Module 3: Process costing

Module 3: Process costing Required reading Overview Chapter 4, pages 129-152 Reading 3-1: "Comparing the weighted-average and the FIFO methods of costing" Reading 3-2: "Spoilage" Module 3 helps you gain a perspective of process cost flows by working through a detailed example of process costing. The module explains the weighted-average and FIFO methods of accounting for cost flows and shows you how they are evaluated in the context of the production report. Module 3 also describes how to deal with shrinkage, spoilage, and lost units in a process costing system. It looks briefly at innovations in costing systems in the ever-changing business environment. The Computer illustration in Topic 3.8 shows how to use a spreadsheet program to prepare a production report and cost reconciliation based on both methods described in the module. Assignment reminder Assignment 1 (see Module 5) is due at the end of week 5 (see Course Schedule). It is a good idea to look at it now to familiarize yourself with the requirements as you work through Modules 3-5. Topic outline and learning objectives 3.1 Comparison of job-order and process costing Identify the major similarities and differences between job-order and process costing. (Level 2) 3.2 A perspective of process cost flows Prepare journal entries to record the flow of materials, labour, and overhead through a process costing system. (Level 1) 3.3 Equivalent units of production Explain and compute the equivalent units of production for both the weighted-average method and the FIFO method. (Level 1) 3.4 Production report Weighted average method Prepare a production report using the weightedaverage method. (Level 1) 3.5 Production report FIFO method Prepare a production report using the FIFO method, and compare production reports prepared under the weighted-average method and FIFO. (Level 1) 3.6 Shrinkage, spoilage, and lost units Compute the cost of lost units or shrinkage. (Level 1) 3.7 Operation costing State the conditions under which operation costing is useful to management, and explain the impact of a flexible manufacturing system on job-order and process costing. (Level 2) 3.8 Computer illustration 3.8-1: Production report Weighted-average method and FIFO method Design a worksheet that calculates and prepares a production report and cost reconciliation for both weighted-average and FIFO methods, and compare the two methods. (Level 1) Module summary Print this module

3.1 Comparison of job-order and process costing Learning objective LEVEL 2 Identify the major similarities and differences between job-order and process costing. (Level 2) Job-order and process costing are not mutually exclusive. In terms of an entire production operation, both approaches to product costing are possible depending on the nature of various parts of the manufacturing operation. It may appear that job-order costing is easier than process costing. In reality, the reverse is true because the supporting requirements for process costing (for example, there is no need to trace material and labour to the product) make process costing easier to apply. Review Exhibit 4-1, which lists the differences between job-order and process costing.

3.2 A perspective of process cost flows Learning objective LEVEL 1 Prepare journal entries to record the flow of materials, labour, and overhead through a process costing system. (Level 1) A department can be viewed as one stage of completion in the production process. The use of a department as a costing object simplifies process costing. From an accounting perspective, a department is an organizational unit, which is easier to deal with than the units produced Study the flow description in Exhibit 4-3 carefully. Notice the yellow line flowing from Department A to Department B. This illustrates the transferred-in costs from Department A to Department B. Transferred-in costs are direct materials plus conversion costs that have been allocated to the units produced in Department A and that are now flowing into the Department B manufacturing process. Transferred-in costs = DM + CC incurred in the previous department. CC = D L + MOH, as introduced in Topic 1.6. Therefore, Transferred-in costs = DM + D L + MOH. Review the journal entries on pages 134-135 associated with material costs, labour costs, and overhead costs. Predetermined overhead rates may not be needed but can be used if production or costs fluctuate. If necessary, review predetermined overhead. Activity 3.2-1 Comparison of job-order and process costing Work through this activity to reinforce your understanding of the similarities and differences between job and process costing, and to review the elements of WIP.

3.3 Equivalent units of production Learning objective LEVEL 1 Explain and compute the equivalent units of production for both the weighted-average method and the FIFO method. (Level 1) The concept of equivalent units is very important. It can also be used to determine production quantity for job costing when production is partially completed. Notice the following fundamental inventory relationship: Beginning inventory + Transferred in = Transferred out + Ending inventory This equation is not needed for simple problems, but it is necessary for situations where shrinkages, evaporation, or other losses occur. The data for Double Diamond at the bottom of page 136 illustrates the analysis. "Units" refers to the number of items that were finished. "Units to account for" and "units accounted for" will be equal unless units are lost. Any difference between the two totals represents the "lost units" that are accounted for in later illustrations. Units "transferred out" determine the costs moved from Work in process in the various departments to either the Work in process for the next step in the process or to Finished goods inventory. "Work in process, end" is used to calculate the costs of Work in process for the department. Appendix 4A describes the Equivalent units of production calculation when using the FIFO method.

