Ben & Jerry's Tracks Its Mix-Ups
Ben & Jerry's Homemade, Inc., based in Waterbury, Vermont, started its first ice cream shop in a former gas station in 1978.
Making ice cream is a process—a movement of product from a mixing department to a prepping department to a pint department. The mixing department is where the ice cream is created. In the prep area, the production process adds extras such as cherries and dark chocolate to make plain ice cream into “Cherry Garcia,” Ben & Jerry's most popular flavor, or fudge-covered waffle cone pieces and a swirl of caramel for “Stephen Colbert's Americone Dream.” The pint department is where the ice cream is actually put into containers. As the product is processed from one department to the next, the appropriate materials, labor, and overhead are added to determine its cost.
“The incoming ingredients from the shipping and receiving departments are stored in certain locations, either in a freezer or dry warehouse,” says Beecher Eurich, staff accountant. “As ingredients get added, so do the costs associated with them.” How much ice cream is produced? Running plants around the clock, the company produces 18 million gallons a year.
With the company's process cost system, Eurich can tell you how much a certain batch of ice cream costs to make—its materials, labor, and overhead in each of the production departments. She generates reports for the production department heads but makes sure not to overdo it. “You can get bogged down in numbers,” says Eurich. “If you're generating a report that no one can use, then that's a waste of time.”
It's more likely, though, that Ben & Jerry's production people want to know how efficient they are. Why? Many own stock in the company.
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After studying this chapter, you should be able to:
[1] Understand who uses process cost systems.
[2] Explain the similarities and differences between job order cost and process cost systems.
[3] Explain the flow of costs in a process cost system.
[4] Make the journal entries to assign manufacturing costs in a process cost system.
[5] Compute equivalent units.
[6] Explain the four steps necessary to prepare a production cost report.
[7] Prepare a production cost report.
[8] Explain just-in-time (JIT) processing.
[9] Explain activity-based costing (ABC).
Preview of Chapter 21
The cost accounting system used by companies such as Ben & Jerry's is process cost accounting. In contrast to job order cost accounting, which focuses on the individual job, process cost accounting focuses on the processes involved in mass-producing products that are identical or very similar in nature. The primary objective of this chapter is to explain and illustrate process costing.
The content and organization of this chapter are as follows.
The Nature of Process Cost Systems
Uses of Process Cost Systems
Companies use process cost systems to apply costs to similar products that are mass-produced in a continuous fashion. Ben & Jerry's uses a process cost system. Production of the ice cream, once it begins, continues until the ice cream emerges, and the processing is the same for the entire run—with precisely the same amount of materials, labor, and overhead. Each finished pint of ice cream is indistinguishable from another.
A company such as USX uses process costing in the manufacturing of steel. Kellogg and General Mills use process costing for cereal production; ExxonMobil uses process costing for its oil refining. Sherwin Williams uses process costing for its paint products. At a bottling company like Coca-Cola, the manufacturing process begins with the blending of ingredients. Next, automated machinery moves the bottles into position and fills them. The production process then caps, packages, and forwards the bottles to the finished goods warehouse. Illustration 21-1 shows this process.
Illustration 21-1
Manufacturing processes
For Coca-Cola, as well as the other companies just mentioned, once production begins, it continues until the finished product emerges, and each unit of finished product is like every other unit.
In comparison, a job order cost system assigns costs to a specific job. Examples are the construction of a customized home, the making of a motion picture, or the manufacturing of a specialized machine. Illustration 21-2 provides examples of companies that primarily use either a process cost system or a job order cost system.
Illustration 21-2
Process cost and job order cost companies and products
Process Costing for Service Companies
Frequently, when we think of service companies, we think of specific, nonroutine tasks, such as rebuilding an automobile engine, performing consulting services on a business acquisition, or working on a major lawsuit. However, many service companies specialize in performing repetitive, routine aspects of a particular business. For example, auto-care vendors such as Jiffy Lube focus on the routine aspects of car care. H&R Block focuses on the routine aspects of basic tax practice, and many large law firms focus on routine legal services, such as uncomplicated divorces. Service companies that perform specific, nonroutine services will probably benefit from using a job order cost system. Those that perform routine, repetitive services will probably be better off with a process cost system.
Similarities and Differences Between Job Order Cost and Process Cost Systems
In a job order cost system, companies assign costs to each job. In a process cost system, companies track costs through a series of connected manufacturing processes or departments, rather than by individual jobs. Thus, companies use process cost systems when they produce a large volume of uniform or relatively homogeneous products. Illustration 21-3 shows the basic flow of costs in these two systems, and the following analysis highlights the basic similarities and differences between these two systems.
Explain the similarities and differences between job order cost and process cost systems.
Illustration 21-3
Job order cost and process cost flow
SIMILARITIES
Job order cost and process cost systems are similar in three ways:
1. The manufacturing cost elements. Both costing systems track three manufacturing cost elements—direct materials, direct labor, and manufacturing overhead.
2. The accumulation of the costs of materials, labor, and overhead. Both costing systems debit raw materials to Raw Materials Inventory, factory labor to Factory Labor, and manufacturing overhead costs to Manufacturing Overhead.
3. The flow of costs. As noted above, both systems accumulate all manufacturing costs by debits to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. Both systems then assign these costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold. The methods of assigning costs, however, differ significantly. These differences are explained and illustrated later in the chapter.
DIFFERENCES
The differences between a job order cost and a process cost system are as follows.
1. The number of work in process accounts used. A job order cost system uses only one work in process account. A process cost system uses multiple work in process accounts.
2. Documents used to track costs. A job order cost system charges costs to individual jobs and summarizes them in a job cost sheet. A process cost system summarizes costs in a production cost report for each department.
3. The point at which costs are totaled. A job order cost system totals costs when the job is completed. A process cost system totals costs at the end of a period of time.
4. Unit cost computations. In a job order cost system, the unit cost is the total cost per job divided by the units produced. In a process cost system, the unit cost is total manufacturing costs for the period divided by the equivalent units produced during the period.
Illustration 21-4 summarizes the major differences between a job order cost and a process cost system.
Illustration 21-4
Job order versus process cost systems
DO IT!
Compare Job Order and Process Cost Systems
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.
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.
Solution
1. False. 2. True. 3. False. 4. False.
Related exercise material: E21-1 and DO IT! 21-1.
Process Cost Flow
Illustration 21-5 shows the flow of costs in the process cost system for Tyler Company. Tyler Company manufactures roller blade and skateboard wheels that it sells to manufacturers and retail outlets. Manufacturing consists of two processes: machining and assembly. The Machining Department shapes, hones, and drills the raw materials. The Assembly Department assembles and packages the parts.
Illustration 21-5
Flow of costs in process cost system
As the flow of costs indicates, the company can add materials, labor, and manufacturing overhead in both the Machining and Assembly departments. When it finishes its work, the Machining Department transfers the partially completed units to the Assembly Department. The Assembly Department finishes the goods and then transfers them to the finished goods inventory. Upon sale, Tyler removes the goods from the finished goods inventory. Within each department, a similar set of activities is performed on each unit processed.
Assigning Manufacturing Costs—Journal Entries
As indicated, the accumulation of the costs of materials, labor, and manufacturing overhead is the same in a process cost system as in a job order cost system. That is, both systems follow these procedures:
- Companies debit all raw materials to Raw Materials Inventory at the time of purchase.
- They debit all factory labor to Factory Labor as the labor costs are incurred.
- They debit overhead costs to Manufacturing Overhead as these costs are incurred.
However, the assignment of the three manufacturing cost elements to Work in Process in a process cost system is different from a job order cost system. Here we'll look at how companies assign these manufacturing cost elements in a process cost system.
Make the journal entries to assign manufacturing costs in a process cost system.
MATERIALS COSTS
All raw materials issued for production are a materials cost to the producing department. A process cost system may use materials requisition slips, but it generally requires fewer requisitions than in a job order cost system, because the materials are used for processes rather than for specific jobs and therefore typically are for larger quantities.
At the beginning of the first process, a company usually adds most of the materials needed for production. However, other materials may be added at various points. For example, in the manufacture of Hershey candy bars, the chocolate and other ingredients are added at the beginning of the first process, and the wrappers and cartons are added at the end of the packaging process. Tyler Company adds materials at the beginning of each process. Tyler makes the following entry to record the materials used.
Ice cream maker Ben & Jerry's adds materials in three departments: milk and flavoring in the mixing department, extras such as cherries and dark chocolate in the prepping department, and cardboard containers in the pinting (packaging) department.
FACTORY LABOR COSTS
In a process cost system, as in a job order cost system, companies may use time tickets to determine the cost of labor assignable to production departments. Since they assign labor costs to a process rather than a job, they can obtain, from the payroll register or departmental payroll summaries, the labor cost chargeable to a process.
Labor costs for the Machining and Assembly Departments will include the wages of employees who shape, hone, drill, and assemble the materials. The entry to assign these costs for Tyler Company is:
MANUFACTURING OVERHEAD COSTS
The objective in assigning overhead in a process cost system is to allocate the overhead costs to the production departments on an objective and equitable basis. That basis is the activity that “drives” or causes the costs. A primary driver of overhead costs in continuous manufacturing operations is machine time used, not direct labor. Thus, companies widely use machine hours in allocating manufacturing overhead costs using predetermined overhead rates. Tyler's entry to allocate overhead to the two processes is:
TRANSFER TO NEXT DEPARTMENT
At the end of the month, Tyler needs an entry to record the cost of the goods transferred out of the Machining Department. In this case, the transfer is to the Assembly Department, and Tyler makes the following entry.
TRANSFER TO FINISHED GOODS
When the Assembly Department completes the units, it transfers them to the finished goods warehouse. The entry for this transfer is as follows.
TRANSFER TO COST OF GOODS SOLD
When Tyler sells the finished goods, it records the cost of goods sold as follows.
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.
