Question: Describe how products flow through departments and how costs flow through accounts.

18 Oct 2022,10:13 PM

 

The balance in beginning Work in Process at Golden Rubber Company for direct labor was $133,900. During the month of March, an additional $975,860 of direct labor was incurred, and 37,700 pounds of rubber were produced. At the end of March, 9,700 pounds of rubber were in process and the units were 60 percent complete. At the start of March, the company had 5,600 pounds of rubber that were 50 percent complete.

Calculate the cost per equivalent unit for labor, assuming that labor is added uniformly throughout the production process. (Round answer to 2 decimal places, e.g. 25.26.)

Cost per equivalent unit

$enter the cost per equivalent unit amount in dollars

per pound

 

Case #1		Work in Process, October 1		4,520	gallons
		Units started during October		enter a dollar amount	gallons
		Units completed during October		14,000	gallons
		Work in Process, October 31		2,490	gallons

 

 

LEARNING OBJECTIVES

1. Describe how products flow through departments and how costs flow through accounts.
2. Discuss the concept of an equivalent unit and calculate the cost of goods completed and the ending Work in Process balance in a processing department.
3. Prepare a production cost report.

Stacy Brannen was just completing a tour at Kent Chemical Company’s Midwest plant. Only two weeks ago, Stacy had graduated from State University with a degree in mechanical engineering, and now she was nearing the end of her first day on the job at Kent. The assistant plant manager, Bill Merton, conducted the tour and pointed out the steps involved in processing paints, stains, and wood preservatives.

Although the tour concentrated on the equipment used in the production processes, Stacy found herself wondering how the cost of products was determined. “Bill, can you give me a rough idea of how you calculate product costs?” she asked. “I noticed, for example, that to end up with a gallon of wood preservative ready to ship, we perform both mixing and packaging operations. With labor, material, and overhead added in these separate operations, is assigning costs to wood preservative a difficult job?”

“Well,” Bill replied, “let’s see if we can catch Walter Hunt before he goes home for the day. He’s the plant controller, and no one can do a better job than Walt of explaining how we do product costing at Kent Chemical.”

The type of product costing system used at Kent Chemical Company is a process costing system. Such systems are in common use by companies that produce large numbers of homogeneous items in a continuous production process. Companies using process costing include producers of paints, plastics, paper products, cereals, cosmetics, and metals. Thus, well-known companies like DuPont, the Quaker Oats Company, and PepsiCo use process costing. This chapter introduces you to the essential elements of a process costing system.

Difference between Job-Order and Process Costing Systems

As explained in Chapter 2, there are two primary systems for calculating the cost of inventory: a job-order system and a process costing system. In a job-order system, each unique product or batch is a “job” for which the company needs cost information. Therefore, it is necessary to trace manufacturing costs to specific jobs. When jobs are completed, the costs of the jobs are removed from Work in Process and included in Finished Goods. When completed jobs are sold, the costs of the jobs are removed from Finished Goods and included in Cost of Goods Sold.

Process costing, in contrast, is essentially a system of averaging. Dividing production costs by the total number of homogeneous items produced results in an average unit cost. When items are completed, multiplying the number of units completed by the average unit cost determines the costs to be removed from Work in Process Inventory and included in Finished Goods Inventory. When items are sold, multiplying the number of units sold by the average unit cost determines the costs to remove from Finished Goods Inventory and include in Cost of Goods Sold. Illustration 3.1 presents a comparison of job-order and process costing systems. The remainder of the chapter describes process costing systems in more detail.

ILLUSTRATION 3.1 Comparison of job-order and process costing systems

Any Questions?

Q: I noticed that some companies produce a large number of somewhat identical items. For example a company may produce thousands of very similar laptop computers. Different models may have the same case, keyboard, and screen, but one may have a faster processor and more memory than the other. Or consider a producer of Cabernet wine. Two of the company’s wines could be similar in all respects except one is aged in French oak barrels while the other is aged in American oak barrels. What do these companies use, process costing or job-order costing?

A: Good observation! In practice, firms frequently use a hybrid system that combines features of job-order costing and process costing. The hybrid system is called operations costing. In operations costing, conversion costs are assigned to products, as in process costing. Different materials, however, are assigned to products, as in job-order costing. Those of you who become managers most likely won’t need to know much more than this. Those of you who plan on becoming accountants will receive more information in your cost accounting course.

Link to Practice

What Type of Costing System Is Used by ExxonMobil Corporation for the Product Mobil 1?

ExxonMobil is one of the world’s largest companies engaged in the exploration, production, and sale of crude oil and natural gas. The company also manufactures numerous petroleum products. One product you may have heard of is Mobil 1, the world’s leading synthetic motor oil. What type of costing system do you think the company uses for this product? Large quantities of identical units are produced in continuous production processes. So, to account for the cost of Mobil 1, ExxonMobil uses process costing.

LEARNING OBJECTIVE 1

Describe how products flow through departments and how costs flow through accounts.

Product and Cost Flows

Just as a product passes through several departments before it is completed, costs flow through several accounts before the product costs of the product are recorded in finished goods. Here we discuss the flow of products through departments and the flow of costs through accounts of companies that use process costing.

Product Flows through Departments

In the manufacturing operations of a company using process costing, a product typically must pass through two or more departments, and costs are accumulated in each department. The Kent Chemical Company manufactures wood preservative in two departments: mixing and packaging. After chemical materials are blended in the Mixing Department, the liquid preservative is transferred to the Packaging Department, where it is placed in plastic containers. Materials, labor, and overhead are added at different stages in each processing department.

Generally, identifying the stage when materials enter the production process is easy. Let’s assume that in the Mixing Department the chemical materials are added at the start of the process. Determining exactly when labor and overhead are added to the process is more difficult. Labor and overhead are often grouped together and referred to as conversion costs. These costs are often assumed to be added evenly throughout the process.

Illustration 3.2 shows how items flow through the two processing departments and how costs are incurred. As indicated, materials enter the Mixing Department at the start. However, conversion costs (labor and overhead) are assumed to enter mixing at a constant rate.

ILLUSTRATION 3.2 Flow of items through processing departments

Cost Flows through Accounts

The product costs accumulated in a process costing system are essentially the same costs considered in job-order costing: direct material, direct labor, and manufacturing overhead. Additionally, a processing department may have a cost called transferred-in cost. This is the cost incurred in one processing department that is transferred to the next processing department. For example, at Kent Chemical, the cost incurred in the Mixing Department is transferred to the Packaging Department. In essence, the cost transferred in from Mixing becomes a material cost added to Packaging. However, it is called a “transferred-in” cost.

Link to Practice

Virtual Plant Tour for Manufacturing Electrical Tape

Process costing is used by companies that produce large numbers of homogeneous items in a continuous production process. Have you ever been in a plant that has such a production process? If not, take a virtual tour of one. 3M produces electrical tape, as well as many other products, and uses process costing. A virtual tour of the production process is available at http://electrictv.net/videos/3m-tape-manufacturer-how-its-made-necaibew-team/

Each processing department accumulates product cost in a separate departmental Work in Process account. The sum of the departmental Work in Process accounts is the amount in Work in Process for the entire company. The following entries illustrate the flow of costs between processing departments.

Direct Material

Suppose that $142,000 of direct materials are used during April in the Mixing Department of Kent Chemical Company. The following entry would be appropriate for this transaction:

(date)	Work in Process, Mixing	142,000
	Raw Materials		142,000
	To record use of raw material

Direct Labor

Suppose that $62,200 of direct labor costs are incurred during April in the Mixing Department. The following entry would be appropriate for this transaction:

(date)	Work in Process, Mixing	62,200
	Wages Payable		62,200
	To record direct labor cost

Manufacturing Overhead

To assign overhead to products in a process costing system, a company may use either actual overhead costs or a predetermined overhead rate. Unless the amount of overhead cost and the level of production are fairly constant from month to month, using actual overhead costs results in substantial fluctuations in the unit cost of goods produced. For this reason, most companies use a predetermined overhead rate.

Suppose that at the start of the year, the Mixing Department estimates it will incur $2,160,000 of overhead cost and $720,000 of direct labor cost. Using direct labor as an allocation base, the department calculates a predetermined overhead rate of $3 for each dollar of direct labor cost (i.e., $2,160,000 ÷ $720,000). Assuming $62,200 of direct labor cost was incurred in the month of April, $186,600 of overhead ($62,200 × $3 = $186,600) would be assigned to Work in Process that month.

(date)	Work in Process, Mixing	186,600
	Manfacturing Overhead		186,600
	To record manufacturing overhead applied to Work in Process

Transferred-in Cost

When one processing department completes its work, the items are transferred to the next department along with their related cost. As mentioned earlier, this cost is referred to as transferred-in cost. Suppose that during April, the Mixing Department completes units with a cost of $360,000. The completed units are transferred to the Packaging Department, and the related cost becomes a transferred-in cost to packaging. The entry to record the transfer is:

(date)	Work in Process, Packaging	360,000
	Work in Process, Mixing		360,000
	To record transfer of units from Mixing to Packaging

The flow of costs between departmental Work in Process accounts is presented in Illustration 3.3.

