CHAPTER 17
PROCESS COSTING
17-1 Give three examples of industries that use process-costing systems.
Industries using process costing in their manufacturing area include chemical processing, oil
17-2 In process costing, why are costs often divided into two main classifications?
Process costing systems separate costs into cost categories according to the timing of when costs
are introduced into the process. Often, only two cost classifications, direct materials and
17-3 Explain equivalent units. Why are equivalent-unit calculations necessary in process
costing?
Equivalent units is a derived amount of output units that takes the quantity of each input (factor
of production) in units completed or in incomplete units in work in process, and converts the
17-4 What problems might arise in estimating the degree of completion of semiconductor
chips in a semiconductor plant?
The accuracy of the estimates of completion depends on the care and skill of the estimator and
17-5 Name the five steps in process costing when equivalent units are computed.
The five key steps in process costing follow:
Step 1: Summarize the flow of physical units of output.
17-6 Name the three inventory methods commonly associated with process costing.
Three inventory methods associated with process costing are:
17-7 Describe the distinctive characteristic of weighted-average computations in assigning
costs to units completed and to units in ending work in process.
The weighted-average process-costing method calculates the equivalent-unit cost of all the work
17-8 Describe the distinctive characteristic of FIFO computations in assigning costs to units
completed and to units in ending work in process.
FIFO computations are distinctive because they assign the cost of the previous accounting
period’s equivalent units in beginning work-in-process inventory to the first units completed and
17-9 Why should the FIFO method be called a modified or department FIFO method?
FIFO should be called a modified or departmental FIFO method because the goods transferred in
17-10 Identify a major advantage of the FIFO method for purposes of planning and control.
17-11 Identify the main difference between journal entries in process costing and job costing.
The journal entries in process costing are basically similar to those made in job-costing systems.
17-12 “The standard-costing method is particularly applicable to process-costing situations.” Do
you agree? Why?
Standard-cost procedures are particularly appropriate to process-costing systems where there are
various combinations of materials and operations used to make a wide variety of similar products
17-13 Why should the accountant distinguish between transferred-in costs and additional direct
materials costs for each subsequent department in a process-costing system?
There are two reasons why the accountant should distinguish between transferred-in costs and
additional direct materials costs for a particular department:
17-14 “Transferred-in costs are those costs incurred in the preceding accounting period.” Do
you agree? Explain.
No. Transferred-in costs or previous department costs are costs incurred in a previous department
17-15 “There’s no reason for me to get excited about the choice between the weighted-average
and FIFO methods in my process-costing system. I have long-term contracts with my materials
suppliers at fixed prices.” Do you agree with this statement made by a plant controller? Explain.
Materials are only one cost item. Other items (often included in a conversion costs pool) include
A second factor is the amount of inventory on hand at the beginning or end of an
17-16 Assuming beginning work in process is zero, the equivalent units of production computed
using FIFO versus weighted average will have the following relationship:
1. FIFO equivalent units will be greater than weighted-average equivalent units.
2. FIFO equivalent units will be less than weighted-average equivalent units.
3. Weighted-average equivalent units are always greater than FIFO equivalent units.
4. Weighted-average equivalent units will be equal to FIFO equivalent units.
SOLUTION
Choice “4” is correct. Weighted average and FIFO equivalent units will be equal in the event that
Choice “1” is incorrect. FIFO equivalent units are generally less than weighted average
Choice “2” is incorrect. Although FIFO equivalent units are generally less than weighted average
Choice “3” is incorrect. Equivalent units computed using weighted average are not always
17-17 The following information concerns Westheimer Corporation’s equivalent units in May
20X1:
Units
Beginning work-in-process (50% complete) 4,000
Units started during May 16,000
Units completed and transferred 14,000
Ending work-in-process (80% complete) 6,000
Using the weighted-average method, what were Westheimer’s May 20X1 equivalent units?
1. 14,000 2. 18,800
3. 20,000 4. 39,000
SOLUTION
Choice “2” is correct.
In this question, they want a calculation of equivalent units for a month using the
weighted-average method of process costing.
Before computing the equivalent units, it is helpful to reconcile the actual units. 4,000 units were
Converting to equivalent units using the weighted-average method, the units completed at 100%
complete and the units in ending inventory at their percentage of completion are considered.
17-18 Sepulveda Corporation uses a process costing system to manufacture laptop PCs. The
following information summarizes operations for its VeryLite model during the quarter ending
March 31, Year 1:
Units
Direct
Materials
Work-in-process inventory, January 1 100 $ 60,000
Started during the quarter 500
Completed during the quarter 400
Work-in-process inventory, March 31 200
Costs added during the quarter $840,000
Beginning work-in-process inventory was 50% complete for direct materials. Ending
work-in-process inventory was 75% complete for direct materials. What were the equivalent
units for direct materials for the quarter using the FIFO method?
1. 450 2. 500
3. 550 4. 600
SOLUTION
Choice “2” is correct.
In this question, they want they want a calculation of equivalent units for direct materials for a
quarter using the FIFO method of process costing.
Before computing the equivalent units, it is helpful to reconcile the actual units. 100 units were
Converting to equivalent units using the FIFO method, the units started and completed at 100%
Units started and completed during the quarter were 300 (400 completed − 100 in beginning
17-19 Penn Manufacturing Corporation uses a process-costing system to manufacture printers
for PCs. The following information summarizes operations for its NoToner model during the
quarter ending September 30, Year 1:
Units
Direct
Labor
Work-in-process inventory, July 1 100 $ 50,000
Started during the quarter 500
Completed during the quarter 400
Work-in-process inventory, September 30 200
Costs added during the quarter $775,000
Beginning work-in-process inventory was 50% complete for direct labor. Ending
work-in-process inventory was 75% complete for direct labor. What is the total value of the
direct labor in the ending work-in-process inventory using the weighted-average method?
