978-1337119207 Chapter 17 Part 2

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Chapter 17(3) Process Cost Systems 346

Process—Packaging is credited. After the product is sold, Cost of Goods Sold is debited and Finished

Goods is credited. These cost flows are shown in Exhibit 9.

Relevant Check Up Corner and Exhibits

 Exhibit 9—Frozen Delight’s Cost Flows

 Check Up Corner 17(3)-3 – Process Costing Journal Entries

SUGGESTED APPROACH

1. Separate work in process accounts are maintained for each department.

2. Separate factory overhead accounts are maintained for each department.

3. To determine the cost of units transferred from one production department to the next department (or

to finished goods), equivalent units must be computed and costs assigned using the method illustrated

under Objective 2.

Refer students to the journal entries illustrated in the text. Stress that a cost of production report or four–

step process costing calculation must be prepared to determine the cost of units transferred to the various

departments and the cost of completed units transferred to finished goods.

It would be an excellent learning activity to ask your students to work in groups to complete a process

costing problem and all related journal entries at this point. However, that activity would be extremely

lengthy. As an alternative, give your students the opportunity to start a homework assignment requiring

journal entries (such as Problem 17(3)-1A or 17(3)-1B) in class. This will allow them to ask any

questions necessary to get started on the “right foot.”

OBJECTIVE 4

Describe and illustrate the analysis of unit cost changes between periods.

SYNOPSIS

Using the cost of production reports, managers can track and analyze these costs over time. By

investigating the causes of increases or problems, managers can make decisions regarding efficiency and

improvement.

SUGGESTED APPROACH

The objective in this section is to move the students from preparing cost reports to using them for

decision making. A manufacturing cost system provides the user with a database of cost information. This

Chapter 17(3) Process Cost Systems 347

database can be used to segment cost data in a number of ways, such as by product, by process, by

production line, or by work shift. This detail gives manufacturers the ability to discover the root causes of

cost problems. Use the Group Learning Activity below to develop these issues in class.

You may also want to point out that the cost of production report illustrated in the text is highly

summarized. In a real-world setting, each significant material and energy input would be individually

identified. In most cases, conversion costs are not lumped together but would be individually identified as

well.

GROUP LEARNING ACTIVITY—Decision Making Exercise

Provide students with Handout 17(3)-1. This handout describes a situation where material costs have been

stratified by line and by shift. This information will give students an opportunity to think in relational

database terms. There are often a number of different ways to view data. Asking for the right view and

then interpreting the patterns that you see is part of the role of a business analyst. The solution to Handout

17(3)-1 is provided in TM 17(3)-14.

OBJECTIVE 5

Compare lean manufacturing with traditional manufacturing processing.

SYNOPSIS

The objective of most manufacturers is to produce goods with high quality, low cost, and instant

availability. Just-in-time processing is an approach that focuses on reducing time and cost and eliminating

poor quality. The traditional manufacturing process is streamlined, waiting time is eliminated, workers

become multifunctional, and inventories are reduced when using lean manufacturing methods.

Key Terms and Definitions

 Lean Manufacturing—A processing approach that produces products with high quality, low

cost, fast response, and immediate availability.

 Manufacturing Cells—A grouping of processing functions that are combined into work centers.

Relevant Check Up Corner and Exhibits

 Exhibit 10—Traditional Production Line

 Exhibit 11—Lean Production Line

SUGGESTED APPROACH

Lean manufacturing is not just a method of reducing inventory. It is embraced as a philosophy that

emphasizes eliminating waste from all processes. Inventory is simply a buffer that protects a process

against unreliability (such as poor supplier delivery or machinery that breaks down frequently). Reducing

Chapter 17(3) Process Cost Systems 348

inventory levels without correcting the problems that create unreliability will stop production.

Constructing a reliable system will eliminate the need for an inventory buffer.

Exhibits 10 and 11 in the text illustrate the production line and flow of products under a traditional and a

lean manufacturing system. Review these diagrams with your students and emphasize the following

points.

