Ch06 Cost Acct

Chapter 6
Process Costing
LEARNING OBJECTIVES
Chapter 6 addresses the following questions:
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
How are costs assigned to mass-produced products?

What are equivalent units, and how do they relate to the production process?
How is the weighted average method used in process costing?
How is the FIFO method used in process costing?
What alternative methods are used for mass production?
How is process costing performed for multiple production departments?
How are spoilage costs handled in process costing?
What are the uses and limitations of process cost information?
These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual
exercises and problems.
COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.
Questions Having a Single Correct Answer:
No Symbol
This question requires students to recall or apply knowledge as shown in the
textbook.
This question requires students to extend knowledge beyond the applications
e
shown in the textbook.
Open-ended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):
Step 1 skills (Identifying)
Step 2 skills (Exploring)
Step 3 skills (Prioritizing)
Step 4 skills (Envisioning)
6-2
Cost Management
QUESTIONS
6.1
Weighted average and FIFO process costing produce similar equivalent unit costs
whenever the unit cost of production does not change or whenever there are no beginning
or ending work-in-process inventories. In addition, the equivalent unit costs will be
similar if the number of equivalent units produced during the period is large relative to
inventories.
6.2
A process would complete more units during the period than it started when there are
more units in beginning inventory than in ending inventory.
6.3
This approach would overstate the cost of spoiled units because partially complete units
would be treated as if they had received 100% of direct materials and conversion costs,
regardless of the amount actually allocated to those units.
6.4
If the beginning and ending inventories are the same from one period to the next, the
number of units started is equal to the number of units completed and transferred out.
This means that WIP inventory can be ignored when calculating equivalent units.
However, if costs change from one period to the next, then the cost allocated to ending
WIP will not be the same as the cost allocated to beginning WIP.
6.5
Judgment is needed to determine the percentage complete that is used in process costing
calculations. Each unit or batch of units is complete to a different degree than other units
or batches because the process is continuous. The percent complete is an average
completion percentage that is estimated using judgment.
6.6
If the percent completion in year 1 is overestimated, then the equivalent units for those
units will be too high in year 1. In turn, this will cause the cost per equivalent unit in year
1 to be understated. In year 2, this misstatement will cause the equivalent units for
completion of beginning WIP to be too low. The understatement of equivalent units will
cause the cost per equivalent unit to be overstated in year 2.
6.7
The weighted average method ignores the period in which product is started. In addition,
costs from beginning inventories are added to costs of this period. All products
completed are then given an average cost, regardless of when they were started. The
FIFO method, on the other hand, tracks work completed and costs from the prior period
separately from work completed and costs incurred during the current period. Under
FIFO, beginning WIP consists of last periods costs and work valued separately. At the
end of the accounting period, this periods costs to complete these units are added. Then
the total costs for beginning WIP from last period and this period are summed and
attached to the beginning inventory units that were completed this period. Then the units
started and completed this period are valued using this periods costs. If an organizations
costs fluctuate regularly, the FIFO method will reflect the most current costs so that
managers can investigate changes in cost more quickly.
6.8
Goods that are mass-produced have uniform specifications and are made in large batches
or on a continuous assembly line. Services that are mass-produced are performed using
Chapter 6: Process Costing
6-3
the same skills and time and each task is very similar. Goods that are custom produced
come in many variations and are made to specifications that vary with each order. Many
services are custom, such as accounting, health care, and law services because each
customer requires different inputs to match their needs. While it is relatively easy to
track costs for custom made goods by attaching tags or using individual records to log
costs of materials and labor, it is impossible to trace costs to mass-produced units. Job
order costing is used for custom products. Direct material and labor costs are traced to
each product and overhead costs are allocated using some allocation base that is labor or
machine related. For mass-production, process costing is used. Equivalent units are
calculated to account for units that are partially complete. Direct materials costs are
allocated separately. Direct labor and overhead are combined and called conversion
costs. These are allocated to complete and partially completed units.
6.9
They should be counted as ending WIP inventory in the department. Completed units
imply that the units have been transferred to the next department or to finished goods,
which is not the case with these units.
6.10
This is what is referred to as "continuous processing." Units just entering the process
have had little done to them, while units just about to leave the process have had all or
most of the conversion done. On average, the units in process are 50% complete as to
conversion.
6.11
The cost of spoiled units is added to the total cost of goods transferred and increases the
cost per unit.
6.12
Job costing is often used when products are manufactured in batches. In this firm, a
single batch would have a specific sized wire and specific length of nail. The cost of
each type of nail will depend primarily on the cost of the type of wire used and the time
required for each type. Therefore job costing is the most appropriate method. This
information would be lost if process cost techniques were employed.
6.13
Here are three factors. 1. If inspection costs are high and the cost to produce a single
unit is very low, managers may decide to reduce the number of time units are inspected.
In this case, inspection might occur only when units are completed. 2. If production
costs are high and units go through several different departments, inspection may take
place earlier in the manufacturing process so that spoiled units are caught when they are
relatively incomplete. 3. If a firm is developing a strategy of high quality products,
inspection may take place more often to insure that products are free of defects.
6.14
Advantages of reducing spoilage include saving the cost of the spoiled units and being
able to sell those units and increasing the contribution margin. In addition, in some
industries all firms need to compete on quality, and increased spoilage may lead to
increased defects in units sold, harming the reputation of the company resulting in a loss
of market share. Disadvantages might be that the costs incurred do not guarantee that
spoilage will be significantly reduced, or that the benefits in improved quality will be
worth the costs.
6-4
Cost Management
EXERCISES
6.15 Franciscos
A and B
Assumptions:
Work performed in May:
Beginning WIP
% complete direct materials
% complete conversion costs
Units started
Units completed and transferred out
Ending WIP
9,000
100%
40%
50,000
47,000
12,000
100%
30%
Summarize Physical and Equivalent Units
Physical Units
Equivalent Units:
Direct Materials
Conversion Costs
Beginning
WIP
9,000
Complete
Beginning
WIP
0
9,000
3,600
0
5,400
Work This Period

Start
Start
and
Ending
Complete
WIP
38,000
12,000
38,000
38,000
12,000
3,600
Total Work
Performed
This Period
50,000
Total
Units to
Account for
59,000
50,000
47,000
Total Work
59,000
50,600
A. Weighted average equivalent units for direct materials is 59,000 (total work this period)
because the ending units get 100% credit for direct materials, since direct materials are
added at the beginning of processing. Equivalent units for conversion costs are 50,600
(total work this period) because ending inventory units are only 30% complete and,
hence, have only 30% of the conversion costs (since conversion costs are incurred evenly
during production).
B. FIFO equivalent units are found under Total Work Performed This Period. Therefore
direct materials equivalent units are 50,000 (excludes beginning inventory because direct
materials were added last period and includes ending inventory because materials were
added this period), and equivalent units for conversion costs are 47,000 (excluding work
done on beginning WIP but including this periods work to complete those units and
including the portion of work completed on ending WIP.
6-5
6.16 Fine Fans

A and B
Assumptions for October:
Work performed:
Costs:
Beginning WIP
Units started
Ending WIP
9,000
100%
20%
100,000
94,000
15,000
100%
60%
Beginning WIP (FIFO and Weighted

Average)
Direct materials
Conversion costs
Total beginning WIP costs
Costs added this month
Direct materials
Conversion costs
Total costs added
Total costs to account for
18,000
36,000
54,000
100,000
200,000
300,000
$354,000
Physical Units
Beginning
WIP (20%)
9,000
Complete
Beginning
WIP (80%)
0
9,000
1,800
0
7,200
Equivalent Units:
Direct Materials
Conversion Costs
Work This Period

Start
Start
Total Work
and
Ending
Performed
Complete
WIP (60%) This Period
85,000
15,000
100,000
85,000
85,000
15,000
9,000
100,000
101,200
Total
Units to
Account for
109,000
Total Work
109,000
103,000
Calculate Actual Cost Per Equivalent Unit

