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Fundamental Accounting Principles, 21st Edition
1204
Comprehensive Problem (Continued)
(Using FIFO)
Cost per EUP
Direct
Materials
Direct Labor
Factory
Overhead
Costs incurred this period ..................
$ 52,440
$ 202,250
$ 101,125
÷ EUP ....................................................
÷ 14,000
÷ 10,450
÷ 10,450
Cost per EUP (rounded) ......................
$3.75 per
EUP
$19.35 per
EUP
$ 9.68 per
EUP
Cost assignment and reconciliation
Costs transferred out
Cost of beginning goods in process ................................
$ 8,135
Cost to complete beginning goods in process
Direct materials (0 EUP x $3.75 per EUP) ............................
$ 0
Direct labor (1,250 EUP x $19.35 per EUP) ..........................
24,188
Factory overhead (1,250 EUP x $9.68 per EUP) ..................
12,100
36,288
Costs of units started and completed this period
Direct materials (6,000 EUP x $3.75 per EUP) .....................
22,500
Direct labor (6,000 EUP x $19.35 per EUP) ..........................
116,100
Factory overhead (6,000 EUP x $9.68 per EUP) ..................
58,080
196,680
Total cost of goods finished this period ................................
241,103
Costs of ending goods in process
Direct materials (8,000 EUP x $3.75 per EUP) .....................
30,000
Direct labor (3,200 EUP x $19.35 per EUP) ..........................
61,920
Factory overhead (3,200 EUP x $9.68 per EUP) ..................
30,976
122,896
Total costs accounted for ........................................................
$363,999*
*Equals $363,950 costs to account for with $49 rounding difference
Part 3 — Journal entries (Using FIFO)
g.
Finished Goods Inventory ...................................................
241,103
Goods in Process Inventory ................................
241,103
Transferred goods to Finished Goods.
h.
Cash .......................................................................................
625,000
Sales ................................................................................
625,000
Sold finished goods for cash.
Cost of Goods Sold .............................................................
265,700
Finished Goods Inventory ..............................................
265,700
Transferred costs to COGS.
Comprehensive Problem (Continued)
Part 4 (Using FIFO)
General ledger accounts
Raw Materials Inventory
Acct. No. 132
Date
Explanation
Debit
Credit
Balance
June
30
Balance
25,000
(a)
Purchases
125,000
150,000
(b)
Usage
62,440
87,560
Goods in Process Inventory
Acct. No. 133
Date
Explanation
Debit
Credit
Balance
June
30
Balance
8,135
(b)
Direct materials
52,440
60,575
(d)
Direct labor
202,250
262,825
(f)
Overhead allocation
101,125
363,950
(g)
Transfer to Fin. Goods
241,103
122,847*
*Agrees with $122,896 from process cost summary with $49 rounding difference
Finished Goods Inventory
Acct. No. 135
Date
Explanation
Debit
Credit
Balance
June
30
Balance
110,000
(g)
Transfer in from prod.
241,103
351,103
(h)
July sales
265,700
85,403
Fundamental Accounting Principles, 21st Edition
1206
Comprehensive Problem (Concluded)
Part 4—concluded
Sales
Acct. No. 413
Date
Explanation
Debit
Credit
Balance
(h)
July sales
625,000
625,000
Cost of Goods Sold
Acct. No. 502
Date
Explanation
Debit
Credit
Balance
(h)
July sales
265,700
265,700
Factory Payroll
Acct. No. 530
Date
Explanation
Debit
Credit
Balance
(c)
July costs
227,250
227,250
(d)
Allocation
227,250
0
Factory Overhead
Acct. No. 540
Date
Explanation
Debit
Credit
Balance
(b)
Indirect materials
10,000
10,000
(d)
Indirect labor
25,000
35,000
(e)
Other overhead costs
80,000
115,000
(f)
Overhead application
101,125
13,875
Part 5 (Using weighted-average)
Computation of gross profit for July
Sales ....................................................................................................
$ 625,000
Cost of goods sold* ...........................................................................
(279,575)
Gross profit ........................................................................................
$ 345,425
* $279,575 = $265,700 + $13,875 (underapplied overhead)
Reporting in Action — BTN 20-1
1. These costs are part of getting the products that Polaris sells to its
customers, costs to fulfill warranties to its customers, and
2. These costs would either be expensed as cost of sales or as selling
and administrative expenses. Thus, net income will not be affected.
Comparative Analysis — BTN 20-2
1.
Polaris
Arctic Cat
($ thousands)
Current Year
Prior Year
Current Year
Prior Year
Expenses
Cost of goods sold ......
$1,916,366
$1,460,926
$363,142
$367,492
Operating expenses ....
414,751
326,348
83,374
81,900
Total expenses .............
$2,331,117
$1,787,274
$446,516
$449,392
COGS .
Total expenses
$1,916,366
$2,331,117
= 82.2%
$1,460,926
$1,787,274
= 81.7%
$363,142
$446,516
= 81.3%
$367,492
$449,392
= 81.8%
2. Polaris and Arctic Cat have similar ratios for both years. Polaris has a
higher ratio in the current year and Arctic Cat has a higher ratio in the
Ethics Challenge — BTN 20-3
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Instructor note: The student’s solution will vary depending on the industry, product, and process
chosen. It will also depend on the sources obtained.
