978-0133058789 Chapter 14 Part 1

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CHAPTER 14
COVERAGE OF LEARNING OBJECTIVES CASES, FUNDA- CRITICAL NIKE 10K, MENTAL THINKING EXCEL, ASSIGN-EXERCISES COLLAB. & MENT AND INTERNET LEARNING OBJECTIVE MATERIAL EXERCISES PROBLEMS EXERCISES LO1: Distinguish between A1,B1 15,16,18,20, 52, 54, 55 job-order costing and 29 process costing. LO2: Prepare summary 21,22,24,25, 40, 41, 50, 51 journal entries for the 26,27 typical transactions of a job-costing system. LO3: Use an activity-based- 28 costing system in a job-order environment. LO4: Show how service 17,23 39, 42 organizations use job costing. LO5: Explain the basic ideas 30 55 underlying process costing and how they differ from job costing. LO6: Compute output in A2,B2 31,32,33,36 44,45,46,47 terms of equivalent units. LO7: Compute costs and A2,B2 32,33,34,35, 43,45,46,47 prepare journal entries for 37,38 the principal transactions in a process-costing system. LO8: Demonstrate how the A3,B3 49 53 presence of beginning inventories affects the computation of unit costs under the weighted-average method. LO9: Understand the 48 concept of transferred-in costs in a process-costing system with sequential processes. LO10: Use backflush costing A4,B4 19 with a JIT production system.
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
607 CHAPTER 14 Job-Costing and Process-Costing Systems
14-A1 (15-20 min.) Answers are in thousands. 1.
a.
Direct materials inventory

350

Cash

350

b.
Work in process inventory

210

Direct materials inventory

210

c.
Work in process inventory

150

Accrued payroll

150

d.
Factory department overhead control
240

Various accounts

240

(130 + 40 + 70 = 240)

e.
Work in process inventory

270

Factory department overhead

control

270

(180% × 150)

f.
Finished goods inventory

575

Work in process inventory

575

g.
Cost of goods sold

415

Finished goods inventory

415
2. Direct Materials Inventory _

Finished Goods Inventory ___
a.

350
b.

210
f.

575
g.

415
* Bal.
140

* Bal.
160

Work in Process Inventory
Cost of Goods Sold____

210
f.

575
g.

415
c.

150

270

Factory Department

Overhead Control
_

* Bal.
55

240
e.

270
* 12/31/X1 Balance
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
608 14-A2 (10-15 min.)
1.
(Step 2)

(Step 1) Equivalent Units

Physical
Direct Conversion
Flow of Production
Units
Materials

Started and completed
20,000
20,000
20,000
Work in process, ending inventory
3,000
Direct materials added: 3,000 × 1

3,000
Conversion costs added: 3,000 × (1/3)

1,000
Total accounted for
23,000

Total work done

23,000
21,000

Total
Direct Conversion

Costs Materials
Cost
Total costs to account for (Step 3):
$187,000
$73,600 $113,400
Divide by equivalent units (Step 4)
23,000
21,000
Unit costs
$ 8.60
$ 3.20
$ 5.40
2.
Totals
Details

Direct
Conversion
Application of costs (Step 5): Materials
Costs
To units completed and transferred to Testing, 20,000 units × $8.60
$172,000
To units not completed and still in process, Feb. 28, 3,000 units: Direct materials
$ 9,600
3,000 × $3.20

Conversion costs
5,400
1,000 × $5.40
Work in process, Feb. 28
$ 15,000
Total costs accounted for
$187,000

(Step 1)
Equivalent Units

Physical
Direct Conversion

Flow of Production
Units
Materials

Work in process, beg. inv.
10,000 (25%)*

Started
80,000

To account for
90,000

Completed and transferred out

during current period
70,000
70,000
70,000

Work in process, end. inv.
20,000 (50%)*
20,000
10,000

Units accounted for
90,000

Work done to date

90,000
80,000

_Details

Direct Conversion

Costs
Totals
Materials
Costs

Work in process, beg. inv.
$ 175,500
$138,000 $ 37,500

Costs added currently
1,486,500
852,000 634,500
(Step 3)
Total costs to account for
$1,662,000
$990,000 $672,000
(Step 4)
Divisor, equivalent units for

work done to date

÷ 90,000 ÷ 80,000

Cost per equivalent unit
$ 19.40
$ 11.00 $ 8.40
(Step 5)
Application of Costs

Completed and transferred

(70,000 units)
$1,358,000

Work in process, ending inv.

