporting records show that (a) the Assembly Department used $24,000 of raw materials and $35,000 of the factory labor, and (b) the Finishing Department used the remainder. Journalize the assignment of the costs to the processing departments on March 31.

Journalize the assignment of overhead costs.

(LO 2), AP

BE16-3 Factory labor data for Warner Company are given in BE16-2. Manufacturing overhead is assigned to departments on the basis of 160% of labor costs. Journalize the assignment of overhead to the Assembly and Finishing Departments.

Compute equivalent units of production.

(LO 3), AP

BE16-4 Goode Company has the following production data for selected months.

			Ending Work in Process
Month	Beginning Work in Process	Units Transferred Out	Units	% Complete as to Conversion Cost
January	–0–	35,000	10,000	40%
March	–0–	40,000	8,000	75
July	–0–	45,000	16,000	25

Compute equivalent units of production for materials and conversion costs, assuming materials are entered at the beginning of the process.

Compute equivalent units of production.

(LO 3), AP

BE16-5 The Smelting Department of Kiner Company has the following production data for November.

Beginning work in process 2,000 units that are 100% complete as to materials and 20% complete as to conversion costs; units transferred out 9,000 units; and ending work in process 7,000 units that are 100% complete as to materials and 40% complete as to conversion costs.

Compute the equivalent units of production for (a) materials and (b) conversion costs for the month of November.

Compute unit costs of production.

(LO 4), AP

BE16-6 In Mordica Company, total materials costs are $33,000, and total conversion costs are $54,000. Equivalent units of production are materials 10,000 and conversion costs 12,000. Compute the unit costs for materials, conversion costs, and total manufacturing costs.

Assign costs to units transferred out and in process.

(LO 4), AP

BE16-7 Trek Company has the following production data for April: units transferred out 40,000, and ending work in process 5,000 units that are 100% complete for materials and 40% complete for conversion costs. If unit materials cost is $4 and unit conversion cost is $7, determine the costs to be assigned to the units transferred out and the units in ending work in process.

Compute unit costs.

(LO 4), AP

BE16-8 Production costs chargeable to the Finishing Department in June in Hollins Company are materials $12,000, labor $29,500, and overhead $18,000. Equivalent units of production are materials 20,000 and conversion costs 19,000. Compute the unit costs for materials and conversion costs.

Prepare cost reconciliation schedule.

(LO 4), AP

BE16-9 Data for Hollins Company are given in BE16-8. Production records indicate that 18,000 units were transferred out, and 2,000 units in ending work in process were 50% complete as to conversion costs and 100% complete as to materials. Prepare a cost reconciliation schedule.

Assign costs to units transferred out and in process.

(LO 5), AP

*BE16-10 Pix Company has the following production data for March: no beginning work in process, units started and completed 30,000, and ending work in process 5,000 units that are 100% complete for materials and 40% complete for conversion costs. Pix uses the FIFO method to compute equivalent units. If unit materials cost is $6 and unit conversion cost is $10, determine the costs to be assigned to the units transferred out and the units in ending work in process. The total costs to be assigned are $530,000.

Prepare a partial production cost report.

(LO 5), AP

*BE16-11 Using the data in BE16-10, prepare the cost section of the production cost report for Pix Company.

Compute unit costs.

(LO 5), AP

*B163-12 Production costs chargeable to the Finishing Department in May at Kim Company are materials $8,000, labor $20,000, overhead $18,000, and transferred‐in costs $67,000. Equivalent units of production are materials 20,000 and conversion costs 19,000. Kim uses the FIFO method to compute equivalent units. Compute the unit costs for materials and conversion costs. Transferred‐in costs are considered materials costs.

DO IT!

EXERCISES

Compare job order and process cost systems.

(LO 1), C

DO IT 16-1 Indicate whether each of the following statements is true or false.

1. Many hospitals use job order costing for small, routine medical procedures.

2. A manufacturer of computer flash drives would use a job order cost system.

3. A process cost system uses multiple work in process accounts.

4. A process cost system keeps track of costs on job cost sheets.

Assign and journalize manufacturing costs.

(LO 2), AP

DO IT 16-2 Kopa Company manufactures CH‐21 through two processes: mixing and packaging. In July, the following costs were incurred.

	Mixing	Packaging
Raw materials used	$10,000	$28,000
Factory labor costs	8,000	36,000
Manufacturing overhead costs	12,000	54,000

Units completed at a cost of $21,000 in the Mixing Department are transferred to the Packaging Department. Units completed at a cost of $106,000 in the Packaging Department are transferred to Finished Goods. Journalize the assignment of these costs to the two processes and the transfer of units as appropriate.

