Chap 020

Chapter 20
Process Cost Accounting

QUESTIONS
1. Yes, services can be delivered by processes. For example, Federal Express delivers
parcels by (a) picking them up from the sender, (b) transporting them to Memphis, (c)
sorting them for rerouting, (d) transporting them to their destination cities, and (e)
delivering them to the recipient.
2. The main deciding factor in choosing between a job order costing system or a
process costing system is the type of product or service. Examples where a process
costing system is likely appropriate include chemicals, cleaning fluids, mail
processing, and oil refinement. Examples where a job order costing system is likely
appropriate include home building, tax return preparation, financial planning, legal
services, and consulting. (Hybrid systems are also common.)
3. A materials consumption report is an alternative control document.
4. The main focus in process costing is the production department (process).
5. The journal entries to match cost flows with product flows are primarily the same
between process costing and job order costing. In process costing, the materials flow
into production and direct labor is applied to the product. Also, factory overhead is
measured and applied to each production department. This similarly compares to
each job in job order costing.
6. The computation of equivalent units of production focuses on converting partially
completed units to a measure in terms of completed units. We need to use EUP
because some units of the production process are partially completed at the end of
the accounting period (for example, mail that must still be processed into additional
categories) and we desire some measure of the stage of completion. The stage of
completed units is typically different for direct materials, direct labor, and factory
overhead. For example, toys must still be assembled once all the parts are
completed.
7. The two main methods of process costing are the first-in, first-out (FIFO) and the
weighted-average methods. The FIFO method considers the explicit flow of costs and
activity for a period whereas the weighted-average method considers average flow
of the beginning inventory costs along with the current activity for a period.
Consequently, the information resulting from a FIFO system is likely to be more
accurate and current, whereas the information resulting from a weighted-average
system is slightly distorted (more so if beginning inventories are large and the costs
fluctuate from period to period).
McGraw-Hill Companies, Inc., 2005

Solutions Manual, Chapter 20
355
8. A process cost accounting system treats labor that is used entirely within one
production department as direct labor. The labor may include the software engineer
to control the equipment and the maintenance by persons who work entirely within
that department. The key is that the cost object is the process and not the job.
9. Direct labor costs flow first from the Factory Payroll account to both the Goods in
Process InventoryMixing and the Goods in Process InventoryCutting accounts.
Also, the direct labor in the Goods in Process InventoryMixing account flows to the
Goods in Process InventoryCutting account when the partially processed units are
transferred from mixing to cutting. Finally, the direct labor costs in these accounts
flow to the Finished Goods Inventory and then on to Cost of Goods Sold.
10. After all labor costs have been allocated to Goods in Process Inventory accounts
and/or Factory Overhead, the Factory Payroll account should have a zero balance.
11. Yes, it is possible to have either underapplied or overapplied overhead in a process
cost accounting system. Since the overhead allocation rate is based on predictions
of overhead and other variables such as direct labor, the predicted amounts are not
likely to be exactly equal to the actual amounts incurred.
12. Equivalent units for both direct labor and overhead are the same when overhead
costs are applied based on direct labor. Equivalent units for direct materials differ
from that for direct labor (and overhead) if direct materials and direct labor (and
overhead) are added at different stages in the production process.
13. The four steps in accounting for production activity (for process operations) are: 1)
calculate the physical flow of units, 2) compute equivalent units of production, 3)
compute cost per equivalent units, and 4) prepare a cost reconciliation.
14. The process cost summary serves at least three purposes: (a) to help department
managers control their departments; (b) to help factory managers evaluate
department managers performances; and (c) to provide cost information for the
financial statements. To accomplish these objectives, a process cost summary
describes the costs charged to the department, the equivalent units of production
achieved by the department, and the costs assigned to the output.
15. A typical Krispy Kreme production process for the special order follows:
Incoming
baking
materials
Other
overhead
Raw
materials
inventory
Factory
overhead
Indirect
labor
Labor
cost
Direct baking materials
Indirect
baking
materials
Mixing and
shaping
Raw donuts
Baking
Applied overhead
Direct mixing
labor
Factory
payroll
Donuts to
glazing
Finished
donuts
Donuts
Delivered
Donuts sold
Finished
donuts
Direct
baking
labor
Glazing
Direct
glazing
labor
16. Likely processing steps for the motorcycles include assembling the body, engine,
handlebars, and tires. Additional processing departments would include painting,
testing, quality inspection, and preparing the motorcycles for shipping.

356
Fundamental Accounting Principles, 17th Edition
QUICK STUDIES
Quick Study 20-1 (10 minutes)
1.
2.
3.
4.
5.
Process operation.
Job order operation.
Process operation.
6.
7.
8.
9.
10.

Process operation.
Process operation.
Process operation.
Process operation.

1.
Aug. 31
Goods in Process InventorySewing .........................

287,200
Goods in Process InventoryCutting ...................
287,200
Transfer of goods from cutting to sewing.
2.
Aug. 31

58,200
Raw Materials Inventory ..........................................
58,200
Direct materials used.
3.
Aug. 31

96,000
Factory Payroll ........................................................
96,000
Direct labor incurred.
4.
Aug. 31

96,000
Factory Overhead ...................................................
96,000
Overhead applied.
5.
Aug. 31
Finished Goods Inventory ............................................

102,400
Goods in Process InventorySewing ...................
102,400
Transfer of finished goods to inventory.

Equivalent units under the FIFO method
Units of
EUP for Labor
Product
Beginning goods in process .......... 150,000
Goods started and completed ....... 340,000
Ending goods in process ............... 120,000
Total units ........................................
Percent of
Equivalent
Labor Added
Units
x
25% =
37,500
x
100
= 340,000
x
40
=
48,000
425,500

357

Equivalent units under the weighted-average method
Units of
Percent of
Equivalent
EUP for Labor
Product
Labor Added
Units
Beginning goods in process .......... 150,000 x
100% =
150,000
Goods started and completed ....... 340,000 x
100
=
340,000
Ending goods in process ............... 120,000 x
40
=
48,000
Total units ........................................
538,000

The cost of beginning inventory plus the costs added during the period
should equal the cost of units transferred out plus the cost of ending
inventory.
A hybrid costing system contains features of both process costing and job
order costing. A hybrid system of processes requires a hybrid costing
system to properly cost products or services.
Products or services that might well fit a hybrid costing system would be
those that resemble process operations but that also include varying
degrees of customization. Product examples: cars with custom add-ons;
shirts with custom names on back; high-end courier services; inoculation
programs; and so forth.
EXERCISES
Exercise 20-1 (10 minutes)
1.
2.
3.
4.
F
H
D
A
5.
6.
7.
8.
C
G
B
E

358

1.
Raw Materials Inventory ..............................................

40,000
Accounts Payable ...................................................
40,000
Purchased materials on credit.
2.
Goods in Process InventorySanding .......................

19,000
Goods in Process InventoryPainting .......................
5,000
Raw Materials Inventory ........................................
24,000
Used materials in sanding and painting.
3.
Factory Overhead .........................................................

20,500
Raw Materials Inventory ........................................
20,500
Used indirect materials.
4.
Factory Payroll ..............................................................

75,000
Cash .........................................................................
75,000
Incurred labor costs.
5.

30,000
24,000
Factory Payroll ........................................................
54,000
Used labor in sanding and painting.
6.

21,000
Factory Payroll ........................................................
21,000
Used indirect labor.
7.

24,000
Cash .........................................................................
24,000
Incurred overhead costs.
8.

37,500
18,000
55,500
Applied overhead: Sanding-- $30,000

x 125%; Painting-- $24,000 x 75%.
9.
Goods in Process InventoryPainting ......................

79,900
Goods in Process InventorySanding .................
79,900
Transfer goods from sanding to painting.

359
Exercise 20-2 (Continued)

10.
Finished Goods Inventory ............................................

145,000
Goods in Process InventoryPainting .................
145,000
Transfer goods from painting to finished goods.
11.
Accounts Receivable ....................................................