(20,000 units):

Direct materials
$ 220,000
20,000($11.00)

Conversion costs
84,000
10,000($8.40)

Total work in process
$ 304,000

Total costs accounted for
$1,662,000
*Degree of completion for conversion costs.
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
610 14-A4 (15-20 min.) 1.
Materials inventories
235,000

Accounts payable

235,000

Conversion costs
100,000

Accrued payroll

24,000

Miscellaneous accounts

76,000

Finished goods inventories (10,000 × $33)
330,000

Materials inventories (10,000 × $22)

220,000

Conversion costs (10,000 × $11)

110,000

Cost of goods sold (9,970 × $33)
329,010

Finished goods inventories

329,010
2.
Conversion costs
10,000

Cost of goods sold

10,000

To recognize actual conversion costs that were

$10,000 less than the amount applied to the

products.

Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
611 14-B1 (20-25 min.) Entries are in thousands of British pounds (£). 1.
a.
Direct materials inventory

Accounts payable

b.
Work in process inventory

Direct materials inventory

c.
Work in process inventory

200

Accrued payroll

200

d.
Factory department overhead control
156

Various accounts, such as cash or

accounts payable

156

e.
Work in process inventory

160

Factory department overhead control

160

f.
Finished goods inventory

417

Work in process inventory

417

g.
Cost of goods sold

532

Finished goods inventory

532

h.
Accounts receivable

742

Sales

742
2. Direct Materials Inventory

Finished Goods Inventory_

* Bal.
12
b.
52

* Bal.
130
g.
532
a.

417

** Bal.
34

** Bal.
15

Work in Process Inventory

Cost of Goods Sold

* Bal.
20
f.

417

532
b.
52

c.
200

e.
160

Factory Department

Overhead Control

** Bal.
15

156 e.
160
* 12/31/11 Balance ** 12/31/12 Balance
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
612 14-B2 (10-15 min.) 1.

(Step 2)

Equivalent Units

(Step 1)

Physical
Direct Conversion
Flow of Production

Units
Materials
Costs
Started and completed
287,000
287,000
287,000
Work in process, ending inv.
283,000
283,000
70,750*
Units accounted for
570,000

Units work done to date

570,000
357,750

Totals
Direct
Conversion

Materials
Costs
Total costs to account for (Step 3)
$3,825,000
$2,394,000
$1,431,000
Divide by equivalent units (Step 4)

570,000
357,750
Unit costs
$8.20
$4.20
$ 4.00
*283,000 × .25 2. Application of costs (Step 5):
Totals

Details

Direct
Conversion

Materials
Costs
To units completed and transferred to Finishing, 287,000 units × $8.20
$2,353,400
To units not completed and still in process, end, 283,000 units: Direct materials
$ 1,188,600
283,000 × $4.20
Conversion costs
283,000

70,750 × $4.00
Work in process, end
$ 1,471,600
Total costs accounted for
$3,825,000

(Step 1)
_ Equivalent Units___

Physical
Direct

Flow of Production
Units
Materials Conversion

Work in process, beg. inv.
900 (30%)*
Started
9,200
To account for
10,100

Completed and transferred

out during current period,
900 + 9,200 – 2,400
7,700
7,700
7,700

Work in process, end. inv.
2,400 (25%)*
2,400
600

Units accounted for
10,100

Work done to date

10,100
8,300

_Details
__

Direct Conversion
Costs
Totals
Materials
Costs
Work in process, beg. inv.
$ 4,600
$ 2,900 $ 1,700
Costs added currently
122,750
82,950 39,800
(Step 3) Total costs to account for
$127,350
$85,850 $41,500
(Step 4) Divisor, equivalent units For work done to date