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.
Solution
Related exercise material: BE21-1, BE21-2, BE21-3, E21-2, E21-4, and DO IT! 21-2.
Equivalent Units
Suppose you have a work-study job in the office of your college's president, and she asks you to compute the cost of instruction per full-time equivalent student at your college. The college's vice president for finance provides the following information.
Illustration 21-6
Information for full-time student example
Part-time students take 60% of the classes of a full-time student during the year. To compute the number of full-time equivalent students per year, you would make the following computation.
Illustration 21-7
Full-time equivalent unit computation
The cost of instruction per full-time equivalent student is therefore the total cost of instruction ($9,000,000) divided by the number of full-time equivalent students (1,500), which is $6,000 ($9,000,000 ÷ 1,500).
A process cost system uses the same idea, called equivalent units of production. Equivalent units of production measure the work done during the period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product.
Weighted-Average Method
The formula to compute equivalent units of production is as follows.
Illustration 21-8
Equivalent units of production formula
To better understand this concept of equivalent units, consider the following two separate examples.
Example 1. In a specific period, the entire output of Sullivan Company's Blending Department consists of ending work in process of 4,000 units which are 60% complete as to materials, labor, and overhead. The equivalent units of production for the Blending Department are therefore 2,400 units (4,000 × 60%).
Example 2. The output of Kori Company's Packaging Department during the period consists of 10,000 units completed and transferred out, and 5,000 units in ending work in process which are 70% completed. The equivalent units of production are therefore 13,500 [10,000 + (5,000 × 70%)].
This method of computing equivalent units is referred to as the weighted-average method. It considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process.
Refinements on the Weighted-Average Method
Kellogg Company has produced Eggo® Waffles since 1970. Three departments produce these waffles: Mixing, Baking, and Freezing/Packaging. The Mixing Department combines dry ingredients, including flour, salt, and baking powder, with liquid ingredients, including eggs and vegetable oil, to make waffle batter. Illustration 21-9 provides information related to the Mixing Department at the end of June.
Illustration 21-9
Information for Mixing Department
Illustration 21-9 indicates that the beginning work in process is 100% complete as to materials cost and 70% complete as to conversion costs. Conversion costs are the sum of labor costs and overhead costs. In other words, Kellogg adds both the dry and liquid ingredients (materials) at the beginning of the waffle-making process, and the conversion costs (labor and overhead) related to the mixing of these ingredients are incurred uniformly and are 70% complete. The ending work in process is 100% complete as to materials cost and 60% complete as to conversion costs.
We then use the Mixing Department information to determine equivalent units. In computing equivalent units, the beginning work in process is not part of the equivalent-units-of-production formula. The units transferred out to the Baking Department are fully complete as to both materials and conversion costs. The ending work in process is fully complete as to materials, but only 60% complete as to conversion costs. We therefore need to make two equivalent unit computations: one for materials, and the other for conversion costs. Illustration 21-10 shows these computations.
Ethics Note 
An unethical manager might use incorrect completion percentages when determining equivalent units. This results in either raising or lowering costs. Since completion percentages are somewhat subjective, this form of income manipulation can be difficult to detect.
Illustration 21-10
Computation of equivalent units—Mixing Department
We can refine the earlier formula used to compute equivalent units of production (Illustration 21-8, page 990). Illustration 21-11 (page 992) shows the computations for materials and for conversion costs.
Illustration 21-11
Refined equivalent units of production formula
PEOPLE, PLANET, AND PROFIT INSIGHT 
Haven't I Seen That Before?
For a variety of reasons, many companies, including Caterpillar, General Electric, and Eastman Kodak, are making a big push to remanufacture goods that have been thrown away. Items getting a second chance include cell phones, computers, home appliances, car parts, vacuum cleaners, and medical equipment. Businesses have figured out that profit margins on remanufactured goods are significantly higher than on new goods. As commodity prices such as copper and steel increase, reusing parts makes more sense. Also, as more local governments initiate laws requiring that electronics and appliances be recycled rather than thrown away, the cost of remanufacturing declines because the gathering of used goods becomes far more efficient. Besides benefitting the manufacturer, remanufacturing provides goods at a much lower price to consumers, reduces waste going to landfills, saves energy, reuses scarce resources, and reduces emissions. For example, it was estimated that a remanufactured car starter results in about 50% less carbon dioxide emissions than making a new one.
Source: James R. Hagerty and Paul Glader, “From Trash Heap to Store Shelf,” Wall Street Journal Online (January 24, 2011).
In what ways might the relative composition (materials, labor, and overhead) of a remanufactured product's cost differ from that of a newly made product? (See page 1028.)
DO IT!
Equivalent Units
The fabricating department has the following production and cost data for the current month.
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.
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 + Equivalent units of ending work in process = Equivalent units of production.
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 + 10,000 units = 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% × 10,000 units). Thus, 15,000 units + 3,000 units = 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.
Production Cost Report
As mentioned earlier, companies prepare a production cost report for each department. A production cost report is the key document that management uses to understand the activities in a department; it shows the production quantity and cost data related to that department. For example, in producing Eggo® Waffles, Kellogg Company uses three production cost reports: Mixing, Baking, and Freezing/Packaging. Illustration 21-12 shows the flow of costs to make an Eggo® Waffle and the related production cost reports for each department.
Illustration 21-12
Flow of costs in making Eggo® Waffles
In order to complete a production cost report, the company must perform four steps, which, as a whole, make up the process cost system.
1. Compute the physical unit flow.
2. Compute the equivalent units of production.
3. Compute unit production costs.
4. Prepare a cost reconciliation schedule.
Illustration 21-13 shows assumed data for the Mixing Department at Kellogg Company for the month of June. We will use this information to complete a production cost report for the Mixing Department.
Illustration 21-13
Unit and cost data—Mixing Department
Compute the Physical Unit Flow (Step 1)
Physical units are the actual units to be accounted for during a period, irrespective of any work performed. To keep track of these units, add the units started (or transferred) into production during the period to the units in process at the beginning of the period. This amount is referred to as the total units to be accounted for.
The total units then are accounted for by the output of the period. The output consists of units transferred out during the period and any units in process at the end of the period. This amount is referred to as the total units accounted for. Illustration 21-14 shows the flow of physical units for Kellogg's Mixing Department for the month of June.
Illustration 21-14
Physical unit flow—Mixing Department
The records indicate that the Mixing Department must account for 900,000 units. Of this sum, 700,000 units were transferred to the Baking Department and 200,000 units were still in process.
Compute the Equivalent Units of Production (Step 2)
Once the physical flow of the units is established, Kellogg must measure the Mixing Department's productivity in terms of equivalent units of production. The Mixing Department adds materials at the beginning of the process, and it incurs conversion costs uniformly during the process. Thus, we need two computations of equivalent units: one for materials and one for conversion costs. The equivalent unit computation is as follows.
Helpful Hint Materials are not always added at the beginning of the process. For example, materials are sometimes added uniformly during the process.
Illustration 21-15
Computation of equivalent units—Mixing Department
Helpful Hint Remember that we ignore the beginning work in process in this computation.
Compute Unit Production Costs (Step 3)
Armed with the knowledge of the equivalent units of production, we can now compute the unit production costs. Unit production costs are costs expressed in terms of equivalent units of production. When equivalent units of production are different for materials and conversion costs, we compute three unit costs: (1) materials, (2) conversion, and (3) total manufacturing.
The computation of total materials cost related to Eggo® Waffles is as follows.
Illustration 21-16
Total materials cost computation
The computation of unit materials cost is as follows.
Illustration 21-17
Unit materials cost computation
Illustration 21-18 shows the computation of total conversion costs.
Illustration 21-18
Total conversion costs computation
The computation of unit conversion cost is as follows.
Illustration 21-19
Unit conversion cost computation
Total manufacturing cost per unit is therefore computed as shown in Illustration 21-20.
Illustration 21-20
Total manufacturing cost per unit
Prepare a Cost Reconciliation Schedule (Step 4)
We are now ready to determine the cost of goods transferred out of the Mixing Department to the Baking Department and the costs in ending work in process. Kellogg charged total costs of $655,000 to the Mixing Department in June, calculated as shown in Illustration 21-21 (page 996).
Illustration 21-21
Costs charged to Mixing Department
The company then prepares a cost reconciliation schedule to assign these costs to (a) units transferred out to the Baking Department and (b) ending work in process.
Illustration 21-22
Cost reconciliation schedule—Mixing Department
Kellogg uses the total manufacturing cost per unit, $0.75, in costing the units completed and transferred to the Baking Department. In contrast, the unit cost of materials and the unit cost of conversion are needed in costing units in process. The cost reconciliation schedule shows that the total costs accounted for (Illustration 21-22) equal the total costs to be accounted for (Illustration 21-21).
Preparing the Production Cost Report
At this point, Kellogg is ready to prepare the production cost report for the Mixing Department. As indicated earlier, this report is an internal document for management that shows production quantity and cost data for a production department.
There are four steps in preparing a production cost report:
1. Compute the physical unit flow.
2. Compute the equivalent units of production.
3. Compute unit production costs.
4. Prepare a cost reconciliation schedule.
Illustration 21-23 shows the production cost report for the Mixing Department. The report identifies the four steps.
Production cost reports provide a basis for evaluating the productivity of a department. In addition, managers can use the cost data to assess whether unit costs and total costs are reasonable. By comparing the quantity and cost data with predetermined goals, top management can also judge whether current performance is meeting planned objectives.
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.
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.
Solution
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.
Illustration 21-23
Production cost report
Costing Systems—Final Comments
Companies often use a combination of a process cost and a job order cost system. Called operations costing, this hybrid system is similar to process costing in its assumption that standardized methods are used to manufacture the product. At the same time, the product may have some customized, individual features that require the use of a job order cost system.