ILLUSTRATION 3.3 Flow of costs between processing departments

LEARNING OBJECTIVE 2

Discuss the concept of an equivalent unit and calculate the cost of goods completed and the ending Work in Process balance in a processing department.

Calculating Unit Cost

Process costing, as we have seen, is essentially a system of averaging. This section shows how to calculate an average unit cost in a process costing system.1 First, however, we must explain an essential concept in process costing—the concept of an equivalent unit.

Equivalent Units

In calculating the average unit cost, it is necessary to convert the number of partially completed units in Work in Process to an equivalent number of whole units. Otherwise, the denominator in the average unit cost calculation will be misstated. When partially completed units are converted to a comparable number of completed units, they are referred to as equivalent units. For example, if 100 units in Work in Process are 50 percent completed, then they are equivalent to 50 completed units (100 × 50%), as shown in Illustration 3.4.

ILLUSTRATION 3.4 How equivalent units are calculated

The number of equivalent units in Work in Process may be different for material and conversion costs. This is because material and conversion costs enter the production process at different times. For example, suppose that at the end of July, the Mixing Department at Kent Chemical has 100 gallons (units of production) of wood preservative in Work in Process that are 50 percent through the mixing process. Further, assume that materials enter into the process at the start, while conversion costs enter evenly throughout the process. Even though the units are only halfway through the process, they have received 100 percent of material since material was added immediately at the start of the process (see Illustration 3.2). Therefore, with respect to material cost, there are 100 equivalent units in Work in Process. However, because the units are only halfway through the process, they have received only 50 percent of the labor and overhead needed for completion. Since the 100 gallons are only 50 percent complete with respect to conversion costs, there are 50 equivalent units for labor and overhead (see Illustration 3.5).

ILLUSTRATION 3.5 Differences in equivalent units for material and conversion costs, assuming material added at start of process

Cost per Equivalent Unit

The average unit cost in a process costing system is referred to as a cost per equivalent unit. The formula for determining the cost per equivalent unit is:

Cost per equivalent unit=Cost in beginning WIP + Cost incurred in current periodUnits completed + Equivalent units in ending WIP

The numerator contains the cost in beginning Work in Process (WIP) plus the cost incurred in the current period. This amount represents the total cost for which a processing department must account in each period. The total cost is divided by the units completed plus the equivalent units in ending work in process. The result is a cost per equivalent unit amount that can be used to spread the cost at the start of the period and the cost incurred during the period over the units completed and the units in process at the end of the period.

Test Your Knowledge

At Rainier Chemical, conversion costs (labor and overhead) enter evenly throughout the production process. At the end of the year, 200 units in work in process are 80 percent complete.
With respect to conversion costs, how many equivalent units are in Work in Process?

1. a. 200.
2. b. 160.
3. c. 360.
4. d. 280.

Correct or Incorrect?

Clear Check Answer

Calculating and Applying Cost per Equivalent Unit: Mixing Department Example

Next, we consider cost per equivalent unit calculations for the Mixing Department of Kent Chemical Company. At the start of April, the Mixing Department has on hand beginning Work in Process inventory consisting of 10,000 gallons of wood preservative that are 80 percent complete. During the month, 70,000 gallons are started and 60,000 are completed. At the end of April, 20,000 gallons are on hand that are 50 percent complete. The cost in beginning Work in Process consists of $18,000 of material cost, $7,800 of labor cost, and $23,400 of overhead cost. During April, the Mixing Department incurs $142,000 of material cost and $62,200 of labor cost. Because the Mixing Department’s predetermined overhead rate is $3 for each dollar of labor cost, $186,600 ($3 × $62,200) of overhead is applied to production during the month.

The cost per equivalent unit calculations for the Mixing Department is presented in Illustration 3.6. The cost of material includes the $18,000 in beginning Work in Process and the $142,000 of material cost incurred during April. The total of $160,000 is divided by 80,000 units, the sum of the number of units completed (60,000 gallons) and the equivalent units in ending Work in Process (20,000 gallons). Dividing total cost by the total number of units yields a cost per equivalent unit for materials of $2. A similar procedure is used to find the cost per equivalent unit for labor and overhead cost.

ILLUSTRATION 3.6Calculation of cost per equivalent unit, Mixing Department

	Material	Labor	Overhead	Total
Cost
Beginning WIP	$ 18,000	$ 7,800	$ 23,400	$ 49,200
Cost incurred during April	142,000	62,200	186,600	390,800
Total cost	$160,000	$70,000	$210,000	$440,000
Units
Units completed	60,000	60,000	60,000
Equivalent units, ending WIP	20,000	10,000	10,000
Total units	80,000	70,000	70,000
Cost per Equivalent Unit
(Total cost ÷ total units)	$2	+    $1	+    $3	=    $6

Let’s look more closely at the equivalent units used in these calculations. Note that at the end of April, there are 20,000 units on hand that are only 50 percent through the mixing process. However, since material cost enters at the start of the mixing process, the 20,000 units are 100 percent complete with respect to material cost. Thus, there are 20,000 equivalent units in ending Work in Process for materials. In contrast, for both labor and overhead, the 20,000 units on hand are only 50 percent complete, so they correspond to only 10,000 equivalent units.

As shown in the last line of Illustration 3.6, the total cost per equivalent unit is $6, consisting of $2 of material cost, $1 of labor cost, and $3 of overhead cost. These unit cost figures can be used to calculate the cost of goods completed and transferred out of the Mixing Department and the cost of ending Work in Process.

Test Your Knowledge

At Rainier Chemical, labor cost in beginning Work in Process at the start of April was $50,000, and $450,000 of labor was incurred during the month. At the end of April, 200 units are in WIP, and they are 80 percent complete with respect to labor. During this month, 840 units were completed. What is the cost per equivalent unit for labor?

1. $225.
2. $481.
3. $536.
4. $500.

Cost Transferred Out

Recall that 60,000 gallons were completed by the Mixing Department during April and transferred to the Packaging Department. We know that the unit cost is $6. Therefore, $360,000 of cost (60,000 gallons × $6) is related to the units completed and transferred out. The entry at the end of April to record the transfer was presented earlier and is repeated here:

(date)	Work in Process, Packaging	360,000
	Work in Process, Mixing		360,000
	To record transfer of units from Mixing to Packaging

Ending Work in Process

The ending balance in Work in Process in the Mixing Department is $80,000. This balance is made up of 20,000 equivalent units for material at $2 per equivalent unit, 10,000 equivalent units for labor at $1, and 10,000 equivalent units for overhead at $3.

Ending Balance in Work in Process, Mixing
Material (20,000 equiv. units at $2)	$40,000
Labor (10,000 equiv. units at $1)	10,000
Overhead (10,000 equiv. units at $3)	30,000
Total	$80,000

Here is a summary of the cost activity for the Mixing Department resulting in the $80,000 ending balance in Work in Process:

LEARNING OBJECTIVE 3

Prepare a production cost report.

Production Cost Report

A production cost report is an end-of-the-month report for a process costing system that provides a reconciliation of units and a reconciliation of costs as well as the details of the cost per equivalent unit calculations. The reconciliations help ensure that mistakes are not made in calculations. A production cost report for the Mixing Department of Kent Chemical Company is provided in Illustration 3.7. The unit cost calculations in the production report are identical to the ones just presented. We will concentrate now on the reconciliation of units and the reconciliation of costs.

ILLUSTRATION 3.7 Production cost report, Mixing Department

Reconciliation of Units

Assuming no units are lost (e.g., due to evaporation, damage, or theft), the number of units in beginning Work in Process inventory plus the number of units started during the period should be equal to the number of units completed plus the number of units in Work in Process at the end of the period. For the Mixing Department, 10,000 units were in beginning inventory and 70,000 units were started during the period, which means that 80,000 units must be accounted for. Since 60,000 units were completed and 20,000 units are in Work in Process at the end of the period, all of the units are accounted for.

Reconciliation of Costs

For each period, the total cost that must be accounted for is the sum of the costs in beginning Work in Process and the costs incurred during the period. In the Mixing Department, this amounts to $440,000. The cost must be either transferred out with the completed units or remain in ending Work in Process inventory. The amount transferred out is $360,000, and the amount in ending Work in Process inventory is $80,000. Because their sum is $440,000, the total amount of cost is accounted for.

Basic Steps in Process Costing: A Summary

Unless process costing is approached in a systematic way, it is easy to get lost in the calculations. Here is a summary of the basic steps presented earlier. As you can see, each of the steps is performed when the production cost report is prepared.

Step 1. Account for the number of physical units. The number of units at the start of the period plus the number of units started during the period should equal the number of units completed plus the number of units in ending Work in Process.

Step 2. Calculate the cost per equivalent unit for material, labor, and overhead. Remember that cost (numerator in the calculation) includes both beginning cost and cost incurred during the period. The number of equivalent units (denominator in the calculation) includes both the number of units completed and the number of equivalent units in ending Work in Process.