1. Lean manufacturing organizes work centers (manufacturing cells) that perform several manufacturing

steps. Workers are cross-trained to perform more than one task. This allows manufacturing to be more

flexible and gives workers more pride in the final product.

2. Because products do not move between as many departments, the non-value-added cost of

transporting products and parts is reduced.

Emphasize that the employee involvement in a lean manufacturing system also implies employee

IN-CLASS SIMULATION—Just-in-Time Manufacturing

Lean manufacturing is essentially a demand-pull system. Products are not made until they are needed by

the customer, and component parts are not made until they are needed by the next stage of production.

Just-in–time significantly reduces inventories, allowing manufacturers to reduce costs incurred in moving

and storing inventory. Lean manufacturing also emphasizes quality.

As a first simulation, instruct all volunteers to do their assigned tasks as quickly as possible. Tell them to

focus on quantity and ignore quality. Allow them to work for 30 seconds, then stop the production line.

Announce that the customer wants to change the color of the ink used to write the As and Bs, effective

she received.

Run this simulation a second time, but this time institute a demand-pull system. Instruct all workers that

they are not to make a new product (or component) until it is needed for the next stage of production.

Also ask them to focus on quality, not quantity. In addition, physically move the students who are writing

Chapter 17(3) Process Cost Systems 349

production, announce another ink color change, and collect any work in process as scrap. Start up the

production line again for another 30 seconds. Ask your customer to count the completed products

received.

simulation.

LECTURE AID—Value-Added versus Non-Value–Added

Each activity performed by an organization creates cost. If the activity does not create any value for the

customer, its cost represents wasted resources and it can be labeled as “non-value-added.” Since one of

the goals of a lean manufacturing system is to eliminate waste, non-value-added activities should be

identified and eliminated, if possible.

1. Given a choice, would the customer pay for this activity?

2. If you quit performing this activity, would the customer care?

3. If you quit performing this activity, would the output still meet customer requirements?

4. Could you eliminate this activity if some other activity were done correctly or differently?

5. Would reengineering the system eliminate this activity?

A “yes” answer to questions 1 or 2 indicates a value-added activity. A “yes” answer to questions 3, 4, or 5

indicates a non-value-added activity.

ADM OBJECTIVE

Describe and illustrate the use of a cost of production report in evaluating a company’s

performance.

SYNOPSIS

Cost of production reports may be prepared showing more than the direct materials and conversion costs.

This greater detail can help managers isolate problems and seek opportunities for improvement.

Relevant Check Up Corner and Exhibits

 Make a Decision – Analyzing Process Costs

Chapter 17(3) Process Cost Systems 350

APPENDIX—AVERAGE COST METHOD

SYNOPSIS

The appendix illustrates how the average cost method affects the cost of production report. It is completed

in four steps: (1) determine units to be assigned costs, (2) compute equivalent units of production, (3)

determine cost per equivalent unit, and (4) allocate costs to transferred out and partially complete units.

Compare Exhibits 8 and 12 to see how the average cost method changes to amounts allocated to

equivalent units.

Relevant Practice Exercises and Exhibits

 Exhibit 12—Cost of Production Report for S&W’s Mixing Department—Average Cost

SUGGESTED APPROACH

If you are going to present only the average cost method of process costing, you will want to start by

thoroughly explaining the need for equivalent units. Begin by using TM 17(3)-3 to illustrate that each

department in a process costing system can compute the cost to manufacture one unit of product as

follows:

Department’s Cost for the Month

Cost to Make One Unit in One Department Number of Units Produced During the Month



The denominator of this equation assumes that whole units are completed during the month. However,

this usually is not the case. As a result, companies are forced to calculate equivalent units. Equivalent

units are the number of whole units that could have been made using the same manufacturing effort. Refer

to the section entitled “LECTURE AIDS—Equivalent Units” under Objective 2 for material to help you

explain the concept of equivalent units. Then, use the following demonstration problem to present the

four steps to solve an average cost process costing problem.

