Solution manual cost management measuring monitoring and motivating performance 1st by wolcott ch06

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Chapter 6
Process Costing
LEARNING OBJECTIVES
Chapter 6 addresses the following questions:
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8

How are costs assigned to mass-produced products?
What are equivalent units, and how do they relate to the production process?
How is the weighted average method used in process costing?
How is the FIFO method used in process costing?
What alternative methods are used for mass production?
How is process costing performed for multiple production departments?
How are spoilage costs handled in process costing?
What are the uses and limitations of process cost information?

These learning questions (Q1 through Q8) are cross-referenced in the textbook to individual
exercises and problems.

COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the
exercises and problems.
Questions Having a Single Correct Answer:

No Symbol
This question requires students to recall or apply knowledge as shown in the
textbook.
This question requires students to extend knowledge beyond the applications
e
shown in the textbook.

Open-ended questions are coded according to the skills described in Steps for Better Thinking
(Exhibit 1.10):

Step 1 skills (Identifying)

Step 2 skills (Exploring)

Step 3 skills (Prioritizing)

Step 4 skills (Envisioning)


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6-2

Cost Management

QUESTIONS
6.1

Weighted average and FIFO process costing produce similar equivalent unit costs
whenever the unit cost of production does not change or whenever there are no beginning

or ending work-in-process inventories. In addition, the equivalent unit costs will be
similar if the number of equivalent units produced during the period is large relative to
inventories.

6.2

A process would complete more units during the period than it started when there are
more units in beginning inventory than in ending inventory.

6.3

This approach would overstate the cost of spoiled units because partially complete units
would be treated as if they had received 100% of direct materials and conversion costs,
regardless of the amount actually allocated to those units.

6.4

If the beginning and ending inventories are the same from one period to the next, the
number of units started is equal to the number of units completed and transferred out.
This means that WIP inventory can be ignored when calculating equivalent units.
However, if costs change from one period to the next, then the cost allocated to ending
WIP will not be the same as the cost allocated to beginning WIP.

6.5

Judgment is needed to determine the percentage complete that is used in process costing
calculations. Each unit or batch of units is complete to a different degree than other units
or batches because the process is continuous. The percent complete is an average
completion percentage that is estimated using judgment.

6.6

If the percent completion in year 1 is overestimated, then the equivalent units for those
units will be too high in year 1. In turn, this will cause the cost per equivalent unit in year
1 to be understated. In year 2, this misstatement will cause the equivalent units for
completion of beginning WIP to be too low. The understatement of equivalent units will
cause the cost per equivalent unit to be overstated in year 2.

6.7

The weighted average method ignores the period in which product is started. In addition,
costs from beginning inventories are added to costs of this period. All products
completed are then given an average cost, regardless of when they were started. The
FIFO method, on the other hand, tracks work completed and costs from the prior period
separately from work completed and costs incurred during the current period. Under
FIFO, beginning WIP consists of last period’s costs and work valued separately. At the
end of the accounting period, this period’s costs to complete these units are added. Then
the total costs for beginning WIP from last period and this period are summed and
attached to the beginning inventory units that were completed this period. Then the units
started and completed this period are valued using this period’s costs. If an
organization’s costs fluctuate regularly, the FIFO method will reflect the most current
costs so that managers can investigate changes in cost more quickly.

6.8

Goods that are mass-produced have uniform specifications and are made in large batches
or on a continuous assembly line. Services that are mass-produced are performed using


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Chapter 6: Process Costing

6-3

the same skills and time and each task is very similar. Goods that are custom produced
come in many variations and are made to specifications that vary with each order. Many
services are custom, such as accounting, health care, and law services because each
customer requires different inputs to match their needs. While it is relatively easy to
track costs for custom made goods by attaching tags or using individual records to log
costs of materials and labor, it is impossible to trace costs to mass-produced units. Job
order costing is used for custom products. Direct material and labor costs are traced to
each product and overhead costs are allocated using some allocation base that is labor or
machine related. For mass-production, process costing is used. Equivalent units are
calculated to account for units that are partially complete. Direct materials costs are
allocated separately. Direct labor and overhead are combined and called conversion
costs. These are allocated to complete and partially completed units.
6.9

They should be counted as ending WIP inventory in the department. Completed units
imply that the units have been transferred to the next department or to finished goods,
which is not the case with these units.

6.10

This is what is referred to as "continuous processing." Units just entering the process
have had little done to them, while units just about to leave the process have had all or
most of the conversion done. On average, the units in process are 50% complete as to
conversion.

6.11

The cost of spoiled units is added to the total cost of goods transferred and increases the
cost per unit.