Consider, for example, the automobile manufacturer Ford Motor Company. Each vehicle at a given plant goes through the same assembly line, but Ford uses different materials (such as seat coverings, paint, and tinted glass) for different vehicles. Similarly, Kellogg's Pop-Tarts® toaster pastries go through numerous standardized processes—mixing, filling, baking, frosting, and packaging. The pastry dough, though, comes in different flavors—plain, chocolate, and graham—and fillings include Smucker's® real fruit, chocolate fudge, vanilla creme, brown sugar cinnamon, and s'mores.
A cost-benefit trade-off occurs as a company decides which costing system to use. A job order cost system, for example, provides detailed information related to the cost of the product. Because each job has its own distinguishing characteristics, the system can provide an accurate cost per job. This information is useful in controlling costs and pricing products. However, the cost of implementing a job order cost system is often expensive because of the accounting costs involved.
On the other hand, for a company like Intel, which makes computer chips, is there a benefit in knowing whether the cost of the one-hundredth chip produced is different from the one-thousandth chip produced? Probably not. An average cost of the product will suffice for control and pricing purposes.
In summary, when deciding to use one of these systems, or a combination system, a company must weigh the costs of implementing the system against the benefits from the additional information provided.
Contemporary Developments
As indicated in Chapter 19, two contemporary developments in managerial accounting are just-in-time processing and activity-based costing. We explain these innovations in the following sections.
Just-in-Time Processing
Traditionally, continuous process manufacturing has been based on a just-in-case philosophy. Companies hold inventories of raw materials just in case some items are of poor quality or a key supplier is shut down by a strike. They manufacture and store subassembly parts just in case these parts are needed later in the manufacturing process. Companies complete and store finished goods just in case they receive unexpected and rush customer orders. This philosophy often results in a “push approach.” Raw materials and subassembly parts are pushed through each process. Traditional processing often results in the buildup of extensive manufacturing inventories.
Primarily in response to foreign competition, many U.S. firms have switched to just-in-time (JIT) processing. JIT manufacturing is dedicated to having the right amount of materials, parts, or products just as they are needed. JIT first hit the United States in the early 1980s when automobile companies adopted it to compete with foreign automakers. Many companies, including Dell, Caterpillar, and Harley-Davidson now successfully use JIT. Under JIT processing, companies receive raw materials just in time for use in production, they complete subassembly parts just in time for use in finished goods, and they complete finished goods just in time to be sold. Illustration 21-24 shows the sequence of activities in just-in-time processing.
Illustration 21-24
Just-in-time processing
OBJECTIVE OF JIT PROCESSING
A primary objective of JIT is to eliminate all manufacturing inventories. Inventories have an adverse effect on net income because they tie up funds and storage space that could be put to more productive uses. JIT strives to eliminate inventories by using a “pull approach” in manufacturing. This approach begins with the customer placing an order with the company, which starts the process of pulling the product through the manufacturing process. A computer at the final workstation sends a signal to the preceding workstation. This signal indicates the exact materials (parts and subassemblies) needed to complete the production of a specified product for a specified time period, such as an eight-hour shift. The next preceding process, in turn, sends its signal to other processes back up the line. The goal is a smooth continuous flow in the manufacturing process and no buildup of inventories at any point.
ELEMENTS OF JIT PROCESSING
There are three important elements in JIT processing:
1. Dependable suppliers. Suppliers must be willing to deliver on short notice exact quantities of raw materials according to precise quality specifications (even including multiple deliveries within the same day). Suppliers must also be willing to deliver the raw materials at specified work stations rather than at a central receiving department. This type of purchasing requires constant and direct communication. Such communication is facilitated by an online computer linkage between the company and its suppliers.
2. A multiskilled workforce. Under JIT, machines are often strategically grouped around work cells or workstations. Much of the work is automated. As a result, one worker may operate and maintain several different types of machines.
3. A total quality control system. The company must establish total quality control throughout the manufacturing operations. Total quality control means no defects. Since the pull approach signals only required quantities, any defects at any workstation will shut down operations at subsequent workstations. Total quality control requires continuous monitoring by both employees and supervisors at each workstation.
BENEFITS OF JIT PROCESSING
The major benefits of implementing JIT processing are:
1. Significant reduction or elimination of manufacturing inventories.
2. Enhanced product quality.
3. Reduction or elimination of rework costs and inventory storage costs.
4. Production cost savings from the improved flow of goods through the processes.
The effects in many cases have been dramatic. For example, after using JIT for two years, a major division of Hewlett-Packard found that work in process inventories (in dollars) were down 82%, scrap/rework costs were down 30%, space utilization improved by 40%, and labor efficiency improved 50%. As indicated, JIT not only reduces inventory but also enables a manufacturer to produce a better product faster and with less waste.
One of the major accounting benefits of JIT is the elimination of separate raw materials and work in process inventory accounts. These accounts are replaced by one account, Raw and In-Process Inventory. All materials and conversion costs are charged to this account. The reduction (or elimination) of in-process inventories results in a simpler computation of equivalent units of production.
Activity-Based Costing
Activity-based costing (ABC) focuses on the activities performed in producing a product. An ABC system is similar to conventional costing systems in accounting for direct materials and direct labor, but it differs in regard to manufacturing overhead.
A conventional cost system uses a single unit-level basis to allocate overhead costs to products. The basis may be direct labor or machine hours used to manufacture the product. The assumption in this approach is that as volume of units produced increases, so does the cost of overhead. However, in recent years the amount of direct labor used in many industries has greatly decreased, and total overhead costs resulting from depreciation on expensive equipment and machinery, utilities, repairs, and maintenance have significantly increased.
In ABC costing, the cost of a product is equal to the sum of the costs of all activities performed to manufacture it. ABC recognizes that to have accurate and meaningful cost data, more than one basis of allocating activity costs to products is needed.
In selecting the allocation basis, ABC seeks to identify the cost drivers that measure the activities performed on the product. A cost driver may be any factor or activity that has a direct cause–effect relationship with the resources consumed. Examples of activities and possible cost drivers are as follows.
Illustration 21-25
Activities and cost drivers in ABC
Two important assumptions must be met in order to obtain accurate product costs under ABC:
1. All overhead costs related to the activity must be driven by the cost driver used to assign costs to products.
2. All overhead costs related to the activity should respond proportionally to changes in the activity level of the cost driver.
For example, if there is little or no correlation between changes in the cost driver and consumption of the overhead cost, inaccurate product costs are inevitable. An example of the use of ABC is illustrated in the appendix at the end of this chapter.
Activity-based costing may be used with either a job order or a process cost accounting system. The primary benefit of ABC is more accurate and meaningful product costing. Also, improved cost data about an activity can lead to reduced costs for the activity. In sum, ABC makes managers realize that it is activities, and not products, that determine the profitability of a company—a realization that should lead to better management decisions.
SERVICE COMPANY INSIGHT
Using ABC to Aid in Employee Evaluation
Although most publicized ABC applications are in manufacturing companies or large service firms, very small service businesses can apply it also. Mahany Welding Supply, a small family-run welding service business in Rochester, New York, used ABC to determine the cost of servicing customers and to identify feasible cost-reduction opportunities.
Application of ABC at Mahany Welding's operations provided information about the five employees who were involved in different activities of revenue generation—i.e., delivery of supplies (rural versus city), welding services, repairs, telephone sales, field or door-to-door sales, repeat business sales, and cold-call sales. Managers applied activity cost pools to the five revenue-producing employees using relevant cost drivers. ABC revealed annual net income (loss) by employee as follows.
This comparative information was an eye-opener to the owner of Mahany Welding—who was Employee #5!
Source: Michael Krupnicki and Thomas Tyson, “Using ABC to Determine the Cost of Servicing Customers,” Management Accounting (December 31, 1997), pp. 40–46.
What positive implications does application of ABC have for the employees of this company? (See page 1028.)
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.
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.
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.
Solution
1. False. 2. False. 3. True. 4. False. 5. True. 6. False.
Related exercise material: BE21-11 and DO IT! 21-5.
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.
(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.
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.
Solution to Comprehensive DO IT!
SUMMARY OF LEARNING OBJECTIVES
1 Understand who uses process cost systems. Companies that mass-produce similar products in a continuous fashion use process cost systems. Once production begins, it continues until the finished product emerges. Each unit of finished product is indistinguishable from every other unit.
2 Explain the similarities and differences between job order cost and process cost systems. Job order cost systems are similar to process cost systems in three ways: (1) Both systems track the same cost elements—direct materials, direct labor, and manufacturing overhead. (2) Both accumulate costs in the same accounts—Raw Materials Inventory, Factory Labor, and Manufacturing Overhead. (3) Both assign accumulated costs to the same accounts—Work in Process, Finished Goods Inventory, and Cost of Goods Sold. However, the method of assigning costs differs significantly.
There are four main differences between the two cost systems: (1) A process cost system uses separate accounts for each department or manufacturing process, rather than only one work in process account used in a job order cost system. (2) A process cost system summarizes costs in a production cost report for each department. A job cost system charges costs to individual jobs and summarizes them in a job cost sheet. (3) Costs are totaled at the end of a time period in a process cost system, but at the completion of a job in a job cost system. (4) A process cost system calculates unit cost as Total manufacturing costs for the period ÷ Units produced during the period. A job cost system calculates unit cost as Total cost per job ÷ Units produced.
3 Explain the flow of costs in a process cost system. A process cost system assigns manufacturing costs for raw materials, labor, and overhead to work in process accounts for various departments or manufacturing processes. It transfers the costs of units completed from one department to another as those units move through the manufacturing process. The system transfers the costs of completed work to Finished Goods Inventory. Finally, when inventory is sold, the system transfers costs to Cost of Goods Sold.
