ACCT10 Chapter 4 Solutions

Chapter 4
Systems Design: Process Costing

Solutions to Questions
4-1
A process costing system should be
used in situations where a homogeneous product is produced on a continuous basis.
4-2
1. In job-order costing many different jobs are
worked on during each period each with its own
production requirements. In process costing, a
single product is produced on a continuous basis
and all units are identical.
2. The job cost sheet is the key document in
job-order costing while the department production report is the key document in process costing.
3. Unit costs are computed by job in job-order
costing while unit costs are computed by department in process costing.
4-3
Cost accumulation is simpler under process costing because costs only need to be assigned to departmentsnot separate jobs. A
company usually has a small number of
processing departments, whereas a job-order
costing system often must keep track of the
costs of hundreds or even thousands of jobs.
4-4
In a process costing system, a Work in
Process account is maintained for each separate
processing department.
4-5
The journal entry would be:
Work in Process, Firing......................................
XXXX
Work in Process, Mixing ...
XXXX
4-7
Under the weighted-average method,
equivalent units of production consist of units
transferred to the next department (or to finished goods) during the period plus the equivalent units in the departments ending work in
process inventory.
4-8 The company will want to distinguish between the costs of the metals used to make the
medallions, but the medals are otherwise identical and go through the same production
processes. Thus, operation costing is ideally
suited for the companys needs.
4-9 Disagree. In fact, flexible manufacturing
systems may actually increase the use of process costing over time. These systems can have
a major impact on costing since they allow for
an easy switch from producing one type of
product to another. The systems flexibility
means product switching results in little time lost
and relatively low setup costs. Therefore, companies are able to move between products with
about the same speed as they would if they
were working in a continuous processing environment. As the use of flexible manufacturing
systems grows, so should the application of process costing techniques.
4-10 The number of full-time equivalent students is 5,000 + 50%(1,250) = 5,625.
4-6
The costs that might be added in the
Firing Department include: (1) costs transferred
in from the Mixing Department; (2) materials
costs added in the Firing Department; (3) labour
costs added in the Firing Department; and (4)
overhead costs added in the Firing Department.
McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Solutions Manual, Chapter 4
Exercise 4-1 (20 minutes)

a. To record issuing raw materials for use in production:
Work in ProcessMoulding Department .......
28,000
Work in ProcessFiring Department.............
5,000
Raw Materials .......................................
33,000
b. To record direct labour costs incurred:

Wages Payable .....................................
18,000
5,000
23,000
c. To record applying manufacturing overhead:

Manufacturing Overhead .......................
24,000
37,000
61,000
d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department:
67,000
Work in ProcessMoulding Department .
67,000
e. To record transfer of finished bricks from the Firing Department to the
finished goods warehouse:
Finished Goods............................................
108,000
Work in ProcessFiring Department ......
108,000
f. To record Cost of Goods Sold:
Cost of Goods Sold ......................................
Finished Goods .....................................
106,000
106,000

2
Managerial Accounting, 9th Canadian Edition

Weighted-Average Method
Quantity Schedule
Units to be accounted for:

Work in process, October 1
Units started into production
Total units
25,000
195,000
220,000
Units transferred to the next department .........................................................

205,000
Ending work in process:
Materials: 15,000 units 70%
complete .................................................
15,000
Conversion: 15,000 units 50%
complete .................................................
Equivalent units of production .......................
220,000
Equivalent Units
Materials Conversion
205,000
205,000
10,500
215,500
7,500
212,500


Costs per Equivalent Unit:
Total
Cost
Materials Labour Overhead
Work in process, May 1 ........$156,270 $ 14,550 $23,620 $118,100

Cost added during May ........ 174,330
88,350 14,330
71,650
Total cost (a) ......................$330,600 $102,900 $37,950 $189,750
Equivalent units of
production (b)...................
Cost per equivalent unit
(a) (b) ..........................
---------
1,200
1,100
1,100
$85.75
$34.50
$172.50
Total cost per equivalent Unit = $85.75 + $34.50 + $172.50 = $292.75

4

Ending work in process inventory:
Equivalent units of production .................

Cost per equivalent unit ..........................
Cost of ending work in process inventory .
Units completed and transferred out:
Units transferred to the next department .

Cost per equivalent unit ..........................
Cost of units completed and transferred
out ....................................................
Total
300
$31.56
$9,468
100
$9.32
$932 $10,400
1,300
$31.56
1,300
$9.32
$41,028
$12,116 $53,144


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

260,000
Work in ProcessBaking ................................................
120,000
Wages Payable .........................................................
380,000

190,000
90,000
Manufacturing Overhead ...........................................
280,000

760,000
Work in ProcessMixing ...........................................
760,000
Finished Goods ..............................................................

980,000
Work in ProcessBaking ...........................................
980,000

6

1.
Equivalent Units
Materials
Labour Overhead
Units transferred to the next

department ....................................
Materials: 50,000 units 60%
complete......................................
Labour: 50,000 units 20%
complete......................................
Overhead: 50,000 units 20%
complete......................................
Equivalent units of production ............
790,000
790,000
790,000
30,000
10,000
820,000
800,000
10,000
800,000
2. Cost per Equivalent Unit:

Cost of beginning work in process ....... $ 68,600 $ 30,000 $ 48,000
Costs added during the period ............ 907,200 370,000 592,000
Total cost (a) ..................................... $975,800 $400,000 $640,000
Equivalent units of production (b) ....... 820,000 800,000 800,000
Cost per equivalent unit (a) (b)........
$1.19
$0.50
$0.80


Equivalent Units (EU)
Labour &
Materials Overhead
Kilograms transferred to the Packing Department

during May*........................................................ 245,000
Work in process, May 31:
Materials: 10,000 kilograms 100% complete...... 10,000
Labour and overhead: 10,000 kilograms 90%
complete ..........................................................
Equivalent units of production ................................ 255,000
245,000
9,000
254,000
* Beginning WIP 15,000 + Started 240,000 Ending WIP 10,000 =

245,000 kilograms.

8

1. Equivalent Units:
Units transferred to the next process ...............320,000
320,000
Materials: 60,000 units 45% complete ....... 27,000
Conversion: 60,000 units 20% complete ......
12,000
Equivalent units of production .........................347,000
332,000
2. Costs per Equivalent Unit:
Cost of beginning work in process ..................$ 76,600
$ 34,900
Cost added during the period ......................... 410,000
234,500
Total cost (a) ................................................$486,600
$269,400
Equivalent units of production (b)................... 347,000
332,000
Cost per equivalent unit (a) (b) ................... $1.40
$0.81
3.