÷ 10,100 ÷ 8,300
Cost per equivalent unit
$13.50
$8.50 $5.00
(Step 5)
Application of Costs
Completed, (7,700 units)
$103,950

Work in process, ending inventory (2,400 units): Direct materials (2,400)
$ 20,400
2,400($8.50)
Conversion costs (600)
3,000
600($5.00)
Total work in process
$ 23,400
Total costs accounted for
$127,350
*Degree of completion for conversion costs.
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
614 14-B4 (15 min.) 1.
Materials inventories
23,980

Accounts payable

23,980

Conversion costs
10,490

Accrued payroll and

miscellaneous accounts

10,490

Cost of goods sold (2,200 × $14.10)
31,020

Materials inventories (2,200 × $9.40)

20,680

Conversion costs (2,200 × $4.70)

10,340

2.
Cost of goods sold
150

Conversion costs

150

To recognize actual conversion costs that were

$150 more than the amount applied to the products.
14-1 Three purposes of product costing are to satisfy differing demands for (a) inventory valuation and income determination in accordance with generally accepted accounting principles, (b) income tax reporting, and (c) guiding strategic and operational decision-making. 14-2 The distinction between the job cost and the process cost methods centers largely around how product costing is accomplished. Unlike process costing, which deals with broad averages and great masses of like units, the essential feature of the job-cost method is the attempt to apply costs to specific jobs that may consist of either a single physical unit (a custom sofa) or a few like units (a dozen tables) in a distinct batch or job lot. 14-3 The basic record for the accumulation of job costs is the job-cost sheet or job-cost record. Exhibit 14-1 shows a Job-Cost Sheet, and it also shows the related source documents. A file of current job-cost sheets becomes the supporting details for the Work-in-Process Inventory account. 14-4 Source documents include materials requisitions and labor time tickets (time cards). 14-5 Examples of service industries that use the job-costing approach include repairing, consulting, legal, accounting, painting, dentistry, and income tax preparation. 14-6 No, the amount of value-chain activity not captured in either job-cost or process-cost systems is independent of the type of operating system used. 14-7 Examples of industries using process costing include flour, glass, paint, and beer.
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
615 14-8 Examples of process costing include handling of mail, income tax returns, automobile registrations, and driver’s license examinations. 14-9 Five key steps in process cost accounting are;
Step 1: Summarize the flow of physical units Step 2: Calculate output in terms of equivalent units Step 3: Summarize the total costs to account for, which are the total debits in
Work in Process (that is, the costs applied to Work in Process)
Step 4: Calculate unit costs (cost per equivalent unit) Step 5: Apply costs to units completed and to units in ending work in process
14-10 The first two steps concentrate on what is occurring in physical or engineering terms. The financial impact of the production process is measured in the final three steps. 14-11 (1 × 10,000) + (.5 × 5,000) = 12,500 full-time-equivalent students. 14-12 Beginning inventories + Units started = Units transferred out + Ending inventories. 14-13 Transferred-in costs are accounted for operationally the same as direct materials added at the beginning of a production process. They differ from direct material costs because they are a combination of direct material and conversion costs from a previous department; thus, calling them a direct-material cost is inappropriate. 14-14 When actual conversion costs exceed the amount applied, the excess in the conversion cost account is charged directly to cost of goods sold; the treatment is similar to accounting for underapplied overhead. 14-15 In addition to inventory valuation and income determination, managers want accurate job costs as guides to pricing and to allocating effort among particular products, services, or customers. They are also necessary in contracts that reimburse the cost of a product or service. 14-16 The most important point is that product costing is an averaging process. The unit cost used for inventory purposes is the result of taking some accumulated cost and dividing it by some measure of production. The basic distinction between job order costing and process costing is the breadth of the denominator: in job order costing, it is small (for example, one painting, 100 advertising circulars, or one special packaging machine); but in process costing, it is large (for example, thousands of pounds, gallons, or board feet). 14-17 No. Some service firms trace only direct-labor costs to individual jobs. However, with advances in computer technology and needs for better job-cost information because of competition, more service firms are tracing additional costs to jobs. The more costs that are traced to jobs instead of being allocated, the more accurate are the job costs.
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
616 14-18 The central product costing problem in process costing is how each department should compute the cost of goods transferred out and the cost of goods remaining in the department. 14-19 No, but they are especially appropriate for companies with just-in-time systems. Any company with small inventories might find backflush costing appealing. 14-20 (5 min.)
a. and d. are service-sector companies