The memorandum should initially identify an industry (say, steel), a
product (say, cans), and a process (say, forming).
Generally, there are at least three approaches to maintaining and
expanding one’s knowledge about a particular industry, product, and
process—students are likely to have additional insights.
Communicating in Practice — BTN 20-4
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
The main focus of this memorandum should be to explain the difference
between determining direct and indirect costs in a job order versus a
process cost accounting system since this appears to be the primary
source of confusion. In addition to the memorandum’s content, the
instructor should look for a student’s ability to be diplomatic in the
communication.
Points the memorandum should make include:
1. The reason for the assistant’s confusion. Given the assistant’s
2. Since your company does not limit production to specific batches of
3. It is important to recognize that the cost object is the process, not the
job. If costs are traceable to the cost object, they are direct costs.
4. In job order cost accounting, materials and labor used exclusively on
specific jobs are charged to the jobs as direct costs. Materials and
5. A process cost accounting system uses the concepts of direct and
6. Some costs classified as manufacturing overhead in a job order system
can be classified as direct costs in process cost accounting. For
Fundamental Accounting Principles, 21st Edition
1210
Taking It to the Net — BTN 20-5
There are several ways that such software is helpful to a business.
• This software allows companies to create process maps so they can
analyze and communicate processes and workflows.
• It provides a calculation of cost per process and activity.
Teamwork in Action — BTN 20-6
Each member of the team should participate in the activity to improve and
reinforce his/her understanding of the entries that correspond to Exhibit
20.4. (Note: The entries below are pro forma entries since information for
amounts are not provided in this activity.)
1.
Raw Materials Inventory ................................
#
Accounts Payable ....................................................
#
Purchased materials on credit.
2.
Goods in Process Inventory ................................
#
Raw Materials Inventory ................................
#
To assign costs of direct materials
used in production departments.
3.
Factory Overhead ...........................................................
#
Raw Materials Inventory ................................
#
To record indirect materials used.
Teamwork in Action (concluded)
4.
Factory Payroll ..............................................................
#
Cash ................................................................
#
To record factory wages incurred.
5.
Goods in Process Inventory ................................
#
Factory Payroll .........................................................
#
To assign costs of direct labor used
in production.
6.
Factory Overhead ...........................................................
#
Factory Payroll .........................................................
#
To record indirect labor as overhead.
7.
Factory Overhead ..........................................................
#
Prepaid Insurance ...................................................
#
Accrued Utilities Payable ................................
#
Cash ................................................................
#
Accum. Depreciation—Factory Equip ....................
#
To record manufacturing overhead incurred.
8.
Goods in Process Inventory ................................
#
Factory Overhead .....................................................
#
Allocated factory overhead costs
to production.
9.
Finished Goods Inventory ................................
#
Goods in Process Inventory ................................
#
To record the transfer of completed
goods from production to finished
goods inventory.
10.
Accounts Receivable .....................................................
#
Sales ................................................................
#
To record sale.
Cost of Goods Sold ........................................................
#
Finished Goods Inventory ................................
#
To record cost of goods sold.
Fundamental Accounting Principles, 21st Edition
1212
Entrepreneurial Decision — BTN 20-7
1. Neal’s new manufacturing facility enables him to make his own mix for
less than $7 per gallon. Overall, his cost per equivalent unit will be
2. If a business unnecessarily holds materials, it will be less profitable
than a company that maintains appropriate raw materials inventory
levels. First, the inventory requires costs for storage space. Second,
when inventory is perishable, additional costs must be incurred to
3. A hybrid system combines features of both process and job order
operations. Three Twins Ice Cream resembles a process operation in
that each flavor of ice cream goes through the same processing steps.
Hitting The Road — BTN 20-8
Instructor note: This assignment is designed to help students identify
specific costs in a service process costing system. The answers are likely
to be unique for each student. Below are a few suggestions. This problem
is also a review of cost classifications.
Cost
Description
Direct
Material
Direct
Labor
Overhead
Variable
Cost
Fixed
Cost
Manual
sorting
X
X
Heating and
cooling
X
X
Manually
moving mail
– within
department
X
X
If hired on
a temp.
basis
X
Full time
labor under
contract.
Manually
moving mail
– between
departments
X
X
If hired on
a temp.
basis
X
Full time
labor under
contract
Sorting
equipment
X
X
Rentals
X
X
Overhead allocation suggestions:
Not all components should be allocated the same. Some examples:
Heating cost can be allocated on square footage.
Rent cost on the value of floor space occupied.
Fundamental Accounting Principles, 21st Edition
1214
Global Decision — BTN 20-9
1. Ratio of Cost of Goods Sold to Total Expenses
(€ millions)
Current Year
Prior Year
Piaggio ..........................
€1,061.9 / €1,411=
75.3%
€1,023.1 / €1,374.3=
74.4%
(From BTN 20-2)
($ thousands)
Current Year
Prior Year
Polaris ...........................
$1,916,366/
$2,331,117
= 82.2%
$1,460,926/
$1,787,274
= 81.7%
($ thousands)
Current Year
Prior Year
Arctic Cat ......................
$363,142/
$446,516
= 81.3%
$367,492/
$449,392
= 81.8%
2. As a percentage of total expenses, Piaggio spends more on selling and
