Chapter 6 – Process Costing
6-40
Problem 6-50 (continued –2)
Ted is apparently correct about the under-costing of ending working
process. The activity-based method, which separates the batch-related
costs from the other conversion costs, shows $104,329 ending work in
Chapter 6 – Process Costing
6-41
6-51 FIFO Method with Rising Prices (30 min)
1.,2.
Physical Percent
Units Completion Materials Conversion Materials Conversion
Beginning WIP 14,000 100%
Materials 100% 14,000
Conversion 25% 3,500
Units started or Trans-in 33,000 100%
Total to account for 47,000
Units Finished or Trans-out 34,000 100% 34,000 34,000 34,000 34,000
Normal spoilage 1,000 100% 1,000 1,000 1,000 1,000
Abnormal spoilage – 100% – –
Ending WIP 12,000 100%
Materials – 100% 12,000 12,000
Conversion –
40% 4,800 4,800
Total accounted for 47,000 – – – –
Total Equivalent Units 47,000 39,800 33,000 36,300
COST ADDED
Materials Conversion Total
Beginning WIP 3,500$ 3,400$ 6,900$
Current Costs 66,000 104,000 170,000
TOTAL 69,500$ 107,400$ 176,900$
WTAVG Cost per EU 1.4787$ 2.6985$ 4.1772$
FIFO Cost per EU 2.0000$ 2.8650$ 4.8650$
Cost Accounted For: Weighted Average Completed Ending Work
& Trans-out in Process Total
Finished Goods 34,000 units 142,025$ 142,025$
plus Normal Spoilage 1,000 units 4,177 4,177
Total 146,203
Ending Work-in-process 12,000 units
Materials 12,000 units 17,745 17,745
Conversion 4,800 units – 12,953 12,953
Total Costs Accounted For 146,203$ 30,697$ 176,900$
Cost Accounted For: FIFO
Finished Goods 34,000 units
Normal Spoilage 1,000 units 4,865$
Prior period costs in Beginning WIP 6,900
Current cost to complete Beginning WIP
Materials –
Equiv units
–
Conversion 10,500
Equiv units
30,083
Units started & finished 20,000
Equiv units
97,300
TOTAL 139,148$
Ending WIP 12,000 units
Materials 24,000 24,000
Conversion – 13,752 13,752
Total Costs Accounted For 139,148$ 37,752$ 176,900$
—–This Dept—–
Weighted Average
Equivalent Units
FIFO
Equivalent Units
Chapter 6 – Process Costing
6-42
6-51 (continued –1)
3. The CFO is on the right track to consider FIFO costing. With prices
rising rapidly, FIFO provides a way to separate the current and prior
period costs, so that the price increases can be examined and
charged properly to each period’s production. Note that in this case
there is a sizeable amount of beginning and ending work-in-process
inventory, which makes the issue of separating prior period and
For a company like HSC that competes on quality and brand loyalty,
it is likely that the company will be able to pass along at least a good
portion of these increased costs. The FIFO method provides HSC a
good tool to watch the cost changes as they affect the company’s
inventory and cost of goods sold from month to month, and in this
way provide a solid basis for determining the price increases that will
ultimately be necessary.
Chapter 6 – Process Costing
6-43
6-52 Weighted Average Method; Two Departments
1. Production Cost report for the mixing department
Physical Percentage
Units Completion Materials Conversion
Beginning WIP 28,000
Materials 100%
Conversion 60%
Units started 74,000
Total to account for 102,000
Units Finished 76,000 76,000 76,000
Ending WIP 26,000
Materials 100% 26,000
Conversion –
60% 15,600
Total accounted for 102,000 – –
Total Equivalent Units 102,000 91,600
Cost Added Materials Conversion Total
Beginning WIP 56,480$ 282,400$ 338,880$
Current Costs 288,500 989,400 1,277,900
TOTAL 344,980$ 1,271,800$ 1,616,780$
WTAVG Cost per EU 3.3822$ 13.8843$ 17.2664$
Units in Ending
Cost Assigned – Weighted Average
WIP
Out Inventory Total
Finished Goods
76,000 gallons 1,312,249$ $1,312,249
Ending WIP
26,000 gallons
Materials 87,936 $87,936
Weighted Average
Equivalent Units
Chapter 6 – Process Costing
6-52 (continued –1)
2. Process cost report for reacting department
Physical Percent Transferred
Units
Completion
in Costs Materials Conversion
Beginning WIP 16,500 100%
Materials 0%
Conversion 30%
Units started or Trans-in 76,000 100%
Total to account for 92,500
Units Finished or Trans-out 72,000 100% 72,000 72,000
Normal spoilage 2,250 2,250 2,250
Ending WIP 18,250 100% 18,250
Materials – 0% –
Conversion –
40% 7,300
Total accounted for 92,500 – – –
Total Equivalent Units 92,500 81,550
Cost Added
Trans-in Materials Conversion Total
Beginning WIP 242,150$ –$ 412,510$ 654,660$
Current Costs 1,312,249 – 1,245,320 2,557,569
TOTAL 1,554,399$ –$ 1,657,830$ 3,212,229$
WTAVG Cost per EU 16.8043 0.0000 20.3290 37.1333
Cost Assigned – Weighted Average Completed Ending Work
& Trans-out in Process Total
Finished Goods
72,000 units 2,673,599$
Normal spoilage 2,250 units 83,550 2,757,149
Ending Work-in–process
18,250 units
Trans-in 18,250 units 306,679 306,679
Materials – units – –
Conversion 7,300 units – 148,402 148,402
Total Costs Accounted For 2,757,149$ 455,080$ 3,212,229$
——–This Dept––—
6-45
6-52 (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,
delays or interruptions in processing, etc. The additional
in materials cost over time
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 customer.
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
Chapter 6 – Process Costing
6-46
6-53 Backflush Costing
(1) Materials purchased.
Materials Inventory 690,000
Accounts Payable, Cash 690,000
(2) Conversion cost incurred.
Conversion Cost Incurred 1,300,000
(4a) Close the two conversion cost accounts to Cost of Goods Sold:
Conversion Cost Applied 1,317,500
Cost of Goods Sold 17,500
Conversion Cost Incurred 1,300,000
(4b) Close the actual usage of inventory to Cost of Goods Sold
1. 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.
Chapter 6 – Process Costing
6-47
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