b. is merchandising

c. is manufacturing
14-21 (10-15 min.) You may wish to use T-accounts. Amounts are in millions of dollars. You can also use the expression: ending balance (of any account) equals the beginning balance plus additions less subtractions or EB = BB + A – S. In this case
“Purchased” is “additions” and “Used” is “subtractions.” 1.
7 + 10 – 10 = 7 (BB + A – S = EB)
2.
15 + 7 – 13 = 9 (BB + A – EB = S)
3.
6 + Purchases – 10 = 11. Purchases = 15
4.
Beginning inventory + 7 – 6 = 4. Beginning inventory = 3
14-22 (10-15 min.) Amounts are in thousands of dollars. 1.
Finished goods inventory
75

Work in process inventory

Finished goods = 35 + 40 = 75
2.
Debits: 9 + 47 + 30 + 27 =
113

Credits: 35 + 40 =
75

Balance, April 30
38
3.
Accounts receivable
49

Sales

Sale of Job A13

Cost of goods sold
35

Finished goods inventory

Cost of Job A13 sold

Medical School

Unit

Reference
Date
Quantity Cost
Amount
Summary
Direct Materials:
Var. medical supplies
Sept. 5
$ 675

Various chemicals
Sept. 7
1,525
$ 2,200
Direct Labor:
Research associates
Sept. 5-12 125 hrs. × $42 $5,250

Research assistants
Sept. 7-12 205 hrs. × $18
3,690
8,940
Project overhead applied
Sept. 12
$8,940 × .60
$5,364
5,364
Total costs
$16,504
14-24 (10 min.) 1.
$8,400 + $4,800 = $13,200
2.
$9,200 + $8,600 = $17,800
3.
$6,700

Construction
Finished
Cost of
Construction
Finished
Cost of

in Process
Houses,
Houses
in Process
Houses,
Houses
Job Sept. 30
Sept. 30
Sold Sept.
Oct. 31
Oct. 31
Sold Oct.
43

180
51

170
52
150

150
53 200

2501
61 115

1352
62 180

2053
71 118

1544
81 106
___
___
1545
___
___

719
150
350
308
135
605
1200 + 50 2115 + 20 3180 + 25 4118 + 36 5106 + 48 2.

Sept.
Oct

Finished houses inventory
500

590

Construction in process

500

590

Sept.: 180 + 170 + 150 = 500

Oct.: 250 + 135 + 205 = 590
3.
Cash
345

Sales

345

To record sale of Job 53

Cost of houses sold
250

Finished houses inventory

250

To record cost of Job 53 sold

Step-by-step entries are keyed alphabetically. The sequence depends on where
the student prefers to start. You may wish to raise the question of whether the overapplied overhead should be prorated among the affected accounts at the end of the year.
__ Direct Materials

Work in Process
Bal.
158 (a)
328
Bal.
70 (e) Completed 970

(b) 225
(a) Dir. Materials 328

Bal.
55

(d) Applied overhead 960

Bal.