300,000
Sales .........................................................................
300,000
Sale of goods on credit.
Cost of Goods Sold .......................................................

150,000
Finished Goods Inventory ......................................
150,000
Recorded goods sold.

a. Purchased raw materials on credit at a cost of $26,000.
b. Used direct materials costing $12,000 in Cutting and $9,000 in
Assembly.
c. Used direct labor costing $8,000 in Cutting and $5,000 in Assembly.
d. Incurred total labor costs of $16,000, all of which is paid in cash.
e. Incurred overhead costs of $5,000.
f.
Used indirect materials costing $5,000.
g. Used indirect labor costing $3,000.

h. Applied overhead at the rates of 75% ($6,000/$8,000) of direct labor in
the Cutting Department and 140% ($7,000/$5,000) of direct labor in the
Assembly Department.
i.
Transferred partially completed products with a cost of $30,000 to the

Assembly Department from the Cutting Department.
j.
Transferred completed products with a cost of $44,000 to the finished

goods inventory from the Assembly Department.
k. Sold products on credit for $125,000. Their accumulated cost is

$50,000.

360

1.
Oct. 31
Goods in Process InventoryShredding ...................

40,000
Goods in Process InventoryBagging .......................
460,000
Raw Materials Inventory .........................................
500,000
2.
Oct. 31

45,000
75,000
Factory Payroll ........................................................
120,000
Direct labor used.
3.
Oct. 31

54,000
150,000
204,000
Overhead applied: Shredding-- $45,000
x 120%; Bagging-- $75,000 x 200%.
4.
Oct. 31

145,000
Goods in Process InventoryShredding .............
145,000
Transfer goods from shredding to bagging.
5.
Oct. 31
Finished Goods Inventory ...........................................

403,000
Goods in Process InventoryBagging .................
403,000
Transfer goods from bagging to finished goods.
6.
Oct. 31
Accounts Receivable ....................................................

900,000
Sales ........................................................................
900,000
Sales on credit.
Oct. 31
Cost of Goods Sold ......................................................

300,000
Finished Goods Inventory .....................................
300,000
Record cost of sales.

361

1.
Units in beginning inventory ........................................ 50,000

Units started and completed ........................................ 220,000
Total units transferred to finished goods ................... 270,000
2.
Equivalent units of production (direct materials)FIFO
EUP for Materials

Beginning goods in process ...........
Goods started and completed ........
Ending goods in process ................
Total units .........................................
Units of
Percent
Equivalent
Product
Added
Units
50,000 x
40% =
20,000
220,000 x
100
=
220,000
66,000 x
80
=
52,800
336,000
292,800
Equivalent units of production (direct labor)FIFO

EUP for Labor
Total units .........................................
Units of
Percent
Product
Added
50,000 x
60%
220,000 x
100
66,000 x
30
336,000
Equivalent
Units
=
30,000
=
220,000
=
19,800
269,800

Equivalent units of production (direct materials)Weighted average
Units of
Percent
EUP for materials
Product
Added
Completed goods ............................. 270,000 x
100
66,000 x
80
Total units ......................................... 336,000
Equivalent
Units
=
270,000
=
52,800
322,800
Equivalent units of production (direct labor)Weighted average

Units of
Percent
EUP for labor
Product
Added
Completed goods ............................. 270,000 x
100
66,000 x
30
Total units ......................................... 336,000
Equivalent
Units
=
270,000
=
19,800
289,800

362

1. Cost per equivalent unit of direct materials and direct laborFIFO
Direct
Activities
Materials
Cost assigned to department ............................$700,000
Equivalent units of production .......................... 292,800
Cost per equivalent unit .....................................$
2.39
Direct
Labor
$500,000
269,800
$
1.85
2. Assignment of costs to output of departmentFIFO

Equivalent
Units
Beginning goods in process
Direct materials added ..................
Direct labor added .........................
Total costs to process ...................
Goods started and completed
Total costs transferred out .............
Ending goods in process
Total costs accounted for ...............
Cost
Per Unit
20,000
30,000
$2.39
1.85
220,000
220,000
2.39
1.85
52,800
19,800
2.39
1.85
Total
Allocated Cost
$
47,800
55,500
103,300
525,800
407,000
932,800
_________
1,036,100
126,400*
37,500**
163,900
$1,200,000
* Ending goods in process rounded up to $126,400 so as to equal the $700,000 of direct

materials cost charged to department. [Note: Rounding numbers is common practice
in accounting. In this and all assignments, students can round to balance or they can
simply note the difference in cost due to rounding.]
** Ending goods in process rounded up to $37,500 to equal the $500,000 of direct labor
cost charged to department.

363

1.
Cost per equivalent unit of direct materials and direct labor

weighted-average
Direct
Activities
Materials
Cost assigned to department ............................
$790,000*
Equivalent units of production .......................... 322,800
Cost per equivalent unit .....................................$
2.45
2.
Direct
Labor
$540,000**
289,800
$
1.86
* Cost of direct materials

Direct materials in beginning goods in process
Direct materials added during April
Total direct materials cost
$ 90,000
700,000
$790,000
**Cost of direct labor

Direct labor in beginning goods in process
Direct labor added during April
Total direct labor cost
$ 40,000
500,000
$540,000
Assignment of costs to output of departmentweighted-average

Equivalent
Units
Cost
Per Unit
Goods completed
270,000
270,000
$2.45
1.86

52,800
19,800
2.45
1.86
Total
Allocated Cost
$ 661,500
502,200
1,163,700
128,500*
37,800**
166,300
$1,330,000
* Ending goods in process rounded down to $128,500 so as to equal the $790,000 of

direct materials cost in beginning goods in process plus the cost of direct materials
charged to the department
** Ending goods in process rounded up to $37,800 so as to equal the $540,000 of direct
labor cost in beginning goods in process plus the cost of direct labor charged to the
department

364

1. Beginning inventory is 100% complete with respect to materials.
Ending inventory is 100% complete with respect to materials.
Units of
EUP for Materials
Product
75,000
Goods started and completed ........ 175,000
50,000
Total units ......................................... 300,000
Percent
Added
0%
100
100
Equivalent
Units
0
175,000
50,000
225,000

EUP for Materials
Total units .........................................
Units of
Product
75,000
175,000
50,000
300,000
Percent
Added
50%
100
70
Equivalent
Units
37,500
175,000
35,000
247,500

Units of
EUP for Materials
Product
75,000
Goods started and completed ........ 175,000
50,000
Total units ......................................... 300,000
Percent
Added
50%
100
50
Equivalent
Units
37,500
175,000
25,000
237,500

365

[Note: Solution key is on the following page.]
Punching
Beginning Goods
in Process
$7,500
Direct
Materials
$60,000
Direct
Labor
$12,000
Total costs in process in

punching department
(1) $94,500
Factory
Overhead
$15,000
Ending Goods in
Process
$6,000
Costs transferred
to bending
(2) $88,500
Bending
Beginning Goods
in Process
$9,750
Direct
Materials
(3) $83,250
Direct
Labor
$30,750
Total costs in process in

bending department
$249,150
Factory
Overhead
$36,900
Ending Goods
in Process
$12,750
Costs transferred
to Finished Goods
(4) $236,400
Warehouse
Beginning
Inventory
$18,000
Cost of Goods Available

For Sale
(5) $254,400
Ending
Inventory
(6) $22,500
Cost of Goods
Sold
$231,900

366

Key to solution of flowchart
(1) Beginning Goods in process in punching
Direct materials added
Direct labor added
Factory overhead added
Total manufacturing costs added
Total costs in process in punching department
7,500
$ 60,000
12,000
15,000
87,000
$ 94,500
(2) Total costs in process in punching department

Less ending goods in process
Costs transferred to bending
$ 94,500
6,000
$ 88,500
(3) Beginning goods in process in bending

Total costs added
Total costs in process in bending department
9,750
[?]
$249,150
Total costs added = $249,150 - $9,750 = $239,400

