Solution manual accounting 21e by warreni ch 19

CHAPTER 19
PROCESS COST SYSTEMS
CLASS DISCUSSION QUESTIONS
1. a. A job order cost system is best suited
for a custom jewelry manufacturer
because most of the production
consists of job orders, and costs can be
reasonably identified with each job.
b. A process cost system would be best
suited for a paper manufacturer
because the processes are continuous
and the products are homogeneous.
c. A job order cost system is best suited
for an automobile repair shop because
costs can be reasonably identified with
each job.
d. A job order cost system would be used
by a building contractor to accumulate
the costs for each individual building
because the costs can be identified
with each job without great difficulty.
e. An assembly-type industry using mass
production methods, such as TV
assembly, would use the process cost
system because the products are
somewhat standard and lose their
identities as individual items. In such
industries, it is neither practical nor
necessary to identify output by jobs.
2. Since all goods produced in a process cost
system are identical units, it is not

necessary to classify production costs into
job orders.
3. In a process cost system, the direct labor
and factory overhead applied are debited to
the work in process accounts of the
individual production departments in which
they occur. The reason is that all products
produced by the department are similar.
Thus, there is no need to charge these
costs to individual jobs. For the process
manufacturer, the direct materials and the
conversion costs are charged to the
department and divided by the completed
production of the department to determine
a cost per unit.
4. Transferred-out materials are materials that
are completed in one department and
transferred to another department or to
finished goods.

5. (1) Determine the units to be costed.
(2) Calculate the equivalent units of
production.
(3) Determine the cost per equivalent unit.
(4) Allocate costs to completed and
partially completed units.
6. Equivalent units is the term used to
represent the total number of units that
would have been completed within a
processing department as a result of the

productive efforts during a period had there
been no work in process at the beginning
or end of the period. Equivalent units may
be said to measure the productive activity
for a given period.
7. The cost per equivalent unit is frequently
determined separately for direct materials
and conversion costs because these two
costs are frequently incurred at different
rates in the production process. For
example, materials may be incurred at the
beginning of the process and conversion
costs incurred evenly throughout the
process.
8. The cost per equivalent unit is used to
allocate direct materials and conversion
costs between completed and partially
completed units.
9. The transferred-in cost from Department A
to Department B includes the materials
costs, direct labor, and applied factory
overhead incurred to complete units in
Department A.
10. Actual factory overhead incurred is debited
to departmental factory overhead accounts.
11. The most important purpose of the cost of
production report is to assist in the control
of costs. This is accomplished by holding
each department head responsible for the
costs incurred in the department.

12. Cost of production reports can provide
detailed data about the process. The
reports can provide information on the
department by individual cost elements.
This
can
enable
management
to
investigate problems and opportunities.

39


13. Yield is a measure of the materials usage
efficiency of a process manufacturer. It is
determined by dividing the output volume
of product by the input volume of product.
For example, if 950 tons of aluminum were
rolled from 1,000 tons of ingot, then the
yield would be said to be 95%. Five percent
of the ingot was scrapped during the rolling
process.
14. Just-in-time processing is a business
philosophy that focuses on reducing time
and cost and eliminating poor quality within
processes.

15. Just-in-time
processing

emphasizes
combining
process
functions
into
manufacturing cells, involving employees in
process improvement efforts, eliminating
wasteful activities, and reducing the
amount of work in process inventory
required to fulfill production targets.

40


EXERCISES
Ex. 19–1
a.

Work in Process—Blending Department......................
Materials—Cocoa beans..........................................
Materials—Sugar......................................................
Materials—Dehydrated milk.....................................

XXX

b. Work in Process—Molding Department.......................
Work in Process—Blending Department................

XXX

c.

Work in Process—Packing Department.......................
Work in Process—Molding Department..................

XXX

d. Finished Goods.............................................................
Work in Process—Packing Department..................

XXX

e.

XXX

Cost of Goods Sold.......................................................
Finished Goods........................................................

XXX
XXX
XXX

XXX

XXX

XXX

XXX

Ex. 19–2
Materials

Factory Overhead—
Smelting Dept.

Work in Process—
Smelting Dept.

Factory Overhead—
Rolling Dept.