988

Finished Goods

Cost of Goods Sold

Bal.
100 (f)
975
(f)
975

(e) 970

Bal.
95

Step-by-step entries are keyed alphabetically. The sequence depends on where
the student prefers to start. You may wish to raise the question of whether the underapplied overhead should be prorated among the affected accounts at the end of the year. Note the heavy ending Finished Goods.
Direct Materials

Work in Process

Bal.* 17 (a)
242
Bal.*

116 (e) Completed 630
(b)
299

(a) Dir. Materials
242

(d) Applied overhead 174

Bal.

Finished Goods

Cost of Goods Sold

Bal.* 142 (f)
592
(f)
592

(e)
630

Bal.
180

* Let BB = beginning balance Direct materials: BB + 299 – 242 = 74
BB = 17
Work in process: BB + 242 + 116 + 174 – 630 = 18
BB = 116
Finished goods: BB + 630 – 592 = 180
BB = 142
14-28 (5-10 min.)
Case A, $3,600,000 ÷ $2,000,000 = 180% of direct-labor cost

Case B, $5 × 450,000 = $2,250,000

Case C, $1,500,000 ÷ 250,000 = $6 per machine hour
14-29 (5 min.) Coca-Cola and Nally and Gibson are manufacturing companies. U. S. Post Office and State Farm are service companies.
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
621 14-30 (5 min.)
(1)
The debit to (increase in) the work in process account when transferring a subcomponent from Process A to the assembly process is a transferred-in cost.
(2)
The direct materials used in process A and assembly are variable-cost resources.
(3)
Direct labor costs in process A and assembly are directly traced fixed-cost resources.
(4)
An example of an indirect resource cost is the indirect material and indirect labor used for process A and the assembly process.
14-31 (5 min.)
The direct material is the limestone rock that is delivered to the plant. Because
crushing and screening the rock can begin immediately, we assume that direct material is always 100% completed. Thus, the equivalent units of direct material is the entire 400 tons.
The 320 tons of rock that have been stocked are 100% complete with respect to
both direct labor and overhead.
The 80 tons of rock that are in process at the end of March are 40% complete.
This is 32 equivalent tons (80 tons × .40). Thus, the total work done during March is 400 tons of direct material and 352 (that is, 320 + 32) equivalent tons of direct labor and overhead.
Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.
622 14-32 (10-15 min.) 1.

(Step 2)

(Step 1)
Equivalent Units

Physical
Direct
Conversion
Flow of Production
Units
Materials

Started and completed
675,000
675,000
675,000
Work in process, ending inv.
249,000
249,000
87,150*
Units accounted for
924,000

Work done to date

924,000
762,150

Totals
Direct
Conversion

Materials
Costs

Total costs to account for (Step 3)
$6,063,375
$4,158,000 $1,905,375
Divide by equivalent units (Step 4)

924,000
762,150
Unit costs
$7.00
$4.50
$2.50
*249,000 × .35 2.
Totals

Details

Application of costs (Step 5): To units completed and transferred, 675,000 units × $7.00
$4,725,000
To units still in process, end, 249,000 units: Direct materials
$1,120,500
249,000×$4.50
Conversion costs
217,875
87,150×$2.50
Work in process, end
$1,338,375
Total costs accounted for
$6,063,375

(Step 2)

Equivalent Units

(Step 1)

Physical
Direct

Flow of Production
Units
Materials Conversion
Units started and completed
68,000
68,000
68,000
Work in process, end:
6,000
Materials added: 6,000 × .90

5,400
Conversion costs: 6,000 × .70

4,200
Units accounted for
74,000

Work done to date

73,400
72,200
2.

Details

Total
Direct
Conversion

Costs
Materials

Costs
Costs to account for (Step 3)
$602,620
$205,520
$397,100
Divide by equivalent units (Step 4)

73,400
72,200
Unit costs
$8.30
$2.80
$5.50
Application of costs (Step 5): To units completed and transferred, 68,000 × $8.30
$564,400
To units still in process, end,
6,000 units:
Direct materials
$ 15,120
5,400×$2.80
Conversion costs
23,100

4,200×$5.50
Work in process, end
$ 38,220
Total costs accounted for
$602,620