Direct labor added
Factory overhead added
Costs transferred from punching
Total costs added (from above)
[?]
30,750
36,900
88,500
$239,400
= $239,400-$30,750-$36,900-$88,500
= $83,250
(4) Total costs in process in bending department

Costs transferred to finished goods
$249,150
12,750
$236,400
(5) Beginning Finished Goods inventory

Add costs transferred to finished goods
Cost of goods available for sale
$ 18,000
236,400
$254,400
(6) Cost of goods available for sale

Less ending inventory
Cost of goods sold
$254,400
[?]
$231,900
Ending inventory = $254,400 - $231,900 = $22,500

367

SORIANO COMPANY
Process Cost Summary Slicing Department
For Month Ended July 31
COSTS CHARGED TO DEPARTMENT
Direct materials requisitioned ......................................................... $224,000
Direct labor charged .........................................................................
39,000
Overhead allocated (at 200% of direct labor) .................................
78,000
Total processing costs for the month ............................................. 341,000
Goods in process at the beginning of the month ..........................
24,000
Total costs to be accounted for ....................................................... $365,000
UNITS OF
EQUIVALENT UNIT PROCESSING COSTS
Units Processed
Beginning goods in process .........
Units started and completed .........
Ending goods in process ..............
Total ................................................
PRODUCT
1,600
20,000
2,400
24,000
EQUIVALENT UNITS
DIRECT
LABOR &
MATERIALS
0
20,000
2,400
22,400
OVERHEAD
1,200
20,000
1,800
23,000
Total direct materials cost for July ..................................................... $224,000

Direct materials cost per equivalent unit ($224,000/22,400 units) ....... $ 10.00
Total direct labor cost for July ........................................................... $ 39,000
Direct labor cost per equivalent unit ($39,000/23,000 units) ............ $
1.70
Total overhead cost for July ............................................................... $ 78,000
Overhead cost per equivalent unit ($78,000/23,000 units) ............... $
3.39
continued on next page

368
ASSIGNMENT OF COSTS TO OUTPUT OF DEPT
EQUIVALENT
UNITS
Goods in process, June 30, and completed in July

Costs from prior month ...................................
Direct materials added ...................................
0
Direct labor added ........................................... 1,200
Overhead applied ............................................ 1,200
Total costs to process ....................................
Goods started and completed in July

Direct materials added ................................... 20,000
Direct labor added .......................................... 20,000
COST
PER UNIT
$10.00
1.70
3.39
$10.00
1.70
3.39
TOTAL
COST
$ 24,000
0
2,040
4,068
30,108
200,000
34,000
67,800
301,800
________
Total costs transferred to Canning Dept * ........
331,908
Goods in process, July 31

$10.00
1.70
3.39
Total costs accounted for .................................
24,000
3,060
6,102
33,162
$365,070**
* The average cost of a unit of inventory completed during July is:

$331,908/21,600 completed units = $15.37 per unit
** The total cost accounted for is $70 over the $365,000 due to rounding. Another
approach to handling the rounding problem is to assign (plug) $6,032 to the overhead
value as shown in Exercise 20-7.

369
PROBLEM SET A
Problem 20-1A (45 minutes)
Part 1: Cost of goods transferred and cost of goods sold
Weaving
Sewing
Department Department
Finished
Goods
Beginning inventory .................................. $ 300,000 $ 570,000 $1,266,000

Direct materials ..........................................
240,000
75,000
Direct labor ................................................. 1,200,000
360,000
Overhead applied (80% & 150% of labor) ......
540,000
960,000
Total costsWeaving .............................. 2,700,000

Less ending inventoryWeaving ..........
(330,000)
TRANSFERRED TO SEWING (a) ....................... $2,370,000

Total costsSewing ...............................
2,370,000
3,915,000
Less ending inventorySewing ............

TRANSFERRED TO FINISHED GOODS (b) ........
(700,000)
$3,215,000
3,215,000
Less ending inventoryFinished goods ....
(1,206,000)
COST OF GOODS SOLD (c) ............................
$3,275,000
Part 2: Summary journal entries recording transactions.

a.
May 31 Raw Materials Inventory ...............................................
500,000
500,000
Purchased raw materials.
b.
May 31 Goods in Process InventoryWeaving .......................
240,000
75,000
315,000
Used direct materials.
c.
May 31 Factory Overhead ..........................................................
120,000
120,000

370
Problem 20-1A (Continued)

d.
May 31 Factory Payroll ..............................................................
3,060,000
Cash .........................................................................
3,060,000
Incurred payroll cost.
e.
May 31 Goods in Process InventoryWeaving ......................
1,200,000
Goods in Process InventorySewing ........................
360,000
Factory Payroll ........................................................
1,560,00
0
Used direct labor.
f.
1,500,000
Factory Payroll ........................................................
1,500,00
0
g.
156,000
Other Accounts .......................................................
156,000
Incurred other overhead costs.
h.
May 31 Goods in Process InventoryWeaving ......................
960,000
Goods in Process InventorySewing ........................
540,000
Factory Overhead.....................................................
1,500,00
0
Applied overhead using predetermined rates.
i.
May 31 Goods in Process InventorySewing ........................
2,370,000
Goods in Process InventoryWeaving .................
2,370,00
0
Transferred products from weaving to sewing.
j.
May 31 Finished Goods Inventory .............................................
3,215,000
Goods in Process InventorySewing ...................
3,215,00
0
Transferred completed products from

sewing to finished goods inventory.
k.
May 31 Accounts Receivable ....................................................
4,000,000
Sales .........................................................................
4,000,00
0
Sold finished goods.
May 31 Cost of Goods Sold .......................................................

3,275,000
371
3,275,00
0
To record cost of goods sold for May.

372

Part 1
(a) Equivalent units with respect to direct labor
Units of
Product
EUP for Labor

Total units .........................................
Percent
Added
Equivalent
Units
60%
100
25
60,000
475,000
75,000
610,000
Percent
Added
Equivalent
Units
75%
100
25
75,000
475,000
75,000
625,000
100,000
475,000
300,000
875,000
(b) Equivalent units with respect to direct materials

Units of
Product
EUP for Materials

Total units .........................................
100,000
475,000
300,000
875,000
Part 2
Activities
Direct Labor
Cost assigned to department ............................ $1,220,000
Equivalent units of production ..........................
610,000
Cost per equivalent unit ..................................... $
2.00
Direct Materials
$1,875,000
625,000
$
3.00
Part 3: Assignment of costs to output of department

Equivalent
Units

Cost
Per Unit
Total
Cost
75,000
60,000
$3.00
2.00
$ 225,000
120,000
345,000
475,000
475,000
3.00
2.00
1,425,000
950,000
2,375,000
_________
2,720,000
75,000
75,000
3.00
2.00
225,000
150,000
375,000
$3,095,000

373

Part 4
MEMORANDUM
TO:
FROM:
DATE:
RE:
Percentage of Completion Error Analysis
If the units in ending inventory are 60% complete instead of 25% with respect
to labor, the number of equivalent units in ending inventory with respect to
labor is understated, and the total equivalent units produced for the period is
also understated. Since direct materials are added when the process is 50%
complete with respect to labor, the number of equivalent units in the ending
inventory with respect to materials is understated and also the total equivalent
units produced for the period.
If the correct percentage of completion with respect to labor is used, both the
direct labor cost and the direct materials cost per equivalent unit will be
smaller. However, the cost of direct materials and direct labor in ending
goods in process is larger because the percentage of equivalent units
remaining in ending inventory is greater.
Regarding financial statements, this error causes an overstatement of cost of
goods sold and an understatement of net income on the income statement for
November. On the November 30 balance sheet, the goods in process
inventory and retained earnings are understated; therefore total assets, and
equity are also understated.
This error represents a timing concern. Why? If the ending inventory
percentage is correct in December, the understatement in November ending
inventory results in an overstatement in December EUP of beginning
inventory. This type of error is usually immaterial for external financial
reporting purposes.

