CHAPTER 18
PROCESS COSTING
Brief Learning
Exercises Topic Objectives Skills
B. Ex. 18.1 Selecting a cost accounting system 18-1 Analysis, judgment
B. Ex. 18.2 Real World: Walmart and J & J 18-1 Analysis, judgment
Selecting a cost accounting system
B. Ex. 18.3 Understanding cost flows 18-2 Analysis
B. Ex. 18.4 Process costing journal entries 18-2 Analysis
B. Ex. 18.5 Computing equivalent units 18-3 Analysis
B. Ex. 18.6 Computing cost per equivalent unit 18-3, 18-4 Analysis
B. Ex. 18.7 Solving for missing information 18-3, 18-4 Analysis
B. Ex. 18.8 Determining departmental unit costs 18-5 Analysis
B. Ex. 18.9 Interpreting a production cost report 18-6 Analysis
B. Ex. 18.10 Interpreting a production cost report 18-6 Analysis
Learning
Exercises Topic Objectives Skills
18.1 Accounting terminology
18-1–18-3,
18-6
Analysis
18.2 Calculating equivalent units 18-2, 18-3 Analysis
18.3 Process costing in a single department 18-2–18-5 Analysis
18.4 Preparing a production cost report 18-6 Analysis
18.5 Computing equivalent units 18-2–18-5 Analysis
18.6 Process costing with no beginning inventories, 18-2–18-5 Analysis,
Part I 18-2–18-5 communication
18.7 Process costing with no beginning inventories, 18-2–18-5 Analysis
Part II 18-2–18-5
18.8 Process costing with beginning inventories, 18-2–18-5 Analysis
Part I 18-2–18-5
18.9 Process costing with beginning inventories, 18-2–18-5 Analysis
Part II 18-2–18-5
18.10 Process costing through two departments, Part I 18-2–18-5 Analysis
18.11 Process costing through two departments, 18-2–18-5 Analysis
Part II 18-2–18-5
18.12 Solving for missing information 18-2–18-5 Analysis
18.13 Assessing the need for process costing 18-1–18-6
Communication,
judgment, analysis
18.14 Interpreting a production cost report 18-2–18-6 Analysis
18.15 Solving for missing information 18-2–18-6 Analysis
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Learning
Topic Objectives Skills
18.1 A,B Calculating equivalent units 18-2, 18-3 Analysis
18.2 A,B Computing and using unit costs 18-2–18-5 Analysis, communication
18.3 A,B Preparing a production cost report 18-6 Analysis
18.4 A,B
Process costing with no beginning or ending
inventories
18-2–18-5 Analysis, communication
18.5 A,B Computing equivalent units and unit costs 18-2–18-4 Analysis
18.6 A,B Preparing a production cost report 18-5, 18-6 Analysis, communication
18.7 A,B Comprehensive process costing 18-2–18-5 Analysis
problem with two departments
18.8 A,B
Comprehensive process costing problem with
two departments
18-2–18-5 Analysis
Critical Thinking Cases
18.1 Evaluating a process costing system 18-1–18-3
Judgment,
communication
18.2
Interpreting and using process costing
information
18-2–18-6 Communication, analysis
18.3
Processes & Product Costs in Soft Drink
Manufacturing (Internet)
18-1, 18-2
Analysis, judgment,
communication
18.4
Real World: Wrigley Company
Manufacturing processes
18-1, 18-2
Communication,
technology, research
Ethics, Fraud & Corporate Governance
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
18.1 A,B Brite Ideas/Street Smarts 20 Easy
Compute equivalent units for two consecutive months with three
categories of inputs and beginning and ending work in process.
18.2 A,B Sun Appliance/MowTown Manufacturing 20 Easy
Compute per-unit costs of products and processes. Assess the usefulness
of these costs for managers.
18.3 A,B Sun Appliance/MowTown Manufacturing 30 Medium
Produce a cost of production report based on information in P18-2.
18.4 A,B Toll House/Snack Happy 30 Medium
A process cost problem involving three processes and an explanation of
the usefulness of different unit costs. Does not include equivalent unit
calculations.
18.5 A,B Badgersize Company/Balfanz Company 35 Medium
Determine the cost per equivalent unit with partially complete beginning
and ending work in process.
