Chapter 4 Systems Design: Process Costing

Chapter 4
Systems Design: Process Costing
Solutions to Questions
4-1 A process costing system is
appropriate when a homogeneous product
is produced on a continuous basis.
4-2 Process costing and job-order
costing are similar in the following ways:
1. Both systems have the same basic
purposes, which are to assign
materials, labor, and overhead cost to
products and to provide a mechanism
for computing unit costs.
2. Both systems use the same basic
accounts.
3. Cost flows through the accounts in
basically the same way in both
systems.
4-3 Costs are accumulated by
department in a process costing system.
4-4 Cost accumulation is simpler under
process costing because costs only need
to be identified by department—not by
separate job. Usually a company has only
a few departments, whereas there can be
hundreds or even thousands of jobs in a
job-order costing system.
4-5 A Work in Process account is
maintained for each separate processing
department in a process costing system.
4-6 The journal entry to transfer the
costs of partially completed goods from
the Mixing Department to the Firing
Department would be:
Work in Process, Firing......... XXXX
Work in Process, Mixing.. XXXX
4-7 The costs that might be added to
the Firing Department’s Work in Process
account would include: (1) cost
transferred in from the Mixing
Department, (2) materials cost, (3) labor
cost, and (4) overhead cost.
4-8 Under the weighted-average
method, the equivalent units of production
consist of units transferred to the next
department (or to finished goods) during
the period plus the equivalent units in the
department’s ending Work in Process
inventory.
4-9 A quantity schedule shows the
physical flow of units through a
department during a period. It serves
several purposes. First, it provides the
manager with information about activity in
his or her department and also shows the
manager the stage of completion of any
in-process units. Second, it provides data
for computing the equivalent units and for
preparing the other parts of the
production report.
4-10 A unit of product accumulates cost
in each department that it passes through,
with the costs of one department added to
the costs of the preceding department in a
snowballing fashion.
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Solutions Manual, Chapter 4 137

Brief Exercise 4-1 (30 minutes)
a. To record issuing raw materials for use in production:
Work in Process—Molding Department.. $28,000
Work in Process—Firing Department..... $5,000
Raw Materials.................................. $33,000
b. To record direct labor costs incurred:
Work in Process—Molding Department.. $18,000
Work in Process—Firing Department..... $5,000
Wages Payable................................ $23,000
c. To record applying manufacturing overhead:
Work in Process—Molding Department.. $24,000
Work in Process—Firing Department..... $37,000
Manufacturing Overhead................. $61,000
d. To record transfer of unfired, molded bricks from the Molding
Department to the Firing Department:
Work in Process—Firing Department..... $67,000
Work in Process—Molding Department
$67,000
e. To record transfer of finished bricks from the Firing Department
to the finished goods warehouse:
Finished Goods...................................... $108,000
Work in Process—Firing Department
$108,000
f. To record Cost of Goods Sold:
Cost of Goods Sold................................ $106,000
Finished Goods................................ $106,000
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138 Introduction to Managerial Accounting, 2nd Edition

Brief Exercise 4-2 (10 minutes)
Weighted-Average Method
Equivalent Units
Materials
Conversio
n
Units transferred to the next
department 410,000 410,000
Work in process, October 31:
30,000 units × 70% 21,000
30,000 units × 50% 15,000
Equivalent units 431,000 425,000
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Solutions Manual, Chapter 4 139

Brief Exercise 4-3 (15 minutes)
Weighted-Average Method
1. Work in process, May 1............................................... 80,000
Started into production during May............................. 300,000
Total kilograms in process.......................................... 380,000
Deduct work in process, May 31................................. 50,000
Completed and transferred out during May................ 330,000
2. Kilograms to be accounted for:
Work in process, May 1 (materials 80% complete;
conversion 20% complete)..................................... 80,000
Started into production during the month................ 300,000
Total kilograms to be accounted for............................ 380,000
Kilograms accounted for as follows:
Transferred out during the month............................ 330,000
Work in process, May 31 (materials 40% complete;
conversion 10% complete)..................................... 50,000
Total kilograms accounted for..................................... 380,000
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140 Introduction to Managerial Accounting, 2nd Edition

Brief Exercise 4-4 (15 minutes)
1.
Materials Labor Overhead
Work in process, May 1 $ 14,550 $23,620 $118,100
Cost added during May 88,350 14,330 71,650
Total cost (a) $102,900 $37,950 $189,750
Equivalent units of production
(b)
1,200 1,100 1,100
Cost per equivalent unit (a) ÷
(b)
$85.75 $34.50 $172.50
2.
Cost per EU for materials $ 85.75
Cost per EU for labor 34.50
Cost per EU for overhead 172.50
Total cost per EU
$292.7
5
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Solutions Manual, Chapter 4 141