Work in Process—
Rolling Dept.

Finished Goods—
Rolled Sheet

Factory Overhead—
Converting Dept.

Work in Process—
Converting Dept.

Finished Goods—
Sheared Sheet

Cost of Goods

Sold


Ex. 19–3
a.

1. Work in Process—Refining Department.................
Materials..............................................................

245,000

2. Work in Process—Refining Department.................
Wages Payable....................................................

112,000

3. Work in Process—Refining Department.................
Factory Overhead—Refining Department..........

81,600

b. Work in Process—Sifting Department..........................
Work in Process—Refining Department.................

245,000
112,000
81,600
424,600*
424,600

*$24,000 + $245,000 + $112,000 + $81,600 – $38,000

Ex. 19–4
a.

Factory overhead rate:
$936,000 ÷ $780,000 = 120%

b. Work in Process—Blending Department......................
Factory Overhead—Blending Department..............
$64,500 × 120% = $77,400

77,400
77,400

c. $2,400 credit
d. Overapplied factory overhead

Ex. 19–5
Whole Units
Inventory in process, beginning
(75% completed).......................
Started and completed..................
Transferred to Packing Dept.........
Inventory in process, ending
(40% complete).........................
Total................................................
*13,500 – 1,800

Equivalent Units

Direct Materials Conversion

1,800
11,700*
13,500

0
11,700
11,700

450
11,700
12,150

1,200
14,700

1,200
12,900

480
12,630


Ex. 19–6
a.

Drawing Department
Whole Units

Inventory in process, July 1
(35% completed)...........................
Started and completed in July..........
Transferred to Winding Department
in July............................................
Inventory in process, July 31
(80% complete).............................
Total....................................................

Equivalent Units
Direct Materials Conversion

4,500
81,500*

0
81,500

2,925
81,500

86,000

81,500

84,425

5,400

5,400

4,320

91,400

86,900

88,745

*86,000 – 4,500
b. Winding Department
Whole Units
Inventory in process, July 1
(55% completed)...........................
Started and completed in
July................................................
Transferred to finished goods
in July............................................
Inventory in process, July 31
(18% complete).............................
Total....................................................

2,000

Equivalent Units
Direct Materials Conversion
0

900

82,800*

82,800

82,800

84,800

82,800

83,700

3,200

3,200

576

88,000

86,000

84,276

*84,800 – 2,000
Note: Of the 86,000 units transferred in, 82,800 units were started and completed
and 3,200 units are in ending work in process.


Ex. 19–7

a.

Units in process, July 1..............................................
Units placed into production for July.......................
Less units finished during July.................................
Units in process, July 31............................................

b.
Whole Units
Inventory in process, July 1
(3/5 completed).............................
Started and completed in July..........
Transferred to finished goods
in July............................................
Inventory in process, July 31
(2/3 complete)...............................
Total....................................................
*175,000 – 10,000

10,000
180,000
(175,000)
15,000

Equivalent Units
Direct Materials Conversion

10,000
165,000*

0
165,000

4,000
165,000

175,000

165,000

169,000

15,000

15,000

10,000

190,000

180,000

179,000


Ex. 19–8
a.

1. $2.20 ($396,000/180,000 units)
2. $7.80 [($558,480 + $837,720)/179,000 units]

3. $98,200, determined as follows:
Work in Process—Finishing Department Balance, July 1........
Conversion costs incurred during July
(4,000 equivalent units × $7.80)...............................................
Cost of beginning work in process completed during July.....

$ 67,000
31,200
$ 98,200

4. $1,650,000 [($2.20 + $7.80) × 165,000 units]
Note to Instructors: The cost of the beginning work in process completed
during July, $98,200, plus the cost of the units started and completed
during July, $1,650,000, equals the cost of the units finished during July,
$1,748,200.
5. $111,000, determined as follows:
Direct materials ($2.20 × 15,000 units).......................................
Conversion costs ($7.80 × 10,000 equivalent units).................
Cost of ending work in process.................................................