374

Part 1
a.
Mar. 31 Raw Materials Inventory ................................................
221,120
Accounts Payable ....................................................
221,120
Raw materials purchased.
b.
Mar. 31 Goods in Process InventorySpinning ......................
160,000
Goods in Process InventoryCutting .........................
37,120
197,120
c.
Mar. 31 Factory Overhead...........................................................
40,560
40,560
Indirect materials used.
d.
Mar. 31 Factory Payroll ...............................................................
160,000
Cash ..........................................................................
160,000
Factory payroll costs.
e.
68,000
55,680
Factory Payroll .........................................................
123,680
Direct labor used.
f.
36,320
Factory Payroll .........................................................
36,320
Indirect labor used.
g.
91,640
Other Accounts ........................................................
91,640
Other overhead costs.
h.
85,000
83,520
168,520
Application of overhead.
i.
Mar. 31 Goods in Process InventoryCutting .........................
272,000
Goods in Process InventorySpinning ................
272,000
Transfer goods from spinning to cutting.

375

j.
Mar. 31 Finished Goods Inventory .............................................
445,200
Goods in Process InventoryCutting ...................
445,200
Transfer goods from cutting to finished goods.
k.
Mar. 31 Cash ................................................................................
1,200,000
Sales ..........................................................................
1,200,000
Sales of finished goods. (10,000 x $120)
Mar. 31 Cost of Goods Sold........................................................

530,000
Finished Goods ........................................................
530,000
Cost of goods sold.
Part 2
Equivalent units of production (spinning department)Direct materials
EUP for Materials

Total units .........................................
Units of
Product
Percent
Added
4,000
12,000
8,000
24,000
0%
100
100
Equivalent
Units
0
12,000
8,000
20,000
Direct materials cost per equivalent unit = $160,000 / 20,000 = $8 per unit
Equivalent units of production (spinning dept.)Direct labor and overhead
EUP for Labor and Overhead

Total units .........................................
Units of
Product
Percent
Added
4,000
12,000
8,000
24,000
75%
100
25
Equivalent
Units
3,000
12,000
2,000
17,000
Direct labor cost per equivalent unit = $68,000 / 17,000
= $4 per unit
Overhead cost per equivalent unit = $85,000 / 17,000
= $5 per unit

376

Part 3
Cost of goods in process inventory for the spinning department at month-end
Equivalent
Units
Cost per
Unit
Total
Cost
Direct materials added ....................
8,000
$8.00
$64,000
Direct labor added ...........................
2,000
4.00
8,000
Overhead added ...............................
2,000
5.00
10,000
Total cost ..........................................
$82,000
Part 4
If equivalent units of production for the spinning department's ending
inventory for March are understated, then total equivalent units of
production is also understated. This means the cost per equivalent unit is
overstated and the manager of the spinning department would be paid a
smaller bonus in March than should be the case.
However, because the percentage of completion of the units of production
in beginning inventory is understated, total equivalent units of production
for April are overstated. This means the cost per equivalent unit is
understated and the manager of the spinning department would be paid a
larger bonus than should be the case.
Units transferred to the cutting department are, of course, 100% complete
with respect to production in the spinning department. Since managers are
only responsible for production in their own department, the error has no
impact on the bonus paid to the manager of the cutting department in
March or April.

377

Part 1
Equivalent units of productionMaterials, Labor, and Overhead
Units of
Product

Total units .........................................
30,000
120,000
20,000
170,000
Percent
Added
70%
100
80
Equivalent
Units
21,000
120,000
16,000
157,000
Part 2
RSTN Company
Process Cost Summary
For Month Ended October 31
COSTS CHARGED TO THE DEPARTMENT
Direct materials requisitioned ..................................................

Direct labor charged ..................................................................
Overhead allocated ....................................................................
Total processing costs for the month ......................................
Goods in process at the beginning of the month ...................
Total costs to be accounted for ................................................
UNITS OF
PRODUCT
Units Processed
Beginning goods in process ...................................... 30,000
Units started and completed ...................................... 120,000
Ending goods in process ........................................... 20,000
Total ............................................................................. 170,000
$100,200
400,500
123,000
623,700
40,800
$664,500
EQUIVALENT
UNITS
21,000
120,000
16,000
157,000
Total direct materials cost for October ........................................... $100,200

Direct materials cost per equivalent unit ($100,200/157,000 units) ....... $
0.64
Total direct labor cost for October ................................................. $400,500
Direct labor cost per equivalent unit ($400,500/157,000 units)..... $
2.55
Total overhead cost for October .................................................... $123,000
Overhead cost per equivalent unit ($123,000/157,000 units) ........ $
0.78

378

EQUIVALENT
UNITS
Goods in process, October 1,

and completed in October
Costs from prior month ..................................
Direct materials added ...................................21,000
Direct labor added ..........................................21,000
Overhead applied ............................................21,000
Goods started and completed in October
Direct materials added ...................................
120,000
Direct labor added ..........................................
120,000
Overhead applied ............................................
120,000
COST
PER UNIT
$0.64
2.55
0.78
$0.64
2.55
0.78
TOTAL
COST
$ 40,800
13,440
53,550
16,380
124,170
76,800
306,000
93,600
476,400
________
Total costs transferred to Finished Goods ..........
600,570
Goods in process, Oct. 31

Overhead applied .............................................16,000
Total costs to process .....................................
Total costs accounted for ..................................
$0.64
2.55
0.78
10,240
40,800
12,480
63,520
$664,090*
* Rounding is a common practice in cost reconciliation for process costing. The difference of
$410 ($664,500-$664,090) is due to rounding.
Part 3
Oct. 31 Finished Goods Inventory .............................................
600,570
Goods in Process Inventory ...................................
600,570
Transfer of goods to finished goods inventory.

379

Part 1
Equivalent units of productionDirect Materials
EUP for Materials

Total units .........................................
Units of
Product
3,000
19,200
2,400
24,600
Percent
Added
0%
100
100
Equivalent
Units
0
19,200
2,400
21,600
Equivalent units of productionDirect labor and Overhead

Total units .........................................
Units of
Product
3,000
19,200
2,400
24,600
Percent
Added
60%
100
80
Equivalent
Units
1,800
19,200
1,920
22,920

380

Part 2
VISTA COMPANY
For Month Ended May 31
Direct materials requisitioned ..................................................

Direct labor charged ..................................................................
Overhead allocated ....................................................................
Total processing costs for the month ......................................
Goods in process at the beginning of the month ...................
Total costs to be accounted for ................................................
UNITS OF
PRODUCT
Units Processed
Beginning goods in process ............................ 3,000
Units started and completed ............................19,200
Ending goods in process ................................. 2,400
Total ...................................................................24,600
$ 496,800
1,185,600
948,480
2,630,880
181,320
$2,812,200
EQUIVALENT UNITS
DIRECT
LABOR &
MATERIALS
OVERHEAD
0
19,200
2,400
21,600
1,800
19,200
1,920
22,920
Total direct materials cost for May ......................................................

$ 496,800
Direct materials cost per equivalent unit ($496,800/ 21,600 units) ............
$
23.00
Total direct labor cost for May.............................................................
$1,185,600
Direct labor cost per equivalent unit ($1,185,600/22,920 units) .................
$
51.73
Total overhead cost for May ................................................................
$ 948,480
Overhead cost per equivalent unit ($948,480/22,920 units)........................
$
41.38

381

EQUIVALENT
UNITS
COST
PER UNIT
TOTAL
COST
Goods in process, May 1, and completed in May
Costs from prior month ...................................