Step 3. Assign costs to units completed and units in ending Work in Process and reconcile the sum of these two costs to the total cost to account for. The cost of items completed is simply the product of the total cost per equivalent unit and the number of units completed. The cost of items in Work in Process is the sum of the products of equivalent units in process and the cost per equivalent unit for material, labor, and overhead. The cost of beginning inventory plus the cost incurred during the period should equal the amount of cost assigned to completed units plus the amount of cost assigned to units in ending Work in Process.

Data Analytics in Action

Data Analytics Driving New Insights at Shell

Royal Dutch Shell PLC (a company that uses process costing) uses data analytics to lower the cost of extraction of oil and gas. With a deep water well often costing over $100 million, it’s important to look in the right place. Surveying sites involves the use of probes to monitor low frequency seismic waves. If the waves pass through oil or gas, the waves are distorted which suggests a likely spot for drilling. This can involve more than a million readings. Using data analytic tools, these reading can be compared to thousands of others from around the world enabling geologists to make accurate recommendations.

Source: Bernard Marr, “Big Data In Big Oil: How Shell Uses Analytics to Drive Business Success,” Forbes (May 26, 2015). https://www.forbes.com/sites/bernardmarr/2015/05/26/big-data-in-big-oil-how-shell-uses-analytics-to-drive-business-success/#4d6d071b229e

Kent Chemical Revisited: Answering Stacy’s Question

Recall that in the scenario at the beginning of the chapter, Stacy Brannen asked how the cost of products like wood preservative are calculated at the Kent Chemical Company. At this point you should be able to answer that question. Essentially, material, labor, and overhead costs are accumulated in each processing department. In each department, the cost per equivalent unit is calculated for material, labor, and overhead (Step 2 in the previous section). Then the costs per equivalent unit are used to determine the cost of items completed and the cost of ending Work in Process (Step 3).

Dealing with Transferred-in Cost: Packaging Department Example

As previously noted, companies using process costing systems generally use several processes to make their products. When items are completed in one processing department, the cost of the completed units is transferred to the next processing department. This procedure is repeated until the units are completed in the last process. At that point, the cost of the items is transferred to finished goods.

Here we consider an example to illustrate the method for dealing with cost transfers. The example involves the Packaging Department of Kent Chemical. To calculate product costs in the Packaging Department, we will use the same procedures already used to calculate product costs in the Mixing Department, thereby providing you with another opportunity to enhance your understanding of process costing.

Step 1. In working through the Packaging Department example, it will be helpful to examine the information provided in the Production Cost Report for the Packaging Department (see Illustration 3.8). At the start of April, the Packaging Department has 15,000 gallons that are 50 percent through the packaging operation. During the month of April, the department receives 60,000 gallons from the Mixing Department. There are now 75,000 gallons to account for. At the end of April, 5,000 gallons are 40 percent complete, and 70,000 gallons are completed and transferred to finished goods, which accounts for the total of 75,000 gallons. Reconciling the physical number of units is the first of the four steps in solving a process costing problem and is shown in the quantity reconciliation section of the Production Cost Report (see Illustration 3.8).

ILLUSTRATION 3.8Production cost report, Packaging Department

Production Cost Report Packaging Department April
Unit Reconciliation
Units in beginning WIP (100% material, 50% conversion costs)					15,000
Units received from Mixing during April					60,000
Units to account for					75,000
Units completed and transferred to finished goods					70,000
Units in ending WIP (100% material, 40% conversion costs)					5,000
Units accounted for					75,000
Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Trans. In	Total
Cost
Beginning WIP	$10,500	$ 4,500	$ 9,000	$ 92,250	$116,250
Cost incurred
during April	49,500	27,900	55,800	360,000	493,200
Total	$60,000	$32,400	$64,800	$452,250	$609,450
Units
Units completed	70,000	70,000	70,000	70,000
Equivalent units, ending WIP	5,000	2,000	2,000	5,000
Total	75,000	72,000	72,000	75,000
Cost per equivalent unit	$0.80	$0.45	$0.90	$6.03	$8.18
Cost Reconciliation
Total cost to account for					$609,450
Cost of completed units transferred to Finished Goods (70,000 × $8.18)					$572,600
Cost of ending WIP
Material (5,000 equivalent units × $0.80)				$  4,000
Labor (2,000 equivalent units × $0.45)				900
Overhead (2,000 equivalent units × $0.90)				1,800
Transferred-in (5,000 equivalent units at $6.03)				30,150	36,850
Total cost accounted for					$609,450

Step 2. The second step is to calculate the cost per equivalent unit. The beginning balance in Work in Process includes $10,500 of material cost, $4,500 of labor, $9,000 of overhead, and $92,250 of cost transferred in from the Mixing Department. In addition, $49,500 of material cost, $27,900 of labor cost, $55,800 of overhead, and $360,000 of cost transferred in from the Mixing Department were incurred during the month of April. The sum of these costs is divided by the number of completed units plus the equivalent units in ending Work in Process for each cost category. As the Production Cost Report shows, this yields cost per equivalent unit values of $.80 for material, $.45 for labor, $.90 for overhead, and $6.03 for transferred-in cost. Note that the calculation for material assumes that material is added at the start of the packaging process—thus the 5,000 units in ending Work in Process are 100 percent complete with respect to materials.

Because it was not covered in the previous example, note especially the calculation of cost per equivalent unit for transferred-in cost. The sum of transferred-in cost in beginning Work in Process ($92,250) plus the cost transferred-in during April ($360,000) is the numerator of the calculation ($452,250). The denominator (75,000 units) is the sum of the units completed (70,000) plus the equivalent units in ending Work in Process (5,000). The result is a cost per equivalent unit for transferred-in cost of $6.03.

One aspect of the calculation may be confusing: the equivalent units in ending Work in Process. At the end of April, there are 5,000 units in process that are only 40 percent through the packaging process. However, these units are 100 percent complete with respect to transferred-in cost because they were transferred in with all of the Mixing Department cost that they will receive. Therefore, there are 5,000 equivalent units in ending Work in Process for transferred-in cost.

Step 3. The third step in solving the process costing problem is to assign costs to items completed and items in ending Work in Process. The cost of the completed items is $572,600. As indicated in the Production Cost Report (see Illustration 3.8), this is computed as the cost per equivalent unit ($8.18) times the number of units completed (70,000). Once the units are completed in the Packaging Department, they include the cost of both the mixing operation and the packaging operation and they are ready to be transferred to Finished Goods. The entry to record the transfer is:

(date)	Finished Goods	572,600
	Work in Process, Packaging		572,600
	To record cost of units completed and transferred to Finished Goods

The cost of ending Work in Process is composed of material, labor, overhead, and transferred-in cost. For each cost category, the equivalent units in ending Work in Process are multiplied by the cost per equivalent unit. As indicated in the production cost report, the sum of the cost categories is the ending balance of $36,850.

As indicated in the production cost report, the cost of the completed items ($572,600) plus the cost of ending Work in Process ($26,850) equals the total cost to account for ($609,450).

Test Your Knowledge

The packaging department at Rainier Chemical had no beginning Work in Process inventory at the start of April. During April, the department received $300,000 of transferred-in cost from the Mixing Department. During April, the department completes 600 units, and 200 are in Work in Process. Packaging has not yet started on the in-process units since they were received right before the plant closed on April 30. With respect to transferred-in cost, the 200 units in work in process are:

1. a. Equivalent to 200 completed units.
2. b. Equivalent to 0 completed units.
3. c. Equivalent to 100 completed units.
4. d. Identical to the equivalent units for conversion costs.

Correct or Incorrect?

Clear Check Answer

Process Costing and Incremental Analysis

Decision Making/Incremental Analysis

Recall from Chapter 1 that whenever we make a decision, we need to perform incremental analysis. That is, we need to determine the change in revenue and the change in cost, assuming a particular decision alternative is selected. If the net change is positive, the decision alternative is “good” since it will have a positive impact on firm profit. If the net change is negative, the decision alternative is “bad” in that it will have a negative impact on firm profit.

When using process costing information (or, for that matter, job-order costing information) to make a decision, we have to be careful to recognize that the cost per unit is typically the average of fixed and variable costs. Thus, it does not measure the change in cost associated from producing an additional unit. Let’s consider a simplified example to clarify this point. Later in Chapter 7, we’ll go into more detail on decision making with product cost information.

Suppose that a company has no beginning Work in Process inventory and no ending Work in Process inventory for 2020. During 2020, the company incurs $100,000 of direct material cost, $200,000 of direct labor cost, and $300,000 of manufacturing overhead in producing 200,000 units that sell for $3.25 per unit. Further, let’s assume that material and labor are variable costs and, for simplicity, that manufacturing overhead is completely fixed. In this case, the annual profit for 2020 is $50,000, as follows:

	200,000 Units	Per Equivalent Unit
Direct material cost	$100,000	$0.50
Direct labor cost	200,000	1.00
Manufacturing overhead cost	300,000	1.50
Total	$600,000	$3.00
Current selling price $3.25
Profit=Sales − Cost=($3.25×200,000)−$600,000=$50,000

Now suppose that the company is considering decreasing its price to $2.90 for 2021 and expects that demand for its product will increase 75,000 units to 275,000. Note that the price of $2.90 is less than the cost per equivalent unit in 2020 so it might appear that decreasing the price is a poor decision. However, to evaluate the decision properly, we must perform incremental analysis.