Weighted Average:
Direct materials:
Beginning WIP + Direct materials cost =

Equivalent units for total work
$118,000
109,000
= $ 1.08
Conversion costs:

$236,000
103,000
Total cost per equivalent unit:
2.29
$3.37
First-in, First-out:
Direct materials:
_____________Direct materials cost_____________

Equivalent units for total work performed this period
= $100,000
100,000
= $ 1.00
Conversion costs:
______________Conversion costs______________
= $200,000
101,200
1.98
$2.98
6-6
Cost Management
6.17 Journal Entry for Abnormal Spoilage

[Note: This problem requires students to extend concepts about journal entries for spoilage from
Chapter 5 to Chapter 6.]
When spoiled units are sold, the net realizable value offsets the cost. In this case the total
cost of spoiled units is $16,000 (80*$200). However, $2,000 is recovered by selling the
spoiled units for their net realizable value. The journal entry follows.
Loss from Abnormal Spoilage
Cash
Work-in-Process inventory
$14,000
2,000
$16,000
6.18 Journal Entry for Normal and Abnormal Spoilage

A. Number of spoiled units = 10,000 8,000 = 2,000
Cost of spoiled units = 2,000*$5 = $10,000
B. When all spoilage is normal, the total cost of units (good and spoiled) is transferred into
finished goods. That cost is $50,000 (10,000*$5). The journal entries follow.
Finished Goods Inventory
Work-in-Process Inventory
$50,000
$50,000
C. For abnormal spoilage, only the cost of good units is transferred to finished goods. The
cost of spoiled units is recorded as a separate loss. The cost of good units is $40,000
(8,000*$5).
Finished Goods Inventory
Loss from Abnormal Spoilage
Work-in-Process Inventory
$40,000
10,000
$50,000
6-7
6.19 through 6.22 Felix and Sons

Assumptions for December:
Work performed:
Costs:
Beginning WIP
Units started (12,000 8,000 + 6,000)
Ending WIP
8,000
100%
75%
10,000
12,000
6,000
100%
50%

Average)
Direct materials
Conversion costs
Direct materials
Conversion costs
Total costs added
19,200
7,200
26,400
31,200
21,600
52,800
$79,200
Physical Units
Beginning
WIP (30%)
8,000
Complete
Beginning
WIP (75%)
0
8,000
6,000
0
2,000
Equivalent Units:
Direct Materials
Conversion Costs
Work This Period

Start
Start
Total Work
and
Ending
Performed
Complete
4,000
6,000
10,000
4,000
4,000
6,000
3,000
10,000
9,000
Total
Units to
Account for
18,000
Total Work
18,000
15,000

Weighted Average:
Direct materials:

$50,400
18,000
= $ 2.80
Conversion costs:

$28,800
15,000

Direct materials:
Conversion costs:
1.92
$4.72

= $31,200
10,000
= $ 3.12
= $21,600
9,000
2.40
$5.52
6-8
Cost Management
Process Cost Reports for December 31
Beginning WIP
Costs to complete
beginning WIP:
Direct materials
Conversion costs
Total costs added this
period
First-in, First-Out
Computation
Units
From November
cost report
8,000
4,000x$5.52
Total units completed and

transferred out
Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost
Weighted Average
Computation
Units
0
4,800
_____
4,800
8,000
31,200
4,000
22,080
12,000
53,280
(8,000+4,000)x$4.7
2
6,000
12,000
_____
18,720
7,200
25,920
18,000
$79,200
6,000x$2.80
3,000x$1.92
_____
16,800
5,760
22,560
18,000
$79,200
6.23 Humphrey Manufacturing

A and B
Assumptions for April:
Work performed:
Beginning WIP
Units started (8,000+40,000-6,000)
Ending WIP
$56,640
6,000
6,000x$3.12
3,000x2.40
Total Accounted For
Costs
$26,400
0x$3.12
2,000x$2.40
Total cost of beginning WIP

transferred out
New units started,
completed, and transferred
out
Costs
Costs:
6,000
100%
40%
42,000
40,000
8,000
100%
25%

Average)
Direct materials
Conversion costs
Direct materials
Conversion costs
Total costs added
7,500
2,125
9,625
70,000
42,500
112,500
$122,125
6-9
Physical Units
Beginning
WIP (40%)
6,000
Complete
Beginning
WIP (60%)
0
6,000
2,400
0
3,600
Equivalent Units:
Direct Materials
Conversion Costs
Work This Period

Start
Start
Total Work
and
Ending
Performed
Complete
34,000
8,000
42,000
34,000
34,000
8,000
2,000
42,000
39,600
Total
Units to
Account for
48,000
Total Work
48,000
42,000

Weighted Average:
Direct materials:

$77,500
48,000
= $ 1.6146
Conversion costs:

$44,625
42,000
1.0625
$2.6771
Direct materials:

= $70,000
42,000
$1.6667
Conversion costs:
= $42,500
39,600
1.0732
$2.7399
6-10 Cost Management

Process Cost Reports for April
Beginning WIP
Costs to complete beginning
WIP:
Direct materials
Conversion costs
period
First-in, First-Out
Computation
Units
Costs
From March
cost report
6,000
$ 9,625
0x$1.6667
3,600x$1.0732

transferred out
New units started,
out
34,000x$2.7399

transferred out
Ending WIP:
Direct materials
Conversion costs
Total Accounted For
Weighted Average
Computation
Units
Costs
0
3,864
_____
3,864
6,000
13,489
34,00
0
93,157
40,000
106,646
40,000x$2.6771
8,000x$1.6146
2,000x$1.0625
_____
13,336
2,146
15,482
48,000
$122,128
8,000
8,000x$1.667
2,000x1.073
40,000
$107,084
8,000
_____
12,917
2,125
15,042
48,000
$122,126
Differences in total costs are due to rounding errors. If a spreadsheet is used to make these
calculations, the totals will have fewer rounding errors.
C. Journal entries for weighted average method for April:
Work in process inventory
$70,000
Raw materials inventory
$70,000
To record the cost of raw materials used in production during April.
$42,500
Wages and accounts payable
$42,500
To record the conversion costs incurred in production during April.
Finished goods
$107,084
$107,084
To record the cost of 40,000 units transferred to finished goods during April
(includes the cost of normal spoilage).
Chapter 6: Process Costing 6-11

Journal entries for FIFO method for April:
$70,000
$70,000
To record the cost of raw materials used in production during April.
$42,500
$42,500
To record the conversion costs incurred in production during April.
Finished goods
$106,646
$106,646
To record the cost of 40,000 units transferred to finished goods during April
6.24 For Seniors Only
A. Process costing is appropriate in this situation because the returns are very similar in the
amount of time and therefore cost to complete each one. If the returns were more
complex or extra research was needed on certain ones, process costing would no longer
be appropriate because there would be too much variation between different returns.
B. To determine the costs for April, last years cost data is needed as well as data from
previous months. Additional information required is the approximate number of returns
will be done, the salary paid to the employees, overhead costs, the number of employees
that will be hired for the month, the amount of time each will work, and the amount of
time it takes for each return. Also, an estimate is needed for the number of returns that
are likely to be in progress at the beginning of April.
C. The first step in determining the cost for April returns is to find the total units in progress
and their percent completion. In addition, the number of returns to be completed in April
needs to be estimated. Last years data will be useful in estimating this years volume.
Using data mentioned in part B, costs are categorized as direct materials or conversion
costs. An equivalent cost per unit for the tax returns can then be estimated. Once the
number of returns for the month of April has been predicted, the equivalent costs can be
estimated and a total cost for that month can be predicted. It is likely that there will be no
ending WIP inventory, because tax returns are due April 15 and this organizations clients
are likely to file by the due date rather than request extensions.
PROBLEMS
6.25 Benton Industries
1. Summarize Total Costs to Account For
FIFO:
Transferred-in
$ 40,470
224,130
$264,600
Beginning WIP
Current period costs
Direct Materials Conversion Costs