Compute equivalent units.

(LO 3), AP

DO IT 16-3 The Assembly Department for Right pens has the following production data for the current month.

Beginning Work in Process		Units Transferred Out		Ending Work in Process
–0–		20,000		10,000

Materials are entered at the beginning of the process. The ending work in process units are 70% complete as to conversion costs. Compute the equivalent units of production for (a) materials and (b) conversion costs.

Prepare cost reconciliation schedule.

(LO 4), AP

DO IT 16-4 In March, Kelly Company had the following unit production costs: materials $10 and conversion costs $8. On March 1, it had no work in process. During March, Kelly transferred out 22,000 units. As of March 31, 4,000 units that were 40% complete as to conversion costs and 100% complete as to materials were in ending work in process.

(a) Compute the total units to be accounted for.

(b) Compute the equivalent units of production.

(c) Prepare a cost reconciliation schedule, including the costs of materials transferred out and the costs of materials in process.

EXERCISES

Understand process cost accounting.

(LO 1), C

E16-1 Robert Wilkins has prepared the following list of statements about process cost accounting.

1. Process cost systems are used to apply costs to similar products that are mass‐produced in a continuous fashion.

2. A process cost system is used when each finished unit is indistinguishable from another.

3. Companies that produce soft drinks, movies, and computer chips would all use process cost accounting.

4. In a process cost system, costs are tracked by individual jobs.

5. Job order costing and process costing track different manufacturing cost elements.

6. Both job order costing and process costing account for direct materials, direct labor, and manufacturing overhead.

7. Costs flow through the accounts in the same basic way for both job order costing and process costing.

8. In a process cost system, only one work in process account is used.

9. In a process cost system, costs are summarized in a job cost sheet.

10. In a process cost system, the unit cost is total manufacturing costs for the period divided by the equivalent units produced during the period.

Instructions

Identify each statement as true or false. If false, indicate how to correct the statement.

Journalize transactions.

(LO 2), AP

E16-2 Harrelson Company manufactures pizza sauce through two production departments: Cooking and Canning. In each process, materials and conversion costs are incurred evenly throughout the process. For the month of April, the work in process accounts show the following debits.

	Cooking	Canning
Beginning work in process	$ –0–	$ 4,000
Materials	21,000	9,000
Labor	8,500	7,000
Overhead	31,500	25,800
Costs transferred in		53,000

Instructions

Journalize the April transactions.

Answer questions on costs and production.

(LO 2, 3, 4), AP

E16-3 The ledger of American Company has the following work in process account.

Work in Process—Painting
5/1	Balance	3,590	5/31	Transferred out	?
5/31	Materials	5,160
5/31	Labor	2,530
5/31	Overhead	1,380
5/31	Balance	?

Production records show that there were 400 units in the beginning inventory, 30% complete, 1,600 units started, and 1,700 units transferred out. The beginning work in process had materials cost of $2,040 and conversion costs of $1,550. The units in ending inventory were 40% complete. Materials are entered at the beginning of the painting process.

Instructions

(a) How many units are in process at May 31?

(b) What is the unit materials cost for May?

(d) What is the total cost of units transferred out in May?

(e) What is the cost of the May 31 inventory?

Journalize transactions for two processes.

(LO 2), AP

E16-4 Schrager Company has two production departments: Cutting and Assembly. July 1 inventories are Raw Materials $4,200, Work in Process—Cutting $2,900, Work in Process—Assembly $10,600, and Finished Goods $31,000. During July, the following transactions occurred.

1. Purchased $62,500 of raw materials on account.

2. Incurred $60,000 of factory labor. (Credit Wages Payable.)

3. Incurred $70,000 of manufacturing overhead; $40,000 was paid and the remainder is unpaid.

4. Requisitioned materials for Cutting $15,700 and Assembly $8,900.

5. Used factory labor for Cutting $33,000 and Assembly $27,000.

6. Applied overhead at the rate of $18 per machine hour. Machine hours were Cutting 1,680 and Assembly 1,720.

7. Transferred goods costing $67,600 from the Cutting Department to the Assembly Department.

8. Transferred goods costing $134,900 from Assembly to Finished Goods.

9. Sold goods costing $150,000 for $200,000 on account.

Instructions

Journalize the transactions. (Omit explanations.)

Compute physical units and equivalent units of production.

(LO 3, 4), AP

E16-5 In Shady Company, materials are entered at the beginning of each process. Work in process inventories, with the percentage of work done on conversion costs, and production data for its Sterilizing Department in selected months during 2017 are as follows.