3.4 Production report Weighted-average method Learning objective LEVEL 1 Prepare a production report using the weighted-average method. (Level 1) Exhibit 4-8 presents a production report using weighted-average costing. The costs of the beginning work in process are broken down and added to the cost of raw materials used, direct labour used, and factory overhead applied during the period. These totals are used as the numerator in the unit cost calculation. When there are multiple production departments, transferred-in costs require separate treatment in the production report. The easiest way to approach transferred-in costs is to view them as a direct material cost of the department receiving the transfer. These costs are combined with that department's own materials, labour, and overhead costs, producing a total unit cost, which in turn is transferred out to another production department or to Finished goods.

3.5 Production report FIFO method Learning objective LEVEL 1 Prepare a production report using the FIFO method, and compare production reports prepared under the weighted-average method and FIFO. (Level 1) Using FIFO, the equivalent units are calculated differently because the equivalent work done on the opening work in process last period is excluded from the computation. In Exhibit 4-9, page 149, the resulting equivalent units of production of 4,850 for materials and 4,840 for conversion give the measure of work done for each cost category in the current period. The numerator for the unit cost calculation is therefore the cost added during the current period for materials and conversion. The opening work in process costs are ignored for the unit cost calculation. Therefore, the costs accounted for calculation is different under FIFO because beginning work in process costs are not taken into consideration when allocating current period costs using equivalent units. Instead the beginning work in process costs are included in the current period costs only and not spread over both goods completed in the current period and ending inventory. Production report comparison Weighted-average and FIFO methods The major difference between the two methods is that weighted-average mixes the manufacturing costs of beginning inventory with the current period s production costs to calculate the equivalent unit cost. In fact, these costs were incurred in the previous period. Fluctuations in price of materials or conversion between periods would result in the variation in cost from the previous period being carried through to future periods. When using the FIFO method, all costs in beginning inventory incurred in the previous period are realized only in the current period because these units are considered to be finished first before the new units are started. In a JIT environment, there is very little difference between the two methodologies because the variation is due to the costing of ending and beginning inventories. The text on pages 151-152 provides a discussion of the differences between weighted-average and FIFO. Reading 3-1 and Appendix 4A of the textbook also provide a more detailed comparison of the two methods.

3.6 Shrinkage, spoilage, and lost units Learning objective LEVEL 1 Compute the cost of lost units or shrinkage. (Level 1) Shrinkage and lost units are briefly discussed in Supplement 4C of the textbook. In many industries, the loss of units is an unavoidable aspect of manufacturing operations. Consequently, shrinkage and lost units are necessary components in the study of process costing. Management also needs to know what has been lost in order to control the production process. Machine breakdowns, operator errors, or accidents can result in units being lost. Evaporations or machine tolerances can result in fewer good units being finished than were started. Carefully study Reading 3-2, which explains and illustrates alternative ways of dealing with spoilage and lost units. Note: Standard costing methods are mentioned on page 4 of Reading 3-2. This material is not examinable in this course, and the detailed discussion has therefore been removed from the reading.

3.7 Operation costing Learning objective LEVEL 2 State the conditions under which operation costing is useful to management, and explain the impact of a flexible manufacturing system on job-order and process costing. (Level 2) Job-order costing is a costing system used for products that are made to the customer's specifications. Process costing is used for products that are identical. Some products may have part of their operations costed using the job-order costing system and other parts costed using the process costing system. This mixed accounting system is called operation costing. The cost of the product is the total of some costs applied on an average or FIFO basis plus other costs accumulated specifically for that product. For example, consider the cost of a pizza. All crusts have the same per-unit cost for the dough and the labour. The cost of one layer of cheese may be added to the basic cost. These costs may be tracked by a process costing system. The cost of the toppings is recorded by a job-cost system because the topping cost depends on the type of pizza prepared. In the previous two modules and this module, you learned about manufacturing innovations (JIT, FMS) that are making operations more efficient. Flexible manufacturing systems streamline operations so that costs become more generalized rather than specific to each job. When costs are generalized, process costing may be used. Therefore, FMS not only streamlines the physical process but leads to efficiency in the accounting process. Chapter summary This topic marks the end of the textbook coverage of process costing. To ensure you understand this material and the corresponding terminology, read the summary on page 143 and work through the review problems on pages 143-147.