$
0
$ 14,322
166,840
315,228
$166,840
$329,550
Total Cost
$ 54,792
706,198
$760,990
2. Summarize Physical and Equivalent Units
Physical Units
Beginning
WIP (33%)
15,000
Complete
Beginning
WIP (67%)
0
0
0
5,000
0
15,000
10,000
Equivalent Units:
Transferred-in
Direct Materials
Conversion Costs
Work This Period

Start
Start
Total Work
and
Ending
Performed
Complete
82,000
11,000
93,000
82,000
82,000
82,000
11,000
0
4,400
Total to
Account for
108,000
93,000
97,000
96,400
3. Calculate First-in, First-out Cost Per Equivalent Unit

Transferred-in:
_____________Transferred-in costs_____________
= $224,130
93,000
= $ 2.41
Direct materials:

= $166,840
97,000
1.72
Conversion costs:
= $315,228
96,400
3.27
$7.40

4. Process cost report for the year
Computation
From last year
Beginning WIP
Costs to complete beginning WIP:
Direct materials
Conversion costs
Total costs added this period
15,00 x $1.72
10,000 x $3.27
Total cost of beginning WIP transferred out

New units started, completed, and transferred out
82,000*$7.40
Total units completed and transferred out

Ending WIP:
Transferred-in
Direct materials
Conversion costs
First-in, First-Out
Units
Costs
15,000
$ 54,792
_____
25,800
32,700
58,500
15,000
113,292
82,000
606,800
97,000
720,092
11,000
11,000 x $2.41
0 x $1.72
4,400 x $3.27
Total Accounted For
_____
26,510
0
14,388
40,898
108,000
$760,990
Notice that the total costs summarized above ($760,990) are equal to the costs accounted for in
the cost report.
6.26 Victorias Closet-A
A. Preparation of process cost report using the weighted average method.
Summary of unit information given in the problem:
WIP Units
Beginning (25% complete) 11,000
Started
74,000
61,000 Good completed
8,000 Spoiled
Ending (75% complete)
16,000
Summary of Spoilage
Normal spoilage
Abnormal spoilage
Total
6,600
???
8,000
When computing equivalent units, notice that the ending WIP inventory units are
considered 100% complete with respect to direct materials, since direct materials are
added at the beginning of processing. However, the ending WIP inventory units are only
75% complete and, hence, have only 75% of the conversion costs (incurred evenly
throughout production). Both normal and abnormal spoilage are assigned 100% of all
costs because spoilage occurs just before inspection, which is at the 100% stage of
completion.
Beginning WIP
Direct Materials
$220,000
1,480,000
$1,700,000
Conversion Costs
$30,000
942,000
$972,000
Total Cost
$ 250,000
2,422,000
$2,672,000
Physical Units
Complete
Beginning Beginning
WIP (25%) WIP (75%)
11,000
0
Equivalent Units:
Direct Materials 11,000
Conversion Costs 2,750
0
8,250
Work Performed This Period

Start
Start
Total Work
and
Ending
Performed
Complete WIP (75%) This Period
58,000
16,000
74,000
58,000
58,000
16,000
12,000
Total
Units to
Account for
85,000
Spoiled
Units
(100%)
(8,000)
Total Work
85,000
81,000
74,000
78,250
(8,000)
(8,000)
Total Spoilage
Less Normal Spoilage
Abnormal Spoilage
8,000
6,600
1,400
3. Calculate Cost per Equivalent Unit: Weighted Average

Direct materials:

$1,700,000
85,000
Conversion costs:

$972,000
81,000
= $20
=
12
$32
4. Weighted Average Process Cost Report for January

Computation
Total units completed and transferred out:
Good units
Normal spoilage
Total transferred out
(11,000 + 58,000 8,000) x$32

6,600 x $32
Abnormal spoilage
1,400*$32
Ending WIP:
Direct materials
Conversion costs
16,000 x $20
12,000 x $12
Total Good Units Accounted For

Total Accounted For
Units
61,000
______
61,000
Costs
$1,952,000
211,200
2,163,200
44,800
16,000
85,000 8,000
320,000
144,000
464,000
77,000
$2,672,000
B. Journal entries:
$1,480,000
$1,480,000
To record the cost of raw materials used in production during January.
$942,000
$942,000
To record the conversion costs incurred in production during January.

Finished goods
$2,163,200
$2,163,200
To record the cost of 61,000 units transferred to finished goods during January
Abnormal spoilage loss
$44,800
To record the cost of abnormal spoilage during January.
$44,800
6.27 Victorias Closet-B

A. This problem is identical to problem 6.26, except that the FIFO method is used instead of
the weighted average method. The first two parts of the process cost report are identical
under the two methods. Therefore, the following solution shows only the last two parts
of the process cost report.
3. Calculate Cost per Equivalent Unit: FIFO
Direct materials:

= $1,480,000
74,000
= $20.0000
Conversion costs:
= $942,000
78,250
12.0383
$32.0383
4. FIFO Process Cost Report for Victorias Closet

Computation
Beginning WIP
Direct materials
Conversion costs
Units
11,000
Costs
$ 250,000
_____
0
99,316
99,316
11,000
349,316
0x$20
8,250*$12.0383

50,000*$32.0383
50,000
1,601,915
Normal spoilage
6,600*$32.0383
______
211,453
61,000
2,162,684

Abnormal spoilage
1,400*$32.0383
Ending WIP:
Direct materials
Conversion costs
16,000 x $20
12,000 x $12.0383

Total Costs Accounted For
44,854
16,000
_____
85,000-8,000
320,000
144,460
464,460
77,000
$2,671,998

B. A standard cost report would be the same as the FIFO cost report from a format
standpoint. However, the standard costs would be used instead of equivalent unit costs.
That is the only difference.
C. If Victorias Closet wants to set a benchmark for productivity, standard costs are
appropriate. A standard cost is an estimate of cost under efficient operations and
therefore acts as a benchmark or budget with which actual costs can be compared. The
standards need to be updated regularly, though.
6.28 Kim Mills-A
Summary of information given in the problem:
WIP Units
20,000
????
90,000 Good completed
7,000 Spoiled
17,000
Beginning
Started
Ending
Summary of Spoilage
Normal spoilage
Abnormal spoilage
Total
3,600
????
7,000
A. Abnormal spoilage = 7,000 3,600 = 3,400 units

B. Spoilage costs = 7,000 x $1,000 = $7,000,000
C. The opportunity costs of spoilage can be measured in several ways. First, in addition to
the cost of the spoiled units, there is also the contribution margin foregone because the
products could not be sold. In addition, there are the opportunity costs of bad units that
are sold because they pass through inspection without having been detected as spoiled.
Through word of mouth or services such as Consumer Reports or Good Housekeeping, a
companys reputation may suffer and the organization loses market share. These costs
can be considerable, especially if competitors have reputations for high quality with
similar prices.
6.29 Kim Mills-B
A. If inspection occurs when units are 40% complete, direct materials have already been
added, but conversion costs will only be 40% added.
Equivalent units for direct materials = 100% x 7,000 units = 7,000 units
Equivalent units for conversion costs = 40% x 7,000 units = 2,800 units
B. Abnormal spoilage for conversion costs = 2,800 (total spoilage per Part A) 1,800
(normal spoilage) = 1,000 units.
C. Here are several advantages of inspecting units earlier in their manufacturing process:
Kim saves the rest of the conversion cost that would be added.
Units are removed from further handling (storage and control), except to dispose
of them.
If the manufacturing process further down the line would tend to hide the defects,
a larger number of defective units are identified, and Kim avoids selling defective
units to customers.
6.30 Red Dog Products