DEMONSTRATION PROBLEM—Process Costing, Average Cost Method

Use the following facts to demonstrate process costing [also on TM 17(3)-15].

Healthy Harvest Company is a bakery that makes breads. The manufacturing department is organized into

three departments: dough making, baking, and packaging. The following information is related to the

dough making department:

Cost data for the month of April:

Work in process inventory, April 1 (100 units, 40 percent complete) $ 49.00

Direct materials cost (for 2,050 units) 400.00

Direct labor cost 80.00

Factory overhead applied 220.00

Total production costs $749.00

Chapter 17(3) Process Cost Systems 351

Unit data:

Units transferred to baking in April 2,100

STEP 1: Determine the units to be assigned costs. In this step, students determine the total number of

units worked on in the dough-making department during April from both an “Input” and an “Output”

perspective.

The Input Perspective:

Units in work in process, April 1 100

Total units to be accounting for 2,150

The Output Perspective:

Units transferred out to the next department (baking) 2,100

Units in work in process, April 30 50

Total units to be accounting for 2,150

STEP 2: Calculate equivalent units of production. In the textbook problems and exercises based on the

chapter appendix, students must assume that materials and conversion costs are added evenly throughout

production. Therefore, only one equivalent unit calculation is required. If you have not covered the FIFO

method, students won’t be expecting two equivalent unit calculations (one for materials and one for

In the average cost method, the calculation of equivalent units can be summarized in the following

equation:

No. of Whole Units  Percent of these units complete at the end of the month

(expressed as a fraction or a percentage)

Equivalent units transferred to baking in April (2,100  100%) 2,100

Equivalent units in work in process on April 30 (50  80%) 40

Total equivalent units 2,140

Chapter 17(3) Process Cost Systems 352

STEP 3: Determine the cost per equivalent unit. The formula for this calculation is:

Total Production Costs

Cost per Equivalent Unit Total Equivalent Units



$749

Cost/Equivalent Unit $0.35

2,140 equiv. units



# of equivalent units  cost per equivalent unit

Using the data from Healthy Harvest:

Costs transferred to the baking department

(2,100 equivalent units  $0.35) $735

(40 equivalent units  $0.35) 14

Total production costs assigned $749

From a journal entry perspective, $735 is transferred from WIP-dough making to WIP-baking. The

balance remaining in WIP-dough making after this entry is posted would be $14.

Method

TM 17(3)-16 presents data for Healthy Harvest’s baking department for the month of April. Ask your

students to perform the four-step process costing calculations using the average cost method. The solution

is on TMs 17(3)-17 and 17(3)-18.

Handout 17(3)–1

Decision Making Using Process Cost Data

January

Total materials costs ……………………………………………………………….. $335,050

Total number of pounds produced……………………………………………… 50,400

Cost per pound ………………………………………………………………………. $6.65

Materials Costs by Production Line

Line 1 Line 2 Line 3 Line 4 Total

Shift 1 …………………………... $36,000 $36,000 $40,300 $36,000 $148,300

Shift 2 …………………………... 45,500 45,500 50,250 45,500 186,750

Total ……………………………… $81,500 $81,500 $90,550 $81,500 $335,050

Pounds Produced by Production Line

Line 1 Line 2 Line 3 Line 4 Total

Shift 1 …………………………... 6,000 6,000 6,200 6,000 24,200

Shift 2 …………………………... 6,500 6,500 6,700 6,500 26,200

Total ……………………………… 12,500 12,500 12,900 12,500 50,400

Juanita’s shift.

Juanita: I have decided to keep first-shift production on lines 1, 2, and 4 at 6,000 pounds per

shift. That’s because I remember the last time we had our production rates increased. Our

materials consumption shot through the roof. Therefore, I’m running a small experiment on Line

running nearly as well as the machines back at my old place. I guess when we see the numbers

at the end of the month we’ll have a good feel for it.

Required: Provide an analysis of the data that will assist the management of Hall Company

determine whether or not the increase in production rates is having a favorable impact on

production costs.