3.8 Computer illustration 3.8-1: Production report Weighted-average method and FIFO method Learning objective LEVEL 1 Design a worksheet that calculates and prepares a production report and cost reconciliation for both weighted-average and FIFO methods, and compare the two methods. (Level 1) Chapter 4 of the textbook explains the preparation of a production report using the weighted-average method and the FIFO method in detail. Reconciliation of costs charged to production under FIFO is also explained well in Appendix 4A. This computer illustration contrasts the two methods and demonstrates how you can use a spreadsheet program to prepare a production report and cost reconciliation for both methods. Material provided Description File MA1M3P1 which contains a prebuilt worksheet M3P1, which you will complete, and a completed solution worksheet M3P1S, to which you can compare your work. Problems P4-19 and P4-20 on pages 162-163 in your textbook require you to prepare a production report for the mixing department for the month of June 20X5 using the weighted-average method and the FIFO method, respectively. Required Complete the worksheet M3P1 by entering the required formulas. Procedure First familiarize yourself with the information in Exhibit 4-8 and the illustrations on pages 140-141. Note how the various costs are calculated and recorded. Then perform the following steps. 1. Open the file MA1M3P1 and click the sheet tab M3P1. 2. Study the layout of the worksheet. Cells A6 to E14 contain the data table with the information provided in Problem P4-19 (page 162-163). Move to cell B12 and observe the formula displayed: =IF (C8+C9<>C10+C11, "******ERROR IN DATA TABLE******, "COSTS") This formula can be analyzed as follows: if beginning WIP (C8) plus units started into production (C9) do not equal (<>) units completed and transferred out (C10) plus ending WIP (C11), then the error message ******ERROR IN DATA TABLE****** is displayed in B12. If C8+C9=C10+C11, then B12 displays the label COSTS. (You can test this by entering 60,000 in C8. The error message should appear.) The purpose of this formula is to reduce the chance of data entry errors that will carry down through the production report.

3. Display rows 16 to 29. Notice the way the worksheet is set up. Columns A to C contain the quantity schedule for the weighted-average method. Columns F to I contain the quantity schedule for the FIFO method. 4. Display rows 24 to 29. Observe the difference in presentation of the units accounted for between the weighted-average method and the FIFO method. The FIFO method separates the units in beginning inventory from the units started and completed in the current month while the weighted-average method does not. 5. Move down rows 30 to 70, which contain a partially completed production report for both methods of calculating unit costs. The production report for the weighted-average method appears in columns A to E. The production report for the FIFO method appears in columns F to J. Notice that some cells show a value of 0. These cells contain formulas that have been preentered to save you time. When you have completed the equivalent unit calculations, these cells will show the correct values. 6. Enter in cells B39 to C40 the required formulas to calculate the equivalent units of production under the weighted-average method. 7. Enter in cells G38 to H40 the required formulas to calculate the equivalent units of production under the FIFO method. Note the difference in presentation from the weighted-average method. As discussed in the textbook, when calculating equivalent units under the FIFO method, the amount of work to be completed on the units of beginning inventory must be shown. Then the number of units started and completed is shown, followed by the amount of work completed on units in process at the end. 8. Enter in row 48 the required formulas to calculate the unit cost of production under both methods. 9. Complete the worksheet by entering the necessary formulas in the following cells. 10. After you have completed the worksheet, save a copy. 11. Print a copy of your sheet. 12. Next, click the M3P1S tab for the solution. Compare the solution with your printout from step 11. If you do not have the same results, go to step 13. 13. Print a copy of the formulas of your worksheet, and compare them with the formulas of the

Conclusion solution worksheet. Correct any errors. The only difference between the weighted-average method and the FIFO method is the treatment of the beginning inventory. The FIFO method separates the transferred units into units from the beginning inventory and units started and completed during the current period. The FIFO method is therefore more complex than the weighted-average method; however, it more accurately reflects the production costs incurred during the current period.