Direct materials added ....................................
0
$ 181,320
0
$51.73
93,114
41.38
74,484
348,918
Goods started and completed in May

$23.00
51.73
41.38
441,600
993,216
794,496
2,229,312
_________
2,578,230
$23.00
51.73
41.38
55,200
99,322
79,450
233,972
Total costs transferred to finished goods ...............
Goods in process, May 31

Overhead applied ............................................. 1,920
$2,812,202*
* Rounding is a common practice in cost reconciliation for process costing. The total rounding
difference is $2 ($2,812,202-$2,812,200).
Part 3
2,578,230
2,578,23
0
Transfer of goods to finished inventory.
Part 4
4a. Two major estimates are: i) percentage of dollars allocated to overhead, and
ii) percentage of completion for materials, labor, and overhead.
4b. Management might try to assign the least amount of overhead applied to their
respective production process, and we might anticipate underestimation of
the percentage of completion. If materials are added at the beginning of the
process, then this number is difficult to manage. More typically,
management might try to underestimate the percentage complete because
this reduces the equivalent units for labor and overhead. This results in
lowering the dollar value assigned to these components of ending inventory.
382
PROBLEM SET B
Problem 20-1B (45 minutes)
Part 1: Cost of goods transferred and cost of goods sold
Molding
Beginning inventory ...........................................$ 12,000
Direct materials ...................................................
Assembly
Finished
Goods
$ 66,000 $ 78,000
6,000
54,000
Direct labor .......................................................... 100,000
75,000
Overhead applied (80% and 75% of labor) ....... 80,000
56,250
Total costsMolding ........................................ 198,000

Less ending inventoryMolding .................... (21,000)
TRANSFERRED TO ASSEMBLY (a) ............................$177,000
177,000
Total costsAssembly ....................................
428,250
Less ending inventoryAssembly .................
(54,000)
TRANSFERRED TO FINISHED GOODS (b) ...................
$374,250
374,250
Less ending inventoryFinished goods .......
(99,000)
COST OF GOODS SOLD (c) .......................................
$353,250
Part 2: Summary journal entries for manufacturing activities

a.
June 30 Raw Materials Inventory ...............................................
100,000
100,000
Purchased raw materials.
b.
June 30 Goods in Process InventoryMolding ........................
6,000
Goods in Process InventoryAssembly ....................
54,000
60,000
Used direct materials.
c.
June 30 Factory Overhead .........................................................
21,000
21,000

383
Problem 20-1B (Continued)

d.
June 30 Factory Payroll ..............................................................
200,000
Cash .........................................................................
200,000
Incurred payroll cost.
e.
100,000
75,000
Factory Payroll ........................................................
175,000
Used direct labor.
f.
25,000
Factory Payroll ........................................................
25,000
g.
50,000
Other Accounts .......................................................
50,000
Incurred other overhead costs.
h.
80,000
56,250
Factory Overhead ....................................................
136,250
Applied overhead to departments using rates.
i.
June 30 Goods in Process InventoryAssembly ....................
177,000
Goods in Process InventoryMolding ..................
177,000
Transferred goods from molding to assembly.
j.
June 30 Finished Goods Inventory ............................................
374,250
Goods in Process Inventory
Assembly ........................................................................
374,250
Transferred completed products to

finished goods inventory.
k.
June 30 Accounts Receivable ....................................................
500,000
Sales ........................................................................
500,000
Sold finished goods.
June 30 Cost of Goods Sold .......................................................

353,250
353,250
To record cost of goods sold for June.

384

Part 1
(a) Equivalent units with respect to direct labor
Units of
Product
EUP for Labor

Total units .........................................
Percent
Added
9,000
31,000
4,000
44,000
Equivalent
Units
0%
100
50
0
31,000
2,000
33,000
(b) Equivalent units with respect to direct materials

Units of
Product
EUP for Materials

Total units .........................................
9,000
31,000
4,000
44,000
Percent
Added
Equivalent
Units
40%
100
25
3,600
31,000
1,000
35,600
Part 2
Activities
Direct Labor Direct Materials
Cost assigned to department ............................ $990,000
$356,000
Equivalent units of production ..........................
33,000
35,600
Cost per equivalent unit ..................................... $
30
$
10
Part 3: Assignment of costs to output of department
Equivalent
Units

Cost
Per Unit
Total
Cost
3,600
0
$10
30
36,000
0
36,000
31,000
31,000
10
30
310,000
930,000
1,240,000
_________
1,276,000
1,000
2,000
10
30
10,000
60,000
70,000
$1,346,000

385

Part 4
MEMORANDUM
TO:
FROM:
DATE:
RE:
If the units in ending inventory are 75% complete instead of 25% with respect
to materials, the number of equivalent units in the ending inventory with
respect to materials is understated and the total equivalent units produced for
the period are also understated. Since one-half of the direct labor is added
when the process is 50% complete with respect to materials, the number of
equivalent units in the ending inventory with respect to labor is understated
by 50% and the total equivalent units produced for the period is also
understated.
If the correct percentage of completion with respect to materials is used, both
the direct labor cost and the direct materials cost per equivalent unit are
smaller. However, both ending inventories are assigned a larger portion of
September's costs because the percentage of equivalent units produced
during the period remaining in ending inventory is greater.
Regarding financial statements, the error causes an overstatement of cost of
goods sold and an understatement of net income on the income statement for
September. On the September 30 balance sheet, the goods in process
inventory and retained earnings are understated; so also total assets and
equity.
Assuming the correct ending balance in October, this error reverses in the
following period.

386

Part 1
a.
May 31 Raw Materials Inventory ................................................
500,000
Accounts Payable ....................................................
500,000
Raw materials purchased.
b.
May 31 Goods in Process InventoryTooling .........................
248,200
Goods in Process InventoryMachining ....................
178,200
426,400
c.
May 31 Factory Overhead...........................................................
101,600
101,600
Indirect materials used.
d.
May 31 Factory Payroll ...............................................................
400,000
Cash ..........................................................................
400,000
Factory payroll costs.
e.
318,000
35,640
Factory Payroll .........................................................
353,640
Direct labor used.
f.
46,360
Factory Payroll .........................................................
46,360
Indirect labor used.
g.
50,520
Other Accounts ........................................................
50,520
Other overhead costs.
h.
127,200
71,280
198,480
Application of overhead.
i.
May 31 Goods in Process InventoryMachining ....................
720,000
Goods in Process InventoryTooling ...................
720,000
Transfer goods from tooling to machining.

387

j.
1,024,800
1,024,800
Transferring completed products to

finished goods inventory.
k.
May 31 Cash ................................................................................
1,600,000
Sales ..........................................................................
1,600,000
Sales of finished goods.
May 31 Cost of Goods Sold........................................................

1,000,400
Finished Goods ........................................................
1,000,400
Cost of goods sold.
Part 2
Equivalent units of production (tooling)Direct materials
EUP for Materials

Total units .........................................
Units of
Product
Percent
Added
40,000
120,000
20,000
180,000
20%
100
90
Materials cost per equivalent unit = $248,200 / 146,000
Equivalent
Units
8,000
120,000
18,000
146,000
= $1.70 per unit
Equivalent units of production (tooling)Direct labor and overhead


Total units .........................................
Units of
Product
Percent
Added
40,000
120,000
20,000
180,000
60%
100
75
Equivalent
Units
24,000
120,000
15,000
159,000
Labor cost per equivalent unit = $318,000 / 159,000
= $2.00 per unit
Overhead cost per equivalent unit = $127,200 /159,000
= $0.80 per unit

388

Part 3
Cost of goods in process inventory for the tooling department at month-end
Equivalent
Units
Cost per
Unit
Total
Cost
Direct materials added .................... 18,000
$1.70
$30,600
Direct labor added ........................... 15,000
2.00
30,000
Overhead added ............................... 15,000
0.80
12,000
Total cost ..........................................
$72,600
Part 4
If equivalent units of production for the tooling department's ending
inventory for May are overstated, total equivalent units of production is
also overstated. This means the cost per equivalent unit is understated
and the manager of the tooling department is paid a larger bonus in May
than should be the case.
However, in June, because the percentage of completion of the units of
production in beginning inventory is overstated, total equivalent units of
production for the period is understated. This means the cost per
equivalent unit is overstated and the manager of the tooling department is
paid a smaller bonus than should be the case.
The units transferred to the machining department are 100% complete with
respect to production in the tooling department. Since managers are only
responsible for production in their own department, the error has no
impact on the bonus paid to the manager of the machining department in
May or June.