4 Make the journal entries to assign manufacturing costs in a process cost system. Entries to assign the costs of raw materials, labor, and overhead consist of a credit to Raw Materials Inventory, Factory Labor, and Manufacturing Overhead, and a debit to Work in Process for each department. Entries to record the cost of goods transferred to another department are a credit to Work in Process for the department whose work is finished and a debit to the department to which the goods are transferred. The entry to record units completed and transferred to the warehouse is a credit to Work in Process for the department whose work is finished and a debit to Finished Goods Inventory. The entry to record the sale of goods is a credit to Finished Goods Inventory and a debit to Cost of Goods Sold.
5 Compute equivalent units. Equivalent units of production measure work done during a period, expressed in fully completed units. Companies use this measure to determine the cost per unit of completed product. Equivalent units are the sum of units completed and transferred out plus equivalent units of ending work in process.
6 Explain the four steps necessary to prepare a production cost report. The four steps to complete a production cost report are: (1) Compute the physical unit flow—that is, the units to be accounted for and the units accounted for. (2) Compute the equivalent units of production. (3) Compute the unit production costs, expressed in terms of equivalent units of production. (4) Prepare a cost reconciliation schedule, which shows that the total costs accounted for equal the total costs to be accounted for.
7 Prepare a production cost report. The production cost report contains both quantity and cost data for a production department. There are four sections in the report: (1) number of physical units, (2) equivalent units determination, (3) unit costs, and (4) cost reconciliation schedule.
8 Explain just-in-time (JIT) processing. JIT is a manufacturing technique dedicated to producing the right products at the right time as needed. One of the principal accounting effects is that a Raw and In-Process Inventory account replaces both the raw materials and work in process inventory accounts.
9 Explain activity-based costing (ABC). ABC is a method of product costing that focuses on the activities performed to produce products. It assigns the cost of the activities to products by using cost drivers that measure the activities performed. The primary objective of ABC is accurate and meaningful product costs.
GLOSSARY
Activity-based costing (ABC) A cost accounting system that focuses on the activities performed in manufacturing a specific product. (p. 1000).
Conversion costs The sum of labor costs and overhead costs. (p. 991).
Cost driver Any factor or activity that has a direct cause–effect relationship with the resources consumed. (p. 1000).
Cost reconciliation schedule A schedule that shows that the total costs accounted for equal the total costs to be accounted for. (p. 996).
Equivalent units of production A measure of the work done during the period, expressed in fully completed units. (p. 990).
Just-in-time (JIT) processing A processing system dedicated to producing the right products (or parts) as they are needed. (p. 998).
Operations costing A combination of a process cost and a job order cost system, in which products are manufactured primarily by standardized methods, with some customization. (p. 998).
Physical units Actual units to be accounted for during a period, irrespective of any work performed. (p. 994).
Process cost systems An accounting system used to apply costs to similar products that are mass-produced in a continuous fashion. (p. 984).
Production cost report An internal report for management that shows both production quantity and cost data for a production department. (p. 993).
Total units (costs) accounted for The sum of the units (costs) transferred out during the period plus the units (costs) in process at the end of the period. (pp. 994, 996).
Total units (costs) to be accounted for The sum of the units (costs) started (or transferred) into production during the period plus the units (costs) in process at the beginning of the period. (pp. 994, 996).
Unit production costs Costs expressed in terms of equivalent units of production. (p. 995).
Weighted-average method Method used to compute equivalent units of production which considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process. (p. 990).
APPENDIX 21A Example of Traditional Costing versus Activity-Based Costing
Production and Cost Data
In this appendix, we present an example that compares activity-based costing to traditional costing. Assume that Atlas Company produces two abdominal-training products, the Ab Bench and the Ab Coaster. The Ab Bench is a high-volume item totaling 25,000 units annually. The Ab Coaster is a low-volume item totaling only 5,000 units per year. Each product requires one hour of direct labor for completion. Therefore, total annual direct labor hours are 30,000 (25,000 + 5,000). Expected annual manufacturing overhead costs are $900,000. The predetermined overhead rate is $30 ($900,000 ÷ 30,000) per direct labor hour.
The direct materials cost per unit is $40 for the Ab Bench and $30 for the Ab Coaster. The direct labor cost is $12 per unit for each product.
Unit Costs Under Traditional Costing
Illustration 21A-1 shows the unit cost for each product under traditional costing.
Illustration 21A-1
Units costs—traditional costing
Unit Costs Under ABC
Let's now calculate unit costs under ABC, in order to compare activity-based costing with a traditional costing system. The first step is to determine overhead rates under ABC.
DETERMINING OVERHEAD RATES UNDER ABC
Analysis reveals that Atlas Company's expected annual overhead costs of $900,000 relate to three activities—machine setups, machining, and inspections. Illustration 21A-2 shows the cost driver and overhead rate for each activity.
Illustration 21A-2
Computing overhead rates—ABC
ASSIGNING OVERHEAD COSTS TO PRODUCTS UNDER ABC
In assigning costs, it is necessary to know the expected number of cost drivers for each product. Because of its low volume, the Ab Coaster requires more setups and inspections than the Ab Bench. The expected number of cost drivers for each product is as follows.
Illustration 21A-3
Expected number of cost drivers
Using these data, Atlas can assign the expected annual overhead cost to each product as follows.
Illustration 21A-4
Assignment of overhead costs to products
These data show that under ABC, overhead costs are shifted from the high-volume product (Ab Bench) to the low-volume product (Ab Coaster). This shift results in more accurate costing for two reasons:
1. Low-volume products often require more special handling, such as more machine setups and inspections, than high-volume products. This is true for Atlas Company. Thus, the low-volume product frequently is responsible for more overhead costs per unit than a high-volume product.
2. Assigning overhead using ABC will usually increase the cost per unit for low-volume products as compared to a traditional overhead allocation. Therefore, traditional cost drivers such as direct labor hours are usually not appropriate for assigning overhead costs to low-volume products.
Comparing Unit Costs
A comparison of unit manufacturing costs under traditional costing and ABC shows the following significant differences.
Illustration 21A-5
Comparison of unit product costs
The comparison shows that unit costs under traditional costing have been significantly distorted. The cost of the Ab Bench has been overstated $13 per unit ($82 − $69). The cost of the Ab Coaster has been understated $65 per unit ($137 – $72). The differences are attributable to how Atlas Company assigns manufacturing overhead. A likely consequence of the differences is that Atlas has been over-pricing the Ab Bench and possibly losing market share to competitors. It also has been sacrificing profitability by underpricing the Ab Coaster.
As illustrated in the above case, ABC involves the following steps.
1. Identify the major activities that pertain to the manufacture of specific products.
2. Accumulate manufacturing overhead costs by activities.
3. Identify the cost driver(s) that accurately measure(s) each activity's contribution to the finished product.
4. Assign manufacturing overhead costs for each activity to products, using the cost driver(s).
Benefits of ABC
The primary benefit of ABC is more accurate product costing. Here's why:
1. ABC leads to more cost pools being used to assign overhead costs to products. Instead of one plantwide pool (or even departmental pools) and a single cost driver, companies use numerous activity cost pools with more relevant cost drivers. Costs are assigned more directly on the basis of the cost drivers used to produce each product.
2. ABC leads to enhanced control over overhead costs. Under ABC, companies can trace many overhead costs directly to activities—allowing some indirect costs to be identified as direct costs. Thus, managers have become more aware of their responsibility to control the activities that generate those costs.
3. ABC leads to better management decisions. More accurate product costing should contribute to setting selling prices that can help achieve desired product profitability levels. In addition, more accurate cost data could be helpful in deciding whether to make or buy a product part or component, and sometimes even whether to eliminate a product.
Activity-based costing does not change the amount of overhead costs. What it does do is allocate those overhead costs in a more accurate manner. Furthermore, if the scorekeeping is more realistic and more accurate, managers should be able to better understand cost behavior and overall profitability.
Limitations of ABC
Although ABC systems often provide better product cost data than traditional volume-based systems, there are limitations:
1. ABC can be expensive to use. The increased cost of identifying multiple activities and applying numerous cost drivers discourages many companies from using ABC. Activity-based costing systems are more complex than traditional costing systems—sometimes significantly more complex. So companies must ask, is the cost of implementation greater than the benefit of greater accuracy? Sometimes it may be. For some companies, there may be no need to consider ABC at all because their existing system is sufficient. If the costs of ABC outweigh the benefits, then the company should not implement ABC.
2. Some arbitrary allocations continue. Even though more overhead costs can be assigned directly to products through ABC's multiple activity cost pools, certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours.
SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 21A
10 Apply activity-based costing to specific company data. In applying ABC, it is necessary to compute the overhead rate for each activity by dividing total expected overhead by the total expected usage of the cost driver. The overhead cost for each activity is then assigned to products on the basis of each product's use of the cost driver.
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more resources are available for practice in WileyPLUS.
Note: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.
SELF-TEST QUESTIONS
Answers are on page 1028.
(LO 1)
1. Which of the following items is not characteristic of a process cost system?
(a) Once production begins, it continues until the finished product emerges.
(b) The products produced are heterogeneous in nature.
(c) The focus is on continually producing homogeneous products.
(d) When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead.
(LO 2)
2. Indicate which of the following statements is not correct.
(a) Both a job order and a process cost system track the same three manufacturing cost elements—direct materials, direct labor, and manufacturing overhead.
(b) A job order cost system uses only one work in process account, whereas a process cost system uses multiple work in process accounts.
(c) Manufacturing costs are accumulated the same way in a job order and in a process cost system.
(d) Manufacturing costs are assigned the same way in a job order and in a process cost system.
(LO 3)
3. In a process cost system, the flow of costs is:
(a) work in process, cost of goods sold, finished goods.
(b) finished goods, work in process, cost of goods sold.
(c) finished goods, cost of goods sold, work in process.
(d) work in process, finished goods, cost of goods sold.
(LO 4)
4. In making journal entries to assign raw materials costs, a company using process costing:
(a) debits Finished Goods Inventory.
(b) often debits two or more work in process accounts.