Type Item Description Video Excel CLGL LO(s) Difficulty Time Est BUSPROG AICPA

ACBSP – Primary Bloom’s ADM Service Real World

Writing

Ethics

MC 1 1 Easy 5 min. Analytic FN – Measurement Process Costing Remembering

MC 2 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

MC 3 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

MC 4 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

MC 5 4 Easy 5 min. Analytic FN – Measurement Process Costing Applying

LREX 1 Job order versus process costing x 1 Easy 5 min. Analytic FN – Measurement Process Costing Remembering

LREX 2 Units to be assigned costs x 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

PP Problem n/a Challenging 30 min. Analytic FN – Measurement Process Costing Applying

DQ 1 n/a Easy 5 min. Analytic FN – Measurement Process Costing Remembering

DQ 2 n/a Easy 5 min. Analytic FN – Measurement Process Costing Remembering

DQ 3 n/a Easy 5 min. Analytic FN – Measurement Process Costing Remembering

BE 1 Job order versus process costing x 1 Easy 5 min. Analytic FN – Measurement Process Costing Applying

BE 2 Units to be assigned costs x 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

BE 3 Equivalent units of materials cost x 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

BE 4 Equivalent units of conversion costs x 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

Flow chart of accounts related to service and processing departme

EX 3 Entries for flow of factory costs for process cost system x 1,3 Easy 10 min. Analytic FN – Measurement Process Costing Applying x

EX 4

Factory overhead rate, entry for applying factory overhead, and fa

x 1,3 Easy 10 min. Analytic FN – Measurement Process Costing Applying

EX 5 Equivalent units of production x 2 Easy 5 min. Analytic FN – Measurement Process Costing Applying

EX 6 Equivalent units of production x 2 Moderate 15 min. Analytic FN – Measurement Process Costing Applying

EX 9 Equivalent units of production 2 Moderate 10 min. Analytic FN – Measurement Process Costing Applying x

EX 10 Costs per equivalent unit x 2 Moderate 15 min. Analytic FN – Measurement Process Costing Applying

EX 16 Cost of production report x 2,4 Moderate 20 min. Analytic FN – Measurement Process Costing Applying

EX 17 Cost of production report 2,4 Moderate 20 min. Analytic FN – Measurement Process Costing Applying

EX 18 Cost of production and journal entries 1,2,3,4 Moderate 30 min. Analytic FN – Measurement Process Costing Applying

EX 19 Cost of production and journal entries 1,2,3 Moderate 20 min. Analytic FN – Measurement Process Costing Applying

EX 26 Cost per equivalent unit: average cost method Appendix Moderate 20 min. Analytic FN – Measurement Process Costing Applying

EX 27 Cost of production report: average cost method Appendix Moderate 20 min. Analytic FN – Measurement Process Costing Applying

EX 28 Cost of production report: average cost method x Appendix Moderate 20 min. Analytic FN – Measurement Process Costing Applying

PR 1A Entries for process cost system x x 1,3 Moderate 1.5 hours Analytic FN – Measurement Process Costing Applying

Equivalent units and related costs; cost of production report; entrie

Work in process account data for two months: cost of production

PR 3B

Equivalent units and related costs; cost of production report; entrie

x 2,3,4 Challenging 1.5 hours Analytic FN – Measurement Process Costing Applying x

PR 4B

Work in process account data for two months: cost of production

x 1,2,3,4 Moderate 2 hours Analytic FN – Measurement Process Costing Applying x

ADM 1 Analyzing process cost elements across product types x ADM Moderate 20 min. Analytic FN – Measurement Process Costing Analyzing x x

ADM 2 Analyzing process cost elements over time ADM Moderate 20 min. Analytic FN – Measurement Process Costing Evaluating x x

ADM 3 Determining cost relationships ADM Moderate 15 min. Analytic FN – Measurement Process Costing Analyzing x x

TIF 2 Team activity n/a Moderate 45 min. Analytic FN – Measurement Process Costing Applying x

Focus

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