389

Part 1
Equivalent units of productionLabor, Materials, and Overhead
Units of
Product

Total units .........................................
7,500
92,500
12,000
112,000
Percent
Added
20%
100
25
Equivalent
Units
1,500
92,500
3,000
97,000
Part 2
OXFORD COMPANY
For Month Ended November 30
Direct materials requisitioned ...................................................... $ 115,000

Direct labor charged ......................................................................
425,000
Overhead allocated ........................................................................
600,000
Total processing costs for the month .......................................... 1,140,000
Goods in process at the beginning of the month .......................
70,000
Total costs to be accounted for .................................................... $1,210,000
UNITS OF
PRODUCT
Units Processed
Beginning goods in process ........................................... 7,500
Units started and completed ........................................... 92,500
Ending goods in process ................................................ 12,000
Total .................................................................................. 112,000
EQUIVALENT
UNITS
1,500
92,500
3,000
97,000
Total direct materials cost for November ........................................ $115,000

Direct materials cost per equivalent unit ($115,000/97,000 units) ...... $
1.19
Total direct labor cost for November ................................................ $425,000
Direct labor cost per equivalent unit ($425,000/97,000 units)......... $
4.38
Total overhead cost for November.................................................... $600,000
Overhead cost per equivalent unit ($600,000/97,000 units) ............ $
6.19

390

EQUIVALENT
UNITS
COST
PER UNIT
TOTAL
COST
Goods in process, Nov. 1, and completed in

November
Costs from prior month ..................................

$
$1.19
4.38
6.19
70,000
1,785
6,570
9,285
87,640
Goods started and completed in November

$1.19
4.38
6.19
110,075
405,150
572,575
1,087,800
_________
1,175,440
$1.19
4.38
6.19
3,570
13,140
18,570
35,280
$1,210,720*
Total costs transferred to Finished goods ..............

Goods in process, Nov. 30

Overhead applied ............................................. 3,000
* The $720 ($1,210,720-$1,210,000) difference is due to rounding the cost per equivalent unit.
Part 3
Nov. 30 Finished Goods Inventory .............................................
1,175,440
1,175,44
0
Transfer of goods to finished goods inventory.

391

Part 1
Equivalent units of productionDirect Materials
EUP for Materials

Total units .........................................
Units of
Product
10,000
100,000
20,000
130,000
Percent
Added
25%
100
50
Equivalent
Units
2,500
100,000
10,000
112,500
Equivalent units of productionDirect Labor and Overhead

Total units .........................................
Units of
Product
10,000
100,000
20,000
130,000
Percent
Added
40%
100
30
Equivalent
Units
4,000
100,000
6,000
110,000

392

Part 2
ROADRUNNER COMPANY
For Month Ended January 31
Direct materials requisitioned .........................................................

Direct labor charged .........................................................................
Overhead allocated ...........................................................................
Total processing costs for the month .............................................
Goods in process at the beginning of the month ..........................
Total costs to be accounted for .......................................................
UNITS OF
PRODUCT
Units Processed
Beginning goods in process ............................10,000
Units started and completed ............................
100,000
Ending goods in process .................................20,000
Total ...................................................................
130,000
$ 56,250
88,000
220,000
364,250
20,550
$384,800
EQUIVALENT UNITS
DIRECT
LABOR &
MATERIALS
OVERHEAD
2,500
100,000
10,000
112,500
4,000
100,000
6,000
110,000
Total direct material costs for January ............................................ $ 56,250

Direct materials cost per equivalent unit ($56,250/ 112,500 units) ......... $
0.50
Total direct labor cost for January .................................................... $ 88,000
Direct labor cost per equivalent unit ($88,000/ 110,000 units) ................ $
0.80
Total overhead cost for January ....................................................... $220,000
Overhead cost per equivalent unit ($220,000/ 110,000 units) ................. $
2.00

393

EQUIVALENT
UNITS
COST
PER UNIT
TOTAL
COST
$0.50
0.80
2.00
$ 20,550
1,250
3,200
8,000
33,000
Goods in process, Jan. 1, and completed in Jan.
Costs from prior month .....................................

Direct materials added ......................................2,500
Direct labor added ............................................4,000
Overhead applied ..............................................4,000
Total costs to process ......................................
Goods started and completed in January
Direct materials added .....................................

100,000
Direct labor added ............................................
100,000
Overhead applied ..............................................
100,000
Total costs to process ......................................
$0.50
0.80
2.00
________
Total costs transferred to finished goods

(unit cost = $363,000/110,000 units = $3.30) ............
Goods in process, Jan. 31

Direct materials added .....................................
10,000
Direct labor added ............................................6,000
Overhead applied ...............................................6,000
Total costs to process .......................................
Total costs accounted for ....................................
50,000
80,000
200,000
330,000
363,000
$0.50
0.80
2.00
5,000
4,800
12,000
21,800
$384,800
Part 3
Jan. 31 Finished Goods Inventory .............................................
363,000
363,000
To transfer goods to finished goods inventory.
Part 4
4a. The two major estimates are: i) percentage of dollars allocated to overhead,
and ii) percentage of completion for materials, labor, and overhead.
4b. Management might try to assign the least amount of overhead applied to their
respective production process, and we might anticipate underestimation of
the percentage of completion. If materials are added at the beginning of the
process, then this number is difficult to manage. More typically,
management might try to underestimate the percentage complete because
this reduces the equivalent units for labor and overhead. This results in
lowering the dollar value assigned to these components of ending inventory.

394
COMPREHENSIVE PROBLEM
Comprehensive Problem, Corked Bat Company (110 minutes)
[Note: General Ledger accounts are shown in Part 4.]
Part 1
July journal entries
a.
Raw Materials Inventory ..............................................

125,000
Cash..........................................................................
125,000
Purchased raw materials for cash.
b.
Goods in Process InventoryDept. 1 .........................

30,000
22,440
10,000
62,440
To record use of raw materials.
c.
Factory Payroll .............................................................

227,250
Cash .........................................................................
227,250
Paid factory payroll with cash.
d.

135,000
67,250
25,000
Factory Payroll .......................................................
227,250
To record direct and indirect labor.
e.

80,000
Cash .........................................................................
80,000
Paid other overhead with cash.
f.

67,500
33,625
101,125
Allocated overhead at 50% of direct labor.

395
Comprehensive Problem (Continued)

Part 2
Equivalent units and per unit costs
(a)
DEPARTMENT 1
Direct materials
EUP for Materials
Total
Units of
Percent Equivalent
Product
Added
Units
500
0%
0
2,000
100
2,000
1,000
100
1,000
3,500
3,000
Cost per unit = $30,000 (from 1b) / 3,000 units
= $10
Direct labor
EUP for Labor
Total
Units of
Percent Equivalent
Product
Added
Units
500
80%
400
2,000
100
2,000
1,000
30
300
3,500
2,700
Cost per unit = $135,000 (from 1d) / 2,700 units
= $50
Overhead
EUP for Overhead
Total
Units of
Percent Equivalent
Product
Added
Units
500
80%
400
2,000
100
2,000
1,000
30
300
3,500
2,700
Cost per unit = $67,500 (from 1f) / 2,700 units
= $25

396

(b)
DEPARTMENT 2
Direct materials
EUP for Materials
Total
Units of
Percent Equivalent
Product
Added
Units
1,000
0%
0
1,800
100
1,800
1,600
100
1,600
4,400
3,400
Cost per unit = $22,440 (from 1b) / 3,400 units
= $6.60
Direct labor
EUP for Labor
Total
Units of
Percent Equivalent
Product
Added
Units
1,000
25%
250
1,800
100
1,800
1,600
40
640
4,400
2,690
Cost per unit = $67,250 (from 1d) / 2,690 units
= $25
Overhead
EUP for Overhead
Total
Units of
Percent Equivalent
Product
Added
Units
1,000
25%
250
1,800
100
1,800
1,600
40
640
4,400
2,690
Cost per unit = $33,625 (from 1f) / 2,690 units
= $12.50

397

Part 3
[Note: Computations on this page, journal entries on following page.]
a. Cost of units transferred from Department 1 to Department 2

Equivalent
Units
Cost
per unit
Total
Cost
Costs from prior period (given) ...........................................