Brief Exercise 4-5 (30 minutes)
1. Computation of the total cost per EU:
Cost per EU for materials $24.00
Cost per EU for labor 7.00
Cost per EU for overhead 14.00
Total cost per EU $45.00
2. Computation of equivalent units in ending inventory:
Materials Labor
Overhea
d
Units in ending inventory 1,500 1,500 1,500
Percentage completed 90% 40% 40%
Equivalent units of
production
1,350 600 600
3. Cost Reconciliation
Total
Cost
Material
s Labor
Over-
head
Cost accounted for as
follows:
Transferred to the next
department: 18,000 units
at $45.00 per unit
$810,00
0 18,000 18,000 18,000
Work in process, ending:
Materials, at $24.00 per
EU 32,400 1,350
Labor, at $7.00 per EU 4,200 600
Overhead, at $14.00 per
EU 8,400 600
Total work in process 45,000
Total cost
$855,00
0
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142 Introduction to Managerial Accounting, 2nd Edition

Exercise 4-6 (15 minutes)
Work in Process—Mixing.........................................330,000
Raw Materials Inventory..................................... 330,000
Work in Process—Mixing.........................................260,000
Work in Process—Baking.........................................120,000
Wages Payable................................................... 380,000
Work in Process—Mixing.........................................190,000
Work in Process—Baking.........................................90,000
Manufacturing Overhead.................................... 280,000
Work in Process—Baking.........................................760,000
Work in Process—Mixing..................................... 760,000
Finished Goods........................................................980,000
Work in Process—Baking.................................... 980,000
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Solutions Manual, Chapter 4 143

Exercise 4-7 (20 minutes)
Weighted-Average Method
Quantit
y
Schedul
e
Pounds to be accounted for:
Work in process, May 1
(materials 100% complete,
labor and overhead 55%
complete) 30,000
Started into production during
May 480,000
Total pounds to be accounted for
510,000
Equivalent Units
Materials
Labor &
Overhead
Pounds accounted for as follows:
Transferred to Packing
Department during May* 490,000 490,000 490,000
Work in process, May 31
(materials 100% complete,
labor and overhead 90%
complete) 20,000 20,000 18,000
Total pounds accounted for 510,000 510,000 508,000
*30,000 + 480,000 – 20,000 = 490,000.
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144 Introduction to Managerial Accounting, 2nd Edition

Exercise 4-8 (30 minutes)
Weighted-Average Method
1. For the sake of brevity, only the portion of the quantity schedule from which the
equivalent units are computed is shown below.
Quantit
y Equivalent Units (EU)
Schedul
e Materials
Conversio
n
Units accounted for as follows:
Transferred to the next process 300,000 300,000 300,000
Work in process, June 30
(materials 50% complete,
conversion 25% complete) 40,000 20,000 10,000
Total units accounted for 340,000 320,000 310,000
2. Total
Cost
Material
s
Conversio
n
Whole
Unit
Cost to be accounted for:
Work in process, June 1
$ 71,50
0
$ 56,60
0 $ 14,900
Cost added by the department 599,500 385,000 214,500
Total cost to be accounted for (a)
$671,00
0
$441,60
0 $229,400
Equivalent units (b) 320,000 310,000
Cost per equivalent unit (a) ÷ (b) $1.38 + $0.74 = $2.12
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Solutions Manual, Chapter 4 145

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146 Introduction to Managerial Accounting, 2nd Edition

Exercise 4-9 (20 minutes)
Weighted-Average Method
Total
Equivalent Units
(EU)
Cost
Material
s
Conversio
n
Cost accounted for as follows:
Transferred to the next
process:
300,000 units at $2.12 each $636,00
0 300,000 300,000
Work in process, June 30:
Materials, at $1.38 per EU 27,600 20,000
Conversion, at $0.74 per EU
7,400 10,000
Total work in process 35,000
Total cost accounted for
$671,00
0
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Solutions Manual, Chapter 4 147

Exercise 4-10 (30 minutes)
Weighted-Average Method
1. Quantit
y
Schedul
e
Gallons to be accounted
for:
Work in process, May
1 (materials 80%
complete, labor and
overhead 75%
complete) 80,000
Started into
production 760,000
Total gallons accounted
for 840,000
Equivalent Units
Material
s Labor
Overhea
d
Gallons accounted for as
follows:
Transferred to the
next department 790,000 790,000 790,000 790,000
Work in process, May
31 (materials 60%
complete, labor and
overhead 20%
complete) 50,000 30,000 10,000 10,000
Total gallons accounted
for 840,000 820,000 800,000 800,000
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148 Introduction to Managerial Accounting, 2nd Edition

Exercise 4-10 (continued)
2. Total
Costs
Material
s Labor
Overhea
d
Whole
Unit
Cost to be accounted
for:
Work in process, May
1
$ 146,60
0 $ 68,600
$
30,000 $ 48,000
Cost added during the
month
1,869,20
0 907,200 370,000 592,000
Total cost to be
accounted for (a)
$2,015,80
0
$975,80
0
$400,00
0 $640,000
Equivalent units (b) — 820,000 800,000 800,000
Cost per equivalent unit
(a) ÷ (b) $1.19 + $0.50 + $0.80 = $2.49
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Solutions Manual, Chapter 4 149