Equivalent units of production
(see above) ........................
Cost per equivalent unit (see
above) ...............................
Cost of ending work in process
inventory ............................
27,000
12,000
$1.40
$0.81
$37,800
$9,720
Total
$47,520

department ........................
(see previous exercise)........
Cost of units completed and
transferred out.
320,000
320,000
$1.40
$0.81
$448,000
$259,200
$707,200


Cost Reconciliation
Cost accounted for as follow:
Transferred to Packaging Dept:
25,000 rolls x $17.10
Work in process, January 31:
Materials, $9.50 per EU
Conversion , $7.60 per EU
Total cost accounted for
Total Cost
Materials
$427,500
25,000
$22,800
$13,680
36,480
$463,980
2,400
Conversion
25,000
1,800

10
Problem 4-10 (45 minutes)

1. Equivalent Units of Production
Transferred to next department........................
Materials: 80,000 units 75% complete ........
Conversion: 80,000 units 25% complete .....
Equivalent units of production ..........................
2. Cost per Equivalent Unit
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) (b) ...............
450,000
60,000
510,000
450,000
20,000
470,000
$ 36,550
391,850
$428,400
510,000
$0.84
$ 13,500
267,300
$280,800
470,000
$0.597*
*rounded
3.
Applying Costs to Units

(materials: 80,000 units 75%
complete; conversion: 80,000
units 25% complete) ......
60,000
Cost per equivalent unit .......
$0.84
inventory ...........................
$50,400
department .......................
450,000
$0.84
transferred out...................
$378,000
Total
20,000
$0.597
$11,940
$62,340
450,000
$0.597
$1.437
$268,650
$646,650

11
Problem 4-10 (continued)

4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($36,550 + $13,500)..................................
Costs added to production during the period
($391,850 + $267,300) ..............................
Total cost to be accounted for .......................
Costs accounted for as follows:
Transferred to next department:
450,000 units x $1.437 .....................................
Work in process June 30
Materials at $0.84 per EU .............................
Conversion at $0.597 per EU ........................
Total cost accounted for ...............................
$ 50,050
659,150
$709,200
$646,650
50,400
11,940
62,340
$708,990*
*off $210 due to rounding

12

Transferred to next department* ......................
Materials: 55,000 units 65% complete ........
395,000
35,750
Conversion: 55,000 units 30% complete .....

395,000
16,500
430,750
411,500
*Units transferred to the next department = Units in beginning work in

process + Units started into production Units in ending work in
process = 85,000 + 365,000 55,000 = 395,000
Materials

Total cost (a) ..............................................
$ 101,000
462,000
$563,000
430,750
$1.31
Conversion
$ 51,000
213,000
$264,000
411,500
$0.64

13

3. Cost of Ending Work in Process Inventory and Units Transferred Out

(materials: 55,000 units 65%
complete; conversion: 55,000
units 30% complete) ......
35,750
$1.31
inventory ...........................
$46,833
395,000
department .......................
$1.31
$517,450
Total
16,500
$0.64
$10,560
$57,393
395,000
$0.64
$1.95
$252,800
$770,250

14

($101,000 + $51,000) ....................................
($462,000 + $213,000) ..................................
Total Cost
Transferred to the Coating Department
395,000 x $1.95
Work in process, May 31
Materials at $1.31 per EU
Conversion at $0.64 per EU
Total ending Work in process
Total cost
$152,000
675,000
$827,000
$770,250
46,833
10,560
57,393
*$827,643
*Difference of $643 due to rounding of the per unit costs

15

1. Total units transferred to the next department ...
Less units in the May 1 inventory ......................
Units started and completed in May...................
2. The equivalent units were:
30,000
5,000
25,000
Transferred to next department..................

Materials: 4,000 units 75% complete ....
Conversion: 4,000 units 50% complete .
Equivalent units of production ....................
30,000
30,000
3,000
2,000
32,000
33,000
3. The costs per equivalent unit were:

Total cost (a) ..............................................
9,000
57,000
66,000
33,000
2.00
4,400
30,800
35,200
32,000
1.10
4. The ending work in process figure is verified as follows:

(see above) .................................
Cost per equivalent unit .................
inventory .....................................
3,000
2.00
6,000
Total
2,000
1.10
2,200 8,200
5. Multiplying the unit cost figure of 3.10 per unit by 1,000 units does not
provide a valid estimate of the incremental cost of processing an additional 1,000 units through the department. If there is sufficient idle capacity to process an additional 1,000 units, the incremental cost per unit
is almost certainly less than 3.10 per unit because the conversion costs
are likely to include fixed costs.

16

Transferred to next department* ...................... 270,000

Materials: 45,000 kilograms 100% complete .. 45,000
Conversion: 45,000 kilograms 2/3 complete ..
Equivalent units of production .......................... 315,000
*35,000 + 280,000 45,000 = 270,000.
Total cost (a) ..............................................
Materials
$ 43,400
397,600
$441,000
315,000
$1.40
270,000
30,000
300,000
Conversion
$ 20,300
189,700
$210,000
300,000
$0.70
3. Cost of Ending Work in Process Inventory and Units Transferred Out

(see above) .......................
45,000
$1.40
inventory ...........................
$63,000
department .......................
270,000
$1.40
$378,000
Total
30,000
$0.70
$21,000
$84,000
270,000
$0.70
$2.10
$189,000
$567,000

17

4. In computing unit costs, the weighted-average method mixes costs of
the prior period with current period costs. Thus, under the weightedaverage method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant
when attempting to measure performance in the current period. Good
(or bad) cost control in the current period might be concealed by the
costs that have been brought forward in the beginning inventory.

18

1. The equivalent units are:
Units completed during the year .....................
Work in process, Dec. 31:
Materials: 30,000 units 100% complete ....
Conversion: 30,000 units 50% complete ...
Equivalent units of production ........................
Materials
790,000
30,000
820,000
Conversion
790,000
15,000
805,000
The costs per equivalent unit are:

Work in process, Jan. 1..................................
Cost added during the year ............................
Total cost (a) ................................................
Equivalent units of production (b)...................
Cost per equivalent unit (a) (b) ...................
Materials
Conversion
$ 22,000 $ 48,000
880,000 2,367,000
$902,000 $2,415,000
820,000
805,000
$1.10
$3.00
2. The amount of cost that should be assigned to the ending inventories is:
(see above) .......................
inventory ...........................
Finished goods inventory:
Equivalent units ...................
Total
30,000
$1.10
15,000
$3.00
$33,000
$45,000
$78,000
50,000
$1.10
50,000
$3.00
$4.10
$55,000
$150,000
$205,000

