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CHAPTER 4Process Costing and Hybrid Product-CostingSystemsANSWERS TO REVIEW QUESTIONS4-1In a job-order costing system, costs are assigned to batches or job orders ofproduction. Job-order costing is used by firms that produce relatively small numbersof dissimilar products. In a process-costing system, costs are averaged over a largenumber of product units. Process costing is used by firms that produce largenumbers of nearly identical products.4-2Process costing would be an appropriate product-costing system in the followingindustries: petroleum, food processing, lumber, chemicals, textiles, and electronics.Each of these industries is involved in the production of very large numbers ofhighly similar products.4-3Process costing could be used in the following nonmanufacturing enterprises:processing of tests in a medical diagnostic laboratory, processing of tax returns bythe Internal Revenue Service, and processing of loan applications in a bank.4-4Product-costing systems are used for the following purposes:(a) In financial accounting: Product costs are needed to value inventory on thebalance sheet and to compute the cost-of-goods-sold expense on the incomestatement.(b) In managerial accounting: Product costs are needed for planning, for costcontrol, and to provide managers with data for decision making.(c) In reporting to interested organizations: Product cost information is used toreport on relationships between firms and various outside organizations. Forexample, hospitals keep track of the costs of medical procedures that arereimbursed by insurance companies or by the federal government under theMedicare program.4-5An equivalent unit is a measure of the amount of productive effort applied in theproduction process. In process costing, costs are assigned to equivalent units ratherthan to physical units.McGraw-Hill/IrwinInc.Managerial Accounting, 5/e 2002 The McGraw-Hill Companies,4- 1

4-6The following four steps are used in process costing:(a) Analysis of physical flow of units: All of the units in the beginning and endinginventories, those started during the period, and those transferred out to finishedgoods are accounted for.(b) Calculation of equivalent units: The equivalent units of activity are computed fordirect material and for conversion.(c) Computation of unit costs: The costs per equivalent unit for direct material andconversion are computed.(d) Analysis of total costs: The cost of the goods completed and transferred out andthe cost of the ending work-in-process inventory are determined.4-7(a) Journal entry to enter direct-material costs into Work-in-Process Inventoryaccount:Work-in-Process Inventory: Department A.Raw-Material Inventory.XXXXXX(b) Journal entry to record transfer of goods from the first to the second departmentin the production sequence:Work-in-Process Inventory: Department B.Work-in-Process Inventory: Department A.XXXXXX4-8Transferred-in costs are the costs assigned to partially completed products that havebeen transferred from one production department into the next department.4-9The 175,000 of transferred-in costs were incurred prior to January 1 and in themixing department. The costs must have been incurred prior to January 1, becausethey are included in the cost of the beginning work-in-process inventory on thatdate. Moreover, these costs must have been incurred in the mixing department,because they have been transferred into the cooking department.4-10The name ''weighted-average method'' comes from the fact that the cost perequivalent unit computed under this method is a weighted average of costs incurredduring the current period and costs incurred during prior periods.McGraw-Hill/IrwinInc.4-2 2002 The McGraw-Hill Companies,Solutions Manual

4-11The difference between normal and actual costing lies in the calculation of themanufacturing-overhead cost of the current period. Under actual costing, themanufacturing-overhead cost of the current period is the actual overhead costincurred during the period. Under normal costing, the current-period manufacturingoverhead is computed as the product of the predetermined overhead rate and theactual level of the cost driver used to apply manufacturing overhead.4-12If manufacturing overhead were applied according to some activity base (or costdriver) other than direct labor, then direct-labor costs and manufacturing-overheadcosts would be accounted for separately instead of being combined into oneaccount called "conversion costs." Thus, instead of two columns for direct-materialand conversion costs, there would be three columns: direct material, direct labor,and manufacturing overhead.4-13Operation costing is a hybrid product-costing system that is used when conversionactivities are very similar across product lines, but the direct materials differsignificantly. This is often the case in batch manufacturing operations. Conversioncosts are accumulated by department, and process-costing methods are used toassign these costs to products. In contrast, direct-material costs are accumulated byjob order or by batch, and job-order costing is used to assign direct-material costs toproducts.4-14The departmental production report is the key document in a process-costingsystem rather than the job-cost sheet used in job-order costing. The departmentalproduction report shows the analysis of the physical flow of units, the calculation ofequivalent units, the computation of the cost per equivalent unit, and the analysis ofthe total costs incurred in the production department. The report shows the cost ofthe ending work-in-process inventory as well as the cost of the goods completed andtransferred out of the department.4.15There is no direct material in the March 1 work in process for the stitchingdepartment because direct material (rawhide lacing) is added at the end of theprocess in that department.McGraw-Hill/IrwinInc.Managerial Accounting, 5/e 2002 The McGraw-Hill Companies,4- 3