1. $183,000 2. $194,000
3. $225,000 4. $210,000
SOLUTION
Choice “3” is correct.
In this question, they want a calculation of ending inventory cost using the weighted average
Before computing the equivalent units, it is helpful to reconcile the actual units. 100 units were
Converting to equivalent units using the weighted-average method, the units completed at 100
To compute the unit cost of production, the cost of the beginning inventory plus the cost added
17-20 Kimberly Manufacturing uses a process-costing system to manufacture Dust Density
Sensors for the mining industry. The following information pertains to operations for the month
of May, Year 5.
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May 100,000
Completed production during May 92,000
Ending work-in-process inventory, May 31 24,000
The beginning inventory was 60% complete for materials and 20% complete for conversion
costs. The ending inventory was 90% complete for materials and 40% complete for conversion
costs.
Costs pertaining to the month of May are as follows.
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory
overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory
overhead, $391,160.
Using the weighted-average method, the equivalent-unit conversion cost for May is:
1. $5.65 2. $5.83
3. $6.00 4. $6.41
SOLUTION
Choice “3” is correct.
$6.00 equivalent unit conversion cost using the weighted-average method.
Weighted-average equivalent units:
Weighted-average cost per equivalent unit:
17-21 Equivalent units, zero beginning inventory. Candid, Inc. is a manufacturer of digital
cameras. It has two departments: assembly and testing. In January 2017, the company incurred
$800,000 on direct materials and $805,000 on conversion costs, for a total manufacturing cost of
$1,605,000.
Required:
1. Assume there was no beginning inventory of any kind on January 1, 2017. During January,
5,000 cameras were placed into production and all 5,000 were fully completed at the end of
the month. What is the unit cost of an assembled camera in January?
2. Assume that during February 5,000 cameras are placed into production. Further assume the
same total assembly costs for January are also incurred in February, but only 4,000 cameras
are fully completed at the end of the month. All direct materials have been added to the
remaining 1,000 cameras. However, on average, these remaining 1,000 cameras are only
60% complete as to conversion costs. (a) What are the equivalent units for direct materials
and conversion costs and their respective costs per equivalent unit for February? (b) What is
the unit cost of an assembled camera in February 2017?
3. Explain the difference in your answers to requirements 1 and 2.
SOLUTION
(25 min.) Equivalent units, zero beginning inventory.
2a. Solution Exhibit 17-21A calculates the equivalent units of direct materials and conversion
3. The difference in the Assembly Department cost per unit calculated in requirements 1 and 2
arises because the costs incurred in January and February are the same but fewer equivalent units
of work are done in February relative to January. In January, all 5,000 units introduced are fully
completed resulting in 5,000 equivalent units of work done with respect to direct materials and
conversion costs. In February, of the 5,000 units introduced, 5,000 equivalent units of work is
done with respect to direct materials but only 4,600 equivalent units of work is done with respect
to conversion costs. The Assembly Department cost per unit is, therefore, higher.
SOLUTION EXHIBIT 17-21A
Summarize the Flow of Physical Units and Compute Output in Equivalent Units;
Assembly Department of Candid, Inc. for February 2017.
(Step 2)
(Step 1) Equivalent Units
Physical Direct Conversion
Flow of Production Units Materials Costs
Work in process, beginning (given) 0
*Degree of completion in this department: direct materials, 100%; conversion costs, 60%.
SOLUTION EXHIBIT 17-21B
Compute the Cost per Equivalent Unit,
Assembly Department of Candid, Inc. for February 2017.
Total
Production
Costs
Direct
Materials
Conversion
Costs
17-22 Journal entries (continuation of 17-21). Refer to requirement 2 of Exercise 17-21.
Required:
Prepare summary journal entries for the use of direct materials and incurrence of conversion
costs. Also prepare a journal entry to transfer out the cost of goods completed. Show the postings
to the Work in Process account.
SOLUTION
(20 min.) Journal entries (continuation of 17-21).
2. Work in Process––Assembly 805,000
Various accounts 805,000
To record $805,000 of conversion costs
for February 2017; examples include energy,
manufacturing supplies, all manufacturing
labor, and plant depreciation
3. Work in Process––Testing 1,340,000
To record 4,000 units completed and
transferred from Assembly to Testing
during February 2017 at
$335 4,000 units = $1,340,000
Postings to the Work in Process––Assembly account follow.
Work in Process –– Assembly Department
17-23 Zero beginning inventory, materials introduced in middle of process. Dot and Ken Ice
Cream uses a mixing department and a freezing department in producing its ice cream. Its
process-costing system in the mixing department has two direct materials cost categories (ice
cream mix and flavorings) and one conversion cost pool. The following data pertain to the
mixing department for April 2017:
Work in process, April 1 0
Started in April 10,000 gallons
Completed and transferred to freezing 8,500 gallons
Costs:
Ice cream mix $27,000
Flavorings $ 4,080
Conversion costs $53,700
The ice cream mix is introduced at the start of operations in the mixing department, and the
flavorings are added when the product is 40% completed in the mixing department. Conversion
costs are added evenly during the process. The ending work in process in the mixing department
is 30% complete.
Required:
1. Compute the equivalent units in the mixing department for April 2017 for each cost category.
2. Compute (a) the cost of goods completed and transferred to the freezing department during
April and (b) the cost of work in process as of April 30, 2017.