Module 3 summary Process costing applies mainly to homogeneous products or services produced on a continuous basis. Topic 3.1 explains that the accumulation of costs by department rather than by job distinguishes process costing from job-order costing. Topic 3.2 tracks the flow of costs in the process costing system. Topic 3.3 introduces the concept of equivalent units, which must be determined in order to compute unit costs in a given department. Two methods are usually used to prepare a production report that summarizes the activity and costs that have taken place in a department: weighted average and FIFO. Topics 3.4 and 3.5 (respectively) deal with the application of these methods. Because of the nature of manufacturing operations, shrinkage, spoilage (normal and abnormal), and lost units cannot be avoided. Topic 3.7 explores how to account for and dispose of their costs. Topic 3.8 introduces operation costing, a hybrid cost system that combines accounting treatment borrowed partly from job-order and partly from process costing. This topic also discusses the impact of the flexible manufacturing system.

Module 3 self-test Question 1 Computer question Before you attempt this question, work through Computer illustration 3.8-1. Description Walton Company uses process costing. After three months of intensive effort, the company has converted its Midvale plant to an FMS layout and has installed necessary automated equipment in the various cells. As of the first of last month (May) the company also initiated a JIT system on inventory control. In the past, work-in-process inventories have been a problem in that partially completed materials have accumulated in work areas and impeded the efficiency of operations. But during the last month, the company's new JIT system, in conjunction with the FMS layout, has allowed the company to clear out its in-process items and maintain a smooth flow of goods to meet current demand. Production data for May are as follows: Units Materials Conversion Work in process, May 1 110,000 $ 65,000 $ 45,000 Started into production 550,000 Completed and transferred out 660,000?? Work in process, May 31 Cost added during the month 512,000 714,000 The May 1 Work-in-process inventory was 60% complete as to materials and 40% complete as to conversion costs. The company uses the FIFO method to account for cost flows. Required 1. Use the procedure described after the "Required" to electronically prepare a production report for May. From this report, answer the following questions: a. What was the total cost of one unit of production for the month of May? b. What was the total cost of goods transferred to Finished-goods inventory during the month of May? 2. Use the procedure described and these additional data to electronically prepare a production report for June: During the following month (June), the company is able to increase its efficiency in the Midvale plant so that 720,000 units are started into production. Also, through JIT the company is able to keep work-in-process inventories from accumulating in the plant. The company incurs $586,000 in cost for materials and $602,000 in conversion cost for the month. From this report, answer the following questions: a. What was the total cost of goods transferred to Finished-goods inventory during the month of June? b. How (if at all) would the report you just prepared differ if the company was using the weighted-average method to account for cost flows?

Procedure Source: Ray H. Garrison, Managerial Accounting, Third Canadian Edition, Problem P4-31, page 194. Copyright 1996, by McGraw-Hill Ryerson Limited. Adapted with permission. 1. Open the file MA1M3Q1. 2. Examine the layout of the worksheet. 3. Display rows 19 to 29, and observe that the formulas in the quantity schedule have been preentered to save you time. 4. Move to row 32. Rows 32 to 65 contain a partially completed production report. Notice again that some of the formulas have been pre-entered. To complete requirement 1 5. Following the example of Computer illustration 3.8-1 and, using the information given above, complete the data table in rows 7 to 15. 6. Complete the production report in rows 37 to 65 by entering the required formulas. 7. After you have completed the worksheet, save it. To complete requirement 2 Solution Question 2 8. Retrieve your solution to requirement 1 and modify the data table in accordance with requirement 2 in the problem. Modify the statement title in cell A34. 9. Observe the modified quantity schedule and production report. 10. Save the worksheet under a different name than the name used for your solution to requirement 1. Computer question Before you attempt this question, work through Computer illustration 3.8-1. Description Durall Company manufactures a plastic gasket that is used in automobile engines. The gaskets go through three processing departments: Mixing, Forming, and Stamping. The company's accountant (who is very inexperienced) has prepared a summary of production and costs for the Mixing department for October 20X5, as follows: Mixing department costs: Work-in-process inventory, October 1, 5,000 units, 1/10 complete as to labour and overhead $ 27,620 * Material A added during the month (added at the start of work in the Mixing department) 92,400 Material B added during the month (added when

processing is 30% complete in the Mixing department) 36,200 Conversion costs added during the month 126,200 Total departmental costs $282,420 Mixing department costs assigned to: Units completed and transferred to the Forming department, 105,000 units at $2.6897 each $282,420 Work-in-process inventory, October 31, 10,000 units, 3/8 complete as to labour and overhead Total departmental costs assigned $282,420 * Consists of material A, $12,700; material B, $8,070; and labour and overhead, $6,850. Labour and overhead costs are incurred evenly during processing in the Mixing department. After mulling over the data above, Durall's president commented, "I can't understand what's happening here. Despite a concentrated effort at cost reduction, our unit cost actually went up in the Mixing department last month. With that kind of performance, year-end bonuses are out of the question for the people in that department." The company uses the weighted-average method to account for units and costs. Required 1. Use the procedure described below to electronically prepare a production report for October. From this report, answer the following questions. a. What was the total cost of one unit of production for the month of October? b. What was the total cost of goods transferred to the Forming department during the month of October? 2. Assume that in order to remain competitive, the company undertook a major cost-cutting program during October. Would the effects of this cost-cutting program tend to show up more under the weighted-average method or under the FIFO method? Explain your answer. 3. Explain to the president why the $2.6897 unit cost figure appearing on the report prepared by the accountant is so high. Source: Ray H. Garrison, Managerial Accounting, Third Canadian Edition, Case C4-27, pages 202-203. Copyright 1996, by McGraw-Hill Ryerson Limited. Adapted with permission. Note: Answer requirement 1 using the following procedure, then answer requirements 2 and 3 manually. Procedure 1. Open the file MA1M3Q2. 2. Examine the layout of the worksheet. The worksheet resembles the one used in Computer illustration 3.8-1. Note the error message displayed in cell B13. This message should disappear after you enter the correct formula in cell B9. 3. Enter in cell B9 the formula to calculate the number of units started into production. 4. Complete the data table by entering, for the WIP inventory, the percentage of completion for labour and overhead, and for Materials A and B. Cells C8 to E8 are for the beginning WIP inventory, and cells C11 to E11 are for the ending WIP inventory.

5. Using Computer illustration 3.8-1 as an example, complete the production report beginning in row 37. Note that cells B52, D52, B55, B56, B61, and D61 already contain formulas. These formulas have been pre-entered for you. 6. After you have completed all requirements, save the worksheet. 7. Manually answer the rest of the question. Solution Question 3 Multiple choice a. Which of the following is least likely to be produced in a process costing system? 1. Custom furniture manufacturer 2. Compact disc manufacturer 3. Automobile windshield manufacturer 4. Electronics manufacturer b. Which of the following is true regarding process costing? 1. It applies only to the manufacture of products. 2. It applies only to the provision of services. 3. It applies to the manufacturing and service industries. 4. It involves only heterogeneous products. c. Equivalent units of production are equal to which of the following? 1. The number of units actually finished 2. The number of complete whole units one could obtain from the materials and effort contained in partially completed units 3. The number of units actually finished plus the unfinished units in work in process at the end of the period 4. The number of units started in the period less the unfinished units in ending work in process for the same period d. Beginning work in process includes 20,000 units that are 60% complete. Which of the following describes the meaning of this statement? 1. 40% of these units will be transferred out this period. 2. 12,000 of the 20,000 units are incomplete. 3. Each of the 20,000 units are 40% incomplete. 4. 8,000 of the 20,000 units are incomplete. e. On a production report, what is true about the total units and costs to account for and how they are accounted for? 1. They are seldom identical in amount because of normal/abnormal spoilage. 2. The totals should be identical if all the units and costs are accurately reported. 3. They are different in amount by the amount of current costs assigned to work in process. 4. They are different in amount according to the difference in overhead applied and actual overhead incurred. f. In order to calculate the equivalent units of production, what must you be able to reasonably estimate?