SOLUTIONS TO EXERCISESEXERCISE 4-16 (10 MINUTES)The general formula for all three cases is the following:Work-in-process,beginning Units startedduring month–Units completedduring month Work-in-process,endingUsing this formula, the missing amounts are:1.12,000 units2.5,300 kilograms3.750,000 gallonsEXERCISE 4-17 (30 MINUTES)All three of these companies manufacture large numbers of relatively homogeneousproducts (i.e., lumber and paper). Therefore, process costing is an appropriate productcosting system.McGraw-Hill/IrwinInc.4-4 2002 The McGraw-Hill Companies,Solutions Manual

EXERCISE 4-18 (15 MINUTES)1.6,000 equivalent units (refer to (a) in the following table)2.4,400 equivalent units (refer to (b) in the following table)CALCULATION OF EQUIVALENT UNITS: RAINBOW GLASS COMPANYWeighted-Average MethodPercentageofEquivalent UnitsCompletion withPhysicalRespect toDirectUnitsConversionMaterialConversionWork in process, October 1.1,00060%Units started during October. .5,000Total units to account for.6,000Units completed and transferredout during October.Work in process, October 31. .Total units accounted for.Total equivalent units.4,0002,0006,000100%20%4,0002,000(a) 6,0004,000400(b) 4,400EXERCISE 4-19 (15 MINUTES)CALCULATION OF EQUIVALENT UNITS: TERRA ENERGY COMPANY - LODI PLANTWeighted-Average MethodPercentageofCompletionwithEquivalent UnitsPhysicalRespect toDirectUnitsConversion Material ConversionWork in process, November 1.2,000,00025%Units started during November.950,000Total units to account for.2,950,000Units completed and transferredout during November.Work in process, November 30.Total units accounted for.Total equivalent units.McGraw-Hill/IrwinInc.Managerial Accounting, 5/e2,710,000240,0002,950,000100%80% 2002 The McGraw-Hill Companies,4- 5

EXERCISE 4-20 (20 MINUTES)CALCULATION OF EQUIVALENT UNITS: FIT-FOR-LIFE FOODS CORPORATIONWeighted-Average tionRespect towithEquivalent UnitsPhysicalDirectRespect toDirectUnitsMaterialConversion Material ConversionWork in process, January 1.20,00080%60%Units started during the year. .120,000Total units to account for.140,000Unit completed and transferredout during the year.Work in process, December 31Total units accounted for.Total equivalent 500135,500125,0004,500129,500EXERCISE 4-21 (15 MINUTES)CALCULATION OF COST PER EQUIVALENT UNIT: IDAHO LUMBER COMPANYWeighted-Average MethodDirectMaterialConversionTotalWork in process, November 1. 65,000 180,000 245,000Costs incurred during November.425,000690,0001,115,000Total costs to account for. 490,000 870,000 1,360,000Equivalent units.7,0001,740Costs per equivalent unit. 70* 500† 570* 70 490,000 7,000† 500 870,000 1,740McGraw-Hill/IrwinInc.4-6 2002 The McGraw-Hill Companies,Solutions Manual

EXERCISE 4-22 (15 MINUTES)CALCULATION OF COST PER EQUIVALENT UNIT: OTSEGO GLASS COMPANYWeighted-Average MethodDirectMaterialConversionTotalWork in process, June 1. 37,000 36,750 73,750Costs incurred during June.150,000230,000380,000Total costs to account for. 187,000 266,750 453,750Equivalent units.17,00048,500Costs per equivalent unit. 11.00* 5.50† 16.50* 11.00 187,000 17,000† 5.50 266,750 48,500McGraw-Hill/IrwinInc.Managerial Accounting, 5/e 2002 The McGraw-Hill Companies,4- 7