New revenue ($2.90 × 275,000)		$797,500
Old revenue ($3.25 × 200,000)		650,000
Incremental revenue		$147,500
New cost
Material: variable ($0.50 × 275,000)	$137,500
Labor: variable ($1.00 × 275,000)	275,000
Overhead: fixed	300,000	$712,500
Old Cost		600,000
Incremental cost		$112,500
Net change		$ 35,000

Note that at the new price, revenue will increase by $147,500. However, costs will increase by only $112,500. Thus, there will be a net benefit of $35,000 associated with decreasing the price to $2.90 even though it is below the old cost per unit of $3.00! We can see this only by performing incremental analysis. And in performing incremental analysis, we must take into account that some of the costs are variable (material and labor) and some costs are fixed (manufacturing overhead). We would have made a serious error if we had assumed that the new cost would be $825,000 (i.e., $3.00 × 275,000). Costs won’t increase by $3.00 per unit because $1.50 of the old unit cost is actually fixed.

“You Get What You Measure!” and Manufacturing Processes

You Get What You Measure

Cost information for a manufacturing firm can be quite useful, as we just saw with the pricing decision in the previous section. Additionally, nonmonetary performance measures can help a manufacturing company create value. For example, a key nonmonetary measure for Kent Chemical is the safety measure reportable instance. A reportable instance is an occurrence that could have or did lead to harm and that could have been prevented by a change in how an operation or task was performed. For example, if an employee handling a chemical in the mixing process burned her hand because she was not wearing protective gloves, this would be a reportable instance.

If this performance measure is viewed as important (which would certainly be the case if the number of reportable instances is tied to bonuses!), then employees will pay more attention to safety, reduce the number of reportable instances, and create value related to fewer insurance claims and days off recovering from injuries.

The important point to remember is that manufacturing companies can create value by measuring performance related to important company goals. If safety is important, then they should develop and report safety measures, such as number of reportable instances. If the time it takes to package 4,000 one-gallon containers of wood preservative is important, the company should measure that time and make sure employees know how they are performing with respect to the measure.

Decision-Making Insight

Just as with job-order costing, process costing systems provide information on the full cost of units produced rather than their incremental cost. Since decision making relies on incremental analysis, care must be taken not to treat full cost as if it were incremental cost.

Chapter Review

Summary of Learning Objectives

LEARNING OBJECTIVE 1

Describe how products flow through departments and how costs flow through accounts.

Process costing systems are used to accumulate the cost of inventory in companies that produce large numbers of identical items. Typically, several distinct processes are used to produce the items. When units are completed in one process, the cost of the units is transferred to the next process. This procedure is repeated until the units are completed in the last process. Along with transferred-in costs, each process may add its own material, labor, and overhead costs.

LEARNING OBJECTIVE 2

Discuss the concept of an equivalent unit and calculate the cost of goods completed and the ending Work in Process balance in a processing department.

Units in work in process are not equal to fully completed units. Therefore, in calculating the average cost per unit, it is necessary to express these partially completed units in terms of equivalent whole units.

Process costing is essentially a system of averaging. The average unit cost is referred to as the cost per equivalent unit. It equals the sum of beginning Work in Process costs and current-period costs divided by the sum of units completed and equivalent units in ending Work in Process.

To calculate the cost of completed items, the total cost per equivalent unit is multiplied by the number of units completed. To calculate the cost of units in Work in Process, it is necessary to multiply the number of equivalent units in process by the cost per equivalent unit separately for each cost category (i.e., material, labor, overhead, and transferred-in cost). This is necessary because the units in Work in Process at the end of the period may be completed to different degrees with respect to each of these costs.

LEARNING OBJECTIVE 3

Prepare a production cost report.

A production cost report provides a reconciliation of units in beginning inventory and units started to units in ending inventory and units completed. This report also provides a reconciliation of costs in beginning inventory and costs added during the period to costs in ending inventory and costs transferred out.

Review Problems

Review Problem 1 K/9 Plus Dog Treats has two departments, Mixing and Packaging. The Packaging Department started in December with work in process inventory of 20,000 pounds (a one-pound bag is a unit of production). The units had $12,000 of transferred-in costs but no costs from Packaging.

During December, Packaging received 100,000 more pounds from Mixing and additional transferred-in cost of $54,000. Packaging also incurred $17,250 of material cost, $13,800 of labor, and $8,050 of overhead during the month of December.

At the end of December, Packaging had work in process inventory of 5,000 pounds. These units were zero percent complete with respect to material, labor, and overhead in Packaging (they had just been received from Mixing and had not been worked on by that department).

Required

Prepare a production cost report for Packaging for the month of December.

K/9 Plus Dog Treats Production Cost Report Packaging Department December
Unit Reconciliation
Units in beginning WIP	20,000
Units started	100,000
Units to account for	120,000
Units completed*	115,000
Units in ending WIP	5,000
Units accounted for	120,000
*Units completed = 120,000 units to account for −5,000 in ending WIP = 115,000.
Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Trans. In	Total
Cost
Beginning WIP	$  –0–	$  –0–	$  –0–	$12,000	$ 12,000
Cost incurred in December	17,250	13,800	8,050	54,000	93,100
Total	$17,250	$13,800	$8,050	$66,000	$105,100
Units
Units completed	115,000	115,000	115,000	115,000
Equivalent units in
ending WIP	–0–	–0–	–0–	5,000
Total	115,000	115,000	115,000	120,000
Cost per equivalent unit	$0.15	$0.12	$0.07	$0.55	$0.89
Cost Reconciliation
Total cost to account for					$105,100
Cost of completed units transferred to
Finished Goods (115,000 × $0.89)					$102,350
Cost of ending WIP
($0.55 transferred-in cost × 5,000)					2,750
Total cost accounted for					$105,100

Review Problem 2 Little Gardener Company produces an environmentally safe general purpose plant food that can be used on flower beds and in vegetable gardens. The company operates two departments, Mixing and Packaging. Liquid plant food is prepared in the Mixing Department and packaged in one-gallon containers in the Packaging Department. Material is added at the start of each process, and labor and overhead are added evenly throughout the processes. All units are completed each month in Packaging. Therefore, there is no ending Work in Process in this department.

The following information is related to production in February:

Unit Information (gallons)	Mixing	Packaging
Beginning Work in Process
(Mixing)	2,000
(Packaging)		–0–
Started during March	60,000	61,000
Ending Work in Process
(Mixing: 100% material, 60% conversion costs)	1,000
(Packaging)		–0–

 

Cost Information, Beginning Work in Process	Mixing	Packaging
Direct material	$4,000	$–0–
Direct labor	800	–0–
Manufacturing overhead	1,120	–0–
Transferred-in cost	–0–	–0–
Cost added during February
Direct material	$120,000	$18,300
Direct labor	30,000	3,050
Manufacturing overhead	42,000	6,100
Transferred-in cost	–0–	?

Required

Prepare production cost reports for Mixing and Packaging for the month of February.

Little Gardener Company Production Cost Report Mixing Department February
Unit Reconciliation
Units in beginning WIP				2,000
Units started during February				60,000
Units to account for				62,000
Units completed				61,000
Units in ending WIP (100% material, 60% conversion costs)				1,000
Units accounted for				62,000
Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Total
Cost
Beginning WIP	$  4,000	$  800	$ 1,120	$ 5,920
Cost incurred during February	120,000	30,000	42,000	192,000
Total	$124,000	$30,800	$43,120	$197,920
Units
Units completed	61,000	61,000	61,000
Equivalent units, ending WIP	1,000	600	600
Total	62,000	61,600	61,600
Cost per equivalent unit	$2.00	$0.50	$0.70	$3.20
Cost Reconciliation
Total cost to account for				$197,920
Cost of completed units transferred to
Finished Goods (61,000 × $3.20)				$195,200
Cost of ending WIP
Material (1,000 equivalent units × $2)			$2,000
Labor (600 equivalent units × $0.50)			300
Overhead (600 equivalent units × $0.70)			420	2,720
Total cost accounted for				$197,920

 

Little Gardener Company Production Cost Report Packaging Department February
Unit Reconciliation
Units in beginning WIP					–0–
Units started					61,000
Units to account for					61,000
Units completed					61,000
Units in ending WIP					–0–
Units accounted for					61,000
Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Trans. In	Total
Cost
Beginning WIP	$  –0–	$ –0–	$ –0–	$   –0–	$   –0–
Cost incurred during February	18,300	3,050	6,100	195,200	222,650
Total	$18,300	$3,050	$6,100	$195,200	$222,650
Units
Units completed	61,000	61,000	61,000	61,000
Equivalent units, ending WIP	–0–	–0–	–0–	–0–
Total	61,000	61,000	61,000	61,000
Cost per equivalent unit	$0.30	$0.05	$0.10	$3.20	$3.65
Cost Reconciliation
Total cost to account for					$222,650
Cost of completed units transferred to Finished Goods (61,000 × $3.65)					$222,650
Cost of ending WIP					–0–
Total cost accounted for					$222,650

Key Terms

Conversion costs

Cost per equivalent unit

Equivalent units

Production cost report

Transferred-in cost

Self-Assessment

1. Which of the following characteristics are associated with a process costing system? (Choose all that apply).

1. Heterogeneous products.
2. Homogeneous products.
3. Continuous production.
4. Discontinuous production.
5. Costs are traced to jobs.
6. Costs are traced to processing departments.