	Beginning Work in Process		Ending Work in Process
Month	Units	Conversion Cost%	Units Transferred Out	Units	Conversion Cost%
January	–0–	—	11,000	2,000	60
March	–0–	—	12,000	3,000	30
May	–0–	—	14,000	7,000	80
July	–0–	—	10,000	1,500	40

Instructions

(a) Compute the physical units for January and May.

(b) Compute the equivalent units of production for (1) materials and (2) conversion costs for each month.

Determine equivalent units, unit costs, and assignment of costs.

(LO 3, 4), AP

E16-6 The Cutting Department of Cassel Company has the following production and cost data for July.

Production	Costs
1.	Transferred out 12,000 units.	Beginning work in process	$ –0–
2.	Started 3,000 units that are 60% complete as to conversion costs and 100% complete as to materials at July 31.	Materials	45,000
		Labor	16,200
		Manufacturing overhead	18,300

Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process.

Instructions

(a) Determine the equivalent units of production for (1) materials and (2) conversion costs.

(b) Compute unit costs and prepare a cost reconciliation schedule.

Prepare a production cost report.

(LO 3, 4), AP

Excel

E16-7 The Sanding Department of Quik Furniture Company has the following production and manufacturing cost data for March 2017, the first month of operation.

1. Production: 7,000 units finished and transferred out; 3,000 units started that are 100% complete as to materials and 20% complete as to conversion costs.

2. Manufacturing costs: Materials $33,000; labor $21,000; and overhead $36,000.

Instructions

Prepare a production cost report.

Determine equivalent units, unit costs, and assignment of costs.

(LO 3, 4), AP

E16-8 The Blending Department of Luongo Company has the following cost and production data for the month of April.

Costs:
Work in process, April 1
Direct materials: 100% complete	$100,000
Conversion costs: 20% complete	70,000
Cost of work in process, April 1	$170,000
Costs incurred during production in April
Direct materials	$ 800,000
Conversion costs	365,000
Costs incurred in April	$1,165,000

Units transferred out totaled 17,000. Ending work in process was 1,000 units that are 100% complete as to materials and 40% complete as to conversion costs.

Instructions

(a) Compute the equivalent units of production for (1) materials and (2) conversion costs for the month of April.

(b) Compute the unit costs for the month.

Determine equivalent units, unit costs, and assignment of costs.

(LO 3, 4), AP

E16-9 Baden Company has gathered the following information.

Units in beginning work in process	–0–
Units started into production	36,000
Units in ending work in process	6,000
Percent complete in ending work in process:
Conversion costs	40%
Materials	100%
Costs incurred:
Direct materials	$72,000
Direct labor	$61,000
Overhead	$101,000

Instructions

(a) Compute equivalent units of production for materials and for conversion costs.

(b) Determine the unit costs of production.

Determine equivalent units, unit costs, and assignment of costs.

(LO 3, 4), AP

E16-10 Overton Company has gathered the following information.

Units in beginning work in process	20,000
Units started into production	164,000
Units in ending work in process	24,000
Percent complete in ending work in process:
Conversion costs	60%
Materials	100%
Costs incurred:
Direct materials	$101,200
Direct labor	$164,800
Overhead	$184,000

Instructions

(a) Compute equivalent units of production for materials and for conversion costs.

(b) Determine the unit costs of production.

Compute equivalent units, unit costs, and costs assigned.

(LO 3, 4), AP

Excel

E16-11 The Polishing Department of Major Company has the following production and manufacturing cost data for September. Materials are entered at the beginning of the process.

1. Production: Beginning inventory 1,600 units that are 100% complete as to materials and 30% complete as to conversion costs; units started during the period are 42,900; ending inventory of 5,000 units 10% complete as to conversion costs.

2. Manufacturing costs: Beginning inventory costs, comprised of $20,000 of materials and $43,180 of conversion costs; materials costs added in Polishing during the month, $175,800; labor and overhead applied in Polishing during the month, $125,680 and $257,140, respectively.

Instructions

(a) Compute the equivalent units of production for materials and conversion costs for the month of September.

(b) Compute the unit costs for materials and conversion costs for the month.

Explain the production cost report.

(LO 4), S

E16-12 David Skaros has recently been promoted to production manager. He has just started to receive various managerial reports, including the production cost report that you prepared. It showed that his department had 2,000 equivalent units in ending inventory. His department has had a history of not keeping enough inventory on hand to meet demand. He has come to you, very angry, and wants to know why you credited him with only 2,000 units when he knows he had at least twice that many on hand.