Problem 4-11 (30 minutes)
Weighted-Average Method
1. The computation of equivalent units would be:
Quantit
y Equivalent Units (EU)
Schedul
e
Material
s Labor
Overhea
d
Units accounted for as
follows:
Transferred to the next
department 35,600 35,600 35,600 35,600
Work in process, April 30
(materials 80%
complete, labor and
overhead 60%
complete) 7,400 5,920 4,440 4,440
Total units and equivalent
units of production 43,000 41,520 40,040 40,040
2. The cost reconciliation follows:
Total Equivalent Units (EU)
Cost
Material
s Labor Overhead
Cost accounted for as
follows:
Transferred to the next
department: 35,600
units × $2.90 per unit
$103,24
0 35,600 35,600 35,600
Work in process, April 30:
Materials, at $0.50 per
EU 2,960 5,920
Labor, at $1.10 per EU 4,884 4,440
Overhead, at $1.30 per
EU 5,772 4,440
Total work in process 13,616
Total cost
$116,85
6
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150 Introduction to Managerial Accounting, 2nd Edition

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Solutions Manual, Chapter 4 151

Problem 4-12 (45 minutes)
Weighted-Average Method
1. The equivalent units for the month would be:
Quantity
Equivalent Units
(EU)
Schedul
e
Material
s
Conversio
n
Units accounted for as follows:
Transferred to next
department 92,000 92,000 92,000
Work in process, May 30
(materials 75% complete;
conversion 50% complete) 14,000 10,500 7,000
Total units and equivalent
units of production 106,000 102,500 99,000
2. Total
Cost
Material
s
Conversio
n
Whole
Unit
Work in process, May
1
$ 16,40
0 $ 5,900 $ 10,500
Cost added during
the month 431,200
194,20
0 237,000
Total cost (a)
$447,60
0
$200,10
0 $247,500
Equivalent units of
production (b) 102,500 99,000
Cost per EU (a) ÷ (b) $1.95 + $2.50 = $4.45
3. Total units transferred.............................................92,000
Less units in the beginning inventory......................6,000
Units started and completed during
May.......................................................................86,000
4. No, the manager should not be rewarded for good cost control.
The reason for the Mixing Department’s low unit cost for May is
traceable to the fact that costs of the prior month have been
averaged in with May’s costs in computing the lower, $1.95 per
unit figure. This is a major criticism of the weighted-average
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152 Introduction to Managerial Accounting, 2nd Edition

method in that the figures computed for product costing
purposes can’t be used to evaluate cost control or measure
performance for the current period.
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Solutions Manual, Chapter 4 153

Problem 4-13 (60 minutes)
Weighted-Average Method
Quantity Schedule and Equivalent Units
Quantity
Schedul
e
Units to be accounted for:
Work in process, April 1
(materials 85% complete;
conversion 60% complete) 7,000
Started into production 88,000
Total units 95,000
Equivalent Units
(EU)
Material
s
Conversio
n
Units accounted for as follows:
Transferred to bottling: 82,000 82,000 82,000
Work in process, April 30
(materials 60% complete,
conversion 20% complete) 13,000 7,800 2,600
Total units and equivalent
units of production 5 95,000 89,800 84,600
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154 Introduction to Managerial Accounting, 2nd Edition

Problem 4-13 (continued)
Costs per Equivalent Unit
Total
Cost Materials
Conversio
n
Whole
Unit
Cost to be accounted for:
Work in process, April 1 $ 14,800 $ 6,800 $ 8,000
Cost added during April 249,730 105,450 144,280
Total cost (a) $264,530 $112,250 $152,280
Equivalent units of production (b) 89,800 84,600
Cost per EU (a) ÷ (b) $1.25 + $1.80 = $3.05
Cost Reconciliation
Total Equivalent Units (EU)
Cost Materials
Conversio
n
Cost accounted for as follows:
Transferred to bottling:
82,000 units × $3.05 per unit $250,100 82,000 82,000
Work in process, April 30:
Materials, at $1.25 per EU 9,750 7,800
Conversion, at $1.80 per EU 4,680 2,600
Total work in process 14,430
Total cost $264,530
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Solutions Manual, Chapter 4 155

Problem 4-14 (60 minutes)
Weighted-Average Method
1. 2., and 3.
Quantity Schedule and Equivalent Units
Quantit
y
Schedul
e
Units to be accounted
for:
Work in process, July 1
(materials 100%
complete; labor and
overhead 90%
complete) 15,000
Started into production 160,000
Total units 175,000
Equivalent Units (EU)
Material
s Labor
Overhea
d
Units accounted for as follows:
Transferred out 155,000 155,000 155,000 155,000
Work in process, July 31
(materials 40%
complete; labor and
overhead 10%
complete) 20,000 8,000 2,000 2,000
Total units and
equivalent units of
production 175,000 163,000 157,000 157,000
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156 Introduction to Managerial Accounting, 2nd Edition