19

3. The necessary adjustments would be:
Work in
Process
Finished
Goods
Total
Total cost that should be assigned

to inventories (see above) ............................................
$ 78,000 $205,000 $283,000
Year-end balances in the accounts ..................................
95,000
201,000 296,000
Error..............................................................................
$(17,000) $ 4,000 $(13,000)
Finished Goods Inventory................................................
4,000
Cost of Goods Sold .........................................................
13,000
Work in Process Inventory ......................................... 17,000
4. The cost of goods sold can be determined as follows:
Beginning finished goods inventory..................................
0
Units completed during the year ......................................
790,000
Units available for sale ....................................................
790,000
Less units in ending finished goods inventory ...................50,000
Units sold during the year ...............................................
740,000
Cost per whole unit ($1.10 + $3.00) ................................
$4.10
Cost of goods sold ..........................................................
$3,034,000
Alternative computation:
Total manufacturing cost incurred:
Materials (part 1. above) ..............................................
$ 902,000
Conversion (part 1. above) ...........................................
2,415,000
Total manufacturing cost ................................................
3,317,000
Less cost assigned to inventories (part 3. above)..............
283,000
Cost of goods sold ..........................................................
$3,034,000

20

1. a. Work in ProcessBlending .............................................
495,000
115,000
Work in ProcessBottling
610,000
Raw Materials ...........................................................
b. Work in ProcessBlending .............................................
72,000
Work in ProcessBottling ...............................................
18,000
Salaries and Wages Payable ......................................
90,000
c. Manufacturing Overhead ................................................
225,000
Accounts Payable ......................................................
225,000
d. Work in ProcessBlending .............................................
181,000
181,000
Work in ProcessBottling ...............................................
42,000
42,000
e. Work in ProcessBottling ...............................................
740,000
Work in ProcessBlending ........................................
740,000
f. Finished Goods ..............................................................
950,000
Work in ProcessBottling ..........................................
950,000
g. Accounts Receivable .......................................................
1,500,000
Sales ........................................................................
1,500,000
Cost of Goods Sold .........................................................
890,000
Finished Goods .........................................................
890,000

21

2.
Work in ProcessBottling
Bal.
65,000 (f)
950,000
Work in ProcessBlending
Bal.
38,000 (e)
740,000
(a)
115,000
(a)
495,000
(b)
18,000
(b)
72,000
(d)
42,000
(d)
181,000
(e)
740,000
Bal.
30,000
Bal.
46,000
Bal.
Finished Goods
20,000 (g)
890,000
Manufacturing Overhead
(c)
225,000 (d)
181,000
(d)
Bal.
Bal.
Bal.
42,000
2,000
(f)
950,000
Bal.
80,000
Raw Materials
681,000 (a)
610,000
Accounts Payable
(c)
225,000
71,000
Salaries and Wages Payable

(b)
90,000
Sales
(g)
Accounts Receivable
1,500,000
Cost of Goods Sold

890,000
(g)
(g)
1,500,000

22

3. Production Report Blending Department
Quantity
Schedule
Work in process, March 1
20,000
Started into production
390,000
Total Units
410,000
Equivalent Units (EU)
Material
Labour
Overhead
Units accounted for as follows:

Transferred to Bottling
Work in process March 31
Total units and equivalent
units of production
370,000 370,000 370,000

40,000
30,000
370,000
10,000
10,000
410,000 400,000 380,000
380,000
Costs per Equivalent Unit:

Total cost
Material
Labour Overhead
Cost to be accounted for:

Work in process, March 1
$38,000 $25,000
$4,000
$9,000
Cost added by the Blending

Department
748,000 495,000
72,000
181,000
$786,000 520,000
76,000
190,000
400,000 380,000
380,000
Total Cost
$1.30
$0.20
$0.50

23
Case 4-16 (120 minutes)

This case is difficultparticularly part 3, which requires analytical skills.
Because there are no beginning inventories, it makes no difference
whether the weighted-average or FIFO method is used by the company.
You may choose to specify that the FIFO method be used rather than
the weighted-average method.
1. Computation of the Cost of Goods Sold:
Units completed and sold.......................
Transferred in:
20,000 units 100% complete ..........
Conversion:
20,000 units 25% complete............
Equivalent units of production ................
Cost of beginning work in process ..........
Cost added during the period .................
Total cost (a) ........................................
Equivalent units of production (b) ..........
Cost per equivalent unit, (a) (b) .........
Transferred In
250,000
Conversion
250,000
20,000
270,000
Transferred In
5,000
255,000
Conversion
$
0 $
0
49,221,000 16,320,000
$49,221,000 $16,320,000
270,000
255,000
$182.30
$64.00
Cost of goods sold = 250,000 units ($182.30 + $64.00) per unit =

$61,575,000.
2. The estimate of the percentage completion of ending work in process
inventories affects the unit costs of finished goods and therefore the
cost of goods sold. Jason Bieler would like the estimated percentage
completion of the ending work in process to be increased. The higher
the percentage of completion of ending work in process, the higher the
equivalent units for the period and the lower the unit costs.
3. Increasing the percentage of completion can increase operating income
by reducing the cost of goods sold. To increase operating income by
$62,500, the cost of goods sold would have to be decreased by $62,500
from $61,575,000 down to $61,512,500. See the next page for the necessary calculations.
24
Case 4-16 (continued)

The percentage of completion, X, affects the cost of goods sold by its
effect on the unit cost, which can be determined as follows:
Unit cost = $182.30 +
$16,320,000
250,000 + 20,000X
And the cost of goods sold can be computed as follows:

Cost of goods sold = 250,000 Unit cost
Since cost of goods sold must be reduced down to $61,512,500, the unit
cost must be $246.05 ($61,512,500 250,000 units). Thus, the required percentage completion, X, to obtain the $62,500 reduction in cost
of goods sold can be found by solving the following equation:
$182.30 +
$16,320,000
= $246.05
250,000 + 20,000X
$16,320,000
= $246.05 - $182.30
250,000 + 20,000X
$16,320,000
= $63.75
250,000 + 20,000X
250,000 + 20,000X
1
=
$16,320,000
$63.75
250,000 + 20,000X =
$16,320,000
$63.75
250,000 + 20,000X = 256,000

20,000X = 256,000 - 250,000
20,000X = 6,000
Thus, changing the percentage completion to 30% will decrease cost

of goods sold and increase net operating income by $62,500 as verified
on the next page.
X=
6,000
= 30%
20,000

25

3. (continued)
Computation of the Cost of Goods Sold:
Units completed and sold.......................
Transferred in:
20,000 units 100% complete ..........
Conversion:
20,000 units 30% complete............
Equivalent units of production ................
Cost of beginning work in process ..........
Cost added during the period .................
Total cost (a) ........................................
Equivalent units of production (b) ..........
Cost per equivalent unit, (a) (b) .........
Transferred In
250,000
Conversion
250,000
20,000
270,000
Transferred In
6,000
256,000
Conversion
$
0 $
0
49,221,000 16,320,000
$49,221,000 $16,320,000
270,000
256,000
$182.30
$63.75
Cost of goods sold = 250,000 units ($182.30 per unit + $63.75 per
unit) = $61,512,500.
4. Carol is in a very difficult position. Collaborating with Jason Bieler in
subverting the integrity of the accounting system is unethical by almost
any standard. To put the situation in its starkest light, Bieler is suggesting that the production managers lie in order to get their bonus. Having
said that, the peer pressure to go along in this situation may be intense.
It is difficult on a personal level to ignore such peer pressure. Moreover,
Carol probably prefers not to risk alienating people she might need to
rely on in the future. On the other hand, Carol should be careful not to
accept at face value Bielers assertion that all of the other managers are
doing as much as they can to pull this bonus out of the hat. Those
who engage in unethical or illegal acts often rationalize their own behaviour by exaggerating the extent to which others engage in the same
kind of behaviour. Other managers may actually be very uncomfortable
pulling strings to make the target profit for the year.