6.12

Job costing is often used when products are manufactured in batches. In this firm, a
single batch would have a specific sized wire and specific length of nail. The cost of
each type of nail will depend primarily on the cost of the type of wire used and the time
required for each type. Therefore job costing is the most appropriate method. This
information would be lost if process cost techniques were employed.

6.13

Here are three factors. 1. If inspection costs are high and the cost to produce a single
unit is very low, managers may decide to reduce the number of time units are inspected.
In this case, inspection might occur only when units are completed. 2. If production
costs are high and units go through several different departments, inspection may take
place earlier in the manufacturing process so that spoiled units are caught when they are
relatively incomplete. 3. If a firm is developing a strategy of high quality products,
inspection may take place more often to insure that products are free of defects.

6.14

Advantages of reducing spoilage include saving the cost of the spoiled units and being
able to sell those units and increasing the contribution margin. In addition, in some
industries all firms need to compete on quality, and increased spoilage may lead to
increased defects in units sold, harming the reputation of the company resulting in a loss
of market share. Disadvantages might be that the costs incurred do not guarantee that

spoilage will be significantly reduced, or that the benefits in improved quality will be
worth the costs.


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6-4

Cost Management

EXERCISES
6.15 Francisco’s
A and B
Assumptions:
Work performed in May:
Beginning WIP
% complete direct materials
% complete conversion costs
Units started
Units completed and transferred out
Ending WIP
% complete direct materials
% complete conversion costs

9,000
100%
40%
50,000
47,000
12,000

100%
30%

Summarize Physical and Equivalent Units

Physical Units
Equivalent Units:
Direct Materials
Conversion Costs

Beginning
WIP
9,000

9,000
3,600

Complete
Beginning
WIP
0

0
5,400

Work This Period
Start
Start
Total Work
Total

and
Ending
Performed
Units to
Complete
WIP
This Period
Account for
38,000
12,000
50,000
59,000

38,000
38,000

12,000
3,600

50,000
47,000

Total Work
59,000
50,600

A. Weighted average equivalent units for direct materials is 59,000 (total work this period)
because the ending units get 100% credit for direct materials, since direct materials are
added at the beginning of processing. Equivalent units for conversion costs are 50,600
(total work this period) because ending inventory units are only 30% complete and,

hence, have only 30% of the conversion costs (since conversion costs are incurred evenly
during production).
B. FIFO equivalent units are found under Total Work Performed This Period. Therefore
direct materials equivalent units are 50,000 (excludes beginning inventory because direct
materials were added last period and includes ending inventory because materials were
added this period), and equivalent units for conversion costs are 47,000 (excluding work
done on beginning WIP but including this period’s work to complete those units and
including the portion of work completed on ending WIP.


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Chapter 6: Process Costing

6-5

6.16 Fine Fans
A and B
Assumptions for October:
Work performed:

Costs:

Beginning WIP
% complete direct materials
% complete conversion costs
Units started
Units completed and transferred out
Ending WIP
% complete direct materials

% complete conversion costs

9,000
100%
20%
100,000
94,000
15,000
100%
60%

Beginning WIP (FIFO and Weighted
Average)
Direct materials
Conversion costs
Total beginning WIP costs
Costs added this month
Direct materials
Conversion costs
Total costs added
Total costs to account for

$

18,000
36,000
54,000

100,000
200,000

300,000
$354,000

Summarize Physical and Equivalent Units

Physical Units

Beginning
WIP (20%)
9,000

Equivalent Units:
Direct Materials
Conversion Costs

9,000
1,800

Complete
Beginning
WIP (80%)
0

0
7,200

Work This Period
Start
Start
Total Work

Total
and
Ending
Performed
Units to
Complete
WIP (60%) This Period
Account for
85,000
15,000
100,000
109,000

85,000
85,000

15,000
9,000

100,000
101,200

Total Work
109,000
103,000

Calculate Actual Cost Per Equivalent Unit
Weighted Average:
Direct materials:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$118,000
109,000

=$ 1.08

Conversion costs:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$236,000
103,000

=

Total cost per equivalent unit:

2.29

$3.37

First-in, First-out:
Direct materials:

_____________Direct materials cost_____________
Equivalent units for total work performed this period

= $100,000
100,000

=$ 1.00

Conversion costs:

______________Conversion costs______________
Equivalent units for total work performed this period

= $200,000
101,200

=

Total cost per equivalent unit:

1.98

$2.98


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6-6

Cost Management

6.17 Journal Entry for Abnormal Spoilage
[Note: This problem requires students to extend concepts about journal entries for spoilage from