Problem 4-14 (continued)
Cost per Equivalent Unit
Total
Cost Materials Labor Overhead
Whol
e Unit
Cost to be accounted for:
Work in process, July 1
$
53,120 $ 14,100 $ 22,680 $ 16,340
Cost added during the
month 558,660 142,380 237,940 178,340
Total cost (a)
$611,78
0 $156,480 $260,620 $194,680
Equivalent units of production
(b) 163,000 157,000 157,000
Cost per EU (a) ÷ (b) $0.96 + $1.66 + $1.24 = $3.86
Cost Reconciliation
Equivalent Units (EU)
Total
Cost Materials Labor
Overhea
d
Cost accounted for as follows:
Transferred out:
155,000 units × $3.86 per
unit
$598,30
0 155,000 155,000 155,000
Work in process, July 31:
Materials, at $0.96 per EU
7,680 8,000
Labor, at $1.66 per EU 3,320 2,000
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Solutions Manual, Chapter 4 157

Overhead, at $1.24 per EU
2,480 2,000
Total work in process 13,480
Total cost
$611,78
0
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158 Introduction to Managerial Accounting, 2nd Edition

Problem 4-15 (75 minutes)
Weighted-Average Method
1. A completed production report follows:
Quantity Schedule and Equivalent Units
Quantity
Schedul
e
Units to be accounted for:
Work in process, March 1
(materials 100% complete;
labor and overhead 60%
complete) 4,500
Started into production 56,800
Total Units 61,300
Equivalent Units
(EU)
Material
s
Labor &
Overhead
Units accounted for as follows:
Transferred to mixing 58,400 58,400 58,400
Work in process, March 31
(materials 100% complete;
labor and overhead 70%
complete) 2,900 2,900 2,030
Total Units and equivalent
units of production 61,300 61,300 60,430
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Solutions Manual, Chapter 4 159

Problem 4-15 (continued)
Cost per Equivalent Unit
Total
Cost
Material
s
Labor &
Overhea
d
Whole
Unit
Cost to be accounted for:
Work in process, March 1 $ 12,365 $ 9,125 $ 3,240
Cost added during March 188,794 113,475 75,319
Total cost (a)
$201,15
9
$122,60
0 $78,559
Equivalent units of production (b) 61,300 60,430
Cost per EU (a) ÷ (b) $2.00 + $1.30 = $3.30
Cost Reconciliation
Equivalent Units (EU)
Total
Cost
Material
s
Labor &
Overhea
d
Cost accounted for as follows:
Transferred to mixing: 58,400 units
× $3.30 per unit
$192,72
0 58,400 58,400
Work in process, March 31:
Materials, at $2.00 per EU 5,800 2,900
Labor and overhead, at $1.30 per
EU 2,639 2,030
Total work in process 8,439
Total cost $201,15
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160 Introduction to Managerial Accounting, 2nd Edition

9
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Solutions Manual, Chapter 4 161

Problem 4-15 (continued)
2. In computing unit costs, the weighted-average method mixes
costs of the prior period in with current period costs. Thus,
under the weighted-average method, unit costs are influenced
to some extent by what happened in a prior period. This
problem becomes particularly significant when attempting to
measure performance in the current period. Good cost control
in the current period might be concealed to some degree by
the unit costs that have been brought forward in the beginning
inventory. The reverse could also be true in that poor cost
control during a period might be concealed somewhat (or
entirely) by the costs of the prior period that have been
brought forward and added in with current period costs.
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162 Introduction to Managerial Accounting, 2nd Edition

Problem 4-16 (90 minutes)
Weighted-Average Method
1. The equivalent units would be:
Materials Labor Overhead
Units
completed
during the
year 635,000 635,000 635,000
Work in
process,
December
31:
30,000 units
× 100% 30,000
30,000 units
× 80% 24,000 24,000
Total
equivalent
units (a) 665,000 659,000 659,000
The costs per equivalent unit would be:
Materials Labor Overhead
Whol
e Unit
Work in
process,
January 1 $ 18,000 $ 9,555 $ 7,644 *
Cost added
during the
year 979,500 616,495 493,196 **
Total costs (b) $997,500 $626,050 $500,840
Cost per EU
(b) ÷ (a) $1.50 + $0.95 + $0.76 = $3.21
* $9,555 × 80% = $7,644
** $616,495 × 80% = $493,196
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Solutions Manual, Chapter 4 163