26

From a broader perspective, if the profit figures reported by the
managers in a division cannot be trusted, then the company would be
foolish to base bonuses on the net profit figures. A bonus system based
on divisional profits presupposes the integrity of the accounting system.
The company should perhaps reconsider how it determines the bonus. It
is quite common for companies to pay an all or nothing bonus contingent on making a particular target. This inevitably creates powerful incentives to bend the rules when the target has not quite been attained.
It might be better to have a bonus without this all or nothing feature.
For example, managers could be paid a bonus of x% of profits above
target profits rather than a bonus that is a preset percentage of their
base salary. Under such a policy, the effect of adding that last dollar of
profits that just pushes the divisional net profits over the target profit
will add a few pennies to the managers compensation rather than thousands of dollars. Therefore, the incentives to misstate the operating income are reduced. Why tempt people unnecessarily?

27

1. The revised computations follow:
Quantity Schedule and Equivalent Units of Production
Transferred to next department........................

Transferred in: 5,000 units 100% complete .
Materials: 5,000 units 0% complete ............
Conversion: 5,000 units 2/5 complete ..........
Costs per equivalent unit

Cost of beginning work in process ...................
Cost added during the period ..........................
Total cost (a) .................................................
Equivalent units of production (b) ...................
Cost per equivalent unit, (a) (b) ..................
Transferred
In
100,000
5,000
105,000
Transferred
In
$ 8,820
81,480
$90,300
105,000
$0.86
Materials
100,000
0
100,000
Materials
$ 3,400
27,600
$31,000
100,000
$0.31
Conversion
100,000
2,000
102,000
Conversion
$ 10,200
96,900
$107,100
102,000
$1.05

28
Cost reconciliation

Units transferred to the next department .........
Cost per equivalent unit ..................................
Cost of units completed and transferred out ....
Equivalent units of production (see above) ..
Cost per equivalent unit .............................
Cost of ending work in process inventory ....
Transferred
In
Materials
Conversion
Total
100,000
$0.86
$86,000
100,000
$0.31
$31,000
100,000
$1.05
$105,000
$2.22
$222,000
5,000
$0.86
$4,300
0
$0.31
$0
2,000
$1.05
$2,100
$6,400
2. The unit cost computed above is $2.22 (= $0.86 + $0.31 + $1.05) versus $2.284 on the original report. The unit cost on the report prepared by the accountant is high because none of the cost incurred during the month was assigned to the units in the ending work in process inventory.

29
MEMORANDUM
DATE:
TO:
FROM:
SUBJECT:
September 2010
Rachel Archer
Ed Switzer
Ending Work in Process and Finished Goods Inventory Balances
As agreed, I have calculated the ending inventory balances to be included

in the Balance Sheet of Rachels Real Root Beer as at August 30. The calculations assume process costing using the weighted average method. My
calculations indicate an ending balance in Finished Goods Inventory of
$6,456 and an ending Work in Process balance of $1,944. Details of my
calculations are presented in the attached Production Report for the month
of August.

30
Rachels Real Root Beer

Production Report for August (weighted average method)
Quantity Schedule and Equivalent Units
Quantity
Work in process, August 1 (75%
complete for material, 60% for
550
conversion)
Started into production
3,000
Total units
3,550
Equivalent Units
Materials
Conversion
Units accounted for as follows:
Transferred to Finished Goods
Work in process, August 30
(75% complete for material,
50% for conversion)
Total units and equivalent units
Cost per Equivalent Unit
Cost to be accounted for:
Work in process, August 1
Cost added during the month
Total cost
Total cost per equivalent unit
Cost reconciliation:
Cost accounted for as follows:
Transferred to Finished Goods
2,400 units x $2.69
Work in process, August 30:
Materials at $1.38 per EU
Conversion at $1.31 per EU
Total Work in process, Aug 30
Total cost accounted for:
2,400
2,400
2,400
1,150
3,550
Total Cost
863
3,263
Materials
575
2,975
Conversion
$1,080
7,320
$8,400
$650
3,840
$4,490
3,263
$1.38
$430
3,480
$3,910
2,975
$1.31
$2.69
Total Cost
Materials
$6,456
$2,400
1,191
753
1,944
$8,400
863
Conversion
$2,400
575

31
Research and Application 4-19 (120 minutes)

1. The processing departments for BICs ballpoint pen manufacturing process are listed below in sequential order. The raw material inputs are
listed in parentheses next to the department where they are added to
the manufacturing process.
Ball and point production department (hardening and grinding)
(Tungsten carbide balls, metal points and point supports are added
to production).
The Moulding department (plastic casing materials moulded here).
The Cartridge Filling department (ink cartridges are centrifuged and
quality checked here).
The Assembly department (no raw materials are added).
The Quality Control department (no raw materials added here).
The Packaging department (boxes are filled and shrink wrapped for
shipping here).
2. The production process consumes fairly large amounts of manufacturing
overhead costs. This should be apparent to students based on the photographs that accompany the on-line tour. There are many pictures of
large pieces of capital equipment used to mould pen body assemblies,
grind pen balls and set them into their metal points. In addition, the assembly process is described as highly automated with employees really
only monitoring the output of the assembly machines.
The depreciation costs associated with the equipment as well as the utility and maintenance costs incurred to run the equipment are three examples of overhead costs. It is also worth noting that the equipment
shown in the photographs is large in size, thereby suggesting that BICs
pen-making facilities occupy a large amount of floor spaceall of which
needs lighting, heat, insurance, etc. These are additional examples of
manufacturing overhead costs

32
3.
The T-account model is shown below:
Wages Payable
Manufacturing Overhead
Work in Process: Ball point

production
XXX
Work in Process: Molding

XXX
XXX
The T-account model shown above assumes that labour cost is incurred
at each step of the process to operate and maintain the equipment.
4. While the on-line tour does not provide sufficient information to answer
this question, it is reasonable to expect students to speculate that operation costing may be appropriate because BICs stationary line includes
many different types of pens, some of which may go through a slightly
different manufacturing process. This suggests that some material costs
and conversion costs may be assigned to particular batches of production rather than being spread over the entire volume of production for a
given period without regard to the type of pen being manufactured.