Chapter 5 to Chapter 6.]
When spoiled units are sold, the net realizable value offsets the cost. In this case the total
cost of spoiled units is $16,000 (80*$200). However, $2,000 is recovered by selling the
spoiled units for their net realizable value. The journal entry follows.
Loss from Abnormal Spoilage
Cash
Work-in-Process inventory

$14,000
2,000
$16,000

6.18 Journal Entry for Normal and Abnormal Spoilage
A. Number of spoiled units = 10,000 – 8,000 = 2,000
Cost of spoiled units = 2,000*$5 = $10,000
B. When all spoilage is normal, the total cost of units (good and spoiled) is transferred into
finished goods. That cost is $50,000 (10,000*$5). The journal entries follow.
Finished Goods Inventory
Work-in-Process Inventory

$50,000
$50,000

C. For abnormal spoilage, only the cost of good units is transferred to finished goods. The
cost of spoiled units is recorded as a separate loss. The cost of good units is $40,000
(8,000*$5).
Finished Goods Inventory
Loss from Abnormal Spoilage
Work-in-Process Inventory

$40,000
10,000
$50,000


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Chapter 6: Process Costing

6-7

6.19 through 6.22 Felix and Sons
Assumptions for December:
Work performed:

Costs:

Beginning WIP
% complete direct materials
% complete conversion costs
Units started (12,000 – 8,000 + 6,000)
Units completed and transferred out
Ending WIP
% complete direct materials
% complete conversion costs

8,000
100%
75%
10,000

12,000
6,000
100%
50%

Beginning WIP (FIFO and Weighted
Average)
Direct materials
Conversion costs
Total beginning WIP costs
Costs added this month
Direct materials
Conversion costs
Total costs added
Total costs to account for

$

19,200
7,200
26,400
31,200
21,600
52,800
$79,200

Summarize Physical and Equivalent Units

Physical Units

Beginning
WIP (30%)
8,000

Equivalent Units:
Direct Materials
Conversion Costs

8,000
6,000

Complete
Beginning
WIP (75%)
0

0
2,000

Work This Period
Start
Start
Total Work
Total
and
Ending
Performed
Units to
Complete
WIP (50%) This Period

Account for
4,000
6,000
10,000
18,000

4,000
4,000

6,000
3,000

10,000
9,000

Total Work
18,000
15,000

Calculate Actual Cost Per Equivalent Unit
Weighted Average:
Direct materials:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$50,400
18,000

=$ 2.80

Conversion costs:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$28,800
15,000

=

Total cost per equivalent unit:
First-in, First-out:
Direct materials:

Conversion costs:

1.92

$4.72

_____________Direct materials cost_____________
Equivalent units for total work performed this period

= $31,200
10,000

=$ 3.12

______________Conversion costs______________

Equivalent units for total work performed this period

= $21,600
9,000

=

Total cost per equivalent unit:

2.40

$5.52


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6-8

Cost Management

Process Cost Reports for December 31

Beginning WIP
Costs to complete
beginning WIP:
Direct materials
Conversion costs
Total costs added this
period

First-in, First-Out
Computation
Units
From November
cost report
8,000

4,000x$5.52

Total units completed and
transferred out
Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost

Weighted Average
Computation
Units

0
4,800
_____

4,800

8,000

31,200

4,000

22,080

12,000

53,280

(8,000+4,000)x$4.72

6,000x$2.80
3,000x$1.92

_____

18,720
7,200
25,920

18,000

$79,200

6,000

12,000

_____

16,800

5,760
22,560

18,000

$79,200

6.23 Humphrey Manufacturing
A and B
Assumptions for April:
Work performed:
Beginning WIP
% complete direct materials
% complete conversion costs
Units started (8,000+40,000-6,000)
Units completed and transferred out
Ending WIP
% complete direct materials
% complete conversion costs

$56,640

6,000

6,000x$3.12
3,000x2.40

Total Accounted For

Costs

$26,400

0x$3.12
2,000x$2.40

Total cost of beginning
WIP transferred out
New units started,
completed, and transferred
out

Costs

Costs:
6,000
100%
40%
42,000
40,000
8,000
100%
25%

Beginning WIP (FIFO and Weighted
Average)
Direct materials
Conversion costs
Total beginning WIP costs
Costs added this month

Direct materials
Conversion costs
Total costs added
Total costs to account for

$

7,500
2,125
9,625

70,000
42,500
112,500
$122,125


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Chapter 6: Process Costing

6-9

Summarize Physical and Equivalent Units

Physical Units

Beginning
WIP (40%)
6,000

Equivalent Units:
Direct Materials
Conversion Costs

6,000
2,400

Complete
Beginning
WIP (60%)
0

0
3,600

Work This Period
Start
Start
Total Work
Total
and
Ending
Performed
Units to
Complete
WIP (25%) This Period
Account for
34,000
8,000