2. The best example of a business requiring a process costing system would be a:

1. a. Custom cabinet shop.
2. b. Antique furniture restorer.
3. c. Soap manufacturer.
4. d. Automobile repair shop.

Correct or Incorrect?

Clear Check Answer

3. The costs in a process cost system are traced to:

1. a. Specific jobs.
2. b. Specific customers.
3. c. Specific company administrators.
4. d. Specific production departments.

Correct or Incorrect?

Clear Check Answer

4. Match the following terms with the definitions in the numbered list below.

1. Conversion costs
2. Equivalent units
3. Transferred-in costs
4. Cost per equivalent unit

1. (1) The costs associated with units received from a preceding department for further processing.

1. (2) The unit cost in a process costing system.

1. (3) The costs associated with changing units of direct materials into finished products; they include both direct labor and manufacturing overhead.

1. (4) The quantity of partially completed units expressed in terms of whole units.

5. Determine the amount of conversion cost in the following list of costs.

1. Direct material 25,000
2. Direct labor 35,000
3. Manufacturing overhead 45,000
4. Selling expenses 10,000
5. Administrative expenses 50,000

6. If raw materials are introduced into a production department at the beginning of the process, which statement is correct about the equivalent units in ending Work in Process for materials?

1. a. All of the units in Work in Process are 100 percent complete with respect to materials.
2. b. All of the units in Work in Process are 50 percent complete with respect to materials.
3. c. Equivalent units of materials are not a function of when the materials are entered into the process.
4. d. All of these choices are correct.

Correct or Incorrect?

Clear Check Answer

7. A transfer of units from Production Department 1 to Production Department 2 would be recorded as a:

1. a. Debit to Work in Process, Department 1; credit to Work in Process, Department 2.
2. b. Debit to Work in Process, Department 2; credit to Work in Process, Department 1.
3. c. Debit to Cost of Goods Sold; credit to Work in Process, Department 1.
4. d. Debit to Cost of Goods Sold; credit to Work in Process, Department 2.

Correct or Incorrect?

Clear Check Answer

8. The unit reconciliation section of a production cost report includes all of the following except:

1. a. Beginning units in process.
2. b. Ending units in process.
3. c. Units in finished goods.
4. d. Units completed and transferred out.
5. e. Units started during the period.

Correct or Incorrect?

Clear Check Answer

9. The units as shown in the unit reconciliation section of a production cost report are:

1. a. Equivalent units of production.
2. b. Units without regard to stage of completion.
3. c. Units complete as to materials.
4. d. Units complete as to prime costs.

Correct or Incorrect?

Clear Check Answer

10. Transferred-in costs occur in:

1. a. All production departments.
2. b. The first and last production departments.
3. c. All production departments after the first.
4. d. None of these answer choices is correct.

Correct or Incorrect?

Clear Check Answer

End-of-Chapter Homework

Questions

1. Explain the major differences between job-order and process costing systems.
2. Identify three types of manufacturing companies for which process costing would be an appropriate product costing system. What characteristic(s) do the products of these companies have that would make process costing a good choice?
3. Explain the concept of an “equivalent unit,” including how it is calculated.
4. What is meant by the term conversion costs?
5. What is meant by the term transferred-in cost?
6. Why are units often in a different stage of completion with respect to raw materials and conversion costs?
7. What items of production cost make up the “costs to account for” in a production cost report?
8. What is accomplished by preparing a reconciliation of the physical units as a part of the production cost report?
9. Do transferred-in costs occur in all departments of a manufacturer using a process costing system? Explain.
10. What are the three steps involved in the preparation of a production cost report?

Exercises

Exercise 3.1 (LO2)   Equivalent Units Techno Enterprises is a manufacturer of microchips (referred to as chips). Its production process is complex and involves more than 100 steps, starting with production of small, round silicon wafers and ending with chips being put into individual packages that protect them and provide connections to the products for which the chips are developed. The company uses a process costing system and has always made the simplifying assumption that wafers in production, but not yet finished, are 50 percent complete with respect to conversion costs.

In the current year, the company has struggled due to a decline in computer sales and reduced demand for chips. To boost profit, the company has decided to start a very large number of wafers into production in the last few days of the year. Due to the use of ceramic carriers and other high-performance features, the Techno Enterprises production process typically takes 30 days.

Required

Explain why starting a large number of wafers into production will boost profit even though the chips that ultimately result from the wafers are ones that have not been sold or even completed. Is the company’s approach to boosting profit ethical?

Exercise 3.2 (LO2)  Cost per Equivalent Units Write a paragraph explaining the calculation of the cost per equivalent unit (i.e., explain what goes in the numerator and what goes in the denominator of the calculation). Be sure to explain why the denominator may be different for the cost per equivalent unit of material and the cost per equivalent unit of labor and overhead.

Exercise 3.3 (LO1) Cost Flows through Accounts What are the four cost items that may enter a processing department?

Exercise 3.4 (LO3) Physical Flow of Units In each case below, fill in the missing amount.

Case #1	Work in Process, October 1	5,000 gallons
	Units started during October	?
	Units completed during October	15,000 gallons
	Work in Process, October 31	2,500 gallons
Case #2	Work in Process, March 1	16,000 tons
	Units started during March	4,000 tons
	Units completed during March	14,400 tons
	Work in Process, March 31	?
Case #3	Work in Process, December 1	300,000 pounds
	Units started during December	950,000 pounds
	Units completed during December	?
	Work in Process, December 31	350,000 pounds

Exercise 3.5 (LO3)  Unit Reconciliation During August the Panama Paint Company completed 90,000 cans of paint. At the beginning of August, the company had 850 units that were 75 percent complete with respect to material and 50 percent complete with respect to conversion costs. During the month, the company started production of 95,000 units.

Required

How many units were in Work in Process at the end of August?

Exercise 3.6 (LO3) Unit Reconciliation During August, Wilson Lubricant completed 31,000 gallons of product. At the start of August there were 4,500 gallons in Work in Process, and at the end of August, there were 7,000 gallons in Work in Process.

Required

How many gallons of product were started during the month of August?

Exercise 3.7 (LO2) Cost per Equivalent Unit The balance in beginning Work in Process at Bing Rubber Company for direct labor was $140,000. During the month of March, an additional $800,000 of direct labor was incurred, and 35,000 pounds of rubber were produced. At the end of March, 10,000 pounds of rubber were in process and the units were 50 percent complete. At the start of March, the company had 6,000 pounds of rubber that were 40 percent complete.

Required

Calculate the cost per equivalent unit for labor, assuming that labor is added uniformly throughout the production process.

Exercise 3.8 (LO3)  Cost Reconciliation During December, Western Solvent completed 40,000 units. At the end of December, there were 10,000 units in ending Work in Process that were 30 percent complete with respect to labor and overhead and 100 percent complete with respect to material. During the month of December, the company incurred $260,000 of material cost, $120,000 of labor cost, and $161,000 of manufacturing overhead. Costs per equivalent unit for material, labor, and manufacturing overhead equal $6, $3, and $4, respectively.

Required

Calculate the amount of material cost, labor cost, and overhead cost in beginning Work in Process inventory.

Exercise 3.9 (LO2) Calculation of Equivalent Units The McMillian Tire Company produces tires used on small trailers. The month of June ended with 600 tires in process, 90 percent complete as to direct materials, and 50 percent complete as to conversion costs; 2,000 tires were transferred to finished goods during the month, and 2,400 were started during the month. The beginning Work in Process inventory was 60 percent complete as to direct materials and 40 percent complete as to conversion costs.

Required

Determine the denominators to be used in the calculations of cost per equivalent unit for materials and conversion costs.

Exercise 3.10 (LO2) Reconciliation of Units and Costs At the start of July, the Classic Car Wax Company had beginning Work in Process of 2,500 units that were 90 percent complete with respect to material and 45 percent complete with respect to conversion costs. The cost of the units was $7,000 ($5,000 of material and $2,000 of conversion costs). During the month, the company started production of 40,000 units and incurred $224,500 of material cost and $91,750 of labor and overhead. Costs per equivalent unit were $6.00 for material and $2.50 for labor and overhead (conversion costs). The cost of items completed was $314,500 ($222,000 for materials and $92,500 for labor and overhead). Units in ending Work in Process are 25 percent complete with respect to material and 10 percent complete with respect to conversion costs.

Required

1. Prepare a reconciliation of units.
2. What is the cost of ending Work in Process?

Exercise 3.11 (LO2) Costing Units Completed and Ending Work in Process For the month of September, the Wilber Pickle Company had cost per equivalent unit of $.80 for materials (pickles, vinegar, spices, etc.) and $.90 for conversion costs (labor and overhead). At Wilber Pickle, units are measured in quarts. The company began the month with 600 quarts of pickles. By the end of the month, the company had completed 4,500 quarts, and 950 quarts were in process. The in-process units were 100 percent complete with respect to material and 75 percent complete with respect to labor and overhead.