Instructions

Explain to him why his production cost report showed only 2,000 equivalent units in ending inventory. Write an informal memo. Be kind and explain very clearly why he is mistaken.

Prepare a production cost report.

(LO 3, 4), AP

E16-13 The Welding Department of Healthy Company has the following production and manufacturing cost data for February 2017. All materials are added at the beginning of the process.

Manufacturing Costs	Production Data
Beginning work in process		Beginning work in process	15,000 units
Materials	$18,000			1/10 complete
Conversion costs	14,175	$ 32,175	Units transferred out	55,000
Materials		180,000	Units started	51,000
Labor		67,380	Ending work in process	11,000 units
Overhead		61,445		1/5 complete

Instructions

Prepare a production cost report for the Welding Department for the month of February.

Compute physical units and equivalent units of production.

(LO 3, 4), AP

E16-14 Remington Inc. is contemplating the use of process costing to track the costs of its operations. The operation consists of three segments (departments): Receiving, Shipping, and Delivery. Containers are received at Remington's docks and sorted according to the ship they will be carried on. The containers are loaded onto a ship, which carries them to the appropriate port of destination. The containers are then off‐loaded and delivered to the Receiving Department.

Remington wants to begin using process costing in the Shipping Department. Direct materials represent the fuel costs to run the ship, and “Containers in transit” represents work in process. Listed below is information about the Shipping Department's first month's activity.

Containers in transit, April 1	0
Containers loaded	1,200
Containers in transit, April 30	350,	40% of direct materials and
		20% of conversion costs

Instructions

(a) Determine the physical flow of containers for the month.

(b) Calculate the equivalent units for direct materials and conversion costs.

Determine equivalent units, unit costs, and assignment of costs.

(LO 3, 4), AP

E16-15 Santana Mortgage Company uses a process cost system to accumulate costs in its Application Department. When an application is completed, it is forwarded to the Loan Department for final processing. The following processing and cost data pertain to September.

1.	Applications in process on	Beginning WIP:
	September 1: 100.	Direct materials	$ 1,000
2.	Applications started in	Conversion costs	3,960
	September: 1,000.	September costs:
3.	Completed applications during	Direct materials	$ 4,500
	September: 800.	Direct labor	12,000
4.	Applications still in process at September 30: 100% complete as to materials (forms) and 60% complete as to conversion costs.	Overhead	9,520

Instructions

(a) Determine the equivalent units of service (production) for materials and conversion costs.

(b) Compute the unit costs and prepare a cost reconciliation schedule.

Materials are the forms used in the application process, and these costs are incurred at the beginning of the process. Conversion costs are incurred uniformly during the process.

Compute equivalent units, unit costs, and costs assigned.

(LO 5), AP

*E16-16 Using the data in E16-15, assume Santana Mortgage Company uses the FIFO method. Also, assume that the applications in process on September 1 were 100% complete as to materials (forms) and 40% complete as to conversion costs. Assume overhead costs were $9,620 instead of $9,520.

Instructions

(a) Determine the equivalent units of service (production) for materials and conversion costs.

(b) Compute the unit costs and prepare a cost reconciliation schedule.

Determine equivalent units, unit costs, and assignment of costs.

(LO 5), AP

*E16-17 The Cutting Department of Lasso Company has the following production and cost data for August.

Production	Costs
1.	Started and completed 10,000 units.	Beginning work in process	$ –0–
2.	Started 2,000 units that are 40% completed at August 31.	Materials	45,000
		Labor	13,600
		Manufacturing overhead	16,100

Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process. Lasso Company uses the FIFO method to compute equivalent units.

Instructions

(a) Determine the equivalent units of production for (1) materials and (2) conversion costs.

(b) Compute unit costs and show the assignment of manufacturing costs to units transferred out and in work in process.

Compute equivalent units, unit costs, and costs assigned.

(LO 5), AP

*E16-18 The Smelting Department of Polzin Company has the following production and cost data for September.

1. Production: Beginning work in process 2,000 units that are 100% complete as to materials and 20% complete as to conversion costs; units started and finished 9,000 units; and ending work in process 1,000 units that are 100% complete as to materials and 40% complete as to conversion costs.

2. Manufacturing costs: Work in process, September 1, $15,200; materials added $60,000; labor and overhead $132,000.

Polzin uses the FIFO method to compute equivalent units.

Instructions

(a) Compute the equivalent units of production for (1) materials and (2) conversion costs for the month of September.

(b) Compute the unit costs for the month.

Answer questions on costs and production.

(LO 5), AP

*E16-19 The ledger of Hasgrove Company has the following work in process account.