(c) generally credits two or more work in process accounts.
(d) credits Finished Goods Inventory.
(LO 4)
5. In a process cost system, manufacturing overhead:
(a) is assigned to finished goods at the end of each accounting period.
(b) is assigned to a work in process account for each job as the job is completed.
(c) is assigned to a work in process account for each production department on the basis of a predetermined overhead rate.
(d) is assigned to a work in process account for each production department as overhead costs are incurred.
(LO 5)
6. Conversion costs are the sum of:
(a) fixed and variable overhead costs.
(b) labor costs and overhead costs.
(c) direct material costs and overhead costs.
(d) direct labor and indirect labor costs.
(LO 5)
7. The Mixing Department's output during the period consists of 20,000 units completed and transferred out, and 5,000 units in ending work in process 60% complete as to materials and conversion costs. Beginning inventory is 1,000 units, 40% complete as to materials and conversion costs. The equivalent units of production are:
(a) 22,600.
(b) 23,000.
(c) 24,000.
(d) 25,000.
(LO 6)
8. In RYZ Company, there are zero units in beginning work in process, 7,000 units started into production, and 500 units in ending work in process 20% completed. The physical units to be accounted for are:
(a) 7,000.
(b) 7,360.
(c) 7,500.
(d) 7,340.
(LO 6)
9. Mora Company has 2,000 units in beginning work in process, 20% complete as to conversion costs, 23,000 units transferred out to finished goods, and 3,000 units in ending work in process 
complete as to conversion costs.
The beginning and ending inventory is fully complete as to materials costs. Equivalent units for materials and conversion costs are, respectively:
(a) 22,000, 24,000.
(b) 24,000, 26,000.
(c) 26,000, 24,000.
(d) 26,000, 26,000.
(LO 6)
10. Fortner Company has no beginning work in process; 9,000 units are transferred out and 3,000 units in ending work in process are one-third finished as to conversion costs and fully complete as to materials cost. If total materials cost is $60,000, the unit materials cost is:
(a) $5.00.
(b) $5.45 rounded.
(c) $6.00.
(d) No correct answer is given.
(LO 6)
11. Largo Company has unit costs of $10 for materials and $30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs, and fully complete as to materials cost, the total cost assignable to the ending work in process inventory is:
(a) $45,000.
(b) $55,000.
(c) $75,000.
(d) $100,000.
(LO 7)
12. A production cost report:
(a) is an external report.
(b) shows both the production quantity and cost data related to a department.
(c) shows equivalent units of production but not physical units.
(d) contains six sections.
(LO 7)
13. In a production cost report, units to be accounted for are calculated as:
(a) Units started into production + Units in ending work in process.
(b) Units started into production − Units in beginning work in process.
(c) Units transferred out + Units in beginning work in process.
(d) Units started into production + Units in beginning work in process.
(LO 8)
14. Under just-in-time processing:
(a) raw materials are received just in time for use in production.
(b) subassembly parts are completed just in time for use in assembling finished goods.
(c) finished goods are completed just in time to be sold.
(d) All of the above.
(LO 8)
15. The primary objective of just-in-time processing is to:
(a) accumulate overhead in activity cost pools.
(b) eliminate or reduce all manufacturing inventories.
(c) identify relevant activity cost drivers.
(d) identify value-added activities.
(LO 9)
16. Activity-based costing:
(a) assumes that the cost of a product is equal to the sum of the costs of all activities performed to manufacture it.
(b) has become more widespread as overhead costs have been decreasing relative to materials and labor costs.
(c) is similar to a conventional cost accounting system in accounting for direct labor and manufacturing overhead but differs in regard to direct materials.
(d) uses a single unit-level basis to allocate overhead costs to products.
(LO 9)
17. Activity-based costing (ABC):
(a) can be used only in a process cost system.
(b) focuses on units of production.
(c) focuses on activities performed to produce a product.
(d) uses only a single basis of allocation.
(LO 10)
*18. The overhead rate for Machine Setups is $100 per setup. Products A and B have 80 and 60 setups, respectively. The overhead assigned to each product is:
(a) Product A $8,000, Product B $8,000.
(b) Product A $8,000, Product B $6,000.
(c) Product A $6,000, Product B $6,000.
(d) Product A $6,000, Product B $8,000.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. Identify which costing system—job order or process cost—the following companies would primarily use: (a) Quaker Oats, (b) Jif Peanut Butter, (c) Gulf Craft (luxury yachts), and (d) Warner Bros. Motion Pictures.
2. Contrast the primary focus of job order cost accounting and of process cost accounting.
3. What are the similarities between a job order and a process cost system?
4. Your roommate is confused about the features of process cost accounting. Identify and explain the distinctive features for your roommate.
5. Sam Bowyer believes there are no significant differences in the flow of costs between job order cost accounting and process cost accounting. Is Bowyer correct? Explain.
6. (a) What source documents are used in assigning (1) materials and (2) labor to production in a process cost system?
(b) What criterion and basis are commonly used in allocating overhead to processes?
7. At Ely Company, overhead is assigned to production departments at the rate of $5 per machine hour. In July, machine hours were 3,000 in the Machining Department and 2,400 in the Assembly Department. Prepare the entry to assign overhead to production.
8. Mark Haley is uncertain about the steps used to prepare a production cost report. State the procedures that are required in the sequence in which they are performed.
9. John Harbeck is confused about computing physical units. Explain to John how physical units to be accounted for and physical units accounted for are determined.
10. What is meant by the term “equivalent units of production”?
11. How are equivalent units of production computed?
12. Coats Company had zero units of beginning work in process. During the period, 9,000 units were completed, and there were 600 units of ending work in process. What were the units started into production?
13. Sanchez Co. has zero units of beginning work in process. During the period, 12,000 units were completed, and there were 500 units of ending work in process one-fifth complete as to conversion cost and 100% complete as to materials cost. What were the equivalent units of production for (a) materials and (b) conversion costs?
14. Hindi Co. started 3,000 units during the period. Its beginning inventory is 500 units one-fourth complete as to conversion costs and 100% complete as to materials costs. Its ending inventory is 300 units one-fifth complete as to conversion costs and 100% complete as to materials costs. How many units were transferred out this period?
15. Clauss Company transfers out 14,000 units and has 2,000 units of ending work in process that are 25% complete. Materials are entered at the beginning of the process and there is no beginning work in process. Assuming unit materials costs of $3 and unit conversion costs of $5, what are the costs to be assigned to units (a) transferred out and (b) in ending work in process?
16. (a) Ann Quinn believes the production cost report is an external report for stockholders. Is Ann correct? Explain.
(b) Identify the sections in a production cost report.
17. What purposes are served by a production cost report?
18. At Trent Company, there are 800 units of ending work in process that are 100% complete as to materials and 40% complete as to conversion costs. If the unit cost of materials is $3 and the total costs assigned to the 800 units is $6,000, what is the per unit conversion cost?
19. What is the difference between operations costing and a process cost system?
20. How does a company decide whether to use a job order or a process cost system?
21. (a) Describe the philosophy and approach of just-in-time processing.
(b) Identify the major elements of JIT processing.
22. (a) What are the principal differences between activity-based costing (ABC) and traditional product costing?
(b) What assumptions must be met for ABC costing to be useful?
23. Chopra Co. identifies the following activities that pertain to manufacturing overhead: Materials Handling, Machine Setups, Factory Machine Maintenance, Factory Supervision, and Quality Control. For each activity, identify an appropriate cost driver.
*24. (a) What steps are involved in developing an activity-based costing system?
(b) What are the benefits of ABC costing?
BRIEF EXERCISES
Journalize entries for accumulating costs.
(LO 4)
BE21-1 Weber Company purchases $45,000 of raw materials on account, and it incurs $60,000 of factory labor costs. Journalize the two transactions on March 31 assuming the labor costs are not paid until April.
Journalize the assignment of materials and labor costs.
(LO 4)
BE21-2 Data for Weber Company are given in BE21-1. Supporting records show that (a) the Assembly Department used $24,000 of raw materials and $35,000 of the factory labor, and (b) the Finishing Department used the remainder. Journalize the assignment of the costs to the processing departments on March 31.
Journalize the assignment of overhead costs.
(LO 4)
BE21-3 Factory labor data for Weber Company are given in BE21-2. Manufacturing overhead is assigned to departments on the basis of 200% of labor costs. Journalize the assignment of overhead to the Assembly and Finishing Departments.
Compute equivalent units of production.
(LO 5)
BE21-4 Goode Company has the following production data for selected months.
Compute equivalent units of production for materials and conversion costs, assuming materials are entered at the beginning of the process.
Compute unit costs of production.
(LO 6)
BE21-5 In Lopez Company, total material costs are $36,000, and total conversion costs are $54,000. Equivalent units of production are materials 10,000 and conversion costs 12,000. Compute the unit costs for materials, conversion costs, and total manufacturing costs.
Assign costs to units transferred out and in process.
(LO 6)
BE21-6 Trek Company has the following production data for April: units transferred out 40,000, and ending work in process 5,000 units that are 100% complete for materials and 40% complete for conversion costs. If unit materials cost is $4 and unit conversion cost is $7, determine the costs to be assigned to the units transferred out and the units in ending work in process.
Compute unit costs.
(LO 6)
BE21-7 Production costs chargeable to the Finishing Department in June in Cascio Company are materials $16,000, labor $29,500, overhead $18,000. Equivalent units of production are materials 20,000 and conversion costs 19,000. Compute the unit costs for materials and conversion costs.
Prepare cost reconciliation schedule.
(LO 6)
BE21-8 Data for Cascio Company are given in BE21-7. Production records indicate that 18,000 units were transferred out, and 2,000 units in ending work in process were 50% complete as to conversion cost and 100% complete as to materials. Prepare a cost reconciliation schedule.
Compute equivalent units of production.