18.6 A,B Badgersize Company/Balfanz Company 35 Medium
Prepare a cost of production report based on information in P18.5.
18.7 A,B Hound Havens/Delray Industries 50 Strong
A comprehensive process costing problem with two production
departments.
18.8 A,B Wilson Dynamics/Thompson Tools 50 Strong
A comprehensive process costing problem with two production
departments.
Below are brief descriptions of each problem, case, and the first Internet assignment. These
descriptions are accompanied by the estimated time (in minutes) required for completion and by a
difficulty rating. The time estimates assume use of the partially filled-in working papers.
Critical Thinking Cases
Shouldn’t We Do Things Differently? 30 Strong
Students are to evaluate recommendations for changing a company’s cost
accounting methods. Requires judgment and perspective. Very
challenging—best as a group assignment to be discussed in class.
18.2 Metal Products, Inc. 20 Medium
Students are asked to analyze changes in unit costs from one month to
the next and speculate why these changes may have occurred.
18.3 Processes & Product Costs in Soft Drink Manufacturing 25 Easy
Internet
Students are asked to review the processes and product costs associated
with the production of soft drinks. They also must argue whether direct
labor or manufacturing overhead constitutes a larger portion of a soft
drink manufacturer’s total product costs.
Wrigley Company 30 Medium
Ethics, Fraud and Corporate Governance
Students are asked to read a description of a simple production process
and prepare a flowchart of activities. They must then determine how
various departments might be set up under a process costing system.
Finally, possible overhead sources and activity bases are to be
considered. They are also required to decide whether it is ethical for the
company to report only its good works throughout the world.
18.4
18.1
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
2.
4.
6.
Job order concepts are more appropriate than process cost concepts to the operations of a law firm.
Several answers are possible. Some suggestions include automobiles, furniture, stereo equipment,
Whether a manufacturing company should use job order costing or process costing depends upon
the nature of the company’s manufacturing operations. Job order costing is used when each unit
of product (or batch of products) has unique characteristics that may affect its manufacturing cost.
7.
8.
9.
10.
11.
In process costing, the costs of performing each manufacturing process are accumulated separately
for the accounting period. The cost per unit of product is then determined by dividing the total cost
of performing the manufacturing process by the number of units processed during the accounting
In many situations, assigning the entire cost of production to units completed and transferred
Managers use information obtained from process costing to value inventories, determine the cost
Equivalent units are a measure of work done during the period, including work performed on units
that were partially complete at the beginning or end of the period. The idea is that performing, say,
40% of the work on 100 units is “equivalent” to fully processing 40 units.
In a fast-paced assembly line, units are processed very quickly. Only those units actually on the
usually is insignificant in relation to the total number of units completed during the period. When
Units of production in a process costing system are often manufactured in high volume through
14.
15.
Beginning units in process ……………………………………………………………..
XXX
Plus: Units started ……………………………………………………………………….
XXX
Total units in production …………………………………………………………………
Less: Ending units in process ………………………………………………………….
Units started and completed during the current period may be computed using several
approaches:
The cost of units started and completed during the current period contain only the cost of input
SOLUTIONS TO BRIEF EXERCISES
b.
d.
e.
3: Retail establishments do not make their own products and thus, do not use
1: Handyman Special, Inc. probably does odd jobs for home owners and
1, 2 and 3: Carpet Makers manufactures large amounts of carpeting, in
B. Ex. 18.3 a. (1) XXX
Accounts Payable ………………………….
XXX
c. (1) XXX
Cash (or Accounts Payable) ………………
XXX
XXX
XXX
XXX
Cost of Goods Sold ………………………………
Finished Goods Inventory ………………………
Work in Process Inventory ……………………….
To record factory overhead costs applied to
To record transfer of cost of completed goods to the
To record factory overhead cost (such as payroll for
Materials Inventory ……………………………….
Manufacturing Overhead ………………………..
XXX
XXX
XXX
Work in Process Inventory ……………………….
Direct Labor ……………………………………….
Work in Process Inventory ……………………….
To record cost of direct labor assigned to production.