33
Appendix 4A FIFO Method

Questions
4A-1 Under the weighted-average method, each unit transferred out of the department is counted as
one equivalent unitregardless of in what period the work was done to complete the units. Under the
FIFO method, only the work done in the current period is counted. Units transferred out are divided into
two parts. One part consists of the units transferred out from beginning inventory. Only the work needed
to complete these units is shown as part of the equivalent units for the current period. The other part of
the units transferred out consists of the units started and completed during the current period.
4A-2The weighted-average method mixes costs from the current period with costs from the prior period.
Thus, under the weighted-average method, the departments apparent performance in the current period
is influenced to some extent by what happened in a prior period. In contrast, the FIFO method cleanly
separates the costs and work of the current period from those of the prior period. This makes the FIFO
method superior to the weighted-average method for cost control because current performance should
be measured in relation to costs of the current period only.

34
Exercise 4A-1 (10 minutes)

FIFO Method
To complete beginning work in process:
Materials: 400 units (100% 75%).................
Conversion: 400 units (100% 25%) .............
Units started and completed during the period
(42,600 units started 500 units in ending
inventory) .........................................................
Ending work in process
Materials: 500 units 80% complete .................
Conversion: 500 units 30% complete ..............
Equivalent units of production ................................
100
42,100
400
42,600
300
42,100
150
42,550

35
Exercise 4A-2(10 minutes)

FIFO method
Cost added during May (a).....
Equivalent units of
production (b) ....................
(a) (b) ............................
Materials
Labour
$41,280 $26,460
Overhead
$66,150
8,000
7,000
7,000
$5.16
$3.78
$9.45
Total
$18.39

36
Exercise 4A-3(15 minutes)

FIFO Method
Equivalent units of production ...............

Cost per equivalent unit ........................
Cost of ending work in process inventory
Total
800
$4.40
$3,520
200
$1.30
$260
$3,780
$2,700
$380
$3,080
400
$4.40
700
$1.30
$1,760
$910
7,000
$4.40
7,000
$1.30
$30,800
$9,100
Units transferred out:
Cost in beginning work in process

inventory .........................................
Cost to complete the units in beginning

work in process inventory:
Equivalent units of production required
to complete the beginning inventory
Cost per equivalent unit ......................
Cost to complete the units in beginning
inventory .......................................
Cost of units started and completed this period:

Units started and completed this period
(8,000 units completed and transferred to the next department
1,000 units in beginning work in
process inventory) ..........................
Cost per equivalent unit ......................
Cost of units started and completed
this period .....................................
Total cost of units transferred out ..........
2,670
39,900
$45,650

37

FIFO Method
1.

Materials: 80,000 litres
(100% 80%) ................................ 16,000
Labour: 80,000 litres
(100% 75%) ................................
20,000
Overhead: 80,000 litres
(100% 75%) ................................
Units started and completed during the
period (790,000 80,000) ................... 710,000 710,000
Materials: 50,000 litres 60% ............. 30,000
Labour: 50,000 litres 20% ................
10,000
Overhead: 50,000 litres 20% ............
Equivalent units of production ................ 756,000 740,000
2.
20,000
710,000
10,000
740,000
Cost added during the period (a) ............ $907,200 $370,000 $592,000
Equivalent units of production (b) ........... 756,000 740,000 740,000
Cost per equivalent unit (a) (b) ......... ` $1.20
$0.50
$0.80

38

FIFO method
1. Computation of the total cost per equivalent unit of production:
Cost per equivalent unit of production for material .............
Cost per equivalent unit of production for conversion .........
Total cost per equivalent unit of production .......................
$18.20
23.25
$41.45
2. Computation of equivalent units in ending inventory:

Units in ending inventory .........
Percentage completed .............
Equivalent units of production ..
Materials
300
80 %
240
Conversion
300
40 %
120
3. Computation of equivalent units required to complete the beginning inventory:

Units in beginning inventory.....
Percentage uncompleted .........
Equivalent units of production ..
Materials
400
30 %
120
Conversion
4. Units transferred to the next department .............

Less units from the beginning inventory ..............
Units started and completed during the period .....
400
70 %
280
4,400
400
4,000

39
Exercise 4A-5 (continued)

5.

Equivalent units of production ...................................................
Cost per equivalent unit ............................................................
Cost of ending work in process inventory ...................................
240
$18.20
$4,368

Cost from the beginning work in process inventory.....................
$4,897
Cost to complete the units in beginning work in process inventory:
Equivalent units of production required to complete the units
in beginning inventory.......................................................
120
Cost per equivalent unit .......................................................
$18.20
Cost to complete the units in beginning inventory ..................
$2,184
Units started and completed this period.................................
4,000
Cost per equivalent unit .......................................................
$18.20
Cost of units started and completed this period...................... $72,800
Total cost of units transferred out .............................................
Total
120
$23.25
$2,790
$7,158
$2,989
$7,886
280
$23.25
$6,510
8,694
4,000
$23.25
$93,000
165,800
$182,380

40

FIFO Method
Labour &
Materials Overhead
To complete the beginning work in process:

Materials: 15,000 kilograms (100% 100%) ....
0
Labour and overhead:
15,000 kilograms (100% 55%) ...................
Kilograms started and completed during May
(240,000 kilograms started 10,000 kilograms
in ending inventory) ............................................ 230,000
Materials: 10,000 kilograms 100% complete...... 10,000
Labour and overhead: 10,000 kilograms 90%
complete ..........................................................
Equivalent units of production ................................ 240,000
6,750
230,000
9,000
245,750

41
Problem 4A-7 (45 minutes)

FIFO method
Materials: 70,000 units (100% 70%) ......
Conversion: 70,000 units (100% 40%) ...
(460,000 units started 80,000 units in ending inventory) ...............................................
Materials: 80,000 units 75% complete .......
Conversion: 80,000 units 25% complete ....
Equivalent units of production ...........................
Cost added during the period (a) ..............
Equivalent units of production (b) .............
Cost per equivalent unit (a) (b) .............
21,000
380,000
60,000
461,000
42,000
380,000
20,000
442,000
$391,850
461,000
$0.85
$267,300
442,000
$0.605
3. See the next page.

($36,550 + $13,500)..........................................
$ 50,050
($391,850 + $267,300) ......................................
659,150
Total cost to be accounted for ................................
$709,200
Cost of ending work in process inventory ................
$ 63,100
Costs of units transferred out .................................
646,210
Total cost accounted for ........................................ *$709,310
*Off $110 due to rounding.