Problem 4-16 (continued)
2. The amount of cost that should be assigned to the ending
inventories is:
Work in
Process
Finished
Goods Total
Work in process:
Materials:
30,000 units × $1.50 per
unit $45,000 $ 45,000
Labor:
24,000 EU × $0.95 per EU 22,800 22,800
Overhead:
24,000 EU × $0.76 per EU 18,240 18,240
Finished goods:
12,000 units × $3.21 per
unit $38,520 38,520
Total cost that should be
assigned to inventories $86,040 $38,520 $124,560
3. The necessary adjustments would be:
Work in
Process
Finished
Goods Total
Cost that should be assigned
to inventories (above) $86,040 $ 38,520 $ 124,560
Year-end balances in the
accounts 85,000 60,000 145,000
Difference $ 1,040 $(21,480) $(20,440)
Debit Credit
Work in Process Inventory 1,040
Cost of Goods Sold 20,440
Finished Goods 21,480
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164 Introduction to Managerial Accounting, 2nd Edition

Problem 4-16 (continued)
4. The simplest computation of the cost of goods sold would be:
Beginning finished goods inventory........................ 0
Units completed during the year.............................635,000
Units available for sale............................................635,000
Less units in ending finished goods
inventory..............................................................12,000
Units sold during the year.......................................623,000
Cost per equivalent unit (from part 1).....................× $3.21
Cost of goods sold...................................................
$1,999,83
0
Alternative computation:
Total manufacturing cost incurred:
Materials (part 1)..................................................
$ 997,50
0
Labor (part 1)........................................................626,050
Overhead (part 1).................................................500,840
Total manufacturing cost........................................2,124,390
Less cost assigned to inventories (part 2)...............124,560
Cost of goods sold...................................................
$1,999,83
0
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Solutions Manual, Chapter 4 165

Problem 4-17 (120 minutes)
Weighted-Average Method
1. a. Work in Process—Bending Department...................394,210
Work in Process—Drilling Department.....................100,800
Raw Materials..................................................... 495,010
b. Work in Process—Bending Department...................638,144
Work in Process—Drilling Department.....................250,600
Salaries and Wages Payable............................... 888,744
c. Manufacturing Overhead.........................................685,000
Accounts Payable............................................... 685,000
d. Work in Process—Bending Department...................493,584
Manufacturing Overhead.................................... 493,584
Work in Process—Drilling Department.....................189,000
Manufacturing Overhead.................................... 189,000
e. Work in Process—Drilling Department.....................
1,536,99
0
Work in Process—Bending
Department.....................................................
1,536,99
0
f. Finished Goods........................................................
1,650,00
0
Work in Process—Drilling
Department.....................................................
1,650,00
0
g. Accounts Receivable...............................................
2,700,00
0
Sales..................................................................
2,700,00
0
Cost of Goods Sold..................................................
1,600,00
0
Finished Goods...................................................
1,600,00
0
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166 Introduction to Managerial Accounting, 2nd Edition

Problem 4-17 (continued)
2.
Accounts Receivable Raw Materials
(g) 2,700,00
0
Bal. 500,00
0
495,010 (a)
Bal. 4,990
Work in Process
Bending Department
Work in Process
Drilling Department
Bal
.
45,369 1,536,99
0
(e) Bal
.
10,000 1,650,00
0
(f)
(a) 394,210 (a) 100,800
(b) 638,144 (b) 250,600
(d) 493,584 (d) 189,000
Bal
.
34,317 (e) 1,536,9
90
Bal
.
437,390
Finished Goods Manufacturing Overhead
Bal
.
110,000 1,600,00
0
(g) (c) 685,00
0
682,584 (d)
(f) 1,650,00
0
Bal. 2,416
Bal
.
160,000
Accounts Payable Salaries and Wages Payable
685,000 (c) 888,744 (b)
Sales Cost of Goods Sold
2,700,00
0
(g) (g) 1,600,0
00
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Solutions Manual, Chapter 4 167

Problem 4-17 (continued)
3. The production report for the Bending Department follows:
Quantity Schedule and Equivalent Units
Quantit
y
Schedul
e
Units to be accounted for:
Work in process, May 1 (materials 80%
complete, labor and overhead 60%
complete)...........................................................12,000
Started into production.........................................270,000
Total units.............................................................282,000
Equivalent Units (EU)
Material
s Labor
Overhea
d
Units accounted for as follows:
Transferred to Drilling: 273,000 * 273,000 273,000 273,000
Work in process, May 31 (materials 90%
complete, labor and overhead 60%
complete)...........................................................9,000 8,100 5,400 5,400
Total units and equivalent units of
production..........................................................282,000 281,100 278,400 278,400
* 282,000 units – 9,000 units = 273,000 units
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168 Introduction to Managerial Accounting, 2nd Edition