Work in Process—Painting
3/1	Balance	3,680	3/31	Transferred out	?
3/31	Materials	6,600
3/31	Labor	2,400
3/31	Overhead	1,150
3/31	Balance	?

Production records show that there were 800 units in the beginning inventory, 30% complete, 1,100 units started, and 1,500 units transferred out. The units in ending inventory were 40% complete. Materials are entered at the beginning of the painting process. Hasgrove uses the FIFO method to compute equivalent units.

Instructions

Answer the following questions.

(a) How many units are in process at March 31?

(b) What is the unit materials cost for March?

(d) What is the total cost of units started in February and completed in March?

(e) What is the total cost of units started and finished in March?

(f) What is the cost of the March 31 inventory?

Prepare a production cost report for a second process.

(LO 5), AP

*E16-20 The Welding Department of Majestic Company has the following production and manufacturing cost data for February 2017. All materials are added at the beginning of the process. Majestic uses the FIFO method to compute equivalent units.

Manufacturing Costs	Production Data
Beginning work in process	$ 32,175	Beginning work in process	15,000 units,
Costs transferred in	135,000		10% complete
Materials	57,000	Units transferred out	54,000
Labor	35,100	Units transferred in	64,000
Overhead	68,400	Ending work in process	25,000 units
			20% complete

Instructions

Prepare a production cost report for the Welding Department for the month of February. Transferred‐in costs are considered materials costs.

EXERCISES: SET B AND CHALLENGE EXERCISES

Visit the book's companion website, at www.wiley.com/college/kimmel , and choose the Student Companion site to access Exercises: Set B and Challenge Exercises.

PROBLEMS: SET A

Journalize transactions.

(LO 2), AP

P16-1A Fire Out Company manufactures its product, Vitadrink, through two manufacturing processes: Mixing and Packaging. All materials are entered at the beginning of each process. On October 1, 2017, inventories consisted of Raw Materials $26,000, Work in Process—Mixing $0, Work in Process—Packaging $250,000, and Finished Goods $289,000. The beginning inventory for Packaging consisted of 10,000 units that were 50% complete as to conversion costs and fully complete as to materials. During October, 50,000 units were started into production in the Mixing Department and the following transactions were completed.

1. Purchased $300,000 of raw materials on account.

2. Issued raw materials for production: Mixing $210,000 and Packaging $45,000.

3. Incurred labor costs of $278,900.

4. Used factory labor: Mixing $182,500 and Packaging $96,400.

5. Incurred $810,000 of manufacturing overhead on account.

6. Applied manufacturing overhead on the basis of $23 per machine hour. Machine hours were 28,000 in Mixing and 6,000 in Packaging.

7. Transferred 45,000 units from Mixing to Packaging at a cost of $979,000.

8. Transferred 53,000 units from Packaging to Finished Goods at a cost of $1,315,000.

9. Sold goods costing $1,604,000 for $2,500,000 on account.

Instructions

Journalize the October transactions.

Complete four steps necessary to prepare a production cost report.

(LO 3, 4), AP

P16-2A Rosenthal Company manufactures bowling balls through two processes: Molding and Packaging. In the Molding Department, the urethane, rubber, plastics, and other materials are molded into bowling balls. In the Packaging Department, the balls are placed in cartons and sent to the finished goods warehouse. All materials are entered at the beginning of each process. Labor and manufacturing overhead are incurred uniformly throughout each process. Production and cost data for the Molding Department during June 2017 are presented below.

Production Data	June
Beginning work in process units	–0–
Units started into production	22,000
Ending work in process units	2,000
Percent complete—ending inventory	40%
Cost Data
Materials	$198,000
Labor	53,600
Overhead	112,800
Total	$364,400

Instructions

(a) Prepare a schedule showing physical units of production.

(b) Determine the equivalent units of production for materials and conversion costs.

(c)	Materials	$9.00
	CC	$8.00

(d) Determine the costs to be assigned to the units transferred out and in process for June.

(d)	Transferred out	$340,000
	WIP	$ 24,400

(e) Prepare a production cost report for the Molding Department for the month of June.

Complete four steps necessary to prepare a production cost report.

(LO 3, 4), AP

P16-3A Thakin Industries Inc. manufactures dorm furniture in separate processes. In each process, materials are entered at the beginning, and conversion costs are incurred uniformly. Production and cost data for the first process in making two products in two different manufacturing plants are as follows.