42,000
48,000

34,000
34,000

8,000
2,000

42,000
39,600

Total Work
48,000
42,000

Calculate Actual Cost Per Equivalent Unit
Weighted Average:
Direct materials:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$77,500
48,000

=$ 1.6146

Conversion costs:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$44,625
42,000

=

Total cost per equivalent unit:

1.0625

$2.6771

First-in, First-out:
Direct materials:

_____________Direct materials cost_____________
Equivalent units for total work performed this period

= $70,000
42,000

=$1.6667

Conversion costs:

______________Conversion costs______________
Equivalent units for total work performed this period

= $42,500
39,600

=

Total cost per equivalent unit:

1.0732

$2.7399


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6-10 Cost Management
Process Cost Reports for April

Beginning WIP
Costs to complete beginning
WIP:
Direct materials
Conversion costs
Total costs added this
period

First-in, First-Out
Computation
Units
Costs
From March

cost report
6,000
$ 9,625

0x$1.6667
3,600x$1.0732

Total cost of beginning WIP
transferred out
New units started,
completed, and transferred
out

34,000x$2.7399

Total units completed and
transferred out
Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost
Total Accounted For

Weighted Average
Computation
Units
Costs

0
3,864

_____

3,864

6,000

13,489

34,000

93,157

40,000

106,646

40,000x$2.6771

8,000x$1.6146
2,000x$1.0625

_____

13,336
2,146
15,482

48,000

$122,128

8,000
8,000x$1.667
2,000x1.073

40,000

$107,084

8,000

_____

12,917
2,125
15,042

48,000

$122,126

Differences in total costs are due to rounding errors. If a spreadsheet is used to make these
calculations, the totals will have fewer rounding errors.
C. Journal entries for weighted average method for April:
Work in process inventory
$70,000
Raw materials inventory
To record the cost of raw materials used in production during April.

$70,000

Work in process inventory
$42,500
Wages and accounts payable
To record the conversion costs incurred in production during April.

$42,500

Finished goods
$107,084
Work in process inventory
$107,084
To record the cost of 40,000 units transferred to finished goods during April
(includes the cost of normal spoilage).


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Chapter 6: Process Costing 6-11
Journal entries for FIFO method for April:
Work in process inventory
$70,000
Raw materials inventory
To record the cost of raw materials used in production during April.

$70,000

Work in process inventory
$42,500
Wages and accounts payable

To record the conversion costs incurred in production during April.

$42,500

Finished goods
$106,646
Work in process inventory
$106,646
To record the cost of 40,000 units transferred to finished goods during April
(includes the cost of normal spoilage).

6.24 For Seniors Only
A. Process costing is appropriate in this situation because the returns are very similar in the
amount of time and therefore cost to complete each one. If the returns were more
complex or extra research was needed on certain ones, process costing would no longer
be appropriate because there would be too much variation between different returns.
B. To determine the costs for April, last year’s cost data is needed as well as data from
previous months. Additional information required is the approximate number of returns
will be done, the salary paid to the employees, overhead costs, the number of employees
that will be hired for the month, the amount of time each will work, and the amount of
time it takes for each return. Also, an estimate is needed for the number of returns that
are likely to be in progress at the beginning of April.
C. The first step in determining the cost for April returns is to find the total units in progress
and their percent completion. In addition, the number of returns to be completed in April
needs to be estimated. Last year’s data will be useful in estimating this year’s volume.
Using data mentioned in part B, costs are categorized as direct materials or conversion
costs. An equivalent cost per unit for the tax returns can then be estimated. Once the
number of returns for the month of April has been predicted, the equivalent costs can be
estimated and a total cost for that month can be predicted. It is likely that there will be no
ending WIP inventory, because tax returns are due April 15 and this organization’s

clients are likely to file by the due date rather than request extensions.