42
Problem 4A-7 (continued)

3. Costs of Ending Work in Process Inventory and Units Transferred Out
Equivalent units of production .................................................
Cost per equivalent unit ..........................................................
Cost of ending work in process inventory .................................
60,000
$0.85
$51,000

Cost in beginning work in process inventory ............................ $36,550
Equivalent units of production required to complete the beginning inventory ............................................................
21,000
Cost per equivalent unit .....................................................
$0.85
Cost to complete the units in beginning inventory ................ $17,850
Units started and completed this period .............................. 380,000
$0.85
Cost of units started and completed this period ................... $323,000
Cost of units transferred out ...................................................

43
Total
20,000
$0.605
$12,100
$63,100
$13,500
$50,050
42,000
$0.605
$25,410
43,260
380,000
$0.605
$229,900
552,900
$646,210
Problem 4A-8 (45 minutes)

FIFO Method
Materials: 50,000 units (100% 60%) ......
Conversion: 50,000 units (100% 30%) ...
(500,000 units started 60,000 units in ending inventory) ...............................................
Materials: 60,000 units 80% complete .......
Conversion: 60,000 units 40% complete ....
Equivalent units of production ...........................
Cost added during the period (a) ..............
Equivalent units of production (b) .............
Cost per equivalent unit (a) (b) .............
20,000
440,000
48,000
508,000
35,000
440,000
24,000
499,000
$457,200
508,000
$349,300
499,000
$0.90
$0.70
3. See the next page.

($17,000 + $3,000) ............................................
($457,200+ $349,300) .......................................
Total cost to be accounted for ................................
Cost of ending work in process inventory ................
Costs of units transferred out .................................
Total cost accounted for ........................................
$ 20,000
806,500
$826,500
$ 60,000
766,500
$826,500

44
Problem 4A-8 (continued)

3. Costs of Ending Work in Process Inventory and Units Transferred Out
Equivalent units of production .................................................
Cost per equivalent unit ..........................................................
Cost of ending work in process inventory .................................
48,000
$0.90
$43,200

Cost in beginning work in process inventory ............................ $17,000
Equivalent units of production required to complete the beginning inventory ............................................................
20,000
$0.90
Cost to complete the units in beginning inventory ................ $18,000
Units started and completed this period .............................. 440,000
$0.90
Cost of units started and completed this period ................... $396,000
Cost of units transferred out ...................................................
Total
24,000
$0.70
$16,800
$60,000
$3,000
$20,000
35,000
$0.70
$24,500
42,500
440,000
$0.70
$308,000
704,000
$766,500

45
Case 4A-9 (60 minutes)

FIFO Method
1.
Transferred in: 8,000 units 0% ..................................
Materials: 8,000 units 0% .........................................
Conversion: 8,000 units (1 7/8)..............................
Units completed during the period (100,000 units started
8,000 units in beginning inventory) ................................
Transferred in: 5,000 units x 100% complete
Materials: 5,000 units 0% complete ...........................
Conversion: 5,000 units 2/5 complete ........................
Equivalent units of production ...........................................
Cost added during the period (a) .......................................
Equivalent units of production (b) ......................................
Cost per equivalent unit (a) (b) ......................................
Transferred In
0
92,000
5,000
97,000
Transferred In
$81,480
97,000
$0.84

46
0
92,000
0
92,000
1,000
92,000
2,000
95,000
$27,600
92,000
$0.30
$96,900
95,000
$1.02
Case 4A-9 (continued)

Cost per equivalent unit ...................................
Cost of ending work in process inventory ..........
Transferred In Materials Conversion

5,000
$0.84
$4,200

Cost in beginning work in process inventory .....
$8,820
Cost to complete units in beginning work in process inventory:
Equivalent units of production required to
complete the beginning inventory (see
above) ....................................................
0
Cost per equivalent unit ..............................
$0.84
Cost to complete units in beginning
inventory.................................................
$0
Units started and completed this period .......
92,000
Cost per equivalent unit ..............................
$0.84
Cost of units started and completed this
period .....................................................
$77,280
Cost of units transferred out ............................
Total
0
$0.30
$0
2,000
$1.02
$2,040
$6,240
$3,400
$10,200
$22,420
0
$0.30
1,000
$1.02
$0
$1,020
92,000
$0.30
92,000
$1.02
$27,600
$93,840
$1,020
$198,720
$222,160
2. The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is that
the FIFO method keeps the costs of the current period separate from the costs of the prior period.
Thus, under the FIFO method, the company will be able to compare unit costs of the current period
to those of the prior period to see how effective the cost-cutting program has been. Under the
weighted-average method, however, costs carried over from the prior period are averaged in with
costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort.
47
Appendix 4B Service Department Allocations

Questions
4B-1 Operating departments are the units in an organization within which the central purposes of the
organization are carried out; these departments usually generate revenue. By contrast, service departments provide support or assistance to the operating departments. Examples of service departments include laundry services in a hotel or hospital, internal auditing, airport maintenance services (ground
crews), cafeteria, personnel, cost accounting, and so on.
4B-2 Service department costs are allocated to products and services in two stages. Service department
costs are first allocated to the operating departments. These allocated costs are then included in the operating departments overhead rates, which are used to cost products and services.
4B-3 Interdepartmental services exist whenever two service departments provide services to each other.
4B-4 Under the direct method, interdepartmental services are ignored; service department costs are allocated directly to operating departments. Under the step-down method, the costs of the service department performing the greatest amount of service for the other service departments are allocated first, the
costs of the service department performing the next greatest amount of service are allocated next, and
so forth through all the service departments. Once a service departments costs have been allocated,
costs are not reallocated back to it under the step-down method.
4B-5 The reciprocal method allocates interdepartmental services by simultaneously assigning costs of
one department to another and vice versa. It differs from the step method in that the step method allocates services from the larger provider to the smaller but not vice versa. The step method allocates interdepartmental service work in one direction only and thus does not account for work done in the other
direction.

48
Exercise 4B-1 (15 minutes)
Service Departments
Physical
AdminiPlant
stration
Services
Departmental costs before

allocations ....................... $1,500,000
Allocations:
Administration costs
(40/50, 10/50) ............ (1,500,000)
Physical Plant costs
(25/30, 5/30)*
Total costs after allocation .. $
$654,000
(654,000)
0
Operating Departments
Undergraduate
Programs
Graduate
Programs
$32,650,000
$1,890,000
1,200,000
300,000
545,000
109,000
$34,395,000
$2,299,000
Total
$36,694,000
$36,694,000
*Based on the space occupied by the two operating departments, which is 30,000 square metres.