$ 33,000
78,000
$111,000

Note: The cost of ending work in process is also the balance of the Work
in Process—Finishing Department account as of July 31.
b. The conversion costs in July increased by $0.30 per equivalent unit,
determined as follows:
Work in Process—Finishing Department Balance, July 1.............
Deduct direct materials cost incurred in June

($2.20 × 10,000 units)...................................................................
Conversion costs incurred in June.................................................

$ 67,000
22,000
$ 45,000

June conversion cost per equivalent unit
[$45,000/(10,000 units × 3/5]........................................................

$7.50

July conversion cost per equivalent unit.......................................
Less June conversion cost per equivalent unit.............................
Increase in conversion cost per equivalent unit............................

$7.80
7.50
$0.30


Ex. 19–9
Equivalent units of production:
Cereal
(in pounds)
Inventory in process, October 1..........
Started and completed in October......
Transferred to finished goods
in October........................................
Inventory in process, October 31........

Total.......................................................

Boxes
Conversion Cost
(in boxes)
(in boxes)

—
34,200

—
22,800

1,200
22,800

34,200
900
35,100

22,800
500
23,300

24,000
—
24,000

Supporting explanation:
The inventory in process on October 1 includes both the cereal in the hopper and

the boxes in the carousel, and thus, includes no equivalent units for the material
during the current period. The reason is because the costs for the cereal and
boxes were introduced to the Packing Department in September. Since
conversion costs are incurred only when the cereal is filled into boxes, all 1,200
boxes of the October 1 inventory in process will have conversion costs incurred
in October.
The product started and completed in October includes 22,800 boxes (24,000
boxes completed less the 1,200 in the carousel on October 1). These boxes
represent 34,200 pounds of cereal (22,800 × 24 oz./16 oz.), since there are 16
ounces to a pound. Alternatively, there were a total of 36,000 pounds of cereal
boxed during October (24,000 boxes × 24 oz./16 oz.); however, 4,800 of these
pounds were already introduced in September and accounted for in the October 1
inventory in process.
The inventory in process on October 31 includes the remaining pounds of cereal
in the hopper and boxes in the carousel that are properly included in the
equivalent unit computation for October (since the costs were incurred in the
department in October). No conversion costs have been applied to these boxes
since they remain unfilled.
Note to Instructors: An actual cereal-filling line begins with the empty box
carousel. The box carousel holds flattened boxes that are fed into a high-speed
line that opens the box up and places it on a conveyor. The conveyor brings the
opened box under a filler head. The cereal pours from the hopper through the
filler head into the open box (actually into the inner sealer bag). The box then
moves down the line to be boxed into a large shipping carton, which is then
moved to the warehouse.


Ex. 19–10
a.

Direct labor..........................................................................................
Factory overhead applied...................................................................
Total conversion cost.........................................................................

$ 69,720
29,880
$ 99,600

b. Equivalent units of production for conversion costs:
Beginning inventory......................................................................
Started and completed..................................................................
Ending inventory (3/5 × 7,500 units).............................................
Total equivalent units for conversion costs................................

0
120,000
4,500
124,500

Conversion cost per equivalent unit:
$99,600
= $0.80 conversion cost per equivalent unit
124,500
c.

Equivalent units of production for direct materials costs:
Beginning inventory......................................................................
Started and completed..................................................................
Ending inventory (all units completed as to direct materials)....

0
120,000
7,500

Total equivalent units for direct materials costs.........................

127,500

Direct materials cost per equivalent unit:
$474,300
= $3.72 direct materials cost per equivalent unit
127,500


Ex. 19–11
a.
Units in process at beginning of period......................................
Units placed in production during period...................................
Less units finished during period................................................
Units in process at end of period.................................................

2,500
56,000
(54,500)
4,000

b.
Whole Units
Inventory in process, beginning
(60% completed)...........................

Started and completed......................
Transferred to finished goods..........
Inventory in process, ending............
Total units...........................................

2,500
52,000*
54,500
4,000
58,500

Equivalent Units
Direct Materials Conversion
0
52,000
52,000
4,000
56,000

1,500
52,000
53,500
1,000
54,500

*54,500 – 2,500
c.
Costs
Direct Materials
Conversion

Total costs for period in
Assembly Department...................................
Total equivalent units
(from above)...................................................
Cost per equivalent unit.......................................
**$75,210 + $112,815
d.