Problem 4-17 (continued)
Costs per Equivalent Unit
Total Cost Materials Labor
Overhea
d
Whol
e Unit
Cost to be accounted for:
Work in process, May 1 $ 45,369 $ 13,385 $ 18,880
$
13,104
Cost added during May 1,525,938 394,210 638,144
493,58
4
Total cost (a) $1,571,307 $407,595 $657,024
$506,68
8
Equivalent units of production
(b) 281,100 278,400 278,400
Cost per EU (a) ÷ (b) $1.45 + $2.36 + $1.82 = $5.63
Cost Reconciliation
Total Equivalent Units (EU)
Cost Materials Labor
Overhea
d
Cost accounted for as follows:
Transferred to Drilling:
273,000; × $5.63 per unit $1,536,990 273,000 273,000 273,000
Work in process, May 31:
Materials, at $1.45 per EU 11,745 8,100
Labor, at $2.36 per EU 12,744 5,400
Overhead, at $1.82 per EU 9,828 5,400
Total work in process 34,317
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Solutions Manual, Chapter 4 169

Total cost $1,571,307
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170 Introduction to Managerial Accounting, 2nd Edition

Problem 4-18 (120 minutes)
Weighted-Average Method
1. a. Work in Process—Drying Department.....................540,460
Work in Process—Salting Department.....................295,000
Raw Materials..................................................... 835,460
b. Work in Process—Drying Department.....................397,970
Work in Process—Salting Department.....................201,000
Salaries and Wages Payable............................... 598,970
c. Manufacturing Overhead.........................................542,000
Accounts Payable............................................... 542,000
d. Work in Process—Drying Department.....................208,170
Work in Process—Salting Department.....................340,000
Manufacturing Overhead.................................... 548,170
e. Work in Process—Salting Department.....................
1,200,00
0
Work in Process—Drying
Department.....................................................
1,200,00
0
f. Finished Goods........................................................
1,980,00
0
Work in Process—Salting
Department.....................................................
1,980,00
0
g. Accounts Receivable...............................................
2,500,00
0
Sales..................................................................
2,500,00
0
Cost of Goods Sold..................................................
1,930,00
0
Finished Goods...................................................
1,930,00
0
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Solutions Manual, Chapter 4 171

Problem 4-18 (continued)
2.
Accounts Receivable Raw Materials
(g) 2,500,00
0
Bal. 850,00
0
835,460 (a)
Bal. 14,540
Work in Process
Drying Department
Work in Process
Salting Department
Bal
.
97,400 1,200,00
0
(e) Bal
.
33,000 1,980,00
0
(f)
(a) 540,460 (a) 295,000
(b) 397,970 (b) 201,000
(d) 208,170 (d) 340,000
Bal
.
44,000 (e) 1,200,0
00
Bal
.
89,000
Finished Goods Manufacturing Overhead
Bal
.
57,000 1,930,00
0
(g) (c) 542,00
0
548,170 (d)
(f) 1,980,00
0
6,170 Bal
.
Bal
.
107,000
Accounts Payable Salaries and Wages Payable
542,000 (c) 598,970 (b)
Sales Cost of Goods Sold
2,500,00
0
(g) (g) 1,930,0
00
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172 Introduction to Managerial Accounting, 2nd Edition

Problem 4-18 (continued)
3. The production report for the Drying Department follows:
Quantity Schedule and Equivalent Units
Quantit
y
Schedul
e
Pounds to be accounted for:
Work in process, December 1 (materials
90% complete, labor and overhead 80%
complete)...........................................................19,000
Started into production.........................................191,000 *
Total pounds.........................................................210,000
Equivalent Units (EU)
Materials Labor Overhead
Pounds accounted for as follows:
Transferred to Salting:..........................................200,000 200,000 200,000 200,000
Work in process, December 31 (materials
100% complete, labor and overhead 50%
complete)...........................................................10,000 10,000 5,000 5,000
Total pounds and equivalent units of
production..........................................................210,000 210,000 205,000 205,000
* (200,000 pounds + 10,000 pounds) – 19,000 pounds = 191,000 pounds started
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Solutions Manual, Chapter 4 173

Problem 4-18 (continued)
Cost per Equivalent Unit
Total Cost
Material
s Labor
Overhea
d
Whol
e Unit
Cost to be accounted for:
Work in process, December
1 $ 97,400 $ 47,540 $ 32,530 $ 17,330
Cost added during December
1,146,60
0 540,460 397,970 208,170
Total cost (a)
$1,244,00
0
$588,00
0
$430,50
0 $225,500
Equivalent units of production
(b) 210,000 205,000 205,000
Cost per EU (a) ÷ (b) $2.80 + $2.10 + $1.10 = $6.00
Cost Reconciliation
Total Cost
Equivalent Units (EU)
Material
s Labor
Overhea
d
Cost accounted for as follows:
Transferred to Salting:
200,000 pounds at $6.00
per pound
$1,200,00
0 200,000 200,000 200,000
Work in process, December
31:
Materials, at $2.80 per EU 28,000 10,000
Labor, at $2.10 per EU 10,500 5,000
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174 Introduction to Managerial Accounting, 2nd Edition

Overhead, at $1.10 per EU 5,500 5,000
Total work in process 44,000
Total cost
$1,244,00
0
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Solutions Manual, Chapter 4 175

