# Chapter 3: Exercises

### Short Answer Questions, Exercises, and Problems

➢ Define process costing and describe the types of companies that use process costing.
➢ How does a process cost system differ from a job costing system?
➢ Would a lumber mill use process or job costing?➢ What is meant by the term equivalent units? Of what use is the computation of the numbers of equivalent units of production?
➢ Distinguish between the number of units completed and transferred during a period and the equivalent units for the same period.➢ Under what circumstances would the number of equivalent units of materials differ from the number of equivalent units of labor and overhead in the same department in the same period? Under what circumstances would they be the same?➢ When transferring goods from one department to another, which accounts require journal entries?➢ Units are usually assumed to be at the same stage of completion for both labor and overhead. What is the reason for this assumption?➢ What is the basic information conveyed by a production cost report?➢ What are the four steps in preparing a production cost report?

➢ What is meant by average cost procedure? What other two cost flow assumptions could be used?

➢ Would an automobile plant that makes specialty race cars use job costing or process costing? Would an automobile plant that makes all terrain vehicles use job costing or process costing? Explain your answer.

➢ Show the differences between computing equivalent units of production using the average cost method and FIFO cost method (Appendix 19A).

Real world question Does The Coca-Cola Company use a process cost system or a job costing system in its bottling plants? Why?

Real world question Name five companies that probably use process costing.

Exercises

Exercise A Using the average cost method, compute the equivalent units of production in each of the following cases:

1. Units started in production during the month, 72,000; units completed and transferred, 52,800; and units in process at the end of the month (100% complete as to materials; 60% complete as to conversion), 19,200. (There was no beginning inventory.)
2. Units in process at the beginning of the month (100% complete as to materials; 30% complete as to conversion), 12,000; units started during the month, 48,000; and units in process at the end of the month (100% complete as to materials; 40% complete as to conversion), 24,000.

Exercise B In Department C, materials are added at the beginning of the process. There were 1,000 units in beginning inventory, 10,000 units were started during the month, and 7,000 units were completed and transferred to finished goods inventory. The ending inventory in Department C in June was 40% complete as to conversion costs. Under the average cost method, what are the equivalent units of production for materials and conversion?

Exercise C In Department D, materials are added uniformly throughout processing. The beginning inventory was considered 80% complete, as was the ending inventory. Assume that there were 6,000 units in the beginning inventory and 20,000 in the ending inventory, and that 80,000 units were completed and transferred out of Department D. What are the equivalent units for the period using the average cost method?

Exercise D If in the previous exercise the total costs charged to the department amounted to $960,000, including the$48,000 cost of the beginning inventory, what is the cost of the units completed and transferred out?

Exercise E The following data relate to Work in Process—Department C, in which all materials are added at the start of processing:

 Work in process – Department C: Inventory, March 1: Materials cost (1,200 pounds; 100% complete) $7,020 Conversion cost (20% complete) 1,804 Costs incurred this period: Direct materials used (9,000 pounds)$36,330 Direct labor 10,880 Overhead 17,820 Inventory, March 31 Materials cost (1,800 pounds, 100% complete) ? Conversion cost (1,800 pounds, 80% complete) ? Pounds of product transferred out: 8,400
Using these data, compute:

1. The unit cost per equivalent unit for materials and conversion (use the average cost method).
2. The cost of the product transferred out.

Problems

Problem A The following data refer to a production center of Sipp-Fizz, a soft drink bottler:

 Work in process inventory, August 1, 4,000 units (units equal 12-bottle cases): Direct materials $12,000 Direct labor 6,120 Manufacturing overhead applied 8,000$26,120 Units started in August 12,000 Costs incurred in August: Direct materials $36,000 Direct labor 48,000 Manufacturing overhead applied 60,000 The beginning inventory was 100% complete for materials and 50% complete for conversion costs. The ending inventory on August 31 consisted of 6,000 units (100% complete for materials, 70% complete for conversion costs). Compute the following: 1. Number of units completed and transferred to finished goods inventory. 2. The equivalent units of production for materials and conversion costs using the average cost method. 3. Cost per equivalent unit for materials and conversion costs. 4. Cost of units completed and transferred. 5. Cost of ending inventory. Problem B The following information relates to Aromatic Company for its line of perfume products for the month ended March 31:  Units in beginning inventory (units equal cases of product) 2,700 Cost of units in beginning inventory: Materials$40,500 Conversion $18,900 Units placed in production 54,000 Cost incurred during current period: Materials$239,598 Conversion $215,310 Units remaining in ending inventory (100% complete as to materials, 60% complete as to conversion) 3,000 Prepare a production cost report for the month ended March 31, using the average cost method. Problem C Shine Company uses a process cost system to account for the costs incurred in making its single product, a hair conditioner. This product is processed in Department A and then in Department B. Materials are added in both departments. Production for May was as follows:  Department A Department B Units started or transferred in 200,000 160,000 Units completed and transferred out 160,000 120,000 Stage of completion of May 31 inventory: Materials 100% 80% Conversion 50% 40% Costs incurred this month: Direct materials costs$200,000 $304,000 Conversion costs$540,000 $272,000 There was no May 1 inventory in either department. 1. Prepare a production cost report for Department A in May (determine total product cost for ending wip & units transferred out). 2. Prepare a production cost report for Department B in May (determine total product cost for ending wip & units transferred out). Problem D A bottling company bottles soft drinks using a process cost system. Following are cost and production data for the mixing department for June:  Units Materials costs Conversion costs Inventory, June 1 56,000$11,620 $16,240 Placed in production in June 133,000 29,960 41,720 Inventory, June 30 63,000 ? ? The June 30 inventory was 100% complete as to materials and 30% complete as to conversion. Prepare a production cost report for the month ended June 30 using the average cost method. Problem E Refer to the facts given in the previous problem. Assume the beginning inventory on June 1 was 100% complete as to materials and 25% complete as to conversion. 1. Prepare a production cost report for the month ended June 30, using FIFO. Round unit costs to the nearest cent. 2. Why are ending inventory amounts different than those for the previous problem? Alternate problems Alternate problem A Pure Aqua Company is a producer of flavored mineral water. These data are for its March production:  Work in process inventory, March 1, 3,000 (units equal cases): Direct materials$12,600 Direct labor 6,000 Manufacturing overhead (1,500 machine-hours at $6 per machine-hours) 9,000$27,600 Units started in March 9,000 Costs incurred in March: Direct materials $36,360 Direct labor 55,200 Manufacturing overhead applied (13,800 machine-hours) ? The ending inventory consisted of 4,500 units (100% complete as to materials, 60% complete as to conversion). Compute the following: 1. Number of units completed and transferred to finished goods inventory. 2. The equivalent units of production for materials and conversion costs using the average cost method. 3. Cost per equivalent unit for materials and conversion costs. 4. Cost of units completed and transferred. 5. Cost of ending inventory. Alternate problem B The following data pertain to a production center of Sunbelt Company, a maker of sunscreen products:  Units Materials costs Conversion costs Inventory, October 1 70,000$12,000 $16,000 Placed in production in October 200,000 20,400 18,200 Inventory, October 31 100,000 ? ? The October 31 inventory was 100% complete as to materials and 20% complete as to conversion costs. Prepare a production cost report for the month ended October 31, using the average cost method. Alternate problem C Healthbar Company produces a health food and determines product costs using a process cost system. The product is moved through two departments, mixing and bottling. Production and cost data for the bottling department in August follow.  Work in process, August 1 (30,000 pints): Costs transferred in$30,000 Materials costs 15,000 Conversion costs 9,000 Costs incurred in August: Transferred in (100,000 pints) $100,000 Materials costs 50,000 Conversion costs 39,300 All materials are added at the beginning of the bottling process. Ending inventory consists of 25,000 pints, 100% complete as to materials and 40% complete as to conversion. Prepare a production cost report for August using the average cost method. Beyond the numbers—Critical thinking Business decision case A Bicycles Plus, Inc., produces bicycles. While the company has developed a per unit cost, it has not been able to break down its costs in each of its three departments: frames, assembling, and finishing. Karol Ring, the production manager, has been concerned with cost overruns during July in the frames department, which produces the bicycle frames. On July 1, the frames department had 6,000 units in its work in process inventory. These units were 100% complete as to materials and 40% complete as to conversion. The department had incurred$12,000 in materials costs and $90,000 in conversion costs in processing these 6,000 units. The department handled 30,000 units during the month, including the 6,000 units in beginning inventory on July 1. At the end of the month, the department's work in process included 3,600 units that were 100% complete as to materials and 30% complete as to conversion. The month's costs were allocated on the number of units processed during the month as follows:  Materials Conversion Costs$60,000 $300,216 Units handled during month 30,000 30,000 Cost per unit$ 2 $10 The$12 per unit cost was assigned in a way that resulted in the following costs:

 Beginning work in process Work started and completed Ending work in process Cost per unit incurred during the month: Units 6,000 20,400 3,600 Cost per unit $12$12 $12 Ring realized that this per unit cost is incorrect and asks you to develop a better method of computing these costs for the month ended July 31. 1. How would you recommend that July's costs be assigned to the units produced?How would this differ from the present method? 2. To justify your recommendation, recalculate July's costs using your recommendation. Present your analysis in a production cost report. Ethics case – Writing experience B Steve Yung works in the inventory control group at a company that produces stone-washed jeans. A good friend manages the Stitching Department at the same company. At the end of a recent month, Yung reviewed the Stitching Department's production cost report and found the department had no beginning Work in Process Inventory, had started 27,000 pairs of jeans, and had produced only 24,000 pairs. That leaves 3,000 pairs in ending inventory, Yung thought, that is a lot of jeans they did not finish. Later, Yung visited his friend who managed the Stitching Department. "Why all the ending inventory?" he asked. "One of the new workers set several machines wrong, and the stitching was bad on 2,400 pairs," the manager replied. "We set those aside, and we will fix them when we have some free time. The other 600 pairs are complete now, and have been transferred out. Our entire operation was slower because of the machine problem." "Company policy is to send all defective products to the Rework Department. They can fix the jeans. That is their job," Yung said. “No way!" exclaimed the Stitching Department manager. "We would all be in trouble if plant management finds out. The worker who messed up would probably be fired. I do not want that. This is our little problem, and we will take care of it." 1. What should Yung do? 2. Would your answer change if Yung learned that the Stitching Department had fixed the jeans and sent them on to the next department? Financial analysis C Suppose a bottling company made an error in estimating the stage of completion of its work in process inventory. Suppose the costs in beginning inventory and the costs transferred in were correct, but the company overstated the stage of completion for both materials and conversion costs in ending Work in Process Inventory causing ending Work in Process Inventory to be$100,000 too high. The beginning and ending Finished Goods Inventory amounts are correct. What effect would this error have on the company's last year's financial statements?

Group project D In groups of 3 or 4 students, write a paper on the topic, "How scientific is the allocation of joint costs to products?" Prepare the paper on a computer and prepare and edit several drafts before turning in the final paper. Use examples to demonstrate your points.

Group project E In teams of two or three students, interview the manager of a grocery store. What is the cost of spoilage in the vegetable and fruit section as a percentage of the total cost of goods sold? Does the manager differentiate between normal and abnormal spoilage? If so, provide some examples. Each team should write a memorandum to the instructor summarizing the results of the interview. Information contained in the memo should include:

Date:

To:

From:

Subject:

Content of the memo must include the name and title of the person interviewed, name of the company, and information responding to the questions above.

Group project F In teams of two or three students, interview the manager of a fast food restaurant such as McDonald's. What is the cost of spoilage as a percentage of the total cost of goods sold? Does the manager differentiate between normal and abnormal spoilage? If so, provide some examples. Each team should write a memorandum to the instructor summarizing the results of the interview. Information contained in the memo should include:

Date:

To:

From:

Subject:

Content of the memo must include the name and title of the person interviewed, name of the company, and information responding to the questions above.

Using the Internet—A view of the real world

Using the Internet as a research tool, describe the conversion activities (or processes) involved in producing oil or oil-related products. Your description should include examples of raw materials used as inputs, production activities required to convert inputs into products, and resulting outputs (finished goods). Write your report in the form of a memorandum. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter. Be sure to attach your research materials obtained from the Internet to the memorandum.

Using the Internet as a research tool, describe the conversion activities (or processes) involved in producing milk or milk-related products. Your description should include examples of raw materials used as inputs, production activities required to convert inputs into products, and resulting outputs (finished goods). Write your report in the form of a memorandum. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter. Be sure to attach your research materials obtained from the Internet to the memorandum.

Comprehensive review problem

The Compack Company assembles personal computers. Personal computers go through several departments where sub assemblies are unpacked and checked, the circuit board is attached, the product is tested and repaired if defective, and the computers are packed carefully for shipping. Each order is treated as a job, and the entire job is shipped at once. The company keeps track of costs by job and calculates the equivalent stage of completion for each job based on machine-hours.

Although the company has grown rapidly, it has yet to show a profit. You have been called in as a consultant. Management believes some jobs are profitable and others are not, but it is not clear which are profitable. The accounting system is almost nonexistent; however, you piece together the following information for April:

• Production:

1. Completed Job No. 101.
2. Started and completed Job No. 102.
3. Started Job No. 103.

• Inventory values:

1. Work in process inventory:

 March 31: Job No. 101 Direct materials $60,000 Direct labor 9,600 Overhead 14,400 April 30: Job No. 103 Direct materials$45,000 Direct labor 10,400 Overhead 15,600
1. Job No. 101 was exactly one-half finished in direct labor-hours and machine-hours at the beginning of April, and Job No. 103 was exactly one-half complete in direct labor-hours and machine-hours at the end of April. However, all of the direct materials necessary to do the entire job were charged to each job as soon as the job was started.
2. There were no direct materials inventories or finished goods inventories at either March 31 or April 30.

• Manufacturing overhead is applied at $30 per machine-hour. The company used 1,600 machine-hours during April, 480 machine-hours on Job 101 and 600 machine-hours on Job 102. The actual overhead for the month of April was$50,000.
• Cost of goods sold (before adjustment for over applied or under applied overhead):

 Job No. 101: Materials $60,000 Labor ? Overhead ? Total ? Job No. 102: Materials ? Labor ? Overhead ? Total ? • Overhead was applied to jobs using the predetermined rate of$30 per machine-hour. The same rate had been used since the company began operations. Over- or under applied overhead is debited or credited to Cost of Goods Sold.
• All direct materials were purchased on account. Direct materials purchased in April amounted to $150,000. • Direct labor costs charged to jobs in April were$32,000. All labor costs were the same rate per hour for April for all laborers.

1. Compute the cost of each job, whether in inventory or sold.
2. Show the transactions in journal entry form. Use a separate Work in Process Inventory account for each job.
3. Prepare an income statement for April assuming revenue was $250,000 and selling and administrative expenses were$60,000.
4. [1]For example, a survey of oil refineries indicated that seven of the nine companies did not allocate joint costs. See K. Slater and C. Wooton, A Study of Joint and By-Product Costing in the U.K. (Reprint, London: Chartered Institute of Management Accountants, 1988), p. 110.