A and B. Weighted average and FIFO process costing reports:
Physical Units
Beginning
WIP (30%)
20,000
Complete
Beginning
WIP (70%)
0
20,000
6,000
0
14,000
Equivalent Units:
Direct Materials
Conversion Costs
Work This Period

Start
Start
Total Work
and
Ending
Performed
Complete
68,000
12,000
80,000
68,000
68,000
12,000
6,000
80,000
88,000
Total
Units to
Account for
100,000
Total Work
100,000
94,000

Direct materials:

= $220,000
80,000
= $ 2.75
Conversion costs:
= $74,000
88,000
0.84
$3.59
Weighted Average:
Direct materials:

$245,000
100,000
= $ 2.45
Conversion costs:

$77,000
94,000
0.82
$3.27

Process Cost Reports for Molding Department: May
First-in, First-Out
Computation
Units
Costs
From April
cost report
20,000
$ 28,000
Beginning WIP
WIP:
Direct materials
Conversion costs
0x$2.75
14,000x$0.84

transferred out
New units started, completed, and
transferred out
68,000x$3.59

transferred out
Ending WIP:
Direct materials
Conversion costs
Total Accounted For
_____
0
11,760
11,760
20,000
39,760
68,000
244,120
88,000
283,880
Weighted Average
Computation
Units
(88,000)x$3.27
12,000
88,000
Costs
$287,760
12,000
12,000x$2.75
6,000x$0.84
_____
33,000
5,040
38,040
100,000
$321,920
12,000x$2.45
6,000x$0.82
_____
29,400
4,920
34,320
100,000
$322,080
The total costs to account for disagree with the total calculated in part 1 because of differences
due to rounding the cost per equivalent unit. If students used a spreadsheet for these calculations
they would have no error.
C. Factors that would affect the choice of accounting method include:
The stability of input prices
The need for current price information
Whether managers want to compare a standard cost to actual costs
Whether beginning and ending inventory levels are large or small

6.31 Empire Forging
Summary of information given in the problem:
Beginning
Started
Ending
WIP Units
60,000
???? 420,000 Good completed
36,000 Spoiled
68,000
A. Abnormal spoilage = Total spoilage Normal spoilage

= 36,000 12,600 = 23,400 units
Summary of Spoilage
Normal spoilage
Abnormal spoilage
Total
12,600
??
36,000

B. Units started in May: Refer to the above T-Account, and solve for the unknown number
of units started
60,000 + Started 420,000 36,000 = 68,000
Started = 464,000
C. Percentage of good units allowed for spoilage is 3% (12,600/420,000). Total spoiled
units as a percentage of good units is 8.6% (36,000/420,000). When spoilage rates
increase dramatically, it is likely that more spoiled units are sold as good units because
they have been overlooked in the inspection process. This leads to more returns and
potential loss of market share. In addition, the cost of good units increases, and so the
contribution margin on those units decreases. It is also possible that more units have
been reworked, and these could be lower quality than first run units, and rework also
increases the cost of good units.
D. Below are examples of arguments that could be made; students may think of additional
arguments.
The costs of undetected spoiled units can be quite high. Customers are unhappy with
defective units and may not purchase the goods again, so market share could be lost. In
addition, if the defect causes any type of harm, the company could be subject to legal
action and may have to pay a settlement or high legal fees. These costs are difficult to
value. It is much easier to determine the cost of quality improvements, such as more
frequent inspections, quality circles with employees to elicit suggestions for
improvements, or redesigning the product or manufacturing process to reduce defects.
Because of the uncertainty of the costs of spoiled units, the company should analyze costs
for returned units and warranty work, develop better tracking systems so that all spoiled
units are counted (whether they are reworked or not), and hire a marketing company to
identify customers who have quit using its products to determine if quality was a factor in
this decision. Once the managers have more information, they will better understand the
costs and benefits of quality problems and quality initiatives.

6.32 The Rally Company
A sample spreadsheet showing the solution for this problem is available on the Instructors web
site for the textbook (available at www.wiley.com/college/eldenburg).
A. Weighted average: Following are excerpts from the sample spreadsheet for this problem.
B. Journal entries for weighted average method:

$36,000
$36,000
To record the cost of raw materials used in production during July.
$32,000
$32,000
To record the conversion costs incurred in production during July.
Finished goods
$63,200
$63,200
To record the cost of 14,800 units transferred to finished goods during July
$4,000
To record the cost of abnormal spoilage during July.
$4,000

C. FIFO: Following are excerpts from the sample spreadsheet for this problem.
The input section and the sections for steps 1 and 2 are identical to the spreadsheet shown
in Part A above. Therefore, only the sections for steps 3 and 4 are shown below.
D. Several factors affect accountants choices of costing systems. For process costing, the
two main factors are ease of calculations (although with spreadsheets and software
programs that currently of little concern) and the usefulness of more current cost
information. If costs do not change rapidly and there is no need for the most current cost
information, then weighted average is easier to calculate and understand. However, if
managers want to monitor current period costs more closely, then FIFO is a better method
because it better reflects the most current costs.
It appears that Rallys costs did not change from last period to this period. If costs
change slowly, the weighted average method would be the easiest report to prepare.

6.33 Toddler Toys
Solutions below are provided first for the weighted average method. Then solutions for the FIFO
method are presented.
WEIGHTED AVERAGE SOLUTION
A. If a student chose the weighted average method, its main advantage is that it is a little less
complex to calculate. The disadvantage is that the cost information is not as current as
FIFO information.
B. Here is a cost report using the weighted average method.
Beginning WIP
Transferred-in
$ 4,000
36,000
$40,000
Direct Materials
$ 2,000
18,000
$20,000
Conversion Costs Total Cost

$ 1,600
$ 7,600
16,000
70,000
$17,600
$77,600
Physical Units
Complete
Beginning Beginning
WIP (80%) WIP (20%)
2,000
0
Equivalent Units:
Transferred in
2,000
0
0
400

Start
Start
Total Work
and
Ending
Performed
14,800
3,200
18,000
14,800
14,800
14,800
3,200
0
800
Total
Units to
Account for
20,000
Total Work
20,000
16,800
17,600
18,000
14,800
16,000
Normal spoilage
Abnormal Spoilage
Total spoilage
Spoiled
Units
(100%)
(2,000)
(2,000)
(2,000)
1,000
1,000
2,000
3. Calculate Cost Per Equivalent Unit (Weighted Average)

Transferred-in:
Beginning WIP + Transferred-in costs

$40,000 = $ 2.0000
20,000
Direct materials:
Beginning WIP + Direct materials cost

$20,000 =
16,800
1.1905
Conversion costs: Beginning WIP + Direct materials cost

$17,600 =
17,600
1.0000
______
$4.1905

4. Process Cost Reports for Assembly Department in August (Weighted Average)
Computation
Units
14,800*$4.1905
14,800
Normal spoilage
1,000 x $4.1905
Total cost transferred out
Abnormal spoilage
1,000 x $4.1905
Ending work in process:

Transferred-in
Direct materials
Conversion costs
3,200 x $2.0
0 x $1.1905
800 x $1.00
Costs
$62,020
4,190
66,210
4,190
3,200
Total Accounted For
_____
6,400
0
800
7,200
18,000
$77,600
C. Journal entries:
Work in process inventory-Assembly Dept.
$36,000
Work in process inventory-Plastics Dept.
$36,000
To record the cost of units transferred from the plastics department during August.
$18,000
$18,000
To record the cost of raw materials used in production during August.
$16,000
$16,000
To record the conversion costs incurred in production during August.
Finished goods inventory
$66,210
$66,210
To record the cost of 14,800 units transferred to finished goods during August
$4,190
To record the cost of abnormal spoilage during August.
$4,190

FIFO SOLUTION
A. If a student chose FIFO, its main advantage is that the costs are more current, the
disadvantage is that it is a bit more complex to calculate.
B. Here is a cost report using the FIFO method. Notice that the first two parts are identical
to the report under the weighted average method.
Beginning WIP
Transferred-in
$ 4,000
36,000
$40,000
Direct Materials
$ 2,000
18,000
$20,000