EXERCISE 4-23 (25 MINUTES)SAVANNAH TEXTILES COMPANYWeighted-Average MethodDirectMaterialConversionWork in process, September 1. 94,000 44,400Costs incurred during September.164,000272,800Total costs to account for. 258,000 317,200Equivalent units.60,00052,000Costs per equivalent unit. 4.30 6.101. 10.40Cost of goods completed andtransferred out during September: numberofunits toalcostper transfer dout equivalentunit 2.Total 138,400436,800 575,20050,000 10.40 520,000.Cost remaining in September 30work in process: 43,00012,200Direct material (10,000* 4.30)Conversion (2,000* 6.10).Total.Total costs accounted for.55,200 575,200*Equivalent units in September 30 work in process:Total equivalent units (weighted 4-8 Conversion52,0002002 The McGraw-Hill Companies,Solutions Manual

Units completed and transferred out.Equivalent units in ending work in process.McGraw-Hill/IrwinInc.Managerial Accounting, 5/e (50,000)10,000(50,000)2,0002002 The McGraw-Hill Companies,4- 9

EXERCISE 4-24 (25 MINUTES)TULSA PAPERBOARD COMPANYWeighted-Average MethodDirectMaterialConversionWork in process, February 1. 5,500 17,000Costs incurred during February.110,000171,600Total costs to account for. 115,500 188,600Equivalent units.110,00092,000Costs per equivalent unit. 1.05 2.05Total 22,500281,600 304,100 3.101. Cost of goods completed andtransferred out during February: numberofunits toalcostper transfer dout equivalentunit 2.90,000 3.10 279,000.Cost remaining in February 28 workin process:Direct material (20,000* 1.05).Conversion (2,000* 2.05).Total.Total costs accounted for. 21,0004,10025,100 304,100*Equivalent units in February 28 work in process:DirectMaterialMcGraw-Hill/IrwinInc.4-10 Conversion2002 The McGraw-Hill Companies,Solutions Manual

Total equivalent units (weighted average).Units completed and transferred out.Equivalent units in ending work in process.McGraw-Hill/IrwinInc.Managerial Accounting, 5/e 110,000(90,000)20,00092,000(90,000)2,0002002 The McGraw-Hill Companies,4- 11

EXERCISE 4-25 (45 MINUTES)1. Diagram of production process:Work-in-Process Inventory:Preparation DepartmentBatch P25 Batch S33AccumulatedbydepartmentConversion cess Inventory:Finishing DepartmentBatch P25AccumulatedbybatchBatch S33DirectmaterialcostsWork-in-Process Inventory:Packaging DepartmentBatch P25Finished-Goods InventoryMcGraw-Hill/IrwinInc.4-12 2002 The McGraw-Hill Companies,Solutions Manual

EXERCISE 4-25 (CONTINUED)2. The product cost for each basketball is computed as follows:ProfessionalDirect material:.Batch P25 ( 42,000 2,000).Batch S33 ( 45,000 4,000).Conversion: Preparation Department.Conversion: Finishing Department.*Conversion: Packaging Department.Total product cost.Scholastic 21.00-07.506.00.50 35.00-0 11.257.506.00-0 24.75*The two production departments each worked on a total of 6,000 balls, but the PackagingDepartment handled only the 2,000 professional balls.3.Journal entries:Work-in-Process Inventory: Preparation Department.Raw-Material Inventory.39,500*39,500* 39,500 42,000 of direct materialfor batch P25 – 2,500 of packaging materialWork-in-Process Inventory: Preparation Department.Raw-Material Inventory.45,000*45,000*Direct-material cost for batch S33.Work-in-Process Inventory: Preparation Department.Applied Conversion Costs.45,000*45,000* 45,000 6,000 units 7.50 per unitWork-in-Process Inventory: Finishing Department.Work-in-Process Inventory: Preparation Department129,500*129,500* 129,500 39,500 45,000 45,000McGraw-Hill/IrwinInc.Managerial Accounting, 5/e 2002 The McGraw-Hill Companies,4- 13