	Cutting Department
	Plant 1	Plant 2
Production Data—July	T12-Tables	C10-Chairs
Work in process units, July 1	–0–	–0–
Units started into production	20,000	18,000
Work in process units, July 31	3,000	500
Work in process percent complete	60	80
Cost Data—July
Work in process, July 1	$ –0–	$ –0–
Materials	380,000	288,000
Labor	234,400	110,000
Overhead	104,000	104,800
Total	$718,400	$502,800

Instructions

(a) For each plant:

(1) Compute the physical units of production.

(2) Compute equivalent units of production for materials and for conversion costs.

(3) Determine the unit costs of production.

(4) Show the assignment of costs to units transferred out and in process.

(a) (3)	T12:
	Materials	$19
	CC	$18
(4)	T12:
	Transferred out	$629,000
	WIP	$ 89,400

(b) Prepare the production cost report for Plant 1 for July 2017.

Assign costs and prepare production cost report.

(LO 3, 4), AP

P16-4A Rivera Company has several processing departments. Costs charged to the Assembly Department for November 2017 totaled $2,280,000 as follows.

Work in process, November 1
Materials	$79,000
Conversion costs	48,150	$ 127,150
Materials added		1,589,000
Labor		225,920
Overhead		337,930

Production records show that 35,000 units were in beginning work in process 30% complete as to conversion costs, 660,000 units were started into production, and 25,000 units were in ending work in process 40% complete as to conversion costs. Materials are entered at the beginning of each process.

Instructions

(a) Determine the equivalent units of production and the unit production costs for the Assembly Department.

(b) Determine the assignment of costs to goods transferred out and in process.

(b)	Transferred out	$2,211,000
	WIP	$ 69,000

Determine equivalent units and unit costs and assign costs.

(LO 3, 4), AP

P16-5A Polk Company manufactures basketballs. Materials are added at the beginning of the production process and conversion costs are incurred uniformly. Production and cost data for the month of July 2017 are as follows.

Production Data—Basketballs	Units	Percentage Complete
Work in process units, July 1	500	60%
Units started into production	1,000
Work in process units, July 31	600	40%
Cost Data—Basketballs
Work in process, July 1
Materials	$750
Conversion costs	600	$1,350
Direct materials		2,400
Direct labor		1,580
Manufacturing overhead		1,240

Instructions

(a) Calculate the following.

1. The equivalent units of production for materials and conversion costs.

2. The unit costs of production for materials and conversion costs.

3. The assignment of costs to units transferred out and in process at the end of the accounting period.

(a)	(2)	Materials	$2.10
	(3)	Transferred out	$4,590
		WIP	$1,980

(b) Prepare a production cost report for the month of July for the basketballs.

Compute equivalent units and complete production cost report.

(LO 3, 4), AP

P16-6A Hamilton Processing Company uses a weighted‐average process cost system and manufactures a single product—an industrial carpet shampoo and cleaner used by many universities. The manufacturing activity for the month of October has just been completed. A partially completed production cost report for the month of October for the Mixing and Cooking Department is shown on page 830.

Instructions

(a) Prepare a schedule that shows how the equivalent units were computed so that you can complete the “Quantities: Units accounted for” equivalent units section shown in the production cost report, and compute October unit costs.

(a)	Materials	$1.60
(b)	Transferred out	$282,000
	WIP	$63,000

(b) Complete the “Cost Reconciliation Schedule” part of the production cost report.

HAMILTON PROCESSING COMPANY Mixing and Cooking Department Production Cost Report For the Month Ended October 31
		Equivalent Units
Quantities	Physical Units	Materials		Conversion Costs
Units to be accounted for
Work in process, October 1 (all materials, 70% conversion costs)	20,000
Started into production	150,000
Total units	170,000
Units accounted for
Transferred out	120,000	?		?
Work in process, October 31 (60% materials, 40% conversion costs)	50,000	?		?
Total units accounted for	170,000	?		?
Costs
Unit costs		Materials		Conversion Costs		Total
Total cost		$240,000		$105,000		$345,000
Equivalent units		?		?
Unit costs		$ ?	+	$ ?	=	$ ?
Costs to be accounted for
Work in process, October 1						$ 30,000
Started into production						315,000
Total costs						$345,000
Cost Reconciliation Schedule
Costs accounted for
Transferred out						$ ?
Work in process, October 31
Materials				$ ?
Conversion costs				?		?
Total costs						$ ?

Determine equivalent units and unit costs and assign costs for processes; prepare production cost report.

(LO 5), AP

*P16-7A Owen Company manufactures bicycles and tricycles. For both products, materials are added at the beginning of the production process, and conversion costs are incurred uniformly. Owen Company uses the FIFO method to compute equivalent units. Production and cost data for the month of March are as follows.