$275,600 [($1.85 + $3.45) × 52,000 units]

$103,600

$ 188,025**

÷ 56,000
$
1.85

÷ 54,500
$
3.45


Ex. 19–12
a.

1. $13,400; determined as follows:
Beginning work in process balance..........................................
Conversion costs incurred during period
(1,500 equivalent units × $3.45).............................................

Cost of beginning work in process completed during July.....
2. Cost of beginning work in process............................................
Cost of units started and completed during period.................
Cost of units transferred to finished goods during period......

$ 8,225
5,175
$13,400
$ 13,400
275,600*
$289,000

*($1.85 + $3.45) × 52,000 units
3. $10,850; determined as follows:
Direct materials ($1.85 × 4,000 units)........................................
Conversion costs ($3.45 × 1,000 equivalent units)...................
Cost of ending work in process inventory................................

$ 7,400
3,450
$10,850

Note: The cost of ending work in process is also the ending balance of the
Work in Process—Assembly Department account.
4. $5.36 ($13,400/2,500 units)
b. Yes. The production costs per unit decreased during the current period. We
know this because the cost per unit of the units started and completed during
the period is $5.30 ($1.85 + $3.45). Since the cost per unit of the beginning
work in process completed during the period is $5.36 (see (4) above), the
production costs during the current period must have decreased.

c.

The conversion cost in the current period decrease by $0.15 per equivalent
unit; determined as follows:
Beginning work in process..............................................................
Deduct direct materials cost incurred in prior period
($1.85 × 2,500 units)....................................................................
Conversion costs incurred in prior period.....................................
Prior period conversion cost per equivalent unit
[$3,600/(2,500 units × 0.40)]........................................................
Less current period conversion cost per equivalent unit.............
Decrease in conversion cost per equivalent unit during
current period..............................................................................

$8,225
4,625
$3,600
$3.60
3.45
$0.15


Ex. 19–13
1.

In computing the equivalent units for conversion costs applicable to the April
1 inventory, the 4,500 units are multiplied by 2/3 rather than 1/3, which is the
portion of the work completed in April. Therefore, the equivalent units should
be 1,500 instead of 3,000.
2. In computing the equivalent units for conversion costs for units started and

completed in April, the April 1 inventory of 4,500 units, rather than the April 30
inventory of 6,200 units, was subtracted from 18,000 units started in the
department during April. Therefore, the equivalent units started and
completed should be 11,800 instead of 13,500.
3. The correct equivalent units for conversion costs should be 15,700,
determined as follows:
To process units in inventory on April 1:
4,500 × 1/3......................................................................................
1,500
To process units started and completed in April:
18,000 – 6,200................................................................................
11,800
To process units in inventory on April 30:
6,200 × 1/5......................................................................................
1,240
Equivalent units of production..........................................................
14,540


Ex. 19–14
a.

47,500 units (7,500 + 48,000 – 8,000)

b.
Whole Units
Inventory in process, November 1
(60% completed)..............................
Started and completed
in November....................................

Transferred to finished goods
in November....................................
Inventory in process, November 30
(25% complete)................................
Total units.............................................

7,500

Equivalent Units
Direct Materials Conversion
0

3,000

40,000*

40,000

40,000

47,500

40,000

43,000

8,000

8,000

2,000

55,500

48,000

45,000

*48,000 – 8,000
Costs
Direct Materials Conversion
Total costs for November in
Forging Department............................................
Total equivalent units
(from above)........................................................
Cost per equivalent unit............................................
c. $474,000 [40,000 units × ($8.25 + $3.60)]

$396,000

$162,000

÷ 48,000
$
8.25

÷ 45,000
$
3.60

Ex. 19–15
a.

b.

$86,550; determined as follows:
Beginning work in process balance..................................................
Conversion costs incurred during period
(3,000 equivalent units × $3.60).....................................................
Cost of beginning work in process completed during July............

$ 75,750

Cost of beginning work in process...................................................
Cost of units started and completed during period.........................
Cost of units transferred to finished goods during period.............

$ 86,550
474,000*
$560,550

10,800
$ 86,550

*($8.25 + $3.60) × 40,000 units
c.

$73,200; determined as follows:
Direct materials ($8.25 × 8,000 units)................................................

Conversion costs ($3.60 × 2,000 equivalent units)..........................
Cost of ending work in process inventory.......................................

$ 66,000
7,200
$ 73,200

Note: The cost of ending work in process is also the ending balance of the
Work in Process—Forging Department as of November 30.
d.

Direct materials cost per equivalent unit: $8.00 ($60,000/7,500 units)
Conversion cost per equivalent unit: $3.50 ($15,750/4,500 units)
Work in process, November 1........................................................
Less direct materials cost..............................................................
Conversion cost included in November 1, Work in Process.......

$ 75,750
60,000
$ 15,750

Equivalent units in November 1, Work in Process (7,500 × 60%) = 4,500 units
e.

Direct materials: Increase of $0.25 ($8.25 – $8.00)
Conversion: Increase of $0.10 ($3.60 – $3.50)


Ex. 19–16
EUPHRATES COMPANY

Cost of Production Report—Cooking Department
For the Month Ended January 31, 2006

Units
Units charged to production:
Inventory in process, January 1. .
Received from materials
storeroom................................
Total units accounted for by the
Cooking Department...............
Units to be assigned cost:
Inventory in process, January 1
(30% completed)......................
Started and completed in
January....................................
Transferred to finished goods
in January................................
Inventory in process, January 31
(25% complete)........................
Total units to be assigned cost. . .

Whole Units

Equivalent Units
Direct Materials Conversion
(a)
(a)

1,500
63,500

65,000

1,500

0

1,050

61,700*

61,700

61,700

63,200

61,700

62,750

1,800

1,800

450

65,000

63,500

63,200

*63,500 – 1,800
Continued


Ex. 19–16

Concluded
Costs

Direct Materials

Unit costs:
Total costs for January in
Cooking Department...............
Total equivalent units...................
Cost per equivalent unit (b).........

$177,800
÷ 63,500
$
2.80

Costs
Conversion

$278,080
÷ 63,200
$

4.40

Costs charged to production:
Inventory in process,
January 1.................................
Costs incurred in January............
Total costs accounted for by
the Cooking Department.........
Costs allocated to completed and
partially completed units:
Inventory in process,
January 1 balance....................
To complete inventory in
process, January 1..................
Started and completed
in January................................
Transferred to finished
goods in January (c)...............
Inventory in process,
January 31 (d)..........................
Total costs assigned by
the Cooking Department.........
1
2
3
4
5

1,050 units × $4.40
61,700 units × $2.80

61,700 units × $4.40
1,800 units × $2.80
450 units × $4.40

Total Costs

$ 6,753
455,880
$462,633

$
$

0
172,7602

$

6,753

4,6201

4,620

271,4803

444,240
$455,613

5,0404

1,9805

7,020
$462,633


Ex. 19–17
BOGART CARPET COMPANY
Cost of Production Report—Cutting Department
For the Month Ended March 31, 2006

Units
Units charged to production:
Inventory in process, March 1......
Received from Weaving
Department..............................
Total units accounted for by the
Cutting Department.................
Units to be assigned cost:
Inventory in process, March 1
(75% completed)......................
Started and completed in March..
Transferred to finished goods
in March...................................
Inventory in process, March 31
(40% complete)........................
Total units to be assigned cost. . .

Whole Units

Equivalent Units
Direct Materials Conversion
(a)
(a)

8,000
215,000
223,000

8,000
206,000*

0
206,000

2,000
206,000

214,000

206,000

208,000

9,000

9,000

3,600

223,000

215,000

211,600

*215,000 – 9,000
Continued


Ex. 19–17

Concluded
Costs

Direct Materials

Unit costs:
Total costs for March in
Cutting Department................. $ 1,128,750
Total equivalent units................... ÷ 215,000
Cost per equivalent unit............... $
5.25

Costs
Conversion

$ 1,005,100
÷ 211,600

$
4.75

Costs charged to production:
Inventory in process,
March 1.....................................
Costs incurred in March...............
Total costs accounted for by
the Cutting Department...........
Costs allocated to completed and
partially completed units:
Inventory in process,
March 1 balance.......................
To complete inventory in
process, March 1..................... $
0
Started and completed
in March...................................
1,081,5002
Transferred to finished
goods in March........................
Inventory in process,
March 31...................................
47,2504
Total costs assigned by
the Cutting Department...........
1
2
3
4

5

2,000 units × $4.75
206,000 units × $5.25
206,000 units × $4.75
9,000 units × $5.25
3,600 units × $4.75

Total Costs

$

70,400
2,133,850

$ 2,204,250

$
$

70,400

9,5001

9,500

978,5003

2,060,000
$ 2,139,900

17,1005

64,350
$ 2,204,250


Ex. 19–18
a.