(LO 5)
BE21-9 The Smelting Department of Mathews Company has the following production and cost data for November.
Production: Beginning work in process 2,000 units that are 100% complete as to materials and 20% complete as to conversion costs; units transferred out 8,000 units; and ending work in process 7,000 units that are 100% complete as to materials and 40% complete as to conversion costs.
Compute the equivalent units of production for (a) materials and (b) conversion costs for the month of November.
Understand contemporary developments.
(LO 8, 9)
BE21-10 Sam Snead has formulated the following list of statements about contemporary developments in managerial accounting.
1. Just-in-time processing results in a push approach; that is, raw materials are pushed through each process.
2. A primary objective of just-in-time processing is to eliminate all manufacturing inventories.
3. A major disadvantage of just-in-time processing is lower product quality.
4. A primary benefit of activity-based costing is more accurate and meaningful product costing.
5. A major advantage of activity-based costing is that it uses a single unit-level basis, such as direct labor or machine hours, to allocate overhead.
Identify each statement as true or false. If false, indicate how to correct the statement to make it true.
Compute activity-based overhead rates.
(LO 10)
*BE21-11 Mordica Company identifies three activities in its manufacturing process: machine setups, machining, and inspections. Estimated annual overhead cost for each activity is $150,000, $325,000, and $87,500, respectively. The cost driver for each activity and the expected annual usage are: number of setups 2,500, machine hours 25,000, and number of inspections 1,750. Compute the overhead rate for each activity.
DO IT! 21-1 Indicate whether each of the following statements is true or false.
Compare job order and process cost systems.
(LO 1, 2)
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! 21-2 Kopa Company manufactures CH-21 through two processes: Mixing and Packaging. In July, the following costs were incurred.
Assign and journalize manufacturing costs.
(LO 4)
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.
DO IT! 21-3 The assembly department has the following production data for the current month.
Compute equivalent units.
(LO 5)
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.
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.
Prepare cost reconciliation schedule.
(LO 6, 7)
(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.
DO IT! 21-5 Indicate whether each of the following statements is true or false.
Answer questions about JIT and ABC.
(LO 8, 9)
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.
EXERCISES
E21-1 Robert Mallory has prepared the following list of statements about process cost accounting.
Understand process cost accounting.
(LO 1, 2)
1. Process cost systems are used to apply costs to similar products that are mass-produced in a continuous fashion.
2. A process cost system is used when each finished unit is indistinguishable from another.
3. Companies that produce soft drinks, motion pictures, and computer chips would all use process cost accounting.
4. In a process cost system, costs are tracked by individual jobs.
5. Job order costing and process costing track different manufacturing cost elements.
6. Both job order costing and process costing account for direct materials, direct labor, and manufacturing overhead.
7. Costs flow through the accounts in the same basic way for both job order costing and process costing.
8. In a process cost system, only one work in process account is used.
9. In a process cost system, costs are summarized in a job cost sheet.
10. In a process cost system, the unit cost is total manufacturing costs for the period divided by the equivalent units produced during the period.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
E21-2 Harrelson Company manufactures pizza sauce through two production departments: Cooking and Canning. In each process, materials and conversion costs are incurred evenly throughout the process. For the month of April, the work in process accounts show the following debits.
Journalize transactions.
(LO 4)
Instructions
Journalize the April transactions.
E21-3 The ledger of Custer Company has the following work in process account.
Answer questions on costs and production.
(LO 3, 5, 6)
Production records show that there were 400 units in the beginning inventory, 30% complete, 1,400 units started, and 1,500 units transferred out. The beginning work in process had materials cost of $2,040 and conversion costs of $1,550. The units in ending inventory were 40% complete. Materials are entered at the beginning of the painting process.
Instructions
(a) How many units are in process at May 31?
(b) What is the unit materials cost for May?
(c) What is the unit conversion cost for May?
(d) What is the total cost of units transferred out in May?
(e) What is the cost of the May 31 inventory?
E21-4 Schrager Company has two production departments: Cutting and Assembly. July 1 inventories are Raw Materials $4,200, Work in Process—Cutting $2,900, Work in Process—Assembly $10,600, and Finished Goods $31,000. During July, the following transactions occurred.
Journalize transactions for two processes.
(LO 4)
1. Purchased $62,500 of raw materials on account.
2. Incurred $60,000 of factory labor. (Credit Factory Wages Payable.)
3. Incurred $70,000 of manufacturing overhead; $40,000 was paid and the remainder is unpaid.
4. Requisitioned materials for Cutting $15,700 and Assembly $8,900.
5. Used factory labor for Cutting $33,000 and Assembly $27,000.
6. Applied overhead at the rate of $18 per machine hour. Machine hours were Cutting 1,680 and Assembly 1,720.
7. Transferred goods costing $67,600 from the Cutting Department to the Assembly Department.
8. Transferred goods costing $134,900 from Assembly to Finished Goods.
9. Sold goods costing $150,000 for $200,000 on account.
Instructions
Journalize the transactions. (Omit explanations.)
E21-5 In Wayne Company, materials are entered at the beginning of each process. Work in process inventories, with the percentage of work done on conversion costs, and production data for its Sterilizing Department in selected months during 2014 are as follows.
Compute physical units and equivalent units of production.
(LO 5, 6)
Instructions
(a) Compute the physical units for January and May.
(b) Compute the equivalent units of production for (1) materials and (2) conversion costs for each month.
E21-6 The Cutting Department of Cassel Company has the following production and cost data for July.
Determine equivalent units, unit costs, and assignment of costs.
(LO 5, 6)
Materials are entered at the beginning of the process. Conversion costs are incurred uniformly during the process.
Instructions
(a) Determine the equivalent units of production for (1) materials and (2) conversion costs.
(b) Compute unit costs and prepare a cost reconciliation schedule.
E21-7 The Sanding Department of Richards Furniture Company has the following production and manufacturing cost data for March 2014, the first month of operation.
Production: 9,000 units finished and transferred out; 3,000 units started that are 100% complete as to materials and 20% complete as to conversion costs.
Manufacturing costs: Materials $33,000; labor $24,000; overhead $36,000.
Prepare a production cost report.
(LO 5, 6, 7)
Instructions
Prepare a production cost report.
E21-8 The Blending Department of Luongo Company has the following cost and production data for the month of April.
Determine equivalent units, unit costs, and assignment of costs.
(LO 5, 6)
Units transferred out totaled 17,000. Ending work in process was 1,000 units that are 100% complete as to materials and 40% complete as to conversion costs.
Instructions
(a) Compute the equivalent units of production for (1) materials and (2) conversion costs for the month of April.
(b) Compute the unit costs for the month.
(c) Determine the costs to be assigned to the units transferred out and in ending work in process.
E21-9 Kostrivas Company has gathered the following information.
Determine equivalent units, unit costs, and assignment of costs.
(LO 5, 6)
Instructions
(a) Compute equivalent units of production for materials and for conversion costs.
(b) Determine the unit costs of production.
(c) Show the assignment of costs to units transferred out and in process.
E21-10 Overton Company has gathered the following information.
Determine equivalent units, unit costs, and assignment of costs.
(LO 5, 6)
Instructions
(a) Compute equivalent units of production for materials and for conversion costs.
(b) Determine the unit costs of production.
(c) Show the assignment of costs to units transferred out and in process.
E21-11 The Polishing Department of Harbin Company has the following production and manufacturing cost data for September. Materials are entered at the beginning of the process.
Production: Beginning inventory 1,600 units that are 100% complete as to materials and 30% complete as to conversion costs; units started during the period are 38,400; ending inventory of 5,000 units 10% complete as to conversion costs.
Manufacturing costs: Beginning inventory costs, comprised of $20,000 of materials and $43,180 of conversion costs; materials costs added in Polishing during the month, $177,200; labor and overhead applied in Polishing during the month, $125,680 and $257,140, respectively.
Compute equivalent units, unit costs, and costs assigned.
(LO 5, 6)
Instructions
(a) Compute the equivalent units of production for materials and conversion costs for the month of September.
(b) Compute the unit costs for materials and conversion costs for the month.
(c) Determine the costs to be assigned to the units transferred out and in process.
E21-12 David Skaros has recently been promoted to production manager, and so he has just started to receive various managerial reports. One of the reports he has received is the production cost report that you prepared. It showed that his department had 2,000 equivalent units in ending inventory. His department has had a history of not keeping enough inventory on hand to meet demand. He has come to you, very angry, and wants to know why you credited him with only 2,000 units when he knows he had at least twice that many on hand.
Explain the production cost report.
(LO 7)
Instructions
Explain to him why his production cost report showed only 2,000 equivalent units in ending inventory. Write an informal memo. Be kind and explain very clearly why he is mistaken.
E21-13 The Welding Department of Thorpe Company has the following production and manufacturing cost data for February 2014. All materials are added at the beginning of the process.
Prepare a production cost report.
(LO 5, 6, 7)
Instructions
Prepare a production cost report for the Welding Department for the month of February.
E21-14 Remington Shipping, Inc. is contemplating the use of process costing to track the costs of its operations. The operation consists of three segments (departments): receiving, shipping, and delivery. Containers are received at Remington's docks and sorted according to the ship they will be carried on. The containers are loaded onto a ship, which carries them to the appropriate port of destination. The containers are then off-loaded and delivered to the receiving company.
Compute physical units and equivalent units of production.
(LO 5, 6)
Remington Shipping wants to begin using process costing in the shipping department. Direct materials represent the fuel costs to run the ship, and “Containers in transit” represents work in process. Listed below is information about the shipping department's first month's activity.
Instructions
(a) Determine the physical flow of containers for the month.
(b) Calculate the equivalent units for direct materials and conversion costs.
E21-15 Royale Mortgage Company uses a process cost system to accumulate costs in its loan application department. When an application is completed, it is forwarded to the loan department for final processing. The following processing and cost data pertain to September.
Determine equivalent units, unit costs, and assignment of costs.