Production Data—Bicycles	Units	Percentage Complete
Work in process units, March 1	200	80%
Units started into production	1,000
Work in process units, March 31	300	40%
Cost Data—Bicycles
Work in process, March 1	$19,280
Direct materials	50,000
Direct labor	25,900
Manufacturing overhead	30,000
Production Data—Tricycles	Units	Percentage Complete
Work in process units, March 1	100	75%
Units started into production	1,000
Work in process units, March 31	60	25%
Cost Data—Tricycles
Work in process, March 1	$ 6,125
Direct materials	30,000
Direct labor	14,300
Manufacturing overhead	20,000

Instructions

(a) Calculate the following for both the bicycles and the tricycles.

(1) The equivalent units of production for materials and conversion costs.

(2) The unit costs of production for materials and conversion costs.

(3) The assignment of costs to units transferred out and in process at the end of the accounting period.

(a)	Bicycles:
	(1) Materials	1,000
	(2) Materials	$50
	(3) Transferred out	$102,380
	WIP	$ 22,800

(b) Prepare a production cost report for the month of March for the bicycles only.

PROBLEMS: SET B AND SET C

Visit the book's companion website, at www.wiley.com/college/kimmel , and choose the Student Companion site to access Problems: Set B and Set C.

CONTINUING PROBLEMS

CURRENT DESIGNS

EXCEL TUTORIAL

Excel

CD16 Building a kayak using the composite method is a very labor‐intensive process. In the Fabrication Department, the kayaks go through several steps as employees carefully place layers of Kevlar® in a mold and then use resin to fuse together the layers. The excess resin is removed with a vacuum process, and the upper shell and lower shell are removed from the molds and assembled. The seat, hatch, and other components are added in the Finishing Department.

At the beginning of April, Current Designs had 30 kayaks in process in the Fabrication Department. Rick Thrune, the production manager, estimated that about 80% of the materials costs had been added to these boats, which were about 50% complete with respect to the conversion costs. The cost of this inventory had been calculated to be $8,400 in materials and $9,000 in conversion costs.

During April, 72 boats were started. At the end of the month, the 35 kayaks in the ending inventory had 20% of the materials and 40% of the conversion costs already added to them.

A review of the accounting records for April showed that materials with a cost of $17,500 had been requisitioned by the Fabrication Department and that the conversion costs for the month were $39,600.

Instructions

Complete a production cost report for April 2017 for the Fabrication Department using the weighted‐average method.

WATERWAYS

(Note: This is a continuation of the Waterways problem from Chapters 14 – 15 .)

WP16 Because most of the parts for its irrigation systems are standard, Waterways handles the majority of its manufacturing as a process cost system. There are multiple process departments. Three of these departments are the Molding, Cutting, and Welding Departments. All items eventually end up in the Packaging Department, which prepares items for sale in kits or individually. This problem asks you to help Waterways calculate equivalent units and prepare a production cost report.

Go to the book's companion website, at www.wiley.com/college/kimmel , to see the completion of this problem.

EXPAND YOUR | CRITICAL THINKING

Group Project with AP

DECISION‐MAKING ACROSS THE ORGANIZATION

CT16-1 Florida Beach Company manufactures sunscreen, called NoTan, in 11‐ounce plastic bottles. NoTan is sold in a competitive market. As a result, management is very cost‐conscious. NoTan is manufactured through two processes: mixing and filling. Materials are entered at the beginning of each process, and labor and manufacturing overhead occur uniformly throughout each process. Unit costs are based on the cost per gallon of NoTan using the weighted‐average costing approach.

On June 30, 2017, Mary Ritzman, the chief accountant for the past 20 years, opted to take early retirement. Her replacement, Joe Benili, had extensive accounting experience with motels in the area but only limited contact with manufacturing accounting. During July, Joe correctly accumulated the following production quantity and cost data for the Mixing Department.

1. Production quantities: Work in process, July 1, 8,000 gallons 75% complete; started into production 100,000 gallons; work in process, July 31, 5,000 gallons 20% complete. Materials are added at the beginning of the process.

2. Production costs: Beginning work in process $88,000, comprised of $21,000 of materials costs and $67,000 of conversion costs; incurred in July: materials $573,000, conversion costs $765,000.

Joe then prepared a production cost report on the basis of physical units started into production. His report showed a production cost of $14.26 per gallon of NoTan. The management of Florida Beach was surprised at the high unit cost. The president comes to you, as Mary's top assistant, to review Joe's report and prepare a correct report if necessary.

Instructions

With the class divided into groups, answer the following questions.