B. Ex. 18.4 a. 3,600
Work in Process: Mixing ……………………. 3,600
Computations: Mixing Packaging
Beginning work in process 800$ 700$
B. Ex. 18.5
Input resources required
Direct
Materials
Conversion
Work in Process: Packaging ……………………..
To finish beginning inventory in process, September 1:
Work in Process: Packaging ………………… 7,800
Finished Goods Inventory ……………………….
B. Ex. 18.6 a.
b.
Direct
Materials
Conversion
2,000
B. Ex. 18.7
Direct
Materials
Conversion
Units started and completed in July
Total equivalent units of input resources in July
Equivalent units to finish beginning inventory:
Conversion (12,000 units require 60% to complete)
Direct materials (12,000 units require 0% to complete)
Equivalent units to start ending inventory:
Direct materials (9,000 units 100% complete)
Conversion (9,000 units 70% complete)
500,000$ 352,000$
÷ $25 ÷ $16
Cost per equivalent unit of input resource in July
To finish beginning inventory in process, March 1:
$14 per equivalent unit of direct material
$16 per equivalent unit of conversion
Computations:
Input resources required
Cost of direct materials and conversion incurred in July
Direct materials (5,000 units require 40% to complete)
Direct materials (2,000 units 90% complete)
Conversion (2,000 units 30% complete)
Cost per equivalent unit of input resource in March
Conversion (5,000 units require 60% to complete)
To start ending inventory in process, March 31:
Equivalent units of input resources in March
Cost of direct materials and conversion incurred in March
To start and complete 30,000 units in March:
Equivalent units of resources in March
B. Ex. 18.8 $ 50,000
39,000
B. Ex. 18.9
a.
Direct
b.
Materials Conversion
Equivalent units to start ending inventory:
Units started and completed in December
B. Ex. 18.10
Beginning work in process, September 1
Costs incurred to complete beginning work in
process
The cost per equivalent unit transferred out of the department includes the costs
of beginning inventory carried forward from October. The $162 average cost
Given that no equivalent units of material were required to finish beginning
inventory, all direct materials must be added at the beginning of the production
process in the Distillation Department.
Equivalent units consumed to start new units
Cost of units started in September
September costs assigned to work in process,
Costs transferred out of Blending Department
SOLUTIONS TO EXERCISES
Ex. 18.2 a.
Direct Materials
b.
Direct Materials
Jan. Feb.
Labor and
Overhead
Equivalent Units Produced in February
1Number of units started and completed:
Labor and
Overhead
Equivalent Units Produced in January
Ex. 18.1 a.
b.
d.
Process costing
Job order costing
Conversion costs
Equivalent units
Production cost report
Ex. 18.3 a. 160,000
90,000
b. 160,000
Work in Process Inventory …………………..
c. 320,000
Cost of Goods Sold ………………………………….
Sales ……………………………………………
Finished Goods Inventory ……………………
Finish Goods Inventory …………………………….
Work in Process Inventory ………………………..
Direct Materials ………………………………
Accounts Receivable ………………………………..
Direct Labor …………………………………..
Manufacturing Overhead …………………….
Part I. Physical Flow Total Units
Inputs:
Part II. Equivalent Units Direct Materials
Conversion
Based on monthly input:
Based on monthly output:
Part III. Cost Per Equivalent Unit Total Unit Cost Direct Materials
Conversion
Input costs $90,000 $70,000
Divide by equivalent units ÷20,000 ÷20,000
Costs per equivalent unit $8.00 $4.50 $3.50
Part IV. Total Cost Assignment Total Costs Direct Materials
Conversion
Costs to account for:
Costs accounted for:
Total cost transferred $160,000 $90,000 $70,000
Ex. 18.4
Shamrock Industries
Production Cost Report
For the Month of June
Outputs:
Ex. 18.5
a.
March
Beg. WIP 4,900 (7,000 × .7)
b. March April
$ 6,979,360 $ 7,781,280
c. March April
$ 978,460 $ 1,168,310
April
1,920 (4,800 × .4)
Equivalent full units of production:
Total manufacturing costs …………………………………
Direct Materials costs ………………………………………
End. WIP 2,880 (4,800 × .6)
Units transferred to Finishing Department in January
Total units in process during January
Ending work in process, January 31
Ex. 18.6
a. 0
15,000
b. Direct
Materials Conversion
0 0
Equivalent units of resources in January (see part b)
Cost per equivalent unit of input resource in January
To record the transfer of 11,000 units to the Finishing
Department at $90 per unit ($40 + $50).