Required

Determine the cost of the ending Work in Process inventory and the cost of items completed and transferred to Finished Goods inventory.

Exercise 3.12 (LO2) Costing Units Completed and Ending Work in Process Magi-Clean produces an industrial cleaner in a continuous production process. Materials are added at the beginning of production. Conversion costs are assumed to be added evenly throughout the process. At the end of February, there were twenty 50-gallon containers, 80 percent complete as to labor and overhead. Ninety-five 50 gallon containers were completed during the month. Assume that direct materials cost per equivalent unit during February was $2,050, labor cost per equivalent unit was $800, and overhead per equivalent unit was $1,500.

Required

Determine the cost of the ending Work in Process inventory and the cost of items completed and transferred to Finished Goods inventory.

Exercise 3.13 (LO2) Costing Units Completed and Ending Work in Process At the start of November, Penco Refinery had Work in Process inventory consisting of 4,000 units that were 90 percent complete with respect to materials and 50 percent complete with respect to conversion costs. The cost of the units was $43,000 ($30,000 of material cost and $13,000 of labor and overhead). During November, the company started 44,000 units and incurred $397,950 of material cost and $394,880 of labor and overhead. The company completed 45,000 units during the month, and 3,000 units were in process at the end of November. The units in ending Work in Process were 85 percent complete with respect to materials and 45 percent complete with respect to conversion costs.

Required

1. Calculate the cost per equivalent unit for materials and conversion costs. Round to the nearest cent.
2. Calculate the cost of items completed during November.
3. Calculate the cost of ending Work in Process. Round to the nearest dollar.

Exercise 3.14 (LO3) Quantity Schedule and Equivalent Units The Simon Fishing Company processes salmon for various distributors. The two departments involved are Cleaning and Packing. The next table summarizes the data related to pounds of salmon processed in the Cleaning Department during June:

	Pounds of Salmon	Present Complete*
Work in Process, June 1	40,000	50%
Started into processing during June	500,000	—
Work in Process, June 30	30,000	75%
*Labor and overhead only

All materials are added at the beginning of the process in the Cleaning Department.

Required

Prepare a reconciliation of units and a computation of equivalent units for June for the Cleaning Department.

Exercise 3.15 (LO2, 3) Calculation of Equivalent Units Tempe Chemicals refines a variety of chemicals for cleaning products. The following data are from the company’s Greenville plant:

Work in Process, May 1	2,300,000 gallons
Direct material	100% complete
Conversion costs	40% complete
Units started in process during May	770,000 gallons
Work in Process, May 31	235,000 gallons
Direct material	100% complete
Conversion costs	60% complete

Required

Compute the equivalent units for direct material and conversion costs for the month of May.

Exercise 3.16 (LO1, 2) Physical Flow and Equivalent Units The Sacramento plant of Montero Food Corporation produces a gourmet cheese. The following data pertain to the year ended December 31, 2020:

		Percentage of Completion
	Units	Direct Material	Conversion Costs
Work in process, January 1	45,000 lb	65%	85%
Work in process, December 31	60,000 lb	80%	45%

During the year, the company started 200,000 pounds of material into production.

Required

Prepare a schedule analyzing the physical flow of units and computing the equivalent units for both direct material and conversion costs for the year.

Exercise 3.17 (LO2) Cost per Equivalent Unit The Gandera Glass Company manufactures glass for sliding glass doors. At the start of August, 2,000 units were in process. During August, 15,000 units were complete and 3,000 units were in process at the end of August. These in-process units were 100 percent complete with respect to material and 40 percent complete with respect to conversion costs. Other information is as follows:

Work in process, August 1:
Direct material	$52,000
Conversion costs	$44,000
Costs incurred during August:
Direct material	$200,000
Conversion costs	$280,000

Required

Calculate the cost per equivalent unit, for both direct material and conversion costs, during August.

Exercise 3.18 Incremental Analysis Woodinville Cement uses a process costing system. In 2020, the company produced and sold 100,000 bags of cement and incurred the following costs:

	Total	Per Equivalent Unit
Direct material	$ 25,000	$0.25
Direct labor	100,000	1.00
Manufacturing overhead	200,000	2.00
Total	$325,000	$3.25

The current selling price is $4 per unit, and the profit for 2020 was ($4 × 100,000) − $325,000 = $75,000. Sales projections for 2021 at the current price look flat, but the sales manager believes that if the sales price is reduced to $3.75, sales volume would increase by 12,000 units. Assume that direct material and direct labor are variable costs and that manufacturing costs are primarily fixed. Should Woodinville Cement lower the price?

Problems

Problem 3.1 (LO2)  Comprehensive Problem, One Department Regal Polish manufactures a single product in one department and uses a process costing system. At the start of May, there were 11,000 units in process that were 100 percent complete with respect to direct material and 60 percent complete with respect to conversion costs (labor and overhead). During the month, the company began production of 105,000 units. Ending Work in Process inventory consisted of 5,100 units that were 100 percent complete with respect to material and 70 percent complete with respect to conversion costs.

Cost Information	Beginning Work in Process	Costs Added in May
Direct material	$4,000	$76,040.00
Direct labor	200	8,957.60
Manufacturing overhead	300	10,002.30
Total	$4,500	$94,999.90

Required

1. Calculate the cost per equivalent unit for each of the three cost items and in total. Round to two decimal places.
2. Calculate the cost of items completed in May and the cost of ending Work in Process. Round to two decimal places.
3. Reconcile the sum of the two costs in part b to the sum of beginning Work in Process and costs added in May.

Problem 3.2 (LO2) Comprehensive Problem, One Department Marquita Filters produces an air filter for use in jet aircraft. Parts are added at several points in the production process. In August, production began with 600 filters in Work in Process, 80 percent complete as to materials and 70 percent complete as to labor and overhead. During the month, an additional 2,700 units were started into production. Seven hundred filters were in Work in Process at the end of the month, and they were 70 percent complete as to materials and 60 percent complete as to labor and overhead.

Cost Information for August	Beginning Work in Process Inventory	Cost Added in August
Direct material	$ 45,000	$267,090
Direct labor	11,000	76,580
Manufacturing overhead	80,000	496,820
Total	$136,000	$840,490

Required

1. Calculate the cost per equivalent unit for each of the three cost items and in total.
2. Calculate the cost of items completed in August and the cost of ending Work in Process inventory.
3. Reconcile the sum of the two costs in part b to the sum of beginning Work in Process and costs added in August.

Problem 3.3 (LO2, 3) Production Cost Report Kao Tiles is a specialized producer of ceramic tiles. Its production process involves highly skilled workers and top-quality ceramic crafters. Work in Process is relatively large because each tile is in process for up to three weeks because of art, mold work, and drying time. October began with 5,000 units (a unit is one ceramic tile) in process, on average 65 percent complete as to direct materials and 35 percent complete as to conversion costs; 6,000 units were started during the month, and ending Work in Process inventory consisted of 7,000 units that were on average 75 percent complete as to direct materials and 50 percent complete as to conversion costs.

Cost Information	Beginning Work in Process	Costs Added in October
Direct material	$170,000	$ 422,000
Direct labor	160,000	1,055,000
Manufacturing overhead	50,000	107,500

Required

1. Prepare a production cost report for the month of October.
2. Prepare the journal entry to recognize the transfer of the units completed and transferred to finished goods during October.

Problem 3.4 (LO2, 3) Production Cost Report Aussie Yarn is a U.S. producer of woollen yarn made from wool imported from Australia. Material is added in the beginning of processing, and conversion costs are added evenly throughout processing.

Aussie began the month of August with 7,000 units in process that were 100 percent complete as to materials and 70 percent complete as to labor and overhead. It started 34,000 units into production during the month of August of which 8,000 remained in ending Work in Process inventory and were 50 percent complete as to conversion costs. The cost data are as follows:

Beginning work in process:
Direct materials	$ 6,000
Direct labor	2,000
Manufacturing overhead	2,500
	$10,500
Costs added during August:
Direct materials	$26,390
Direct labor	12,430
Manufacturing overhead	14,520
	$53,340

Required

Prepare a production cost report for the month of August.

Problem 3.5 (LO1) Journal Entries in Process Costing Lakeland Solvent produces a single product in two departments. The following costs relate to April:

	Department 1	Department 2
WIP, March 31	$ 24,000	$ 44,000
Costs added during April
Direct material	80,000	15,000
Direct labor	40,000	70,000
Manufacturing overhead	220,000	100,000
Transferred-in costs	N/A	?
WIP, April 30	–0–	30,000

Required

Prepare journal entries to record:

1. The issuance of direct material.
2. The cost of direct labor (credit wages payable).
3. The application of manufacturing overhead.
4. The transfer of cost associated with units completed in both departments.

Problem 3.6 (LO1) Journal Entries in Process Costing The Wilmont Box Company produces a single box used by AirSpeed, an express shipping company. Wilmont uses a just-in-time system and has almost no inventories of material, work in process, or finished goods. Indeed, the balances are so small that the company treats them as zero for purposes of its accounting reports.