Analytical Thinking (90 minutes)
Weighted-Average Method
1. The revised production report follows:
Quantity Schedule and Equivalent Units
Quantity
Schedul
e
Units to be accounted
for:
Work in process,
October 1 (material
100% complete,
conversion 7/8
complete) 8,000
Received from the
preceding
department* 97,000
Total units to be
accounted for 105,000
Equivalent Units (EU)
Transferre
d In
Material
s
Conver-
sion
Units accounted for as
follows:
Transferred to
Stamping
100,00
0 100,000 100,000 100,000
Work in process,
October 31
(material 0%
complete,
conversion 2/5
complete) month 5,000 5,000 — 2,000
Total units accounted
for
105,00
0 105,000 100,000 102,000
*100,000 + 5,000 – 8,000 = 97,000.
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176 Managerial Accounting, 10th Edition

Analytical Thinking (continued)
Costs per Equivalent Unit Total
Cost
Transferre
d In Materials
Conversio
n
Whole
Unit
Cost to be accounted for:
Work in process, October 1
$
22,420 $ 8,820 $ 3,400 $ 10,200
Cost transferred in or added
during the month 205,980 81,480 27,600 96,900
Total cost to be accounted for
(a)
$228,40
0 $ 90,300
$
31,000 $107,100
Equivalent units (b) 105,000 100,000 102,000
Cost per equivalent unit (a) ÷
(b) $0.86 + $0.31 + $1.05 = $2.22
Cost Reconciliation Total Equivalent Units (EU)
Cost
Transferred
In Materials
Conversio
n
Cost accounted for as follows:
Transferred to Stamping:
100,000 units × $2.22 per unit...........................
$222,00
0 100,000 100,000 100,000
Work in process, October 31:
Transferred in cost, at $0.86 per
EU....................................................................4,300 5,000
Conversion, at $1.05 per EU...............................2,100 2,000
Total work in process............................................6,400
Total cost accounted for..........................................
$228,40
0
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Solutions Manual, Chapter 4 177

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

Ethics Case (120 minutes)
 This case is difficult—particularly part 3, which requires
analytical skills.
 Since there are no beginning inventories, it makes no
difference whether the weighted-average or FIFO method is
used by the company. You may choose to assign the problem
specifying that the FIFO method be used rather than the
weighted-average method.
1. The computation of the cost of goods sold follows:
Transferred
In Conversion
Estimated completion 100% 25%
Computation of equivalent
units:
Completed and transferred
out 250,000 250,000
Work in process, ending:
Transferred in,
20,000 units × 100% 20,000
Conversion,
20,000 units × 25% 5,000
Total equivalent units 270,000 255,000
Transferred
In Conversion
Whole
Unit
Cost to be accounted for:
Work in process 0 0
Cost added during the month
$49,221,00
0
$16,320,00
0
Total cost to be accounted for
(a)
$49,221,00
0
$16,320,00
0
Equivalent units (above) (b) 270,000 255,000
Cost per equivalent unit (a) ÷
(b) $182.30 + $64.00
=
$246.30
Cost of goods sold = 250,000 units × $246.30 per unit =
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Solutions Manual, Chapter 4 179

$61,575,000
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180 Managerial Accounting, 10th Edition

Ethics Case (continued)
2. The estimate of the percentage completion of ending work in
process inventories affects the unit costs of finished goods and
therefore of the cost of goods sold. Thad Kostowski would like
the estimated percentage completion figures to be increased
for the ending work in process. The higher the percentage of
completion of ending work in process, the higher the equivalent
units for the period and the lower the unit costs.
3. Increasing the percentage of completion can increase net
operating income by reducing the cost of goods sold. To
increase net operating income by $62,500, the cost of goods
sold would have to be decreased by $62,500 from $61,575,000
down to $61,512,500.
The percentage of completion, X, affects the cost of goods
sold by its effect on the unit cost, which can be determined as
follows:
Unit cost = $182.30 +
And the cost of goods sold can be computed as follows:
Cost of goods sold = 250,000 × Unit cost
Since cost of goods sold must be reduced down to
$61,512,500, the unit cost must be $246.05 ($61,512,500 ÷
250,000 units). Thus, the required percentage completion, X, to
obtain the $62,500 reduction in cost of goods sold can be found
by solving the following equation:
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Solutions Manual, Chapter 4 181

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182 Introduction to Managerial Accounting, 2nd Edition

Ethics Case (continued)
Thus, changing the percentage completion to 30% will
decrease cost of goods sold and increase net operating income
by $62,500 as verified on the next page.
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Solutions Manual, Chapter 4 183