(LO 5, 6)
Materials are the forms used in the application process, and these costs are incurred at the beginning of the process. Conversion costs are incurred uniformly during the process.
Instructions
(a) Determine the equivalent units of service (production) for materials and conversion costs.
(b) Compute the unit costs and prepare a cost reconciliation schedule.
*E21-16 Major Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities.
Compute overhead rates and assign overhead using ABC.
(LO 10)
The cost driver volume for each product was as follows.
Instructions
(a) Determine the overhead rate for each activity.
(b) Assign the manufacturing overhead costs for April to the two products using activity-based costing.
(c) Write a memorandum to the president of Major Instrument explaining the benefits of activity-based costing.
*E21-17 Kowalski Company manufactures a number of specialized machine parts. Part Compo-24 uses $35 of direct materials and $15 of direct labor per unit. Kowalski's estimated manufacturing overhead is as follows.
Compute product cost using traditional costing and ABC.
(LO 10)
Overhead is applied based on direct labor costs, which were estimated at $200,000.
Kowalski is considering adopting activity-based costing. The cost drivers are estimated at:
Instructions
(a) Compute the cost of 1,000 units of Compo-24 using the current traditional costing system.
(b) Compute the cost of 1,000 units of Compo-24 using the proposed activity-based costing system. Assume the 1,000 units use 2,500 pounds of materials, 500 machine hours, and 1,000 direct labor hours.
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
PROBLEMS: SET A
Journalize transactions.
(LO 3, 4)
P21-1A Conwell Company manufactures its product, Vitadrink, through two manufacturing processes: Mixing and Packaging. All materials are entered at the beginning of each process. On October 1, 2014, inventories consisted of Raw Materials $26,000, Work in Process—Mixing $0, Work in Process—Packaging $250,000, and Finished Goods $289,000. The beginning inventory for Packaging consisted of 10,000 units that were 50% complete as to conversion costs and fully complete as to materials. During October, 50,000 units were started into production in the Mixing Department and the following transactions were completed.
1. Purchased $300,000 of raw materials on account.
2. Issued raw materials for production: Mixing $210,000 and Packaging $45,000.
3. Incurred labor costs of $258,900.
4. Used factory labor: Mixing $182,500 and Packaging $76,400.
5. Incurred $810,000 of manufacturing overhead on account.
6. Applied manufacturing overhead on the basis of $24 per machine hour. Machine hours were 28,000 in Mixing and 6,000 in Packaging.
7. Transferred 45,000 units from Mixing to Packaging at a cost of $979,000.
8. Transferred 53,000 units from Packaging to Finished Goods at a cost of $1,315,000.
9. Sold goods costing $1,604,000 for $2,500,000 on account.
Instructions
Journalize the October transactions.
P21-2A Rosenthal Company manufactures bowling balls through two processes: Molding and Packaging. In the Molding Department, the urethane, rubber, plastics, and other materials are molded into bowling balls. In the Packaging Department, the balls are placed in cartons and sent to the finished goods warehouse. All materials are entered at the beginning of each process. Labor and manufacturing overhead are incurred uniformly throughout each process. Production and cost data for the Molding Department during June 2014 are presented below.
Complete four steps necessary to prepare a production cost report.
(LO 5, 6, 7)
Instructions
(a) Prepare a schedule showing physical units of production.
(b) Determine the equivalent units of production for materials and conversion costs.
(c) Compute the unit costs of production.
(d) Determine the costs to be assigned to the units transferred out and in process for June.
(e) Prepare a production cost report for the Molding Department for the month of June.
P21-3A Seagren Industries Inc. manufactures in separate processes furniture for homes. In each process, materials are entered at the beginning, and conversion costs are incurred uniformly. Production and cost data for the first process in making two products in two different manufacturing plants are as follows.
Complete four steps necessary to prepare a production cost report.
(LO 5, 6, 7)
(a) For each plant:
(1) Compute the physical units of production.
(2) Compute equivalent units of production for materials and for conversion costs.
(3) Determine the unit costs of production.
(4) Show the assignment of costs to units transferred out and in process.
(b) Prepare the production cost report for Plant 1 for July 2014.
P21-4A Rivera Company has several processing departments. Costs charged to the Assembly Department for November 2014 totaled $2,280,000 as follows.
Assign costs and prepare production cost report.
(LO 5, 6, 7)
Production records show that 35,000 units were in beginning work in process 30% complete as to conversion costs, 660,000 units were started into production, and 25,000 units were in ending work in process 40% complete as to conversion costs. Materials are entered at the beginning of each process.
Instructions
(a) Determine the equivalent units of production and the unit production costs for the Assembly Department.
(b) Determine the assignment of costs to goods transferred out and in process.
(c) Prepare a production cost report for the Assembly Department.
P21-5A Morse Company manufactures basketballs. Materials are added at the beginning of the production process and conversion costs are incurred uniformly. Production and cost data for the month of July 2014 are as follows.
Determine equivalent units and unit costs and assign costs.
(LO 5, 6, 7)
Instructions
(a) Calculate the following.
(1) The equivalent units of production for materials and conversion costs.
(2) The unit costs of production for materials and conversion costs.
(3) The assignment of costs to units transferred out and in process at the end of the accounting period.
(b) Prepare a production cost report for the month of July for the basketballs.
P21-6A Hamilton Processing Company uses a weighted-average process cost system and manufactures a single product—a premium rug shampoo and cleaner. The manufacturing activity for the month of October has just been completed. A partially completed production cost report for the month of October for the Mixing and Cooking Department is shown on the next page.
Compute equivalent units and complete production cost report.
(LO 5, 7)
Instructions
(a) Prepare a schedule that shows how the equivalent units were computed so that you can complete the “Quantities: Units accounted for” equivalent units section shown in the production cost report, and compute October unit costs.
(b) Complete the following “Cost Reconciliation Schedule” part of the production cost report.
*P21-7A Schultz Electronics manufactures two large-screen television models: the Royale which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2014 was as follows.
Assign overhead to products using ABC and evaluate decision.
(LO 10)
In 2014, Schultz manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate of $38 per direct labor hour was determined by dividing total expected manufacturing overhead of $7,600,000 by the total direct labor hours (200,000) for the two models.
Under traditional costing, the gross profit on the models was Royale $552 or ($1,600 − $1,048), and Majestic $590 or ($1,300 − $710). Because of this difference, management is considering phasing out the Royale model and increasing the production of the Majestic model.
Before finalizing its decision, management asks Schultz's controller to prepare an analysis using activity-based costing (ABC). The controller accumulates the following information about overhead for the year ended December 31, 2014.
Instructions
(a) Assign the total 2014 manufacturing overhead costs to the two products using activity-based costing (ABC) and determine the overhead cost per unit.
(b) What was the cost per unit and gross profit of each model using ABC costing?
(c) Are management's future plans for the two models sound? Explain.
PROBLEMS: SET B
Journalize transactions.
(LO 3, 4)
P21-1B Wilbury Company manufactures a nutrient, Everlife, through two manufacturing processes: Blending and Packaging. All materials are entered at the beginning of each process. On August 1, 2014, inventories consisted of Raw Materials $5,000, Work in Process—Blending $0, Work in Process—Packaging $3,945, and Finished Goods $7,500. The beginning inventory for Packaging consisted of 500 units, two-fifths complete as to conversion costs and fully complete as to materials. During August, 9,000 units were started into production in Blending, and the following transactions were completed.
1. Purchased $25,000 of raw materials on account.
2. Issued raw materials for production: Blending $18,930 and Packaging $9,140.
3. Incurred labor costs of $25,770.
4. Used factory labor: Blending $15,320 and Packaging $10,450.
5. Incurred $36,500 of manufacturing overhead on account.
6. Applied manufacturing overhead at the rate of $28 per machine hour. Machine hours were Blending 900 and Packaging 300.
7. Transferred 8,200 units from Blending to Packaging at a cost of $44,940.
8. Transferred 8,600 units from Packaging to Finished Goods at a cost of $67,490.
9. Sold goods costing $62,000 for $90,000 on account.
Instructions
Journalize the August transactions.
Complete four steps necessary to prepare a production cost report.
(LO 5, 6, 7)
P21-2B Steiner Corporation manufactures water skis through two processes: Molding and Packaging. In the Molding Department, fiberglass is heated and shaped into the form of a ski. In the Packaging Department, the skis are placed in cartons and sent to the finished goods warehouse. Materials are entered at the beginning of both processes. Labor and manufacturing overhead are incurred uniformly throughout each process. Production and cost data for the Molding Department for January 2014 are presented below.
Instructions
(a) Compute the physical units of production.
(b) Determine the equivalent units of production for materials and conversion costs.
(c) Compute the unit costs of production.
(d) Determine the costs to be assigned to the units transferred out and in process.
(e) Prepare a production cost report for the Molding Department for the month of January.
P21-2B Borman Corporation manufactures in separate processes refrigerators and freezers for homes. In each process, materials are entered at the beginning and conversion costs are incurred uniformly. Production and cost data for the first process in making two products in two different manufacturing plants are as follows.
Complete four steps necessary to prepare a production cost report.
(LO 5, 6, 7)
Instructions
(a) For each plant:
(1) Compute the physical units of production.
(2) Compute equivalent units of production for materials and for conversion costs.
(3) Determine the unit costs of production.
(4) Show the assignment of costs to units transferred out and in process.
(b) Prepare the production cost report for Plant A for June 2014.
P21-4B Luxman Company has several processing departments. Costs charged to the Assembly Department for October 2014 totaled $1,298,400 as follows.
Assign costs and prepare production cost report.
(LO 5, 6, 7)
Production records show that 25,000 units were in beginning work in process 40% complete as to conversion cost, 435,000 units were started into production, and 35,000 units were in ending work in process 40% complete as to conversion costs. Materials are entered at the beginning of each process.