49
Departmental costs before allocations ..

Allocations:
Administration costs (320/3,200,
2,720/3,200, 160/3,200)* .............
Building Services costs
(9,500/10,000, 500/10,000) ........
Total costs after allocation ...................
Service
Departments
AdminiBuilding
stration
Services
$200,000
$60,000
(200,000)
20,000
(80,000)
$
0
Operating
Departments
Coffee
Groceries
Shop
$3,860,000 $340,000
170,000
Total
$4,460,000
10,000
76,000
4,000
$4,106,000 $354,000
$4,460,000
*Based on employee hours in the other three departments, 320 + 2,720 + 160 = 3,200.
Based on space occupied by the two operating departments, 9,500 + 500 = 10,000.
Both the Building Services Department costs of $60,000 and the Administration costs of $20,000 that
have been allocated to the Building Services Department are allocated to the two operating departments.

50
Service
Departments
Admini- JaniMaintestrative torial
nance
Operating
Departments
Prep
Finishing
Costs before allocation .......................... $84,000 $67,800 $36,000 $256,100 $498,600

Allocation:
Administrative: (60/1,200; 240/1,200;
600/1,200; 300/1,200)..................... (84,000) 4,200 16,800
42,000
21,000
Janitorial: (1,000/10,000;
2,000/10,000; 7,000/10,000)............
(72,000)
7,200
14,400
50,400
Maintenance: (10,000/40,000;
30,000/40,000) ...............................
(60,000)
15,000
45,000
Total cost after allocations ..................... $
0 $
0 $
0 $327,500 $615,000
Total
$942,500
$942,500

51
Service
Departments
Costs before allocation .....................

Allocation:
Administrative: (600/900; 300/900)
Janitorial:
(2,000/9,000; 7,000/9,000) .........
Equipment Maintenance:
(10,000/40,000; 30,000/40,000) .
Total cost after allocations ................
Administrative
Equipment
Maintenance
Janitorial
$84,000 $67,800 $36,000

(84,000)
(67,800)
$
(36,000)
$
0
Operating
Departments
Prep
$256,100 $498,600
56,000
28,000
15,067
52,733
9,000
27,000
$336,167 $606,333

52
Finishing
Total
$942,500
$942,500
Problem 4B-5 (45 minutes)
Food
Admin.
X-Ray
Services Services Services
Variable costs ................................................................

$73,150 $ 6,800 $38,100
Food Services allocation:
$1.90 per meal 1,000 meals.....................................
(1,900)
1,900
$1.90 per meal 500 meals .......................................
(950)
950
$1.90 per meal 7,000 meals .....................................
(13,300)
$1.90 per meal 30,000 meals ...................................
(57,000)
Admin. Services allocation:
$0.50 per file 1,500 files .........................................
(750)
$0.50 per file 3,000 files .........................................
(1,500)
$0.50 per file 900 files ............................................
(450)
$0.50 per file 12,000 files .......................................
(6,000)
750
Outpatient
Clinic
OB
Care
General
Clinic
$11,700 $ 14,850 $ 53,400
1,500
13,300
450
57,000
6,000
X-Ray Services allocation:

$4 per X-ray 1,200 X-rays........................................ (4,800)
4,800
$4 per X-ray 350 X-rays .......................................... (1,400)
1,400
$4 per X-ray 8,400 X-rays........................................ (33,600)
33,600
Total variable costs ........................................................
$
0 $
0 $
0 $18,000 $ 30,000 $150,000

53
Problem 4B-5 (continued)
Food
Admin.
X-Ray
Services Services Services
Fixed costs ....................................................................

$48,000 $33,040 $59,520
Food Services allocation:
2% $48,000..........................................................
(960)
960
1% $48,000..........................................................
(480)
17% $48,000 ..........................................................
(8,160)
80% $48,000 ..........................................................
(38,400)
Admin. Services allocation:
10% $34,000 ..........................................................
(3,400)
20% $34,000 ..........................................................
(6,800)
30% $34,000 ..........................................................
(10,200)
40% $34,000 ..........................................................
(13,600)
Outpatient
Clinic
General
Clinic
$26,958 $ 99,738 $344,744
480
3,400
OB
Care
6,800
8,160
10,200
38,400
13,600
X-Ray Services allocation:

13% $63,400 .......................................................... (8,242)
8,242
3% $63,400 .......................................................... (1,902)
1,902
84% $63,400 .......................................................... (53,256)
53,256
Total fixed costs ............................................................
0
0
0
42,000 120,000 450,000
Total overhead costs ......................................................
$
0 $
0 $
0 $60,000 $150,000 $600,000

54
Problem 4B-5 (continued)

Computation of allocation rates:
Variable Food Services:
Variable food service cost

$73,150
=
=$1.90 per meal
Total meals served
38,500 meals
Variable Admin. Services:
Variable administrative cost $6,800+$1,900

=
=$0.50 per file
Files processed
17,400 files
Variable X-Ray Services:
Variable X-ray cost $38,100+$950+$750

=
=$4.00 per X-ray
X-rays taken
9,950 X-rays

Problem 4B-6 (30 minutes)

1. Direct Method
Allocate Accounting dept. (AD) costs to Consulting depts.:
Allocate to Accounting Consulting (AC)
= 60% / (60% + 20%) = 75%
= 75% x $10,000 = $7,500
Allocate to Legal Consulting (LC)
= 20% / (60% + (20%) = 25%
= 25% x $10,000 = $2,500
Allocate Legal dept.(LD) costs to Consulting depts.:
Allocate to Accounting Consulting (AC)
= 10% / (10% + 40%) = 20%
= 20% x $15,000 = $3,000
Allocate to Legal Consulting (LC)
= 40% / (10% + 40%) = 80%
= 80% x $15,000 = $12,000
Income Statement
Accounting
Legal
Consulting
Consulting
Revenue ..............................................................
$40,000
$25,500
Costs AC = 30% $20,000
LC = 70% $20,000
(6,000)
(14,000)
Allocated costs AD*, LD** ....................................
(10,500)
(14,500)
Net income ..........................................................
$23,500
$ (3,000)
* ($7,500 + $3,000), ** ($2,500 + $12,000)

56
2. Step-down Method
Start with Legal Department costs:
Allocate to AD: 50% x $15,000 = $7,500
Allocate to AC: 10% x $15,000= $1,500
Allocate to LC: 40% x $15,000 = $6,000
Now Allocate Accounting Department costs:
Allocate to AC:
60%/ (60% + 20%) of ($10,000 + $7,500 from LD) = $13,125
Allocate to LC:
20%/(60% + 20%) x ($10,000 +$7,500 from LD) = $4,375
Income Statement
Accounting
Legal
Consulting
Consulting
Revenue ..............................................................
$40,000
$25,500
Costs AC = 30% $20,000
LC = 70% $20,000
(6,000)
(14,000)
Allocated AD*, LD** ............................................
(14,625)
(10,375)
Net income ..........................................................
$19,375
$ 1,125
* ($1,500+$13,125), ** ($6,000+$4,375)
The step-down method is preferable since it allows the firm to recognize
that some service departments use the services of other service departments (in this case, it recognizes that the Accounting Department uses services of the Legal Department). Although this method does not also recognize that the Legal Department uses Accounting Department services, it is
still a more accurate method than the direct allocation method. Sometimes
accuracy comes at a higher cost, but in this case the cost of a slightly more
complex system is worthwhile. Note that Legal Consulting operated at a
loss under the Direct Method, but actually shows a positive Net Income
under the step-down method. This is due to the fact that the Accounting
Department uses a significant amount of Legal Department services; therefore, the direct method under-allocates costs to the Accounting Consulting
department.