1. Work in Process—Casting Department..................
Materials—Alloy..................................................

249,200

2. Work in Process—Casting Department..................
Wages Payable....................................................
Factory Overhead................................................
*$162,540 × 150%

406,350

3. Work in Process—Machining Department..............
Work in Process—Casting Department.............

673,450*

249,200
162,540
243,810*

673,450

*Supporting calculations:
Cost of 9,250 transferred-out pounds:
Inventory in Process, October 1...................................................
Cost to complete October 1 inventory:
450 pounds × $45/lb. (see calculations below)......................
Pounds started and completed in October
[8,500 lbs. × ($28 + $45)]..........................................................
Transferred to Machining Department..........................................

$ 32,700
20,250
620,500
$673,450

Supporting equivalent unit and cost per equivalent unit calculations:
Equivalent Units
Whole Units Materials Conversion
Inventory in process, October 1
(40% completed)............................
Started and completed in October.....
Transferred to finished goods in
October...........................................
Inventory in process, October 31
(20% complete)..............................
Total......................................................
Cost per equivalent unit of materials:

750
8,500

—
8,500

450
8,500

9,250

8,500

8,950

400
9,650

400
8,900

80
9,030

$249,200
= $28 per pound
8,900

Cost per equivalent unit of conversion:

$406,350
= $45 per pound
9,030


Ex. 19–18

Concluded

b. $14,800; determined as follows:
Direct materials (400 × $28).....................................
Conversion (400 × 20% × $45).................................
or
$14,800 = $32,700 + $249,200 + $406,350 – $673,450

$ 11,200
3,600
$ 14,800


Ex. 19–19
Memo
To: Production Manager
The cost of production report was used to identify the cost per case for each of
the four flavors as shown below.
Total cost...............................
Number of cases...................
Cost per case........................

Orange

Cola

Lemon-Lime

Root Beer

$ 15,800
÷ 4,000
$
3.95

$ 99,300
÷ 30,000
$
3.31

$ 65,200
÷ 20,000
$
3.26

$ 9,400
÷ 2,000
$ 4.70

As can be seen, the cost per case of Root Beer is significantly above the cost per
case of the other three flavors. A more detailed analysis is necessary. The
individual cost elements that determine the total cost can be divided by the
number of cases. This analysis is provided below.

Cost per Case by Cost Element
Orange
Cola
Lemon-Lime Root Beer
Concentrate................................
Water...........................................
Sugar..........................................
Bottles........................................
Flavor changeover.....................
Conversion cost.........................
Total cost per case.....................

$0.90
0.30
0.50
1.10
0.75
0.40
$3.95

$1.10
0.30
0.50
1.10
0.06
0.25
$3.31

$1.05
0.30

0.50
1.10
0.06
0.25
$3.26

$0.90
0.30
0.50
1.10
1.50
0.40
$4.70

The table above indicates that the concentrate per case is actually less for
Orange and Root Beer than for Cola and Lemon-Lime. This is because the
concentrate supplier charges a higher price for the more popular flavors. The
costs per case for water, sugar, and bottles are the same for each flavor. However,
the costs per case for changeover are much greater for Orange and Root Beer
than for the other two flavors. In addition, the conversion costs per unit for
Orange and Root Beer are $0.15 higher than for Cola and Lemon-Lime. These last
two cost elements are sufficient to cause the cost per case of Orange and Root
Beer to be greater than Cola and Lemon Lime.
Although further analysis is necessary, it appears that Orange and Root Beer are
either bottled in short production runs, meaning more frequent changeovers, or
that each Orange and Root Beer changeover is very difficult and expensive. The
conversion cost per case is larger because the bottling line rate appears slower
for Orange and Root Beer, compared to Cola and Lemon-Lime. It’s possible that
shorter run sizes are related to the slower line rate because it takes some run
time to work the line rate up to a fast speed after a changeover. Root Beer costs

more per case than Orange because it has the shortest run length.