EXERCISE 4-25 (CONTINUED)Work-in-Process Inventory: Finishing Department.Applied Conversion Costs.36,000*36,000* 36,000 6,000 units 6.00 per unitWork-in-Process Inventory: Packaging Department.Finished-Goods Inventory.Work-in-Process Inventory: Finishing Department.66,500*99,000†165,500* 66,500 39,500 (2,000 7.50) (2,000 6.00).These are the costs accumulated for batch P25 only.† 99,000 45,000 (4,000 7.50) (4,000 6.00).These are the costs accumulated for batch S33 only.Work-in-Process Inventory: Packaging Department.Raw-Material Inventory.Applied Conversion Costs.3,5002,500*1,000†*Cost of packaging material for batch P25.† 1,000 2,000 units .50 per unitFinished-Goods Inventory.Work-in-Process Inventory: Packaging Department.70,000*70,000* 70,000 66,500 3,500McGraw-Hill/IrwinInc.4-14 2002 The McGraw-Hill Companies,Solutions Manual

EXERCISE 4-26 (10 MINUTES)1.2.3.4.Work-in-Process Inventory: Pouring Department.Raw-Material Inventory.Wages Payable.Manufacturing Overhead.1,090,000Work-in-Process Inventory: Finishing Department.Work-in-Process Inventory: Pouring Department.900,000Work-in-Process Inventory: Finishing Department.Raw-Material Inventory.Wages Payable.Manufacturing Overhead.725,000Finished-Goods Inventory.Work-in-Process Inventory: Finishing Department.400,000McGraw-Hill/IrwinInc.Managerial Accounting, 5/e ,0002002 The McGraw-Hill Companies,4- 15

SOLUTIONS TO PROBLEMSPROBLEM 4-27 (50 MINUTES)1.2.Physical flow of units:Work in process, 1/1/x1.Units started during 20x1.Total units to account for.PhysicalUnits200,0001,000,0001,200,000Units completed and transferred out during 20x1.Work in process, 12/31/x1.Total units accounted for.900,000300,0001,200,000Equivalent units:Work in process, 1/1/x1.Units started during 20x1.Total units to account for.Units completed and transferredout during 20x1.Work in process, 12/31/x1.Total units accounted for.Total equivalent ionwithPhysical Respect 00300,0001,200,000100%50% Equivalent UnitsDirectMaterial 50,0002002 The McGraw-Hill Companies,Solutions Manual

PROBLEM 4-27 (CONTINUED)3.Costs per equivalent unit:Work in process, 1/1/x1.Costs incurred during 20x1.Total costs to account for.Equivalent units.Costs per equivalent unit.aConversion costbConversion costDirectMaterialConversionTotala 200,000 504,000 704,0001,300,000 3,192,000b 4,492,000 1,500,000 3,696,000 5,196,0001,200,0001,050,000c 1.25 3.52d 4.77e direct labor overheaddirect labor (60% direct labor)160% direct labor160% 315,000 504,000 160% direct labor160% 1,995,000 3,192,000c 1.25 1,500,000 1,200,000d 3.52 3,696,000 1,050,000e 4.77 1.25 3.52McGraw-Hill/IrwinInc.Managerial Accounting, 5/e 2002 The McGraw-Hill Companies,4- 17

PROBLEM 4-27 (CONTINUED)4.Cost of ending inventories:Cost of goods completed and transferred out: numberofunits toalcostper t ransfer dout equivalentunit 900,000 4.77 4,293,000300,000 1.25 375,000.Cost remaining in 12/31/x1 work-in-process inventory:Direct material: numberof costper equivalent equivalent unitsof unitof directmaterial directmaterial McGraw-Hill/IrwinInc.4-18. 2002 The McGraw-Hill Companies,Solutions Manual

Conversion: numberof costper equivalent equivalent unitsof unitof conversion conversion 150,000 3.52528,000Total cost of 12/31/x1 work in process. 903,000Check: Cost of goods completed and transferred o