58
Case 4B-7 (90 minutes)

1. Step-down method:
Total costs before allocations...............
Allocations:
Cafeteria (40/500; 60/500; 100/500;
300/500)1 .....................................
Custodial Services (10,000/70,000;
40,000/70,000; 20,000/70,000)2 ....
Machinery Maintenance
(160,000/200,000;
40,000/200,000)3 ..........................
Total overhead after allocations ...........
Custodial
Cafeteria Services
Machinery
Maintenance
Finishing
$320,000
$65,400
(320,000)
25,600
38,400
64,000
192,000
(91,000)
13,000
52,000
26,000
$ 93,600
Milling
(145,000)
$
0
$416,000 $166,000
116,000
29,000
$648,000 $413,000
Based on 40+60+100+300=500 employees

Based on 10,000+40,000+20,000=70,000 square metres
3
Based on 160,000+ 40,000 = 200,000 machine-hours
2
Milling predetermined
overhead rate
$648,000
160,000 machine hr.
= $4.05 per
machine hr.
Finishing predetermined overhead rate
$413,000
70,000 direct labour hr.
= $5.90 per
DLH

59
Case 4B-7 (continued)

2. Direct method:
Custodial Machinery
Cafeteria Services Maintenance
Total costs before allocations................. $320,000 $65,400

Allocations:
Cafeteria (100/400; 300/400)1 ............ (320,000)
Custodial Services (40,000/60,000;
20,000/60,000)2 ..............................
(65,400)
Machinery Maintenance
(160,000/200,000; 40,000/200,000)3 .
Total overhead after allocations ............. $
0 $
0
Divide by machine-hours.......................
Divide by direct labour-hours ................
Predetermined overhead rate ................
1
2
3
$93,600
(93,600)
$
0
Based on 100 + 300 = 400 employees.

Based on 40,000 + 20,000 = 60,000 square metres.
Based on 160,000 + 40,000 = 200,000 machine-hours.

60
Milling
Finishing
$416,000 $166,000
80,000
240,000
43,600
21,800
74,880
18,720
$ 614,480 $446,520
160,000
70,000
$
3.84 $
6.38
Case 4B-7 (continued)

3. a. The amount of overhead cost assigned to the job would be:
Step-down method:
Milling Department:
2,000 machine-hours $4.05 per machine-hour .......
Finishing Department:
13,000 DLHs $5.90 per DLH .................................
Total overhead cost ....................................................
$ 8,100
76,700
$84,800
Direct method:
Milling Department:
2,000 machine-hours $3.84 per machine-hour .......
Finishing Department:
13,000 DLHs $6.38 per DLH .................................
Total overhead cost ....................................................
$ 7,680
82,940
$90,620
b. The step-down method provides a better basis for computing

predetermined overhead rates than the direct method because it
gives recognition to services provided between service departments.
If this interdepartmental service is not recognized, then either too
much or too little of a service departments costs may be allocated to
a producing department. The result will be an inaccuracy in the
producing departments predetermined overhead rate.
For example, notice from the computations in (2) above that using
the direct method and ignoring interdepartmental services causes the
predetermined overhead rate in the Milling Department to fall to
$3.84 per machine-hour (from $4.05 per machine-hour when the
step-down method is used), and causes the predetermined overhead
rate in the Finishing Department to rise to $6.38 per direct labourhour (from $5.90 per direct labour-hour when the step-down method
is used). These inaccuracies in the predetermined overhead rate affect bids for jobs. Since the direct method in this case understates the
rate in the Milling Department and overstates the rate in the Finishing
Department, it is not surprising that the company tends to bid low on
jobs requiring a lot of milling work and tends to bid too high on jobs
that require a lot of finishing work.

61

ACCT10 Chapter 4 Solutions

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ACCT10 Chapter 4 Solutions

Uploaded by

Copyright:

Available Formats

Chapter 4

Systems Design: Process Costing

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Exercise 4-1 (20 minutes)

b. To record direct labour costs incurred:

c. To record applying manufacturing overhead:

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Managerial Accounting, 9th Canadian Edition

Exercise 4-2 (10 minutes)

Units to be accounted for:

Units transferred to the next department .........................................................

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Exercise 4-3 (10 minutes)

Materials Labour Overhead

Work in process, May 1 ........$156,270 $ 14,550 $23,620 $118,100

Total cost per equivalent Unit = $85.75 + $34.50 + $172.50 = $292.75

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Managerial Accounting, 9th Canadian Edition

Exercise 4-4 (10 minutes)

Ending work in process inventory:

Equivalent units of production .................

Units completed and transferred out:

Units transferred to the next department .

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Exercise 4-5 (10 minutes)

Work in ProcessMixing ................................................

Work in ProcessMixing ................................................

Work in ProcessBaking ................................................

Finished Goods ..............................................................

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Managerial Accounting, 9th Canadian Edition

Exercise 4-6 (20 minutes)

Units transferred to the next

2. Cost per Equivalent Unit:

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Exercise 4-7 (10 minutes)

Kilograms transferred to the Packing Department

* Beginning WIP 15,000 + Started 240,000 Ending WIP 10,000 =

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Managerial Accounting, 9th Canadian Edition

Exercise 4-8 (30 minutes)

Ending work in process inventory:

Units completed and transferred out:

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Exercise 4-9 (20 minutes)

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Managerial Accounting, 9th Canadian Edition

Problem 4-10 (45 minutes)

Applying Costs to Units

Ending work in process inventory:

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Problem 4-10 (continued)

*off $210 due to rounding

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Managerial Accounting, 9th Canadian Edition

Problem 4-11 (45 minutes)

Conversion: 55,000 units 30% complete .....

*Units transferred to the next department = Units in beginning work in

Cost of beginning work in process ................

Cost per equivalent unit, (a) (b) ...............

McGraw-Hill Ryerson Ltd. 2012. All rights reserved.

Problem 4-11 (continued)

Ending work in process inventory: