Accounting Chapter 20 Homework Use This Case Familiarize Students With Process industries Note That Set Example Companies

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CHAPTER 20 Process Cost Systems

Prob. 20-3B (Concluded)

2. Work in Process—Filling Department 496,850

Work in Process—Reaction Department 496,850

3. Direct materials: –$0.08 decrease ($9.50 – $9.58)

Conversion: –$0.10 decrease ($3.80 – $3.90)

4. The cost of production report may be used as the basis for allocating product

costs between Work in Process and Finished Goods. The report can also be

Prob. 20-4B

1. and 2.

Item Dr. Cr. Dr. Cr.

Sept. 1 Bal., 2,600 units, 1/4 completed 45,825

30 Smelting Dept., 28,900 units at

$16.00/unit 462,400 508,225

30 Direct labor 158,920 667,145

30 Factory overhead 101,402 768,547

30 Finished goods* 702,195 66,352

30 Bal., 2,900 units, 4/5 completed 66,352

Date

Balance

Work in Process—Rolling

CHAPTER 20 Process Cost Systems

Prob. 20-4B (Continued)

Direct

Whole Materials Conversion

UNITS Units (a) (a)

Units charged to production:

Units to be assigned costs:

Inventory in process, September 1

(1/4 completed) 2,600 01,950

Started and completed in Septembe

26,000 26,000 26,000

Transferred to finished goods in

Pittsburgh Aluminum Company

Cost of Production Report—Rolling Department

For the Month Ended September 30

Equivalent Units

CHAPTER 20 Process Cost Systems

Prob. 20-4B (Continued)

Direct

COSTS Materials Conversion Total

Costs per equivalent unit:

Total costs for September in Rolling

Costs assigned to production:

Inventory in process, September 1 $ 45,825

Costs incurred in Septembe

722,722

Total costs accounted for by the

Rolling Department $768,547

Cost allocated to completed and

in September (c) $702,195

Inventory in process, September 30 (d) 46,400 19,952 66,352

Total costs assigned by the Rolling

Department $768,547

$158,920 + $101,402

$462,400 + $158,920 + $101,402

Costs

CHAPTER 20 Process Cost Systems

Prob. 20-4B (Continued)

Direct

Whole Materials Conversion

UNITS Units (a) (a)

Units charged to production:

(4/5 completed) 2,900 0580

Started and completed in Octobe

29,000 29,000 29,000

Transferred to finished goods in

October 31,900 29,000 29,580

Pittsburgh Aluminum Company

Cost of Production Report—Rolling Department

For the Month Ended October 31

Equivalent Units

CHAPTER 20 Process Cost Systems

Prob. 20-4B (Concluded)

Direct

COSTS Materials Conversion Total

Costs assigned to production:

Inventory in process, October 1 $ 66,352

Costs incurred in Octobe

778,844

Total costs accounted for by the

Rolling Department $845,196

Cost allocated to completed and

October (c) $805,156

Inventory in process, October 31 (d) 33,000 7,040 40,040

Total costs assigned by the Rolling

Department $845,196

$162,850 + $104,494

$511,500 + $162,850 + $104,494

800 units × $8.80

3. The cost per equivalent unit for direct materials increased from $15.50 in August

to $16.00 in September to $16.50 in October. The cost per equivalent unit for

Costs

CHAPTER 20 Process Cost Systems

Appendix Prob. 20-5B

Whole Equivalent Units

UNITS Units of Production

Units charged to production:

Inventory in process, May 1 1,500

Received from Milling Department 18,300

75% units × 1,800 units

COSTS Costs

Costs per equivalent unit:

Total costs for May in Sifting Department

$58,050

Total equivalent units 19,350

Cost per equivalent unit $ 3.00

Costs assigned to production:

$3,400 + $32,600 + $14,560 + $7,490

$32,600 + $14,560 + $7,490

Blue Ribbon Flour Company

Cost of Production Report—Sifting Department

For the Month Ended May 31

CHAPTER 20 Process Cost Systems

CP 20-1

This case comes from a real story. In that story, the first reduction in chips had

no impact on the marketplace. The manager was promoted, and the next manager

attempted the same strategy—reduce chips by 10%. Again, it worked. The next

manager did the same thing. All of a sudden, the market demand dropped for the

cookie. A threshold was reached, and the cookie was in trouble in the marketplace.

The current cookie was nothing like the original recipe. The cookie’s integrity was

slowly eroded until it wasn’t “Full of Chips.” Senior management had no idea this was

happening because it occurred slowly over a period of many years. Now with respect

to the controller, there are a number of options.

b. Talk to Bishop. You can have a conversation with Bishop. This is also a

reasonably safe strategy and probably the best start. For example, you may

discover that the reduction in chips was okayed by the vice president or that

there was a market study that revealed that the market thought the cookie had

too many chips. This kind of information could be discovered very easily and

without any risk through a personal conversation with Bishop.

Probably the best move is to talk to Bishop. If you discover that Bishop is acting

independently, with the primary motivation being to improve the “bottom line,” then

you may need to talk to the vice president. This is a delicate situation. You would

need to make your case that the reduction in chips strikes you as a short-term

decision that may have short-term benefits but may be a poor long-term decision.

CASES & PROJECTS

CHAPTER 20 Process Cost Systems

CP 20-2

This activity can be accomplished with multiple groups assigned to one or more

of the industry categories. Assign at least one group to each industry category.

(Some are easier than others, so some groups may be assigned multiple categories.)

Have the groups report their research back to the class. The class’s final product

should be a table identifying a company, products, materials, and processes used

by these industries. The most difficult information to obtain is the processes and

CP 20-2 (Concluded)

Industry Category Example Company Products Materials Processes

Beverages PepsiCo, Inc. Pepsi, Diet Pepsi Sugar, carbonated water,

concentrate

Mixing, bottling

Chemicals E. I. du Pont de

Nemours and Company

Stainmaster®, Kevlar®,

Lycra®, Teflon®,

refrigerants, electronic

materials

Petroleum and petroleum-

based intermediates

(esters and olefins)

Reaction, blending,

distilling, extruding

Metals AK Steel Holding

Corporation

Steel Iron ore, coke Melting, casting, rolling

Petroleum refining BP Gasoline, diesel, kerosene Oil Catalytic converting,

distilling

CHAPTER 20 Process Cost Systems

CP 20-3

To: Jamarcus Bradshaw

From: Student Name

Re: Analysis of August Increase in Unit Costs for Papermaking Department

The increase in the unit costs from July to August occurred for both the

conversion and materials (pulp and chemicals) costs in the Papermaking

Department, as indicated in the table below.

July August

Materials cost per ton……………………………………

…

$246.33 $269.12

Conversion cost per ton…………………………………

…

121.67 132.39

Total…………………………………………………………

…

$368.00 $401.51

An analysis was done to isolate the cause of the increased cost per ton. My

interviews indicated that there were two possible causes. First, we changed the

Fortunately, we run both colors on paper machine No. 1. Thus, we can separate

the analysis between these two possible explanations. I have provided the

following cost per ton data for the two paper machines and the two product

colors:

Paper machine analysis:

Materials Conversion

Cost per Ton Cost per Ton Total

…

Product color analysis:

Materials Conversion

Cost per Ton Cost per Ton Total

Green……………………………………

…

$269.15 $132.37 $401.52

Yellow……………………………………

…

269.07 132.41 401.48

Difference………………………………

…

$ 0.08 $ (0.04) $ 0.04

CHAPTER 20 Process Cost Systems

CP 20-3 (Concluded)

The results are clear. Paper machine 1 has a much higher materials and conversion

cost per ton in August. Apparently, the paper machine is overapplying pulp. This is

resulting in an increase in both the materials and conversion cost per ton. Paper

machine No. 2 is running at a cost near our historical cost per ton. There is no

Note to Instructors: The paper machine and product line analysis are determined by

summarizing the data from the computer run provided in the problem. Students

must divide costs by ton-volume for each paper machine and then do the same

thing for each product color. The tables in the memo show the results of the

following analysis (a spreadsheet is recommended for performing this analysis):

Average materials cost per ton for paper machine No. 2:

($38,300 + $33,900 + $35,600 + $33,600) ÷ (160 + 140 + 130 + 140) = $248.07

Average conversion cost per ton for paper machine No. 2:

($18,900 + $15,200 + $18,400 + $17,000) ÷ (160 + 140 + 130 + 140) = $121.93

Average materials cost per ton for green paper:

($40,300 + $44,600 + $38,300 + $35,600) ÷ (150 + 150 + 160 + 130) = $269.15

Average conversion cost per ton for green paper:

($18,300 + $22,500 + $18,900 + $18,400) ÷ (150 + 150 + 160 + 130) = $132.37

CHAPTER 20 Process Cost Systems

CP 20-4

a. This accounting procedure has the effect of rewarding the production of

broke. In essence, the procedure communicates to operating personnel that

broke is a normal part of doing business. In fact, besides broke being a normal

b. The accounting for broke that is typical in the industry fails to account for the

total impact of broke. It is true that the use of recycled materials may reduce the

direct materials cost to the operation. However, such a view is very limited. For

example, the production of broke has a cost. Machine capacity was used to

produce the broke in the first place. Therefore, broke has an original materials

cost and a machine cost. Both of these together are likely to be greater than the

cost of virgin material. One mill manager once commented, “There is a free

paper machine out there.” What he was implying is that if all the machine

capacity used to produce broke could be harnessed for good production, it

would have been equal to a “free” paper machine. The cost of misused capacity

CHAPTER 20 Process Cost Systems

CP 20-5

This case is abstracted from a real situation, where higher raw materials costs due

to tin content were more than offset by lower energy costs. The cost system used

in the real situation was a sophisticated “real-time” expense tracking system. The

subtlety of this trade-off analysis is impressive.

April May June July Aug. Sept.

Materials cost per unit………………

…

$0.28 $0.29 $0.30 $0.31 $0.32 $0.33

Energy cost per unit…………………

…

0.26 0.24 0.22 0.20 0.19 0.16

Total cost per unit……………………

…

$0.54 $0.53 $0.52 $0.51 $0.51 $0.49

The graph below shows the total unit cost data for each month.

The graph reveals that the tin content and energy costs are inversely related. That

is, as the materials cost increased due to higher tin content, the energy costs

dropped. In fact, the total cost line shows that the energy savings exceeds the

$0.40

$0.50

$0.60