Direct materials added .........................................................
0
$ 10
Direct labor added ................................................................
400
50
Overhead applied ..................................................................
400
25
Total costs to process ..........................................................
$ 65,000
0
20,000
10,000
95,000

2,000
$ 10
2,000
50
2,000
25
Total goods transferred from Dept 1 to Dept 2
20,000
100,000
50,000
170,000
$265,000
b. Cost of units transferred from Department 2 to Finished Goods

Equivalent
Units
Cost
Per Unit
Total
Cost
Costs from prior period (given) ..........................................

0
$6.60
250
25.00
250
12.50
$ 25,000
0
6,250
3,125
34,375
Department 1 costs transferred in ......................................

(part a)
1,800
$6.60
1,800
25.00
1,800
12.50
Total goods transferred from Dept 2 to Finished Goods
265,000
11,880
45,000
22,500
344,380
$378,755

398

Part 3 Journal entries
g.

265,000
Goods in Process InventoryDept. 1 ...................
265,000
Transferred goods from Dept. 1 to Dept. 2.
h.
Finished Goods Inventory ...........................................

378,755
Goods in Process InventoryDept. 2 ...................
378,755
Transferred goods from Dept. 2 to

Finished Goods.
i.
Cash................................................................................
625,000
Sales .........................................................................
625,000
Sold finished goods for cash.
Cost of Goods Sold ......................................................

265,700
Finished Goods ......................................................
265,700
Transferred cost from finished goods

to cost of goods sold.

399

Part 4
General ledger accounts
Date
June 30
(a)
(b)
Raw Materials Inventory

Explanation
Debit
Balance
Purchases
125,000
Usage
Acct. No. 132

Credit
Balance
25,000
150,000
62,440
87,560
Goods in Process Inventory - Department 1

Acct. No. 133
Date
Explanation
Debit
Credit
Balance
June 30 Balance
65,000
(b)
Direct materials
30,000
95,000
(d)
Direct labor
135,000
230,000
(f)
Overhead allocation
67,500
297,500
(g)
Transfer to Dept. Two
265,000
32,500
Date
June 30
(b)
(d)
(f)
(g)
(h)
Goods in Process Inventory - Department 2

Acct. No. 134
Explanation
Debit
Credit
Balance
Balance
25,000
Direct materials
22,440
47,440
Direct labor
67,250
114,690
Overhead allocation
33,625
148,315
Transfer in from Dept. 1
265,000
413,315
Transfer to Finished Goods
378,755
34,560
Date
June 30
(h)
(i)
Finished Goods Inventory

Acct. No. 135
Explanation
Debit
Credit
Balance
Balance
110,000
Transfer in from Dept. 2
378,755
488,755
July sales
265,700
223,055

400

Part 4concluded
Sales
Debit
Date
(i)
Explanation
July sales
Date
(i)
Cost of Goods Sold

Explanation
Debit
July sales
265,700
Date
(c)
(d)
Factory Payroll
Explanation
Debit
July costs
227,250
Allocation
Date
(b)
(d)
(e)
(f)
Factory Overhead
Explanation
Debit
Indirect materials
10,000
Indirect labor
25,000
Other overhead costs
80,000
Overhead application
Acct. No. 413

Credit
Balance
625,000
625,000
Credit
Acct. No. 502

Balance
265,700
Acct. No. 530

Balance
227,250
227,250
0
Credit
Acct. No. 540

Credit
Balance
10,000
35,000
115,000
101,125
13,875
Part 5
Computation of gross profit for July
Sales ............................................................. $ 625,000
Cost of goods sold* .................................... (279,575)
Gross profit.................................................. $ 345,425
* $279,575 = $265,700 + $13,875 (underapplied overhead)

401
Reporting in Action
BTN 20-1
Instructor note: This problem is designed to show that important internal estimates are not always
important to external users of financial information.
1.
Account
2003 Error
2002 Error
Work-in-process $23,400 overstated

(computed as $234,000 x 0.10)
inventory
$4,200 understated
Net income
An overstated ending
inventory value means
cost of goods sold is
understated and income
is overstated.
An understated ending
inventory value means
cost of goods sold is
overstated and income is
understated.
The impact is overpaid

tax by $9,360 (.40 x
$23,400), and overstated
income by $14,040
($23,400 - $9,360).
The impact is underpaid

tax by $1,680 (.40 x
$4,200), and understated
income by $2,520 ($4,200 $1,680).
(computed as $28,000 x 0.15)
2.
2003 Error
Percent change
to net income
$14,040/$33,478,000 =
0.04% overstatement
2002 Error
$2,520/$26,378,000 =
0.01% understatement
3. The percent change to net income in both years is small. It is unlikely

that an error of this magnitude would alter a decision of an external user
of financial information. This implies that these particular estimation
errors are likely immaterial. It also shows why external users of
financial information accept reasonable estimates from managerial and
financial accountants in their preparation of financial reports.
4. The solution depends on the data obtained. Note: The percent change is
likely to yield an immaterial impact on the financial statements. This means the
answers should be similar to those above.

402
Comparative Analysis
BTN 20-2
1.
Krispy Kreme
Current Year
Prior Year
COGS /
$381,489/
Total
$410,386
expenses
= 93%
$316,946*/
$344,508
= 92%
Tastykake
Current Year
Prior Year
$111,187/
$156,170
= 71%
$103,297/
$146,533
= 70%
*Krispy Kreme uses the label of operating expenses to denote cost of goods sold.
2. These companies appear to exhibit dissimilar cost structures. The

percentages indicate that Krispy Kreme spends much more for
production as a percent of total expenses than Tastykake.
Ethics Challenge
BTN 20-3
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Instructor note: The students solution will vary depending on the industry, product, and process
chosen. It will also depend on the sources obtained.
The memorandum should initially identify an industry (say, steel), a product

(say, cans), and a process (say, forming).
Generally, there are at least three approaches to maintaining and expanding
ones knowledge about a particular industry, product, and processstudents
are likely to have additional insights.
(1) First, the professional should read a quality trade journal in the selected
industry. Another useful part of this first step is to access companies and
other related Websites for further introductory information.
(2) The second step is to join an industry organization, such as a local society
of steel equipment engineers. This would involve active participation
including meetings, committees, and so forth.
(3) The third step is to learn as much as one can from the management and
employees producing the product once one is engaged on a project. This
would include spending time on the shop floor and become involved as a
team member of, for example, product development.

403
Communicating in Practice
BTN 20-4
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
The main focus of this memorandum should be to explain the difference

between determining direct and indirect costs in a job order versus a
process cost accounting system since this appears to be the primary
source of confusion. In addition to the memorandums content, the
instructor should look for a students ability to be diplomatic in the
communication.
Points the memorandum should make include:
1. The reason for the assistants confusion. Given the assistants
experience in a job order system, it is likely s/he views the process
from that perspective. From a job order perspective, the costs s/he
identified would have been classified as indirect product costs.
2. Since your company does not limit production to specific batches of
product but rather continuously produces homogeneous products, you
need to point out that you use a different system (process costing).
3. It is important to recognize that the cost object is the process, not the
job. If costs are traceable to the cost object, they are direct cost.
4. In job order cost accounting, materials and labor used exclusively on
specific jobs are charged to the jobs as direct costs. Materials and
labor that contribute to manufacturing but are not directly associated
with specific jobs are indirect costs and are allocated to jobs as
manufacturing overhead.
5. A process cost accounting system uses the concepts of direct and
indirect manufacturing costs. Materials and labor that are directly
associated with specific manufacturing processes are assigned to
those processes as direct costs.
6. Some costs classified as manufacturing overhead in a job order system
can be classified as direct costs in process cost accounting. For
example, depreciation of a machine used entirely by one process is a
direct cost of that process.

