Chapter 21

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DO IT!

Compare Job Order and Process Cost Systems Action Plan ✔ Use job order costing in situations where unit costs are high, unit volume is low, and products are unique. ✔ Use process costing when there is a large volume of relatively homogeneous products.

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Process Costing

Indicate whether each of the following statements is true or false. 1. A law firm is likely to use process costing for major lawsuits. 2. A manufacturer of paintballs is likely to use process costing. 3. Both job order and process costing determine product costs at the end of a period of time, rather than when a product is completed. 4. Process costing does not keep track of manufacturing overhead.

Solution 1. False.

2. True.

3. False.

4. False.

Related exercise material: E21-1 and DO IT! 21-1.

DO IT!

Manufacturing Costs in Process Costing

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

Solution Action Plan ✔ In process cost accounting, keep separate work in process accounts for each process. ✔ When the costs are assigned to production, debit the separate work in process accounts. ✔ Transfer cost of completed units to the next process or to Finished Goods.

The entries are: Work in Process—Blending Work in Process—Bottling Raw Materials Inventory (To record materials used) Work in Process—Blending Work in Process—Bottling Factory Labor (To assign factory labor to production) Work in Process—Blending Work in Process—Bottling Manufacturing Overhead (To assign overhead to production)

18,000 4,000 22,000 12,000 5,000 17,000 6,000 2,500 8,500

Work in Process—Bottling Work in Process—Blending (To record transfer of units to the Bottling Department)

19,000

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

11,000

19,000

Related exercise material: BE21-1, BE21-2, BE21-3, E21-2, E21-4, and DO IT! 21-2.

D-106

11,000

DO IT!

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DO IT!

Equivalent Units

Action Plan ✔ To measure the work done during the period, expressed in fully completed units, compute equivalent units of production. ✔ Use the appropriate formula: Units completed and transferred out 1 Equivalent units of ending work in process 5 Equivalent units of production.

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D-107

The fabricating department has the following production and cost data for the current month. Beginning Work in Process

Units Transferred Out

Ending Work in Process

–0–

15,000

10,000

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

Solution (a) Since materials are entered at the beginning of the process, the equivalent units of ending work in process are 10,000. Thus, 15,000 units 1 10,000 units 5 25,000 equivalent units of production for materials. (b) Since ending work in process is only 30% complete as to conversion costs, the equivalent units of ending work in process are 3,000 (30% 3 10,000 units). Thus, 15,000 units 1 3,000 units 5 18,000 equivalent units of production for conversion costs. Related exercise material: BE21-4, BE21-9, E21-5, E21-6, E21-8, E21-9, E21-10, E21-11, E21-13, E21-14, E21-15, and DO IT! 21-3.

DO IT!

Cost Reconciliation Schedule

In March, Rodayo Manufacturing had the following unit production costs: materials $6 and conversion costs $9. On March 1, it had zero work in process. During March, Rodayo transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign the costs to the units transferred out and in process.

Solution Action Plan ✔ Assign the total manufacturing cost of $15 per unit to the 12,000 units transferred out. ✔ Assign the materials cost and conversion costs based on equivalent units of production to units in ending work in process.

The assignment of costs is as follows. Costs accounted for Transferred out (12,000 3 $15) Work in process, March 31 Materials (800 3 $6) Conversion costs (200a 3 $9) Total costs

$180,000 $4,800 1,800

6,600 $186,600

a

800 3 25%

Related exercise material: BE21-5, BE21-6, BE21-7, BE21-8, E21-5, E21-6, E21-7, E21-8, E21-9, E21-10, E21-11, E21-12, E21-13, E21-14, E21-15, and DO IT! 21-4.

D-108

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21 Process Costing

DO IT!

JIT and ABC

Indicate whether each of the following statements is true or false. 1. Continuous process manufacturing often results in a reduction of inventory.

Action Plan ✔ JIT manufacturing is dedicated to having the right amounts of materials, parts, or products just as they are needed. ✔ ABC focuses on the activities performed in producing a product. It recognizes that to have accurate and meaningful cost data, more than one basis of allocating costs to products is needed.

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2. Companies that use just-in-time processing complete and store finished goods all the time to meet rush orders from customers. 3. A major benefit of just-in-time processing is production cost savings from the improved flow of goods through the processes. 4. An ABC system is similar to traditional costing systems in accounting for manufacturing costs but differs in regard to period costs. 5. The primary benefit of ABC is more accurate and meaningful costs. 6. In recent years, the amount of direct labor used in many industries has greatly increased and total overhead costs have significantly decreased.

Solution 1. False.

2. False.

3. True.

4. False.

5. True.

6. False.

Related exercise material: BE21-11 and DO IT! 21-5.

Comprehensive DO IT! Essence Company manufactures a high-end after-shave lotion, called Eternity, in 10-ounce plastic bottles. Because the market for after-shave lotion is highly competitive, the company is very concerned about keeping its costs under control. Eternity is manufactured through three processes: mixing, filling, and corking. Materials are added at the beginning of each of the processes, and labor and overhead are incurred uniformly throughout each process. The company uses a weighted-average method to cost its product. A partially completed production cost report for the month of May for the Mixing Department is shown below.

ESSENCE COMPANY Mixing Department Production Cost Report For the Month Ended May 31, 2014

Equivalent Units QUANTITIES

Physical Units

Units to be accounted for

Step 1

Work in process, May 1 Started into production

1,000 2,000

Total units Units accounted for Transferred out Work in process, May 31 Total units

Materials

Conversion Costs Step 2

3,000 2,200 800

? ?

