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Chapter 06 - Process Costing
6-52 Implementing Process Cost Systems; Activity-based Costing;
Standard Costing (25 min)
Case 1: Because of the moderate volatility in materials prices and because
of the relatively large percentage of costs in ending work-in-process, the
FIFO method should be chosen over the weighted-average method in this
case. The batch sizes fit in a relatively narrow range (100-250 batch size
Case 2: This is the simplest case, with stable prices, low ending inventory
and average batch size. A normal cost, traditional, weighted-average
method is likely to work fine. Because prices do not fluctuate, there is little
need for department-level standards and analysis to identify cost variances,
and since there is little ending inventory, there is little need for FIFO
Case 3: this case involves highly volatile materials prices and materials are
a significant percentage of product cost, so that a standard cost and a FIFO
method would be appropriate. The fact that ending work-in-process is a
relatively significant cost supports this conclusion; using FIFO would mean
Case 4: Prices are stable so that standard costing and FIFO are probably
not needed. Also, ending work-in-process inventory is relatively low, so
that FIFO is probably not needed to more accurately determine the
assignment of costs to ending work-in-process and finished goods.
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Chapter 06 - Process Costing
6-52 (continued -1)
Case 5: The range of batch sizes is relatively narrow, so there is no
apparent need for ABC costing. However, with the relatively large
percentage of materials cost in product, and because of the moderate
volatility in materials prices, a standard costing system should be
considered. Also, because of the materials price volatility and the
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Education.
Chapter 06 - Process Costing
6-53 Weighted Average Method; Two Departments
1. Production Cost report for the mixing department
6-50
Chapter 06 - Process Costing
6-53 (continued -1)
2. Process cost report for reacting department
6-51
Chapter 06 - Process Costing
6-53 (continued -2)
3. Some observations about the two cost reports:
The amount of normal spoilage is relatively small at less than
3%. Why, however, does the firm not consider accounting for
abnormal spoilage to take into account the cost of spoilage
arising from for example: operating error, impure materials,
4. The company’s strategy is best described as a differentiation strategy
based upon its focus on research, product development and
customer service. Note in particular that the company has focused
on a small number of customer that purchase in large quantities. So
a part of the company’s strategy is to achieve strong profits through
lower downstream costs, as noted in the previous chapter in the
The company uses a combination of job and process costing. Job
costing is a good fit for the company’s strategy of focusing on large
purchases; the job costs are efficiently and conveniently allocated to
these large purchase orders. Also, the use of process costing
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Education.
Chapter 06 - Process Costing
6-54 Backflush Costing
1.
(1) Materials purchased.
Materials Inventory 710,000
Accounts Payable, Cash 710,000
(2) Conversion cost incurred.
Conversion Cost Incurred 1,450,000
Wages payable, other accounts 1,450,000
($8.50x155,000)
(4a) Close the two conversion cost accounts to Cost of Goods Sold:
Conversion Cost Applied 1,317,500
Cost of Goods Sold 132,500
Conversion Cost Incurred 1,450,000
(4b) Close the actual usage of inventory to Cost of Goods Sold
Actual usage = $142,000+$710,000 - $185,000 = $667,000
Note to Instructor: the above treatment of the differences between actual
and applied materials and conversion is simplified for this brief section on
backflush costing, and assumes that the topic is covered prior to standard
costing. If covered after standard costing, the treatment of the materials
and conversion variances can be enhanced.
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Education.
Chapter 06 - Process Costing
2. Backflush costing is used when the level of work-in-process inventory
is very small. This can be the case for firms that use just-in-time
manufacturing (JIT), so that purchases are carefully coordinated with
6-54
Education.