(a) Show how Joe arrived at the unit cost of $14.26 per gallon of NoTan.

(b) What error(s) did Joe make in preparing his production cost report?

MANAGERIAL ANALYSIS

CT16-2 Harris Furniture Company manufactures living room furniture through two departments: Framing and Upholstering. Materials are entered at the beginning of each process. For May, the following cost data are obtained from the two work in process accounts.

	Framing	Upholstering
Work in process, May 1	$ –0–	$ ?
Materials	450,000	?
Conversion costs	261,000	330,000
Costs transferred in	–0–	600,000
Costs transferred out	600,000	?
Work in process, May 31	111,000	?

Instructions

Answer the following questions.

(a) If 3,000 sofas were started into production on May 1 and 2,500 sofas were transferred to Upholstering, what was the unit cost of materials for May in the Framing Department?

(b) Using the data in (a) above, what was the per unit conversion cost of the sofas transferred to Upholstering?

(c) Continuing the assumptions in (a) above, what is the percentage of completion of the units in process at May 31 in the Framing Department?

REAL‐WORLD FOCUS

CT16-3 Paintball is now played around the world. The process of making paintballs is actually quite similar to the process used to make certain medical pills. In fact, paintballs were previously often made at the same factories that made pharmaceuticals.

Address: Go to www.youtube.com/watch?v=2hKrv60PJKE#t=129 to access the video.

Instructions

View that video at the site listed above and then answer the following questions.

(a) Describe in sequence the primary steps used to manufacture paintballs.

(b) Explain the costs incurred by the company that would fall into each of the following categories: materials, labor, and overhead. Of these categories, which do you think would be the greatest cost in making paintballs?

Writing with E

COMMUNICATION ACTIVITY

CT16-4 Diane Barone was a good friend of yours in high school and is from your home town. While you chose to major in accounting when you both went away to college, she majored in marketing and management. You are now the accounting manager for the Snack Foods Division of Melton Enterprises. Your friend Diane was promoted to regional sales manager for the same division of Melton. Diane recently telephoned you. She explained that she was familiar with job cost sheets, which had been used by the Special Projects Division where she had formerly worked. She was, however, very uncomfortable with the production cost reports prepared by your division. She emailed you a list of her particular questions:

1. Since Melton occasionally prepares snack foods for special orders in the Snack Foods Division, why don't we track costs of the orders separately?

2. What is an equivalent unit?

3. Why am I getting four production cost reports? Isn't there one work in process account?

Instructions

Prepare a memo to Diane. Answer her questions and include any additional information you think would be helpful. You may write informally but do use proper grammar and punctuation.

ETHICS CASE

CT16-5 R. B. Dillman Company manufactures a high‐tech component used in Bluetooth speakers that passes through two production processing departments, Molding and Assembly. Department managers are partially compensated on the basis of units of products completed and transferred out relative to units of product put into production. This was intended as encouragement to be efficient and to minimize waste.

Jan Wooten is the department head in the Molding Department, and Tony Ferneti is her quality control inspector. During the month of June, Jan had three new employees who were not yet technically skilled. As a result, many of the units produced in June had minor molding defects. In order to maintain the department's normal high rate of completion, Jan told Tony to pass through inspection and on to the Assembly Department all units that had defects nondetectable to the human eye. “Company and industry tolerances on this product are too high anyway,” says Jan. “Less than 2% of the units we produce are subjected in the market to the stress tolerance we've designed into them. The odds of those 2% being any of this month's units are even less. Anyway, we're saving the company money.”

Instructions

(a) Who are the potential stakeholders involved in this situation?

(b) What alternatives does Tony have in this situation? What might the company do to prevent this situation from occurring?

CONSIDERING PEOPLE, PLANET, AND PROFIT

CT16-6 In a recent year, an oil refinery in Texas City, Texas, on the Houston Ship Channel exploded. The explosion killed 14 people and sent a plume of smoke hundreds of feet into the air. The blast started as a fire in the section of the plant that increased the octane of the gasoline that was produced at the refinery. The Houston Ship Channel is the main waterway that allows commerce to flow from the Gulf of Mexico into Houston.

The Texas Commission on Environmental Quality expressed concern about the release of nitrogen oxides, benzene, and other known carcinogens as a result of the blast. Neighbors of the plant complained that the plant had been emitting carcinogens for years and that the regulators had ignored their complaints about emissions and unsafe working conditions.

Instructions

Answer the following questions.

(a) Outline the costs that the company now faces as a result of the accident.

(b) How could the company have reduced the costs associated with the accident?