Work in Process: Cutting Department
800 equivalent units of conversion × $50 per unit
c. Direct Conversion
Materials Costs
600,000$ 590,000$
d. 990,000
e. 160,000$
To finish beginning inventory
Input resources required
Beginning work in process, January 1
Units started in January
(there was no beginning inventory)
Work in Process: Finishing Department
Cost of direct materials and conversion incurred in January
4,000 equivalent units of direct materials × $40 per unit
To start and complete 11,000 units in January
To start ending inventory in process on January 31:
Equivalent units of input resources in January
Conversion (4,000 units 20% complete)
Direct materials (4,000 units 100% complete)
a.
b. 0
c. Cut Direct Trim
Materials Materials Conversion
Equivalent units of input resources in January
To start ending inventory in process on January 31:
0 0 0
8,000 8,000 8,000
d. Cut Direct Trim Conversion
Materials Materials Costs
Cost per equivalent unit in January
Equivalent units in January (see part c)
990,000$ 142,400$ 235,200$
e. 1,040,000
To record the transfer of 8,000 units to Finished Goods
Inventory at $130 per unit ($90 + $16 + $24).
f. 270,000$
1,800 equivalent units of conversion x $24
Total costs assigned to work in process on January 31
900 equivalent units of direct trim materials x $16
Ex. 18.7
Input resources required
To finish beginning inventory (there was none)
The number of units started by the Finishing Department equals the number of units transferred
in January from the Cutting Department, or 11,000 (see Exercise 18.6, part a).
Beginning work in process, January 1
To start and complete 8,000 units in January
Finished Goods Inventory
Cost of input resources in January
3,000 equivalent units of cut materials x $90
Units transferred to Finished Goods Inventory in January
Units started (transferred in) during January
Total units in process during January
Ending work in process, January 31
a. 500
11,500
b. Direct
Materials Conversion
Conversion (600 units 25% complete) 150
To start and complete 10,900 units in August
Direct materials (600 units 100% complete)
Equivalent units of input resources in August
To start ending inventory in process on August 31
0
350
c. Direct Conversion
Materials Costs
Equivalent units of resources in August (see part b )
Cost per equivalent unit of input resource in August
34,500$ 22,800$
d. 57,000
Work in Process: Mixing Department 57,000
Total cost of units transferred in August
August direct materials (10,900 equivalent units × $3)
August conversion (11,250 equivalent units × $2)
Cost of beginning inventory on August 1
600 equivalent units of direct materials × $3 per unit
150 equivalent units of conversion × $2 per unit
Total costs assigned to work in process on August 31
To finish beginning inventory in process on August 1:
Direct materials (500 gallons require 0% to complete)
To record the transfer of 11,400 gallons of mix to the Finishing
Conversion (500 gallons require 70% to complete)
Department in August:
Cost of direct materials and conversion incurred in August
Work in Process: Baking Department
Ex. 18.8
Beginning work in process, August 1
Units started by Mixing Department in August
Input resources required
1. 11,400
2. 10,900
Total units in process during August
Ending work in process, August 31
Units transferred to the Baking Department in August
Beginning work in process, August 1
Units started and completed in August
a.
b. 600
Units started and completed in August
Beginning work in process, August 1
Units transferred to Finished Goods Inventory in August
Units started by Mixing Department in August
Total units in process during August
Ending work in process, August 31
c. Mixed Direct
Materials Materials Conversion
Mixed materials (600 units, 0% to complete) 0
To start ending inventory in process on August 31
Equivalent units of input resources in August
To start and complete 10,900 units in August
d. Mixed Direct Conversion
Materials Materials Costs
Equivalent units of resources in August
Cost of direct materials incurred in August
Cost of conversion incurred in August
in August
Cost per equivalent unit of input resource
(see part c)
57,000
(see Ex. 18.8, part d)
Cost of batter mix transferred in
August 1:
Input resources required
To finish beginning inventory in process on
Ex. 18.9
One gallon of mix is required for each cake Baked by the Baking Department.
Beginning work in process, August 1