Ethics Case (continued)
3. (continued)
Transferred In Conversion
Estimated completion 100% 30%
Computation of equivalent units:
Completed and transferred out 250,000 250,000
Work in process, ending:
Transferred in, 20,000 units ×
100% 20,000
Conversion, 20,000 units × 30% 6,000
Total equivalent units 270,000 256,000
Transferred In Conversion
Whole
Unit
Cost to be accounted for:
Work in process 0 0
Cost added during the month $49,221,000
$16,320,00
0
Total cost to be accounted for (a) $49,221,000
$16,320,00
0
Equivalent units (above) (b) 270,000 256,000
Cost per equivalent unit (a) ÷ (b) $182.30 + $63.75
=$246.0
5
Cost of goods sold = 250,000 units × $246.05 per unit = $61,512,500
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184 Managerial Accounting, 10th Edition

Ethics Case (continued)
4. Carol is in a very difficult position. Collaborating with Thad
Kostowski in subverting the integrity of the accounting system
is unethical by almost any standard. To put the situation in its
starkest light, Kostowski is suggesting that the production
managers lie in order to get their bonus. Having said that, the
peer pressure to go along in this situation may be intense. It is
difficult on a personal level to ignore such peer pressure.
Moreover, Carol probably prefers not to risk alienating people
she might need to rely on in the future. On the other hand,
Carol should be careful not to accept at face value Kostowski’s
assertion that all of the other managers are “doing as much as
they can to pull this bonus out of the hat.” Those who engage
in unethical or illegal acts often rationalize their own behavior
by exaggerating the extent to which others engage in the same
kind of behavior. Other managers may actually be very
uncomfortable “pulling strings” to make the target profit for
the year.
From a broader perspective, if the net profit figures reported by
the managers in a division cannot be trusted, then the
company would be foolish to base bonuses on the net profit
figures. A bonus system based on divisional net profits
presupposes the integrity of the accounting system. However,
the company should perhaps reconsider how it determines the
bonus. It is quite common for companies to pay an “all or
nothing” bonus contingent on making a particular target. This
inevitably creates powerful incentives to bend the rules when
the target has not quite been attained. It might be better to
have a bonus without this “all or nothing” feature. For example,
managers could be paid a bonus of x% of profits above target
profits rather than a bonus that is a preset percentage of their
base salary. Under such a policy, the effect of adding that last
dollar of profits that just pushes the divisional net profits over
the target profit will add a few pennies to the manager’s
compensation rather than thousands of dollars. Therefore, the
incentives to misstate the net operating income are reduced.
Why tempt people unnecessarily?
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Solutions Manual, Chapter 4 185

Communicating in Practice (30 minutes)
Date: Current Date
To: Minesh Patel
From: Student’s Name
Subject: Production Report
Referring to the Production Report for the Shaping and Milling
Department, please perform the following steps:
1. Ensure that the current balance in the Shaping and Milling
Department Work in Process account is currently $734,675,
which is the total cost to be accounted for in the Cost
Reconciliation section of the Production Report.
2. Prepare the following journal entry for the 4,800 units that
were transferred during the month from the Shaping and
Milling Department to the Graphics Application Department:
Work in Process, Graphics Application.....................715,200
Work in Process, Shaping and Milling................. 715,200
3. After this entry is posted to the ledger, the Shaping and Milling
Department account should have an ending account balance of
$19,475, which is the total Work in Process, May 31 amount
reflected in the Cost Reconciliation section of the Production
Report.
If you have any questions, please do not hesitate to contact me.
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186 Introduction to Managerial Accounting, 2nd Edition

Teamwork In Action
Reports similar to the following should be prepared by the Expert
Teams and shared with the Learning Teams:
a. Quantity Schedule and Equivalent Units
The Quantity Schedule and Equivalent Units section of the
production report: (1) accounts for all of the units that were in
production during the period, and (2) computes the equivalent
units of production. Imagine that you are the manager of a
department in a factory. You are responsible for the units that
pass through your department during the month. This section of
the report summarizes that activity. In addition, it converts the
information to equivalent units.
The “work in process, beginning of the period” represents the
number of units that are sitting in your department when you
arrive at work on the first day of the month. These units were
started last month. During the month, the department just before
yours in the production process will transfer units into your
department (or, if you are the first department in the process, raw
materials will be transferred into your department during the
month). These units are “started into production.” Also, during
the month, your department will work on (or process) units. The
units that have been completely processed are “transferred to the
next department.” It is important to note that the units on hand at
the beginning of the month plus the units that were transferred in
must equal the units that were transferred out plus the units that
were still on hand at the end of the period.
To determine the department’s output for the period, the
equivalent units of production are computed for both materials
and conversion (labor and overhead). The equivalent units of
production are determined by adding the number of completed
units that were transferred to the next department and the
equivalent units that are in the ending work in process inventory.
The number of equivalent units in the ending work in process
inventory is computed by multiplying the number of units on hand
times the percent complete.
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Solutions Manual, Chapter 4 187

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

section determines the amount that will be used in the entry to
transfer units from this department’s work in process account to
the next. This is referred to as
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Solutions Manual, Chapter 4 189