During July, the company produced and shipped 125,000 boxes at a cost of $0.90 per box. The cost consisted of 40 percent material cost, 15 percent labor cost, and 45 percent manufacturing overhead.

Required

Prepare journal entries to record:

1. The issuance of direct material.
2. The cost of direct labor (credit wages payable).
3. The application of manufacturing overhead.
4. The completion of units in process and their transfer to finished goods.
5. Cost of goods sold.

Problem 3.7 (LO2, 3)  Production Cost Report, Missing Data Classic 50s Flooring produces linoleum flooring. Below is a partial production cost report for the Mixing Department. In the report, a unit is a gallon of linoleum cement (a mixture of linseed oil, pine resin, and wood flour).

Production Cost Report Mixing Department June
Quantity Reconciliation
Units in beginning WIP	700
Units started	2,700
Units to account for	3,400
Units completed	2,300
Units in ending WIP (100% material, 70% conversion costs)	(a)
Units accounted for	(b)

 

Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Total
Cost
Beginning WIP	$  475	$ 1,200	$ 2,400	$ 4,075
Cost incurred during June	4,115	11,080	22,160	37,355
Total	$4,590	$12,280	$24,560	$41,430
Units
Units completed	2,300	2,300	2,300
Equivalent units, ending WIP	(c)	(d)	(e)
Total	(f)	(g)	(h)
Cost per equivalent unit	(i)	(j)	(k)	(l)

Required

Fill in the missing data (items a through l). Round to two decimal places.

Problem 3.8 (LO2, 3) Production Cost Report, Missing Information Marion Chemicals produces a chemical used as a base in paints. In the manufacturing process, all materials are added at the start of the process, whereas labor and overhead are added evenly throughout production.

Required

Fill in the missing information in Marion’s Production Cost Report for the month of December.

Marion Chemicals Production Cost Report December
Unit Reconciliation
Units in beginning WIP (100% material, 10% conversion costs)	8,000
Units started during December	?
Units to account for	?
Units completed	?
Units in ending WIP (100% material, 20% conversion costs)	5,000
Units accounted for	?

 

Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Total
Cost
Beginning WIP	$45,200	$10,500	$26,300	$  82,000
Cost incurred in December	?	?	?	?
Total	?	?	?	?
Units
Units completed	?	?	?
Equivalent units, ending WIP	?	?	?
Total	?	?	?
Cost per equivalent unit	$1.80	$1.40	$2.64	?
Cost Reconciliation
Total cost to account for				$3,020,640
Cost of completed items				$3,007,600
Cost of ending WIP
Material		$?
Labor		?
Overhead		?		?
Total cost accounted for				$3,020,640

Problem 3.9 (LO2, 3) Comprehensive Problem, Two Departments Simply Shine Shampoo is manufactured in two departments: Mixing and Packing. Once the shampoo mixture is completed in the Mixing Department, it is sent to Packaging, where a machine fills and seals individual bottles, which are then passed to a machine that places the bottles in individual boxes.

The following information is related to production in March:

	Mixing	Packing
Unit Information
Beginning WIP
(Mixing: 100% material, 90% conversion costs)	15,000
(Packing: 60% material, 50% conversion costs)		14,500
Started during March:	660,000	63,000
Ending WIP
(Mixing: 100% material, 70% conversion costs)	40,000
(Packing: 80% material, 60% conversion costs)		38,000
Cost Information, Beginning Work in Process
Direct material	$  8,500	$    925
Direct labor	1,200	60
Manufacturing overhead	2,500	115
Transferred-in cost	—	3,800
Cost Added during March
Direct material	$254,750	$   88,941
Direct labor	78,360	12,626
Manufacturing overhead	130,100	18,914
Transferred-in cost	—	450,850

Required

Prepare production costs reports for Mixing and Packing for the month of March.

Problem 3.10 (LO2, 3) Comprehensive Problem, Two Departments The Carnival Caramel Company makes a high-quality caramel candy. The manufacturing process involves mixing ingredients (Mixing Department) and shaping the processed mixture into one-pound balls (Shaping Department), which are sold to retail outlets. No additional material is added in the shaping process. The following information is related to production in March:

	Mixing	Shaping
Unit Information
Beginning WIP
(Mixing: 100% material, 70% conversion costs)	5,000
(Shaping: 80% conversion costs)		5,000
Started during March	45,000	?
Ending WIP
(Mixing: 100% material, 50% conversion costs)	3,000
(Shaping: 60% conversion costs)		1,500
Cost Information, Beginning Work in Process
Direct material	$ 4,000	—
Direct labor	1,600	$  800
Manufacturing overhead	1,900	600
Transferred-in cost	—	4,630
Cost Added during March
Direct material	$45,500	—
Direct labor	23,135	$13,592
Manufacturing overhead	25,745	9,166
Transferred-in cost	—	?

Required

Prepare production cost reports for Mixing and Shaping for the month of March.

Problem 3.11 (LO2, 3) Production Report Tropical Sun makes suntan lotion in two stages. The lotion is first blended in the Blending Department and then bottled and packed in the Bottling Department. The following information relates to the operations of the Blending Department for May.

		Percent Completed
	Units	Materials	Conversion
Beginning WIP	7,500	80%	55%
Started into production	97,000
Completed and transferred out	92,500
Ending WIP	12,000	65%	20%
		Costs
Beginning WIP		$  7,000	$  8,000
Costs added during May		$106,339	$143,840

Required

Prepare a production report for the Blending Department for May.

Problem 3.12 (LO2, 3) Determination of Production Costs The Kioda Corporation produces computer chips. The following information relates to production in January:

• Beginning Work in Process inventory: 6,000 units, 85 percent complete as to conversion; costing $330,055 (direct materials, $260,000; conversion costs, $70,055).
• Production started: 33,000 units.
• Production completed: 29,500 units.
• Ending Work in Process inventory: 9,500 units, 55 percent complete as to conversion.
• Direct materials used: X1, $295,000; Y2, $750,000; Z3, $490,170.
• Hourly wages of direct laborers, $25; total direct-labor payroll, $162,500.
• Overhead application rate: $70 per direct-labor hour.

Required

All parts are introduced at the beginning of Kioda’s manufacturing process; conversion costs are incurred uniformly throughout production.

1. Calculate the total cost of direct material and conversion during January.
2. Determine the cost of goods completed during the month.
3. Determine the cost of the work in process inventory on January 31.

Problem 3.13 (LO2, 3) Conversion Costs Hartwell Drug Company produces a supplement to improve bone density. Conversion costs are added evenly throughout the production process. The following information is available for March:

	Units
Units (gallons) in process, March 1 (40% complete)	600
Units started in March	1,000
Units in process, March 31 (80% complete)	300
	Costs
Conversion costs in WIP, March 1
Labor	$ 36,000
Overhead	6,000
Labor costs in March (5,100 hours)	102,600
Overhead in March	47,900

Required

1. Compute the number of units completed in March.
2. Compute the cost per equivalent unit for conversion costs.
3. Compute the conversion costs included in units completed in March.
4. Compute the conversion costs included in units in process at the end of March.

Problem 3.14 (LO2, 3) Production Cost Report Sassy Cotton produces fine cotton fabrics. Material is added in the beginning of processing, and conversion costs are added evenly throughout processing.

At the beginning of July, Sassy had 8,000 units in process that were 100 percent complete as to material and 40 percent complete as to labor and overhead. The company started 31,000 units into production during the month of July. At the end of July, 8,500 units were in ending Work in Process inventory and were 60 percent complete as to conversion costs. Cost data are as follows:

Beginning Work in Process:
Direct materials	$7,500
Direct labor	3,400
Manufacturing overhead	2,200
Costs added during July:
Direct materials	$33,060
Direct labor	10,484
Manufacturing overhead	17,024

Required

Prepare a production cost report for the month of July.

Problem 3.15 (LO2, 3) Comprehensive Problem, One Department Lindy Manufacturing uses a process costing system to account for a single product it makes in one department. At the start of November, there were 8,000 units in process that were 100 percent complete for direct material and 70 percent complete for conversion costs (labor and overhead). Lindy began the production of 83,000 units during the month. In ending Work in Process inventory, there were 1,800 units that were 100 percent complete for material and 80 percent complete for conversion costs.

Cost Information	Beginning Work in Process	Costs Added in November
Direct material	$3,000	$71,620
Direct labor	300	8,764
Manufacturing overhead	200	13,396
	$3,500	$93,780

Required

1. Calculate the cost per equivalent unit for each of the three cost items and in total.
2. Calculate the cost of the units completed in November and the cost of ending Work in Process inventory.
3. Reconcile the sum of the two costs in part b to the sum of beginning Work in Process and costs added in November.

Problem 3.16 (LO2, 3) Comprehensive Problem The Newberry Company accumulates costs for its product using a process costing system. Direct materials are added at the beginning of the production process, and conversion occurs evenly throughout the production process. Below is information related to May.