1. Units completed 2. The percentage of completion 3. Units started and completed 4. Spoiled units g. Assuming that materials are added at the beginning of the process and conversion costs are added equally throughout the process, what are the materials and conversion costs that must be added in 2005 to complete 2004 ending work in process that is 60% complete? 1. 100% materials; 60% conversion costs 2. 100% materials; 40% conversion costs 3. 0 materials; 60% conversion costs 4. 0 materials; 40% conversion costs h. Assuming no spoilage and that there are 5,000 units in work in process on October 31 and 45,000 units were started into production during October, how many units were in work in process on October 1 if 43,000 units were completed during October? 1. 0 2. 3,000 3. 5,000 4. 7,000 i. Assuming there were 20,000 units in beginning work in process; 61,000 good units completed during the period; 6,000 units in ending work in process; and 3,000 units spoiled, how many units were started during the accounting period? 1. 41,000 2. 47,000 3. 50,000 4. 55,000 Solution Question 4 Multiple choice a. Assuming no beginning work in process, what is the number of equivalent units if 20,000 units were started during the period and there are 4,000 units in ending working in process that are 30% complete? 1. 15,200 2. 17,200 3. 18,800 4. 21,200 b. There are 8,000 units in beginning inventory that are 80% complete, and 20,000 units were started during the period. If ending work in process consists of 4,000 units that are 40% complete, what is the number of equivalent units assuming FIFO? 1. 19,200 2. 20,000 3. 24,000 4. 24,800

c. Assume the following information under FIFO: Beginning work in process Units started Ending work in process? units; 70% complete 36,000 units 9,000 units; 40% complete How many units were in beginning work in process if the equivalent units of production are 32,400? 1. 1,260 2. 1,800 3. 3,600 4. 6,000 d. Assume the following information under FIFO: Beginning work in process 4,000 units; 70% complete Units started? Ending work in process 7,000 units; 20% complete How many units were started into production during the period if the equivalent units of production are 15,000? 1. 17,800 2. 19,400 3. 20,600 4. 22,200 e. Assume the following information under FIFO: Beginning work in process Units started & completed Ending work in process 20,000 units; 60% complete 48,000 units? units; 20% complete How many units were in ending work in process if the equivalent units of production are 60,000? 1. 0 2. 5,000 3. 10,000 4. 20,000 f. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in process of 8,000 units 40% complete. If materials are added at the beginning of the process and conversion costs occur uniformly during processing, what are the equivalent units for material and conversion costs respectively under a FIFO assumption? 1. 40,000; 37,200 2. 40,000; 43,200 3. 50,000; 47,200 4. 50,000; 53,200 g. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in process of 8,000 units 40% complete. If materials are added halfway during the process and conversion costs occur uniformly during processing, what are the equivalent units for material and conversion costs respectively under a FIFO assumption?

1. 42,000; 37,200 2. 42,000; 43,200 3. 52,000; 37,200 4. 52,000; 43,200 h. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in process of 8,000 units 40% complete. If materials are added at the beginning of the process and conversion costs occur uniformly during processing, what are the equivalent units for material and conversion costs respectively under a weighted average assumption? 1. 40,000; 43,200 2. 40,000; 45,200 3. 50,000; 45,200 4. 50,000; 50,000 i. Beginning work in process was 10,000 units 20% complete; 40,000 units started, with ending work in process of 8,000 units 40% complete. If materials are added halfway during the process and conversion costs occur uniformly during processing, what are the equivalent units for material and conversion costs respectively under a weighted average assumption? 1. 42,000; 43,200 2. 42,000; 45,200 3. 50,000; 45,200 4. 50,000; 50,000 j. How many units were completed and transferred out if beginning work in process consisted of 400 units, units started during the period were 6,400, and ending work in process showed a balance of 1,200 units? 1. 5,600 2. 6,000 3. 6,800 4. 7,600 k. Consider the following information: Direct materials Direct labour Beginning work in process $8/unit $6/unit 5,000 units What was the total cost to complete the beginning work in process units assuming the units were 90% complete as to materials and 40% complete in terms of conversion costs and overhead is applied at the rate of 150% of direct labour cost? 1. 22,000 2. 48,000 3. 49,000 4. 66,000 l. Consider the following information in the Finished-goods inventory account: $64,000 ending balance $90,000 beginning balance

$460,000 for costs transferred in The journal entry to record the cost of goods sold would include which of the following? 1. Credit to Finished goods inventory of $460,000 2. Debit to Cost of goods sold for $460,000 3. Debit to Cost of goods sold for $486,000 4. Debit to Cost of goods sold for $550,000 Solution Question 5 Textbook, Problem 4-27, Requirement 1 only, page 167. Solution Question 6 Textbook, Problem 4-21, pages 163-164. Solution Question 7 Textbook, Problem 4-22, page 164. Solution Question 8 Textbook, Question 4-2, page 156. Solution