$ 1,600
$ 7,600
16,000
70,000
$17,600
$77,600
Physical Units
Complete
Beginning Beginning
WIP (80%) WIP (20%)
2,000
0
Equivalent Units:
Transferred in
2,000
0
0
400

Start
Start
Total Work
and
Ending
Performed
14,800
3,200
18,000
14,800
14,800
14,800
3,200
0
800
18,000
14,800
16,000
Total
Units to
Account for
20,000
Total Work
20,000
16,800
17,600
Normal spoilage
Abnormal Spoilage
Total spoilage
Spoiled
Units
(100%)
(2,000)
(2,000)
(2,000)
1,000
1,000
2,000
3. Calculate Cost Per Equivalent Unit (FIFO)

Transferred-in: _________Transferred-in costs__________ =
Equiv. units for work performed this period
$36,000
18,000
= $2.0000
Direct materials: __________Direct materials cost_________ =

$18,000
14,800
1.2162
Conversion costs:___________Conversion costs__________ =

$16,000
16,000
1.0000
______
$4.2162

4. Process Cost Reports for Assembly Department: June
Beginning WIP from May cost report
Transferred in
Direct materials
Conversion costs
First-in, First-Out
Computation
Units
2,000
0 x $2
0 x $1.2162
400*$1

New units started, completed, and trans. out
12,800*$4.2162
Normal spoilage
1,000 x $4.2162
Total units completed and transferred out

Abnormal spoilage
Ending WIP:
Transferred-in
Direct materials
Conversion costs
Total Accounted For
Costs
$ 7,600
_____
0
0
400
400
2,000
8,000
12,800
53,968
4,216
14,800
66,184
1,000 x $4.2162
4,216
3,200
3,200 x $2.00
0 x $1.2162
800 x $1
_____
6,400
0
800
7,200
18,000
$77,600
C. Journal entries:
$36,000
Work in process inventory-Plastics Dept.
$36,000
To record the cost of units transferred from the plastics department during August.
$18,000
$18,000
To record the cost of raw materials used in production during August.
$16,000
$16,000
To record the conversion costs incurred in production during August.
Finished goods inventory
$66,184
$66,184
To record the cost of 14,800 units transferred to finished goods during August

$4,216
To record the cost of abnormal spoilage during August.
$4,216
6.34 Britains Health and Safety Commission

A. Accounting for each cost in a process costing system would be as follows:
Lost worker time would be part of conversion costs.
Employer-paid medical costs would be conversion costs.
Training to replace workers would require two separate ways to recognize

the cost. Costs of training such as classrooms, materials, and instructors, would
not be assigned to manufacturing; they would be assigned to a support
department. However, the employee time for training is probably part of
conversion costs.
Record-keeping would not be part of manufacturing costs, but instead

would be part of the accounting department costs.
B. Examples of the responsibilities for each group are discussed below. Students might have
identified additional responsibilities.
Governments set up agencies such as Britains Health and Safety

Commission and the U.S. Occupational Safety and Health Administration
(OSHA; part of the U.S. Department of Labor) to establish and regulate safety
standards for workers.
Employers are responsible for keeping their employees safe by monitoring

accident rates, identifying problem areas, improving the physical environment to
prevent accidents, training workers to improve their safety habits, and monitoring
compliance with company standards. Employers are also responsible for
complying with governmental regulations.
Managers oversee employees and are therefore responsible for the safety
of employees directly under their supervision. Managers set the tone by
determining the priority of safety within a company. They also need to track
health and safety problems and make improvements in their physical environment
and also give workers training in safety habits. In addition, managers are
responsible for ensuring that their companies comply with governmental
regulations.
Workers are responsible for their own safety and any team members
safety. This responsibility includes meeting or exceeding employer standards, as
well as adopting a proactive approach toward their own and others safety.
Customers are not typically held responsible for safety. However,

customers can choose to investigate the safety records and practices of companies
with which they do business. They can establish policies of doing business only
with companies having acceptable safety performance. This type of policy can be
most important for goods and services produced in less-developed countries. In
addition, each customer should work at improving their own safety habits and
alert the organizations that they frequent when any safety concerns arise.
C. There are many possible answers to this question. Here are some issues that students
might have considered as they developed their own answers. (These issues are organized
using Steps for Better Thinking.)
Uncertainties: Ideally, the goal for companies should be to achieve perfect health and
safety. However, this goal might not be attainable because it is not possible to identify all
possible health and safety problems or to perfectly control worker actions. For example,
researchers continue to investigate the association between various types of work and
ergonomic problems such as discomfort, fatigue, and musculoskeletal disorders. It is not
always easy to identify the types of actions or work arrangements that cause specific
problems. A chemical believed to be safe may be found to cause previously-unforeseen
medical problems. To complicate matters, workers may be unwilling to comply with
health and safety practices. For example, employees may object to ergonomic seating or
to an ergonomic computer keyboard. Or, they may fail to use safety equipment such as
helmets or masks.
Exploring Perspectives: Who are the major stakeholders in this issue? Worker health
and safety obviously affects the well-being of individual workers and their families. It
also has social implications. Injured or ill workers are less productive and may require
greater social services than other people. From the companys point of view, economic
concerns exist. It might be very expensive to make a small improvement in worker
health and safety. In addition, a company with high health and safety standards may be
unprofitable if it sells goods and services in an industry where competitors adopt lower
standards.
Prioritizing: There are many questions to ask when choosing values and making tradeoffs for deciding on a company goal. Is it appropriate to weigh only the companys cost
and benefit? What are the companys obligations to shareholders, workers, and society?
How can the company attempt to meet all of its obligations in a morally acceptable way?
Envisioning: It is always possible to improve worker health and safety. New practices
can be adopted as research provides new information about the causes of problems and
ways to prevent them. Thus, an important aspect of a companys goal should be to
continuously improve. How can the companys goal be worded to encourage continuous
improvement?

6.35 Cellular Advantage
A sample spreadsheet for this problem is available on the Instructors web site for the textbook
(available at www.wiley.com/college/eldenburg).
A. Weighted Average Method
Beginning WIP
Direct Materials
$ 440,000
2,960,000
$3,400,000
Conversion Costs
$ 60,000
1,884,000
$1,944,000
Total Cost
$ 500,000
4,844,000
$5,344,000
Physical Units
Complete
Beginning Beginning
WIP (30%) WIP (70%)
22,000
0
Equivalent Units:
0
15,400
Total
Units to
Account for
170,000
Spoiled
Units
(75%)
(16,000)
116,000
112,000*
Total Work
170,000
153,200
(16,000)
(12,000)
Physical
Units
16,000
13,200
2,800
Total Spoilage
Less Normal Spoilage
Abnormal Spoilage
*

Start
Start
Total Work
and
Ending
Performed
116,000
32,000
148,000
32,000
19,200
148,000
146,600
Equivalent Units
Direct
Conversion
Materials
Costs
(100%)
(75%)
13,200
2,800
9,900
2,100
Because inspection takes place when units are 75% complete, spoiled units are removed
when units are 100% complete with respect to direct materials and 75% complete with
respect to conversion costs. This also means that 25% of the conversion cost work is
never performed on spoiled units. Therefore, the number of equivalent units started and
completed for conversion costs is calculated as:
Total physical units started and completed
Less spoiled units not completed [16,000 x (1-75%)]
Equivalent units started and completed for conversion costs
116,000
(4,000)
112,000
3. Calculate Cost per Equivalent Unit: Weighted Average

Direct materials:

$3,400,000
170,000
$20.0000
Conversion costs:

$1,944,000
153,200
12.6893
$32.6893

4. Weighted Average Process Cost Report
Computation
Total units completed and transferred out:
Good units
(22,000+116,00016,000)x$32.6893
Normal spoilage:
Direct materials
13,200 x $20
Conversion costs
9,900 x $12.6893
Total transferred out
Abnormal spoilage
Direct materials
Conversion costs
Total abnormal spoilage
2,800 x $20
2,100 x $12.6893
Ending WIP:
Direct materials
Conversion costs
32,000 x $20
19,200 x $12.6893

Total Accounted For
Units
Costs
122,000
$3,988,094
_______
122,000
264,000
125,624
4,377,718
56,000
26,648
82,648
32,000
640,000
243,634
883,634
_______
170,000 16,000
154,000
$5,344,000
B: FIFO Method
The summary of physical and equivalent units and the summary of costs to account for
are the same as those shown above for the weighted average method. Thus, the solution
below shows only steps 3 and 4.
3. Calculate Cost per Equivalent Unit: FIFO
Direct materials:
_____________Direct materials cost_____________ =

$2,960,000
148,000
= $20.0000
Conversion costs:
______________Conversion costs______________ =
$1,884,000
146,600
12.8513
$32.8513

4. FIFO Process Cost Report
Computation
Beginning WIP
Direct materials
Conversion costs
Units
22,000
Costs
$ 500,000
______
0
197,910
197,910
22,000
697,910
0x$20
15,400 x $12.8513

100,000 x $32.8513
100,000
3,285,130
Normal spoilage
Direct materials
Conversion costs
13,200 x $20
9,900 x $12.8513
______
264,000
127,228
122,000
4,374,267

Abnormal spoilage
Direct materials
Conversion costs
Total abnormal spoilage
2,800 x $20
2,100 x $12.8513
Ending WIP:
Direct materials
Conversion costs
32,000 x $20
19,200 x $12.8513

Total Costs Accounted For
56,000
26,988
82,988
32,000
______
170,000-16,000
640,000
246,745
886,745
154,000
$5,344,000
C. Because spoilage increases the cost of good units, most organizations want to minimize
the number of units spoiled. By setting limits on normal spoilage, incentive is provided
for managers and operations employees to keep spoilage under the limit. The accounting
system combines the cost of normal spoilage with good units, so the amount of cost
incurred for normal spoilage is not obvious. Many organizations view spoilage as part of
the cost of producing good units. However, when spoilage amounts become large,
abnormal spoilage is recorded and these amounts are more obvious to managers, so that
quality problems can be investigated.
D. Rework costs are hidden in the accounting system because units reworked go through the
manufacturing process twice, but are counted only once. Therefore, it is difficult to track
rework costs, and the financial affects of rework.

6.36 Rausher Industries
A. FIFO process costing report and calculations for the current year and the budget for next
year:
FIFO CURRENT YEAR
Physical Flow of Units: Current Period
Department 1
0
12,000
0
12,000
3,000
9,000
WIP beginning
Started
Transferred in
Total to account for
Ending WIP
Completed and transferred out
Department 2
0
0
9,000
9,000
2,000
7,000
1. Summarize Total Costs to Account For (Current Year)

Transferred-in
Department 1:
Beginning WIP
not applicable
not applicable
not applicable
Department 2:
Beginning WIP
0
38,700
$38,700
Direct Materials
$
0
36,000
$36,000
not applicable
not applicable
not applicable

$
0
14,040
$14,040
Total Work
Performed
This Period
Total
Units to
Account for
12,000
15,000
0
32,760
$32,760
0
50,040
$50,040
0
71,460
$71,460
2. Summarize Physical and Equivalent Units (Current Year)
Department 1:
Physical Units
Equivalent Units:
Direct Materials
Conversion Costs
Department 2:
Physical Units
Equivalent Units:
Transferred-In
Conversion Costs
Beginning
WIP
(0%)
0
Complete
Beginning
WIP
(0%)
0
Work This Period

Start
Start
and
Ending
Complete
WIP
(60%)
9,000
3,000
0
0
0
0
9,000
9,000
3,000
1,800
12,000
10,800
Total Work
12,000
10,800
(0%)
0
(0%)
0
7,000
(40%)
2,000
12,000
15,000
0
0
0
0
7,000
7,000
2,000
800
9,000
7,800
Total Work
9,000
7,800

3. FIFO Cost Per Equivalent Unit (Current Year)
Department 1:
Direct materials:
_____Current Period Direct materials cost_____

= $36,000
12,000
$3.00
Conversion costs:
______Current Period Conversion costs______

= $14,040
10,800
1.30
$4.30
Department 2:
Transferred-in costs:
_____Current Period Transferred-in cost_____

= $38,700
9,000
$4.30
Conversion costs:

= $32,760
7,800
4.20
$8.50
4. FIFO Process Cost Report (Current Year)

Beginning WIP
WIP:
Transferred-in
Direct materials
Conversion costs
period
Department 1
Computation
Units
0
9,000x$4.30

transferred out
Ending WIP:
Transferred in
Direct materials
Conversion costs
Total Accounted For
Department 2
Computation Units
Costs
0
$
n/a
0
0

transferred out
New units started, completed,
and transferred out
Costs
$
0
0
0
n/a
0
_____
_____
9,000
38,700
7,000
59,500
9,000
38,700
7,000
56,640
7,000x$8.50
3,000
2,000
_____
n/a
9,000
2,340
11,340
12,000
$50,040
3,000x$3
1,800x$1.30
2,000x$4.30
_____
8,600
n/a
3,360
11,960
9,000
$71,460
800x$4.20

FIFO BUDGET FOR NEXT YEAR
Physical Flow of Units: Next Period
Department 1
3,000
15,000
0
18,000
5,000
13,000
WIP beginning
Started
Transferred in
Total to account for
Ending WIP
Completed and transferred out
Department 2
2,000
0
13,000
15,000
1,000
14,000
1. Summarize Total Costs to Account For (Next Year)

Transferred-in
Department 1:
Beginning WIP
not applicable
not applicable
not applicable
Department 2:
Beginning WIP
$ 8,600
55,631
$64,231
Direct Materials
$ 9,000
48,600
$57,600
not applicable
not applicable
not applicable

$ 2,340
14,545
$16,885
$11,340
63,145
$74,485
$ 3,360
59,075
$62,435
$ 11,960
114,706
$126,666
2. Summarize Physical and Equivalent Units (Next Year)
Department 1:
Physical Units
Work This Period

Start
Start
and
Ending
Complete
WIP
(50%)
10,000
5,000
Beginning
WIP
(60%)
3,000
Complete
Beginning
WIP
(40%)
0
3,000
3,000
0
1,200
10,000
10,000
(40%)
2,000
(60%)
0
2,000
800
0
1,200
Equivalent Units:
Direct Materials
Conversion Costs
Department 2:
Physical Units
Equivalent Units:
Transferred-In
Conversion Costs
Total Work
Performed
This Period
Total
Units to
Account for
15,000
18,000
5,000
2,500
15,000
13,700
Total Work
18,000
15,500
12,000
(70%)
1,000
13,000
15,000
12,000
12,000
1,000
700
13,000
13,900
Total Work
15,000
14,700
3. FIFO Cost Per Equivalent Unit (Next Year)

Department 1:
Direct materials:
_____Current Period Direct materials cost_____

= $48,600
15,000
$3.2400
Conversion costs:

= $14,545
13,700
1.0617
$4.3017

Department 2:
Transferred-in costs:
_____Current Period Transferred-in cost_____

= $55,631
13,000
$4.28
Conversion costs:

= $59,075
13,900
4.25
$8.53
4. FIFO Process Cost Report (Next Year)
Beginning WIP
WIP:
Transferred-in
Direct materials
Conversion costs
period
Department 1
Computation
Units
Current year
cost report
3,000
New units started,

out
10,000x$4.3017

transferred out
Ending WIP:
Transferred in
Direct materials
Conversion costs
Total Accounted For
$11,340
n/a
0
1,274
0x$3.24
1,200x$1,0617

transferred out
Costs
Computation
Current year
cost report
Department 2
Units
2,000
Costs
$ 11,960
0x$4.28
0
n/a
5,100
1,200x$4.25
_____
1,274
_____
5,100
3,000
12,614
2,000
17,060
10,000
43,017
12,000
102,352
13,000
55,631
14,000
119,412
12,000x$8.53
5,000
1,000
_____
n/a
16,200
2,654
18,854
18,000
$74,485
5,000x$3.24
2,500x$1.0617
1,000x$4.28
_____
4,279
n/a
2,975
7,254
15,000
$126,666
700x$4.25
B. Weighted average process costing report and calculations for the current year and the
budget for next year
WEIGHTED AVERAGE CURRENT YEAR
Because there are no beginning inventories in period one, the cost reports for FIFO and
weighted-average are the same. See the preceding FIFO report.