404
Taking It to the Net
BTN 20-5
1. Some common business processes in a manufacturing firm include:

Procurement: Securing the materials and equipment necessary to
produce goods or services.
Product development: Planning new goods or services for customers
or refining existing products.
Production: Creating those goods or services.
Order delivery: Receiving orders from customers and ensuring that
those orders are fulfilled.
Distribution: Ensuring smooth distribution of goods to customers.
Customer support: Providing assistance to customers after they've
bought your product or service.
2. The QPR software process guide can be a useful tool to management. It
can provide information about different processes such that
management can evaluate the processes in terms of their efficiencies.
The cost control guide can add to the process guide by providing
accurate cost information for individual processes which can further
help management assess the efficiencies of individual processes. This
information can be used by management to determine the processes
that need improvement and to prioritize the processes that need
attention.

405
Teamwork in Action
BTN 20-6
Each member of the team should participate in the activity to improve and
reinforce his/her understanding of the entries that correspond to Exhibit
20.5. (Note: The entries below are pro forma entries since information for
amounts are not provided in this activity.)
1.
Raw Materials Inventory ............................................... #

Purchased materials on credit.
2.
Goods in Process InventoryGrinding ...................... #

Goods in Process InventoryMixing.......................... #
To assign costs of direct materials

used in production departments.
3.
Factory Overhead .......................................................... #

To record indirect materials used.
4.
Factory Payroll ............................................................. #

Cash .........................................................................
To record factory wages incurred.
5.

Factory Payroll ........................................................
To assign costs of direct labor used in

the grinding and mixing departments.
6.
Factory Overhead .......................................................... #

Factory Payroll ........................................................
To record indirect labor as overhead.
7.
Factory Overhead ......................................................... #

Prepaid Insurance ..................................................
Accrued Utilities Payable ......................................
Cash..........................................................................
Accum. DepreciationFactory Equip ...................
#
#
#
#
To record manufacturing overhead incurred.

406
Teamwork in Action (Continued)

8.

Factory Overhead ....................................................
Allocated factory overhead costs to

the grinding department at X% of
direct labor cost and to the mixing
department at Y% of direct labor cost.
9a.

Goods in Process InventoryGrinding .....................
To record transfer of partially completed

goods from the grinding department to
mixing department.
9b.
Finished Goods Inventory ............................................ #

Goods in Process InventoryMixing....................
To record the transfer of completed

goods from the mixing department to the
finished goods department.
10.
Cost of Goods Sold ....................................................... #

To record cost of goods sold.

407
Business Week Activity
BTN 20-7
1. Examples of goods that are now being customized to consumers tastes

include:
M & M chocolate candies
Cosmetics
Hamburgers
Fighter-pilot visors
Candles
Athletic shoes
Furniture
Food such as cereal and coffee
Athletic equipment (golf clubs and hockey sticks)
2. Factory retooling costs can be significant. Initial offerings may be
somewhat limited given the costs involved with customization. It is
nearly impossible to customize tastes. It is difficult, for example, for
consumers to articulate and define their preferences in tastes. Pricing
can also be challenging as consumers may not be willing to pay $10 per
box for cereal even if it has been customized to their tastes. Products
that have simple designs and shapes have an edge in the mass
customization market.
3. The internet is probably the single greatest innovation that has
encouraged the new trend toward mass customization.
Entrepreneurial Decision
BTN 20-8
As an entrepreneur, Buchanan should first identify the main characteristics

of his business that distinguish it from competitors. The processes
associated with these characteristics should be retained because these are
the ones that can provide him with a competitive advantage in the
marketplace.
Next, Buchanan should assess which processes are being carried out
efficiently and which are not. The efficient ones might be effectively
retainedeven if they are not the ones that distinguish his firm from
competitors.
Finally, the other processesthat is, the secondary ones and those that
are being inefficiently carried outare good candidates for outsourcing.

408
Hitting the Road
BTN 20-9
This assignment is designed to help students identify specific costs in a

service process costing system. The answers should be unique for each
student. Below are a few suggestions. This problem is also a review of
cost classifications.
Cost
description
Direct
Material
Manual
sorting
Direct
Labor
X
Heating and
cooling
Manually
moving mail
within
department
Overhead
Variable
cost
Fixed
cost
X
X
X
X
If hired on Full time

a temp. labor under
contract.
basis
Manually
moving mail
between
departments
Sorting
equipment
Rentals
If hired on Full time

a temp. labor under
contract
basis
Overhead allocation suggestions:

Not all components should be allocated the same. Some examples:
Heating cost can be allocated on square footage.
Rent cost on the value of floor space occupied.

409
Global Decision
BTN 20-10
1. Ratio of Cost of Goods Sold to Total Expenses

Current Year
Grupo Bimbo ................19,155,865 / 38,376,468
= 50%
Prior Year
15,707,809 / 31,523,855
= 50%
Current Year
Krispy Kreme ................ $381,489 / $410,386
= 93%
Prior Year
$316,946 / $344,508
= 92%
Current Year
Tastykake ...................... $111,187 / $156,170
= 71%
Prior Year
$103,297 / $146,533
= 70%
2. Each of the three companies exhibits amazing consistency year-to-year

with this ratio. However, the companies have very dissimilar cost
structures, with Grupo Bimbo expending the least on costs of goods
sold as a percentage of total expenses, and Krispy Kreme expending the
most.

410

Chap 020

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Chap 020

Diunggah oleh

Hak Cipta:

Format Tersedia

Chapter 20

Process Cost Accounting

McGraw-Hill Companies, Inc., 2005

Direct baking materials

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Job order operation.

Quick Study 20-2 (15 minutes)

Goods in Process InventorySewing .........................

Transfer of goods from cutting to sewing.

Goods in Process InventorySewing .........................

Direct materials used.

Goods in Process InventorySewing .........................

Direct labor incurred.

Goods in Process InventorySewing .........................

Finished Goods Inventory ............................................

Transfer of finished goods to inventory.

Quick Study 20-3 (10 minutes)

McGraw-Hill Companies, Inc., 2005

Quick Study 20-4 (10 minutes)

Quick Study 20-5 (5 minutes)

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Exercise 20-2 (25 minutes)

Raw Materials Inventory ..............................................

Purchased materials on credit.

Goods in Process InventorySanding .......................

Used materials in sanding and painting.

Factory Overhead .........................................................

Used indirect materials.

Factory Payroll ..............................................................

Incurred labor costs.

Goods in Process InventorySanding .......................

Used labor in sanding and painting.

Factory Overhead .........................................................

Used indirect labor.

Factory Overhead .........................................................

Incurred overhead costs.

Goods in Process InventorySanding .......................

Applied overhead: Sanding-- $30,000

Goods in Process InventoryPainting ......................

Transfer goods from sanding to painting.

McGraw-Hill Companies, Inc., 2005

Exercise 20-2 (Continued)

Finished Goods Inventory ............................................

Accounts Receivable ....................................................

Cost of Goods Sold .......................................................

Exercise 20-3 (25 minutes)

Used indirect materials costing $5,000.

g. Used indirect labor costing $3,000.

Transferred partially completed products with a cost of $30,000 to the

Transferred completed products with a cost of $44,000 to the finished

k. Sold products on credit for $125,000. Their accumulated cost is

McGraw-Hill Companies, Inc., 2005

Fundamental Accounting Principles, 17th Edition

Exercise 20-4 (25 minutes)

Goods in Process InventoryShredding ...................

Goods in Process InventoryShredding ...................

Goods in Process InventoryShredding ...................

Goods in Process InventoryBagging .......................

Finished Goods Inventory ...........................................

Accounts Receivable ....................................................

Cost of Goods Sold ......................................................