Instructions
(a) Determine the equivalent units of production and the unit production costs for the Assembly Department.
(b) Determine the assignment of costs to goods transferred out and in process.
(c) Prepare a production cost report for the Assembly Department.
Determine equivalent units and unit costs and assign costs.
(LO 5, 6, 7)
P21-5B Swinn Company manufactures bicycles. Materials are added at the beginning of the production process, and conversion costs are incurred uniformly. Production and cost data for the month of May are as follows.
Instructions
(a) Calculate the following.
(1) The equivalent units of production for materials and conversion costs.
(2) The unit costs of production for materials and conversion costs.
(3) The assignment of costs to units transferred out and in process at the end of the accounting period.
(b) Prepare a production cost report for the month of May for the bicycles.
Compute equivalent units and complete production cost report.
(LO 5, 7)
P21-6B Venuchi Cleaner Company uses a weighted-average process cost system and manufactures a single product—an all-purpose liquid cleaner. The manufacturing activity for the month of March has just been completed. A partially completed production cost report for the month of March for the mixing and blending department is shown below.
(a) Prepare a schedule that shows how the equivalent units were computed so that you can complete the “Quantities: Units accounted for” equivalent units section shown in the production cost report above, and compute March unit costs.
(b) Complete the “Cost Reconciliation Schedule” part of the production cost report above.
PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
WATERWAYS CONTINUING PROBLEM
(Note: This is a continuation of the Waterways Problem from Chapters 19 through 20.)
WCP21 Because most of the parts for its irrigation systems are standard, Waterways handles the majority of its manufacturing as a process cost system. There are multiple process departments. Three of these departments are the Molding, Cutting, and Welding departments. All items eventually end up in the Packaging department which prepares items for sale in kits or individually. This problem asks you to help Waterways calculate equivalent units and prepare a production cost report.
Go to the book's companion website, at www.wiley.com/college/weygandt, to see the completion of this problem.
Broadening Your Perspective
Management Decision-Making
Decision-Making Problem: Current Designs
BYP21-1 Building a kayak using the composite method is a very labor-intensive process. In the fabrication department, the kayaks go through several steps as employees carefully place layers of Kevlar® in a mold and then use resin to fuse together the layers. The excess resin is removed with a vacuum process, and the upper shell and lower shell are removed from the molds and assembled. The seat, hatch, and other components are added in the finishing department.
At the beginning of April, Current Designs had 30 kayaks in process in the fabrication department. Rick Thrune, the production manager, estimated that about 80% of the material costs had been added to these boats, which were about 50% complete with respect to the conversion costs. The cost of this inventory had been calculated to be $8,400 in materials and $9,000 in conversion costs.
During April, 72 boats were started. At the end of the month, the 35 kayaks in the ending inventory had 20% of the materials and 40% of the conversion costs already added to them.
A review of the accounting records for April showed that materials with a cost of $17,500 had been requisitioned by this department and that the conversion costs for the month were $39,600.
Instructions
Complete a production cost report for April 2014 for the fabrication department using the weighted-average method.
Decision-Making Across the Organization
BYP21-2 Florida Beach Company manufactures sunscreen lotion, called Surtan, in 11-ounce plastic bottles. Surtan is sold in a competitive market. As a result, management is very cost-conscious. Surtan is manufactured through two processes: mixing and filling. Materials are entered at the beginning of each process, and labor and manufacturing overhead occur uniformly throughout each process. Unit costs are based on the cost per gallon of Surtan using the weighted-average costing approach.
On June 30, 2014, Mary Ritzman, the chief accountant for the past 20 years, opted to take early retirement. Her replacement, Joe Benili, had extensive accounting experience with motels in the area but only limited contact with manufacturing accounting. During July, Joe correctly accumulated the following production quantity and cost data for the Mixing Department.
Production quantities: Work in process, July 1, 8,000 gallons 75% complete; started into production 100,000 gallons; work in process, July 31, 5,000 gallons 20% complete. Materials are added at the beginning of the process.
Production costs: Beginning work in process $88,000, comprised of $21,000 of materials costs and $67,000 of conversion costs; incurred in July: materials $573,000, conversion costs $765,000.
Joe then prepared a production cost report on the basis of physical units started into production. His report showed a production cost of $14.26 per gallon of Surtan. The management of Florida Beach was surprised at the high unit cost. The president comes to you, as Mary's top assistant, to review Joe's report and prepare a correct report if necessary.
Instructions
With the class divided into groups, answer the following questions.
(a) Show how Joe arrived at the unit cost of $14.26 per gallon of Surtan.
(b) What error(s) did Joe make in preparing his production cost report?
(c) Prepare a correct production cost report for July.
Managerial Analysis
BYP21-3 Harris Furniture Company manufactures living room furniture through two departments: Framing and Upholstering. Materials are entered at the beginning of each process. For May, the following cost data are obtained from the two work in process accounts.
Instructions
Answer the following questions.
(a) If 3,000 sofas were started into production on May 1 and 2,500 sofas were transferred to Upholstering, what was the unit cost of materials for May in the Framing Department?
(b) Using the data in (a) above, what was the per unit conversion cost of the sofas transferred to Upholstering?
(c) Continuing the assumptions in (a) above, what is the percentage of completion of the units in process at May 31 in the Framing Department?
BYP21-4 Paintball is now played around the world. The process of making paintballs is actually quite similar to the process used to make certain medical pills. In fact, paintballs were previously often made at the same factories that made pharmaceuticals.
Address: www.youtube.com/watch?v=iQG5m4AK4uY, or go to www.wiley.com/college/weygandt
Instructions
View that video at the site listed above and then answer the following questions.
(a) Describe in sequence the primary steps used to manufacture paintballs.
(b) Explain the costs incurred by the company that would fall into each of the following categories: materials, labor, and overhead. Of these categories, which do you think would be the greatest cost in making paintballs?
(c) Discuss whether a paintball manufacturer would use job order costing or process costing.
Critical Thinking
Communication Activity
BYP21-5 Diane Barone was a good friend of yours in high school and is from your home town. While you chose to major in accounting when you both went away to college, she majored in marketing and management. You have recently been promoted to accounting manager for the Snack Foods Division of Melton Enterprises, and your friend was promoted to regional sales manager for the same division of Melton. Diane recently telephoned you. She explained that she was familiar with job cost sheets, which had been used by the Special Projects division where she had formerly worked. She was, however, very uncomfortable with the production cost reports prepared by your division. She emailed you a list of her particular questions:
1. Since Melton occasionally prepares snack foods for special orders in the Snack Foods Division, why don't we track costs of the orders separately?
2. What is an equivalent unit?
3. Why am I getting four production cost reports? Isn't there one Work in Process account?
Instructions
Prepare a memo to Diane. Answer her questions, and include any additional information you think would be helpful. You may write informally, but do use proper grammar and punctuation.
Ethics Case
BYP21-6 R. B. Dillman Company manufactures a high-tech component that passes through two production processing departments, Molding and Assembly. Department managers are partially compensated on the basis of units of products completed and transferred out relative to units of product put into production. This was intended as encouragement to be efficient and to minimize waste.
Jan Wooten is the department head in the Molding Department, and Tony Ferneti is her quality control inspector. During the month of June, Jan had three new employees who were not yet technically skilled. As a result, many of the units produced in June had minor molding defects. In order to maintain the department's normal high rate of completion, Jan told Tony to pass through inspection and on to the Assembly Department all units that had defects nondetectable to the human eye. “Company and industry tolerances on this product are too high anyway,” says Jan. “Less than 2% of the units we produce are subjected in the market to the stress tolerance we've designed into them. The odds of those 2% being any of this month's units are even less. Anyway, we're saving the company money.”
Instructions
(a) Who are the potential stakeholders involved in this situation?
(b) What alternatives does Tony have in this situation? What might the company do to prevent this situation from occurring?
Considering People, Planet, and Profit
BYP21-7 In a recent year, an oil refinery in Texas City, Texas, on the Houston Ship Channel exploded. The explosion killed 15 people and sent a plume of smoke hundreds of feet into the air. The blast started as a fire in the section of the plant that increased the octane of the gasoline that was produced at the refinery. The Houston Ship Channel is the main waterway that allows commerce to flow from the Gulf of Mexico into Houston.
The Texas Commission on Environmental Quality expressed concern about the release of nitrogen oxides, benzene, and other known carcinogens as a result of the blast. Neighbors of the plant complained that the plant had been emitting carcinogens for years and that the regulators had ignored their complaints about emissions and unsafe working conditions.
Instructions
(a) Outline the costs that the company now faces as a result of the accident.
(b) How could the company have reduced the costs associated with the accident?
Answers to Chapter Questions
Answers to Insight and Accounting Across the Organization Questions
p. 992 Haven't I Seen That Before? Q: In what ways might the relative composition (materials, labor, and overhead) of a remanufactured product's cost differ from that of a newly made product? A: We would expect that the materials costs would be substantially reduced since the bulk of the physical product is being reused. The labor component might increase, and the level of automation might decrease, since remanufacturing a product requires identification and replacement of malfunctioning components. This process might not be as easily automated as the production of a new product.
p. 1001 Using ABC to Aid in Employee Evaluation Q: What positive implications does application of ABC have for the employees of this company? A: ABC will make these employees more aware of which activities cost the company more money. They will be motivated to reduce their use of these activities in order to improve their individual performance.
Answers to Self-Test Questions
1. b 2. d 3. d 4. b 5. c 6. b 7. b [20,000 + (5,000 × 60%)] 8. a 9. c (23,000 + 3,000), 
10. a [$60,000 ÷ (9,000 + 3,000)] 11. b [($10 × 2,500) + ($30 × 2,500 × 40%)] 12. b 13. d 14. d 15. b 16. a 17. c *18. b ($100 × 80); ($100 × 60)
Remember to go back to The Navigator box on the chapter opening page and check off your completed work.