WEIGHTED AVERAGE BUDGET FOR NEXT YEAR
1. Summarize Total Costs to Account For (Next YearWeighted Average)
Transferred-in
Department 1:
Beginning WIP
not applicable
not applicable
not applicable
Department 2:
Beginning WIP
$ 8,600
55,762
$64,362
Direct Materials
$ 9,000
48,600
$57,600
not applicable
not applicable
not applicable

$ 2,340
14,545
$16,885
$11,340
63,145
$74,485
$ 3,360
59,075
$62,435
$ 11,960
114,837
$126,797
2. Summarize Physical and Equivalent Units (Next Year)
Department 1:
Physical Units
Work This Period

Start
Start
and
Ending
Complete
WIP
(50%)
10,000
5,000
Beginning
WIP
(60%)
3,000
Complete
Beginning
WIP
(40%)
0
3,000
3,000
0
1,200
10,000
10,000
(40%)
2,000
(60%)
0
2,000
800
0
1,200
Equivalent Units:
Direct Materials
Conversion Costs
Department 2:
Physical Units
Equivalent Units:
Transferred-In
Conversion Costs
Total Work
Performed
This Period
Total
Units to
Account for
15,000
18,000
5,000
2,500
15,000
13,700
Total Work
18,000
15,500
12,000
(70%)
1,000
13,000
15,000
12,000
12,000
1,000
700
13,000
13,900
Total Work
15,000
14,700
3. Weighted Average Cost Per Equivalent Unit (Next Year)

Department 1:
Direct materials:
Beginning WIP + Current Period Direct materials cost

= $57,600
18,000
$3.2000
Conversion costs:
Beginning WIP + Current Period Conversion costs

= $16,885
15,500
1.0894
$4.2894
Department 2:
Transferred-in costs: Beginning WIP + Current Period Transferred-in cost
= $64,362
15,000
$4.2908
Conversion costs:
= $62,435
14,700
4.2473
Beginning WIP + Current Period Conversion costs

$8.5381

4. Weighted Average Process Cost Report (Next Year)
Department 1
Computation
Units
transferred out
Ending WIP:
Transferred in
Direct materials
Conversion costs
13,000x$4.2894
13,000
Costs
Computation
55,762
14,000x$8.5381
1,000x$4.2908
_____
n/a
16,000
2,723
18,723
18,000
$74,485
5,000
5,000x$3.20
2,500x$1.0894
Total Accounted For
Department 2
Units
14,000
Costs
119,533
1,000
_____
4,291
n/a
2,973
7,264
15,000
$126,797
700x$4.2473
C.
1. If she better understands the flow of resources, she can more accurately determine
percentage completed. This seems like a way to improve accuracy.
2. More accurately estimating percentage completed would mean that cost per unit
would better reflect the use of resources. In addition, the costs for each period would
be more accurately identified with the units of that period. If it takes a lot of time to
develop a more accurate estimate and if ending work in process inventory is relatively
immaterial, the cost could be greater than the benefit.
6.37 Computer Components
A. Here are several possible answers to this question; students may think of others. Actual
costs can differ from standards because of changes in prices, as described in the problem.
Differences can also result from deviations from standards in the efficiency with which
raw materials or labor hours are used. For example, an equipment malfunction might
slow production or spoil some units. Employees can work faster or slower than expected.
The quality of materials can be better or worse than expected, causing deviations from
the expected amount of spoilage or scrap. A new labor contract could be negotiated,
increasing direct labor costs. Overhead costs can also be higher or lower than expected.
There could be an increase in electricity rates or insurance costs. Equipment maintenance
could be higher or lower than expected.
B. Kevin might or might not make the same argument if the suppliers price had decreased.
However, it appears that he might have been making his argument to avoid responsibility.
From the information presented, Kevin has at least some control over the purchase price.
He stated that he does not want to consider changing suppliers at this time, and a division
manager often has control over the purchasing function for the division. If he was
making his argument primarily to avoid responsibility, then he would probably make a
different argument if the price had decreased. In that case, he would probably want to be
rewarded for good performance.

C. Changing vendors could have many benefits, such as reducing costs, enhancing quality,
improving delivery timeliness, etc. Changing vendors could also do the opposite
increase costs, decrease quality, and result in delivery delays. The relationship with the
vendor may also be important. It may not be in the companys best interests to drop a
long-term and beneficial relationship. At the same time, it might be in the companys
interests to develop a relationship with a new supplier.
D. The practice of giving managers bonuses based on comparisons of actual to standard
costs can motivate managers to achieve or exceed standards. In turn, achieving the
standards can help the company meet profitability and other goals.
E. As discussed more completely in Chapter 10, employees are most likely to be motivated
by a standard that is achievable. Vendor price increases or decreases should be reflected
in the standard if they are not in the managers control. This improves the fairness and
achievability of the standard. However, the standard should not be adjusted for vendor
price changes that the manager can influence. In this case, the adjustment would reduce
the managers motivation to control costs.
F. There is no one answer to this part. Sample solutions and a discussion of typical student
responses will be included in assessment guidance on the Instructors web site for the
textbook (available at www.wiley.com/college/eldenburg).
BUILD YOUR PROFESSIONAL COMPETENCIES

6.38 Focus on Professional Competency: Reporting
A. Information used in process costing reports:
Departments in the production process for which process accounting is

performed
Cost flow assumption (e.g., FIFO, weighted average) or standard costs
Beginning WIP: units, percent complete, costs (direct materials, conversion

costs, transferred-in costs)
Costs incurred during the period (direct materials used, conversion costs
incurred)
Ending WIP: units, percent complete
Spoilage: units, normal amount of spoilage
Number of units started and transferred out

Information required to perform calculations needed for a process costing report:
Flow of costs in the production process

o Point at which direct materials are added
o Pattern in which conversion costs are incurred
o Point(s) at which inspection occurs
Assignment of costs in the accounting system for direct materials and

conversion (this could include computation of depreciation, allocation of physical
space costs, estimates for costs incurred but not yet paid, and so on)
B. Chapter 6 introduced three methods for preparing a process costing report: FIFO,
weighted average, and standard costs. Each method has pros and cons and results in
different information for users.
C. Objectivity is needed to avoid bias in the measurement of costs and other factors such as
percent completion. Conciseness and clarity are needed to enhance communication.
Managers are more likely to use the information in a process cost report if the report
contains only important information that is easy to understand.
D. There is no one answer to this question. The explanation of the cost report should be
adapted to the characteristics and needs of the audiencein this case, non-accountant
managers. It should not include technical accounting terms unless there is reason to
believe that the managers know the terms. Also, most non-accountant managers are
probably are more interested in the results of the report than in details about how it was
prepared. They should be given details only for items involving judgment that would
significantly affect the results. For example, it might be appropriate to point out that
spoiled units were assumed to be removed at the end of production rather than at a midpointbut only if the point of inspection for spoilage would be likely to affect the results
sufficiently to affect the managers decisions.

