978-1337119207 Chapter 17 Part 2

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Chapter 17(3) Process Cost Systems 346
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
ProcessPackaging 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
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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 ACTIVITYDecision 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 ManufacturingA processing approach that produces products with high quality, low
cost, fast response, and immediate availability.
Manufacturing CellsA grouping of processing functions that are combined into work centers.
Relevant Check Up Corner and Exhibits
Exhibit 10Traditional Production Line
Exhibit 11Lean 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
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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 SIMULATIONJust-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
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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 AIDValue-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
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Chapter 17(3) Process Cost Systems 350
APPENDIXAVERAGE 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 12Cost of Production Report for S&W’s Mixing DepartmentAverage 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 PROBLEMProcess 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
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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
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Chapter 17(3) Process Cost Systems 352
© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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.
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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.
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Type Item Description Video Excel CLGL LO(s) Difficulty Time Est BUSPROG AICPA
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
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
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
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