Self-test 3 Solution 1 Computer solution Requirement 1 a. The total cost of one unit of production for the month of May was $2.02. Requirement 2 b. The total cost of goods transferred to Finished-goods inventory during the month of May was $1,336,000. a. The total cost of goods transferred to Finished-goods inventory during the month of June was $1,188,00. b. As long as the work-in-process inventories are maintained at a zero level, there will be no difference between the production report prepared under the FIFO and weighted-average methods. Source: Ray H. Garrison, Solutions Manual to accompany Managerial Accounting, Third Canadian Edition. Copyright 1996, by McGraw-Hill Ryerson Limited. Adapted with permission. Requirement 1 Solution printout

Requirement 1 Formula printout

Self-test 3 Solution 2 Computer solution Requirement 1 a. The total cost of one unit of production for the month of October was $2.52. Requirement 2 b. The total cost of goods transferred to the Forming department during the month of October was $264,843. The effects will tend to show up more under the FIFO method. The reason is that the FIFO method keeps the costs of the current period separate from the costs of the prior period. Thus, under the FIFO method, the company will be able to compare unit costs of the current period against those of the prior period to see how effective the cost-cutting program has been. Under the weighted-average method, however, costs carried over from the prior period are averaged in with costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort. Requirement 3 The unit cost figure on the report prepared by the accountant is high because none of the cost incurred during the month was assigned to the units in the ending work-in-process inventory. Source: Ray H. Garrison, Solutions Manual to accompany Managerial Accounting, Third Canadian Edition, Case C4-27, pages 202-203. Copyright 1996, by McGraw-Hill Ryerson Limited. Adapted with permission. Solution printout

Formula printout

Self-test 3 Solution 3 Multiple choice a. 1) Job order costing is most likely used in the production of custom furniture or any custom product. b. 3) Process costing is used by both manufacturers and service providers. c. 2) Equivalent units are the number of complete whole units one could obtain from the materials and effort contained in partially completed units d. 3) e. 2) f. 2) g. 4) You must be able to reasonably estimate the percentage of completion in order to calculate the equivalent units of production. h. 2) Since materials are added at the beginning of the process and the units are 60% complete, no materials are required to complete these units. In terms of conversion costs, 40% more must be added to complete these units since 60% of the conversion costs have already been added. Since there were 43,000 units completed during October and 5,000 units in ending work in process, there are 48,000 units to account for. 48,000 units less 45,000 units started into production during October means there must have been 3,000 units in beginning work in process on October 1. i. 3) 61,000 + 6,000 + 3,000 = 70,000 units to account for; 70,000-20,000 = 50,000 units started during the period

Self-test 3 Solution 4 Multiple choice a. 2) b. 1) c. 4) d. 2) e. 4) 20,000-4,000 = 16,000 units completed; 4,000 30% = 1,200; 16,000 + 1,200 = 17,200 equivalent units. 8,000 0.2 = 1,600; 20,000-4,000 = 16,000; 4,000 0.4 = 1,600; 1,600 + 16,000 + 1,600 = 19,200 equivalent units. Beginning WIP units + Units started and completed + Ending WIP units = Total; Units Started and completed + Ending WIP units = Total units started this period; 36,000-9,000 = 27,000 units started and completed; 9,000 0.4 = 3,600; 32,400 - (27,000 + 3,600) = 1,800 equivalent units in Beginning work in process; 1,800 0.3 = 6,000 units in Beginning work in process. (4,000 0.3 = 1,200 equivalent beginning WIP units) + X equivalent units started = 15,000 total equivalent units; X = 13,800; X equivalent units started and completed + (7,000 0.2 = 1,400 equivalent ending WIP units) = 13,800 equivalent units started; X = 12,400; 12,400 units started and completed + 7,000 ending WIP units = 19,400 actual units started. (20,000 0.4 = 8,000 equivalent beginning WIP units) + X equivalent units started = 60,000 total equivalent units; X = 52,000; 48,000 equivalent units started and completed + X ending inventory units 0.2) = 52,000 equivalent units started; X = 20,000 ending inventory units. f. 2) Actual units Equivalent units Direct materials Conversion costs 10,000 0 8,000 32,000 32,000 32,000 8,000 8,000 3,200 50,000 40,000 43,200 g. 2) Actual units Equivalent units Direct materials Conversion costs 10,000 10,000 8,000