Ex. 19–20
The solution to this exercise is to determine if cost per pound trends in materials,
conversion, and coating costs are remaining stable over time. The following table
can be developed from the data:
January
Transferred-in materials
($ ÷ pounds output).......
Coating cost
($ ÷ pounds output).......
Conversion cost
($ ÷ pounds output).......
Yield (pounds transferred
out ÷ pounds input)........

February March
$0.35

April

May

June

$0.35

$0.35

$0.35

$0.35

$0.35

0.10

0.11

0.125

0.14

0.145

0.16

0.25

0.25

0.25

0.25

0.25

0.25

1.92

1.92

1.92

1.92

1.92

1.92

The cost per pound information is determined by dividing the costs by the
pounds transferred out. The yield is determined by dividing the pounds
transferred out by the pounds input.
Operator 1 believes that energy consumption is becoming less efficient. The
energy cost is part of the conversion cost. The conversion cost per output pound
has remained constant for the six months. If the energy efficiency were declining,
it would take more energy per pound of output over time. Thus, we would expect
to see the conversion rate per pound increasing if Operator 1 were correct.
Operator 2 believes that there are increasing materials losses from increasing
startup and shutdown activity. Yield data would help determine if this were true. If
materials losses were growing, then there would be less materials transferred out
per pound of inputs over time. The yield has remained constant over the sixmonth period. Thus, Operator 2’s hypothesis is not validated. This is also
supported by the constant materials rate per output pound.
Operator 3 is concerned about coating costs. The coating cost per output pound
is increasing over time. Thus, we can conclude that the coating efficiency is
declining over time. Apparently, more coating material was being spread per
pound of output in June than in January. The coating operation may need to be
repaired or recalibrated. Too much coating is being spread on the film.

Ex. 19–21
The Casagrande Machining managers are displaying typical fears to a just-in-time
processing system. Just-in-time removes the safety provided by materials, inprocess, and finished goods inventory balances. Indeed, these types of
comments reflect conventional manufacturing philosophy, which views inventory
as a necessary buffer against surprises and other unwelcome events. The just-intime philosophy focuses on removing the causes that require a need for
inventory.
In the case of materials inventories, a just-in-time philosophy requires all
suppliers to provide high-quality materials on a daily basis in just the right
quantities needed for a day’s production. If the supplier has unreliable production
schedules or quality, then the sources of unreliability would need to be fixed
before moving to just-in-time delivery. Only when suppliers are reliable can
Casagrande Machining move to a just-in-time strategy without exposing the
company to significant risk.
The in-process inventories can be reduced significantly if the underlying
manufacturing processes are made reliable. The Director of Manufacturing is
correct in his observation, but his solution is wrong. The solution is not to
increase inventory but to improve the reliability of the machines so that they do
not experience emergency breakdowns. Thus, the manufacturing operation must
be improved to produce the right product, in the right quantities, at the right
quality, and at the right time. Only with this level of reliability can a plant
responsibly remove in-process inventories from the system.
The finished goods inventory can also be reduced if the manufacturing system
can be made responsive to customer demands. A company will no longer have to
stock warehouses with product based on guesses at what the customer will want
many weeks ahead of demand. Rather, goods are produced at the time the
customer orders them. This is what Dell Computer Corporation does. It builds a
computer to order, rather than stocking the computer and selling it from
inventory.

In other words, inventory covers a “multitude of sins.” When the “sins” are
removed, the inventory can be removed.


Appendix Ex. 19–22
a. and b.
Whole Units
Units to be accounted for:
Beginning work in process..............
Units started during period..............
Total........................................................
Units to be assigned costs:
Transferred to Packing Dept............
Inventory in process, ending
(30% complete)..............................
Total........................................................
*10,500 – 1,200 + 600

Equivalent Units
of Production

1,200
9,900*
11,100
10,500

10,500

600
11,100

180
10,680