Unit Information
Work in Process, May 1 (75% complete)	40,000
Units started during May	90,000
Total to account for	130,000
Units completed	110,000
Units in ending WIP (45% complete)	20,000
Units accounted for	130,000

 

Cost Information
	Direct Material	Conversion	Total
Work in Process, May 1	$43,000	$340,300	$383,300
Cost incurred during May	87,000	733,080	820,080

Required

1. Compute the cost per equivalent unit for material and for conversion costs for May.
2. Compute the costs of units completed during May.
3. Compute the cost of work in process at the end of May.
4. Prepare a journal entry to record the cost of goods completed.

Problem 3.17 (LO1) Journal Entries in Process Costing Douglas Basket produces a specialty basket used by gift basket companies. Douglas uses a just-in-time system and has very little inventory of material, work in process, or finished goods. Since the balances are so small, the company carries them at zero for purposes of accounting.

During August, the company produced and shipped 150,000 baskets at a cost of $1.75 per basket. The cost was made up of 55 percent material cost, 25 percent labor cost, and 20 percent manufacturing overhead.

Required

Prepare journal entries to record:

1. The issuance of direct material.
2. The cost of direct labor (use wages payable).
3. The application of manufacturing overhead.
4. The completion of units in process and their transfer to finished goods.
5. Cost of goods sold.

Problem 3.18 You Get What You Measure! The Plastic Glow Company makes glow sticks. It uses a process costing system and has had a just-in-time inventory policy. The plant has the capacity to produce 500,000,000 units a year but currently operates at 300,000,000 units per year. Direct material and direct labor costs are variable, and manufacturing overhead is primarily fixed. Production costs for 2020 are as follows:

Number of units produced and sold	300,000,000
Direct materials	$ 15,000,000
Direct labor	30,000,000
Manufacturing overhead	105,000,000
Total costs	$150,000,000
Equivalent cost per unit	$0.50

Jim Taylor, the president, receives a bonus each year based on net operating profit and would like to reduce costs in 2021 so that profit will increase. He decides to take advantage of the excess plant capacity and increase production to 350,000,000 even though he expects the company will be unable to increase unit sales in 2021.

Required

1. If Jim increases production to 350,000 units per year, what will be the new equivalent cost per unit?
2. Would increasing the production level be a good idea? Why or why not?

Cases

Case 3.1 Tech-Tonic Sports Drink (LO2, 3)

The Western Beverage Company is marketing a new product, Tech-Tonic Sports Drink Syrup. The product sells for $16 per gallon, and in recent months the company has had sales of more than 525,000 gallons per month. Consumers mix one part syrup with five parts water to make a drink that “replenishes vital bodily fluids following exertion.”

At the start of April, there were 200,000 gallons in beginning Work in Process. The product was 100 percent complete with respect to material and 50 percent complete with respect to conversion costs. During April, 500,000 gallons were started. Of the 700,000 units to account for, 100,000 gallons remained in process at the end of April. These units were 100 percent complete with respect to material and 20 percent complete with respect to conversion costs; 300,000 gallons were completed during April and, unfortunately, 300,000 gallons were lost owing to worker error. The production process calls for sodium to be added at the start of the process. On two separate occasions, a new worker added too much sodium, and batches were ruined. The errors were not identified until the end of the production process when batches were tested for quality assurance. Needless to say, the worker was fired.

The controller of Western Beverage, Gunther Bergman, is considering two ways to treat the cost of the “lost” units. One approach is to “bury” the cost in the units completed and the units in process. This would result in cost of units completed of $1,659,000 and cost of ending Work in Process of $222,600 calculated as follows.

Approach No. 1

Tech-Tonic Sports Drink Syrup Production Cost Report April
Quantity Reconciliation
Units in beginning WIP (100% material, 50% conversion costs)	200,000
Units started	500,000
Units to account for	700,000
Units completed	300,000
Units in ending WIP (100% material, 20% conversion costs)	100,000
Lost units	300,000
Units accounted for	700,000

 

Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Total
Cost
Beginning WIP	$110,000	$ 50,000	$100,000	$ 260,000
Cost incurred during April	450,000	373,000	800,000	1,623,000
Total	$560,000	$423,000	$900,000	$1,883,000
Units
Units completed	300,000	300,000	300,000
Equivalent units, ending WIP	100,000	20,000	20,000
Total	400,000	320,000	320,000
Cost per equivalent unit	$1.40	$1.32	$2.81	$5.53
Cost Reconciliation
Total cost to account for				$1,883,000
Cost of completed units transferred to
Finished Goods (300,000 × $5.53)				$1,659,000
Cost of ending WIP
Material (100,000 equivalent units × $1.40)			$140,000
Labor (20,000 equivalent units × $1.32)			26,400
Overhead (20,000 equivalent units × $2.81)			56,200	222,600
				$1,881,600
Difference due to rounding				1,400
Total cost accounted for				$1,883,000

A second approach involves identifying the lost units for April. The result is a cost of units completed equal to $879,000, cost of Work in Process equal to $122,600, and cost of lost units equal to $879,000, which will be charged to Cost of Goods Sold.

Approach No. 2

Tech-Tonic Sports Drink Syrup Production Cost Report April
Quantity Reconciliation
Units in beginning WIP (100% material, 50% conversion costs)	200,000
Units started	500,000
Units to account for	700,000
Units completed	300,000
Units in ending WIP (100% material, 20% conversion costs)	100,000
Lost units	300,000
Units accounted for	700,000

 

Cost per Equivalent Unit Calculation
	Material	Labor	Overhead	Total
Cost
Beginning WIP	$110,000	$ 50,000	$100,000	$ 260,000
Cost incurred during April	450,000	373,000	800,000	1,623,000
Total	$560,000	$423,000	$900,000	$1,883,000
Units
Units completed	300,000	300,000	300,000
Equivalent units, ending WIP	100,000	20,000	20,000
Lost units	300,000	300,000	300,000
Total	700,000	620,000	620,000
Cost per equivalent unit	$0.80	$0.68	$1.45	$2.93
Cost Reconciliation
Total cost to account for				$1,883,000
Cost of completed units transferred to
Finished Goods (300,000 × $2.93)				879,000
Cost of lost units (300,000 × $2.93)				879,000
Cost of ending WIP
Material (100,000 equivalent units × $0.80)			$ 80,000
Labor (20,000 equivalent units × $0.68)			13,600
Overhead (20,000 equivalent units × $1.45)			29,000	122,600
				$1,880,600
Difference due to rounding				2,400
Total cost accounted for				$1,883,000

Required

1. Assume that 80 percent of the units completed in April are sold in that month. What will be the difference in reported profit between the two approaches?
2. Which approach is most appropriate from a conceptual standpoint?
3. Senior managers at Western Beverage receive monthly bonuses determined as a percent of profit in excess of a targeted level of profit. Which method will they favor?

Case 3.2 Jensen PVC (LO2)

Jensen PVC, Inc., produces polyvinyl chloride (PVC) irrigation pipes. In 2020, the cost of producing a foot of pipe was $0.30, and the selling price was $0.39 per foot. In 2021, production costs increased to $0.40 per foot, although the selling price remained at $0.39.

	2020	2021
Selling price	$0.39	$0.39
Production cost	0.30	0.40

The increase in cost was obvious. Material and labor had remained fairly constant per foot of pipe, but overhead costs, which were $0.15 per foot in 2020, had increased to $0.25 in 2021. The problem was that most overhead costs were fixed, but output had decreased due to weak crop prices and a corresponding decrease in spending on irrigation projects. Bob Elger, CFO of Jensen, reviewed the data generated by the company’s process costing system.

In 2020, overhead costs in all of the company’s departments (mixing, extrusion, cutting, and packing) were $1,500,000, and pipe production was 10,000,000 feet. In 2021, overhead costs were still approximately $1,500,000, but pipe production decreased to 6,000,000 feet. At a recent meeting of the senior management team, Bob noted: “The problem is that we’re not making use of capacity. We could easily produce 15,000,000 feet of pipe given our state-of-the-art equipment, but we’re operating at less than 50% of capacity.”

Required

Bob estimates that to sell 15,000,000 feet of pipe in the current market, the company would have to lower its price to $0.35 per foot, which is even lower than its current cost per foot of $0.40. Would decreasing the price be a good decision?

 

 

 

During August the Sipacore Paint Company completed 89,590 cans of paint. At the beginning of August, the company had 920 units that were 70 percent complete with respect to material and 50 percent complete with respect to conversion costs. During the month, the company started production of 94,240 units.

How many units were in Work in Process at the end of August?

Work in Process

enter a number of cans in work in process

cans

 

 

 

Lawler Manufacturing Company expects annual manufacturing overhead to be $540,000. The company also expects 54,000 direct labor hours costing $600,000 and machine run time of 18,000 hours.

Calculate predetermined overhead allocation rates based on direct labor hours, direct labor cost, and machine time. (Round direct labor cost to 2 decimal places, e.g. 15.25 and all other answers to 0 decimal places, e.g. 5,275.)

		Direct labor hours		Direct labor cost		Machine time
Predetermined overhead allocation		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 2 decimal places		$enter a dollar amount rounded to 0 decimal places