32,000 32,000 32,000 8,000 0 3,200 50,000 42,000 43,200 h. 3) Actual units Equivalent units Direct materials Conversion costs 42,000 42,000 42,000 8,000 8,000 3,200 50,000 50,000 45,200 i. 2) Units Beginning WIP 10,000 Units started 40,000 Ending WIP 8,000 Therefore, units started and transferred = 10,000 + 40,000 8,000 = 42,000 Equivalent units: Materials Conversion Started and transferred (100%, 100%) 42,000 42,000 Ending WIP @ 40% (0%, 40%) 0 3,200 Total equivalent units 42,000 45,200 Actual units Equivalent units Direct materials Conversion costs 12,000 42,000 42,000 38,000 0 3,200 50,000 42,000 45,200 j. 1) 400 + 6,400 = 6,800 units to account for; 6,800-1,200 = 5,600 units completed and transferred out. k. 3) (8 5,000 10% = 4,000) + (6 5,000 60% = 18,000) + (18,000 150% = 27,000) = 49,000 l. 3) $90,000 + $460,000 - $64,000 = $486,000

Self-test 3 Solution 5 Problem 4-27 Source: Ray H. Garrison, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to accompany Managerial Accounting, Eighth Canadian Edition. Copyright 2010, by McGraw-Hill Ryerson Limited. Reproduced with permission.

Self-test 3 Solution 6 Problem 4-21

Source: Ray H. Garrison, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to accompany Managerial Accounting, Eighth Canadian Edition. Copyright 2010, by McGraw-Hill Ryerson Limited. Reproduced with permission.

Self-test 3 Solution 7 Problem 4-22 FIFO Method 1. Equivalent units of production Materials Conversion To complete beginning work in process: Materials: 60,000 units (100% 60%)... 24,000 Conversion: 60,000 units (100% 30%)... 42,000 Units started and completed during the period (510,000 units started 70,000 units in ending inventory)... 440,000 440,000 Ending work in process: Materials: 70,000 units 80% complete... 56,000 Conversion: 70,000 units 40% complete... 28,000 Equivalent units of production... 520,000 510,000 2. Cost per equivalent unit Materials Conversion Cost added during the period (a)... $468,000 $357,000 Equivalent units of production (b)... 520,000 510,000 Cost per equivalent unit (a) (b)... $0.90 $0.70 3. Costs of ending work-in-process inventory and units transferred out Materials Conversion Total Ending work-in-process inventory: Equivalent units of production... 56,000 28,000 Cost per equivalent unit... $0.90 $0.70 Cost of ending work-in-process inventory... $50,400 $19,600 $70,000 Units transferred out: Cost in beginning work-in-process inventory... $27,000 $13,000 $40,000 Cost to complete the units in beginning work-in-process inventory: Equivalent units of production required to complete the beginning inventory... 24,000 42,000 Cost per equivalent unit... $0.90 $0.70 Cost to complete the units in beginning inventory... $21,600 $29,400 $51,000 Cost of units started and completed this period: Units started and completed this period... 440,000 440,000 Cost per equivalent unit... $0.90 $0.70 Cost of units started and completed this period... $396,000 $308,000 $704,000 Cost of units transferred out... $795,000 4. Cost reconciliation Costs to be accounted for: Cost of beginning work-in-process inventory ($27,000 + $13,000)... $ 40,000 Costs added to production during the period ($468,000 + $357,000)... 825,000 Total cost to be accounted for... $865,000 Costs accounted for as follows: Cost of ending work-in-process inventory... $ 70,000

Costs of units transferred out... 795,000 Total cost accounted for... $865,000 Source: Ray H. Garrison, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to accompany Managerial Accounting, Eighth Canadian Edition. Copyright 2010, by McGraw-Hill Ryerson Limited. Reproduced with permission.

Self-test 3 Solution 8 Question 4-2 1. Job-order costing and process costing have the same basic purposes to assign mate-rials, labour, and overhead cost to products and to provide a mechanism for computing unit product costs. 2. Both systems use the same basic manufacturing accounts. 3. Costs flow through the accounts in basically the same way in both systems. Source: Ray H. Garrison, G.R. Chesley, and Raymond F. Carroll, Solutions Manual to accompany Managerial Accounting, Eighth Canadian Edition. Copyright 2010, by McGraw-Hill Ryerson Limited. Reproduced with permission.