E. In the Premier Plastics illustrations, the accountant is not serving as a spokesperson to
people outside the organization. Instead, she is serving as a spokesperson within the
organization; she was choosing a report to communicate the costs of producing products.
Specific things she did as a spokesperson included:
Focusing on the managers needssuch as their need to monitor costs for new
equipment
Choosing a cost flow assumption to provide managers with the most current
cost information
Gaining consensus by discussing her choice with the managers who will use
the information
Remaining alert for deviations from expectationssuch as the large spoilage
identified for July, leading to a revision in the content of the process report to
include normal and abnormal spoilage
Alerting managers to potential competitor strengths and production problem
areassuch as the discoloration quality problem in the plastics department.
F.
1. The methods used to create process cost reports might require monitoring and
updating because of changes in production processes or accounting systems. In
addition, changes may be needed because the information that managers want
changes. For example, successful competition in recent years has increasingly
focused on the ability to control costs. Managers are likely to need more precise and
timely information to effectively monitor costs.
2. Process cost reports can be used to monitor operating performance by allowing
managers to observe trends in per-unit costs over time. Actual costs can also be
compared with standard costs to evaluate whether operations are in controli.e., are
meeting expectations or targeted levels of performance.
6.39 Integrating Across the Curriculum: Production Management
[Note: This problem assumes knowledge of Chapter 5 (job costing). The problem does NOT
assume knowledge of JIT or backflush accounting, but Part B.2 encourages students to think
about how process costing might be less complex in the absence of significant work in process
inventories.]
A.
1. Work in process inventories should greatly decrease. Currently, whole jobs are
waiting to be processed at each department. With continuous processing, these will
disappear. The only in-process inventory will be jobs in process within a cell, most of
which will be completed the next day. Because individual units are produced one by
one, there will be very few individual units in process at any point in time.
Raw material inventory should almost disappear. The company currently carries a
parts inventory. Under the new system, it would carry parts only for jobs in process.

2. Materials handling costs may decrease depending on the trade-off in increased time of
delivering parts more frequently to cells and elimination of transfers between
departments. Finished goods still need to be transported to shipping.
Machine set ups should all but disappear. Since each cell will be dedicated to one
product line, machines can be permanently set for the product. Nonetheless, some
adjustments will likely need to be made for different models, but the adjustments are
probably minor.
3. There should be a substantial decrease in the number of defects. Instead of testing
units after an entire batch has been completed, the units will be tested continuously.
A faulty assembly or soldering operation should be caught (and corrective action
taken) after only one or two units have been affected, not the entire order. In addition,
fewer setting changes will be made to the equipment in assembly and soldering,
which should reduce the likelihood that defects are caused by erroneous settings.
4. The ratio of units produced to units ordered should decrease. Under the current
system the firm must estimate the number of units that will fail to pass inspection.
They must produce enough units so that units produced minus defective units still
yield enough units to satisfy the customer's order. To be highly confident that enough
units will be produced to fill an order, an excess number of units is probably
produced, on average. Under the new system a cell keeps on producing for an order
until enough good units are achieved. Thus, only the minimum number of units
needed will be produced.
5. The firm should experience a decrease in the workload for production scheduling.
Instead of scheduling jobs through several departments, jobs need only be assigned to
a single cell. Also, the need to expedite replacements for spoiled jobs should
disappear as entire jobs should no longer be spoiled.
Machine utilization rates are likely to fall. If there are no orders for a particular
product for a period of time, the cells dedicated to that product would be idle. In fact,
this is the major tradeoff for adopting a job versus process orientation. If a firm
makes many different products (requiring different kinds of processing on a variety of
machines) but none of them in any significant quantity, then it cannot afford to
dedicate equipment to each product line. However, as the breadth of the product line
decreases or manufacturing processes become more similar, management should
consider the benefits of switching to a process orientation.
6. This depends on the tradeoff between the various costs saved and the additional costs
incurred to obtain separate equipment for each cell (if necessary) and the cost of idle
equipment. However, total costs will probably decrease. Presumably, management
will not make the change unless they study existing and expected future production
patterns and expect the cost savings to be larger than the additional costs.
7. The change in system will probably make it more difficult to fill a customers rush
order. No parts inventories are maintained, and it will take approximately one week
to receive new parts.
B.
1. With a change from a job orientation to a process orientation, there does not appear to
be a need to know the cost for any particular order. The company could use process
costing to compute the average materials and conversion cost for each type of
product. For pricing or profitability analysis, the firm could add the cost of materials
required for each model to the average conversion cost. This manufacturing situation
is similar to a fast-food restaurant where managers may wish to track the relative
profitability of food versus drinks, but there is no need to capture the cost of
hamburgers versus cheeseburgers, nor is there a need to know the profitability of a
particular customer's order. Under process costing, costs could be measured and
monitored to ensure that costs of each process are in control. This accounting system
would cost less than the current job costing system because detailed data for each job
would no longer be tracked.
2. First, there would be no need to keep track of raw material inventory. The cost of raw
material purchases could be added directly to production. Second, the absence of
significant work in process inventory reduces the need to calculate and track
equivalent units. Units started would be roughly equal to units completed, so the
company could adopt an actual cost system for each product line and simply record
all production costs directly in cost of goods sold. This would also eliminate the need
to choose between the FIFO and weighted average methods. The average materials
and conversion cost for each type of product could be periodically measured and
monitored to ensure that costs are in control. But it does not appear necessary to
capture this information for units on a continuous basis. If desired, the small amount
of jobs in process at the end of an accounting period could be handled through end of
period adjustments rather than through a system that continuously tracks work in
process inventory.

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Chapter 6

How are costs assigned to mass-produced products?

Step 1 skills (Identifying)

Step 2 skills (Exploring)

Step 3 skills (Prioritizing)

Step 4 skills (Envisioning)

Chapter 6: Process Costing

Summarize Physical and Equivalent Units

Work This Period

Chapter 6: Process Costing

6.16 Fine Fans

Beginning WIP (FIFO and Weighted

Summarize Physical and Equivalent Units

Work This Period

Calculate Actual Cost Per Equivalent Unit

Beginning WIP + Direct materials cost =

Beginning WIP + Direct materials cost =

Total cost per equivalent unit:

_____________Direct materials cost_____________

Total cost per equivalent unit:

6.17 Journal Entry for Abnormal Spoilage

6.18 Journal Entry for Normal and Abnormal Spoilage

Chapter 6: Process Costing

6.19 through 6.22 Felix and Sons

Beginning WIP (FIFO and Weighted

Summarize Physical and Equivalent Units

Work This Period

Calculate Actual Cost Per Equivalent Unit

Beginning WIP + Direct materials cost =

Beginning WIP + Direct materials cost =

Total cost per equivalent unit:

_____________Direct materials cost_____________

Total cost per equivalent unit:

Process Cost Reports for December 31

Total units completed and

6.23 Humphrey Manufacturing

Total Accounted For

Total cost of beginning WIP

Beginning WIP (FIFO and Weighted

Chapter 6: Process Costing

Summarize Physical and Equivalent Units

Work This Period

Calculate Actual Cost Per Equivalent Unit

Beginning WIP + Direct materials cost =

Beginning WIP + Direct materials cost =

Total cost per equivalent unit:

_____________Direct materials cost_____________

Total cost per equivalent unit:

6-10 Cost Management

Total cost of beginning WIP

Total units completed and

Chapter 6: Process Costing 6-11

6-12 Cost Management

Direct Materials Conversion Costs

2. Summarize Physical and Equivalent Units

Work This Period

3. Calculate First-in, First-out Cost Per Equivalent Unit

_____________Direct materials cost_____________

Total cost per equivalent unit:

Chapter 6: Process Costing 6-13

Total cost of beginning WIP transferred out

Total units completed and transferred out

Total Accounted For

_Direct materials cost_

_Direct materials cost_

_Direct materials cost_

_Direct materials cost_

_Direct materials cost_

_Direct materials cost_

Direct materials: __Direct materials cost_ =

Conversion costs:_Conversion costs =