? ?

3,000

?

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DO IT!

COSTS

D-109

Materials

Conversion Costs

Total

?

Unit costs Step 3 Costs in May

(a)

?

?

Equivalent units

(b)

?

?

?

?

Unit costs [(a) 4 (b)] Costs to be accounted for Work in process, May 1 Started into production

? $ 56,300 119,320

Total costs

$175,620

COST RECONCILIATION SCHEDULE Step 4 Costs accounted for Transferred out Work in process, May 31 Materials Conversion costs

? ? ?

Total costs

? ?

Additional information: Work in process, May 1, 1,000 units Materials cost, 1,000 units (100% complete) $49,100 Conversion costs, 1,000 units (70% complete) 7,200 $56,300 Materials cost for May, 2,000 units $100,000 Conversion costs for May $19,320 Work in process, May 31, 800 units, 100% complete as to materials and 50% complete as to conversion costs.

Instructions (a) Prepare a production cost report for the Mixing Department for the month of May. (b) Prepare the journal entry to record the transfer of goods from the Mixing Department to the Filling Department. (c) Explain why Essence Company is using a process cost system to account for its costs.

Solution to Comprehensive Action Plan ✔ Compute the physical unit flow—that is, the units to be accounted for and the units accounted for. ✔ Compute the equivalent units of production. ✔ Compute the unit production costs, expressed in terms of equivalent units of production. ✔ Prepare a cost reconciliation schedule, which shows that the total costs accounted for equal the total costs to be accounted for.

DO IT!

(a) A completed production cost report for the Mixing Department is shown below. Computations to support the amounts reported follow the report. ESSENCE COMPANY Mixing Department Production Cost Report For the Month Ended May 31, 2014

Equivalent Units QUANTITIES

Physical Units

Units to be accounted for

Step 1

Work in process, May 1 Started into production

1,000 2,000

Total units

3,000

Materials

Conversion Costs

Step 2

D-110

21 Process Costing

Equivalent Units QUANTITIES

Physical Units

Units accounted for Transferred out Work in process, May 31 Total units

Materials

Conversion Costs

2,200 800

2,200 800

2,200 400

3,000

3,000

2,600

COSTS Unit costs Step 3

Materials

Conversion Costs

Total $175,620

Costs in May

(a)

$149,100

$26,520

Equivalent units

(b)

3,000

2,600

$49.70

$10.20

Unit costs [(a) 4 (b)]

(800 3 50%)

Costs to be accounted for Work in process, May 1 Started into production

$59.90 $ 56,300 119,320

Total costs

$175,620

COST RECONCILIATION SCHEDULE Step 4 Costs accounted for Transferred out (2,200 3 $59.90) Work in process, May 31 Materials (800 3 $49.70) Conversion costs (400 3 $10.20)

$131,780 $39,760 4,080

Total costs

43,840 $175,620

Additional computations to support production cost report data: Materials cost—$49,100 1 $100,000 Conversion costs—$7,200 1 $19,320 ($119,320 2 $100,000) (b) Work in Process—Filling Work in Process—Mixing

131,780 131,780

(c) Companies use process cost systems to apply costs to similar products that are massproduced in a continuous fashion. Essence Company uses a process cost system because production of the after-shave lotion, once it begins, continues until the after-shave lotion emerges. The processing is the same for the entire run—with precisely the same amount of materials, labor, and overhead. Each bottle of Eternity after-shave lotion is indistinguishable from another.

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DO IT! Review

Compare job order and process cost systems.

(LO 1, 2), C

DO IT! 21-1 Indicate whether each of the following statements is true or false.

1. Many hospitals use job order costing for small, routine medical procedures. 2. A manufacturer of computer flash drives would use a job order cost system. 3. A process cost system uses multiple work in process accounts. 4. A process cost system keeps track of costs on job cost sheets.

DO IT!

Assign and journalize manufacturing costs.

D-111

DO IT! 21-2 Kopa Company manufactures CH-21 through two processes: Mixing and Packaging. In July, the following costs were incurred.

(LO 4), AP Raw materials used Factory labor costs Manufacturing overhead costs

Mixing

Packaging

$10,000 8,000 12,000

$28,000 36,000 54,000

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

(LO 5), AP

DO IT! 21-3 The assembly department has the following production data for the current month.

Beginning Work in Process

Units Transferred Out

Ending Work in Process

–0–

20,000

12,000

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

(LO 6, 7), AP

DO IT! 21-4 In March, Kelly Company had the following unit production costs: materials $10 and conversion costs $8. On March 1, it had zero work in process. During March, Kelly transferred out 22,000 units. As of March 31, 4,000 units that were 40% complete as to conversion costs and 100% complete as to materials were in ending work in process.

(a) Compute the total units to be accounted for. (b) Compute the equivalent units of production. (c) Prepare a cost reconciliation schedule, including the costs of materials transferred out and the costs of materials in process. Answer questions about JIT and ABC.

(LO 8, 9), C

DO IT! 21-5 Indicate whether each of the following statements is true or false.

1. Just-in-time processing is also known as just-in-case processing. 2. Companies that use just-in-time processing complete finished goods just in time to be sold. 3. A major benefit of just-in-time processing is enhanced product quality. 4. An ABC system is similar to conventional costing systems in accounting for period costs but differs in regard to manufacturing costs. 5. The primary benefit of ABC is significant reduction or elimination of manufacturing inventories. 6. In recent years, the amount of direct labor used in many industries has greatly decreased and total overhead costs have significantly increased.