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6-12 Cost Management

PROBLEMS
6.25 Benton Industries
1. Summarize Total Costs to Account For
FIFO:
Beginning WIP
Current period costs
Total costs to account for

Transferred-in Direct Materials Conversion Costs
$ 40,470
$
0
$ 14,322
224,130
166,840
315,228
$264,600
$166,840
$329,550

Total Cost
$ 54,792
706,198

$760,990

2. Summarize Physical and Equivalent Units

Physical Units

Beginning
WIP (33%)
15,000

Equivalent Units:
Transferred-in
Direct Materials
Conversion Costs

0
0
5,000

Complete
Beginning
WIP (67%)
0

0
15,000
10,000

Work This Period
Start

Start
Total Work
and
Ending
Performed
Total to
Complete
WIP (40%) This Period
Account for
82,000
11,000
93,000
108,000

82,000
82,000
82,000

11,000
0
4,400

93,000
97,000
96,400

3. Calculate First-in, First-out Cost Per Equivalent Unit
Transferred-in:

_____________Transferred-in costs_____________

Equivalent units for total work performed this period

= $224,130
93,000

=$ 2.41

Direct materials:

_____________Direct materials cost_____________
Equivalent units for total work performed this period

= $166,840
97,000

= 1.72

Conversion costs:

______________Conversion costs______________
Equivalent units for total work performed this period

= $315,228
96,400

=

Total cost per equivalent unit:

3.27

$7.40


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Chapter 6: Process Costing 6-13
4. Process cost report for the year
Beginning WIP
Costs to complete beginning WIP:
Direct materials
Conversion costs
Total costs added this period

Computation
From last year
15,00 x $1.72
10,000 x $3.27

_____

Total cost of beginning WIP transferred out
New units started, completed, and transferred out

82,000*$7.40

Total units completed and transferred out
Ending WIP:
Transferred-in
Direct materials

Conversion costs
Total ending WIP cost

First-in, First-Out
Units
Costs
15,000
$ 54,792
25,800
32,700
58,500

15,000

113,292

82,000

606,800

97,000

720,092

11,000
11,000 x $2.41
0 x $1.72
4,400 x $3.27
_____

Total Accounted For

108,000

26,510
0
14,388
40,898
$760,990

Notice that the total costs summarized above ($760,990) are equal to the costs accounted for in
the cost report.
6.26 Victoria’s Closet-A
A. Preparation of process cost report using the weighted average method.
Summary of unit information given in the problem:
WIP Units
Beginning (25% complete) 11,000
Started
74,000
61,000
completed
8,000
Ending (75% complete)
16,000

Summary of Spoilage
Good

Normal spoilage

6,600

Spoiled

Abnormal spoilage
Total

???
8,000

When computing equivalent units, notice that the ending WIP inventory units are
considered 100% complete with respect to direct materials, since direct materials are
added at the beginning of processing. However, the ending WIP inventory units are only
75% complete and, hence, have only 75% of the conversion costs (incurred evenly
throughout production). Both normal and abnormal spoilage are assigned 100% of all
costs because spoilage occurs just before inspection, which is at the 100% stage of
completion.


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6-14 Cost Management
1. Summarize Total Costs to Account For
Direct Materials
Conversion Costs
$220,000
$30,000
1,480,000
942,000
$1,700,000

$972,000

Beginning WIP
Current period costs
Total costs to account for

Total Cost
$ 250,000
2,422,000
$2,672,000

2. Summarize Physical and Equivalent Units

Physical Units

Complete
Beginning Beginning
WIP (25%) WIP (75%)
11,000
0

Equivalent Units:
Direct Materials
Conversion Costs

11,000
2,750

Work Performed This Period
Start

Start
Total Work
and
Ending
Performed
Complete WIP (75%) This Period
58,000
16,000
74,000

0
8,250

58,000
58,000

16,000
12,000

74,000
78,250

Total
Spoiled
Units to
Units
Account for
(100%)
85,000 (8,000)
Total Work

85,000
81,000

(8,000)
(8,000)

Total Spoilage
Less Normal Spoilage
Abnormal Spoilage

8,000
6,600
1,400

3. Calculate Cost per Equivalent Unit: Weighted Average
Direct materials:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$1,700,000
85,000

Conversion costs:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$972,000
81,000

= $20

=

Total cost per equivalent unit:

12

$32

4. Weighted Average Process Cost Report for January
Computation
Total units completed and transferred out:
Good units
Normal spoilage
Total transferred out

(11,000 + 58,000 – 8,000) x$32
6,600 x $32

Abnormal spoilage

1,400*$32

Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost

16,000 x $20
12,000 x $12

Total Good Units Accounted For
Total Accounted For

Units
61,000
______
61,000

Costs
$1,952,000
211,200
2,163,200
44,800

16,000

85,000 – 8,000

320,000
144,000
464,000
77,000
$2,672,000

B. Journal entries:
Work in process inventory
$1,480,000

Raw materials inventory
$1,480,000
To record the cost of raw materials used in production during January.


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Chapter 6: Process Costing 6-15
Work in process inventory
$942,000
Wages and accounts payable
$942,000
To record the conversion costs incurred in production during January.
Finished goods
$2,163,200
Work in process inventory
$2,163,200
To record the cost of 61,000 units transferred to finished goods during January
(includes the cost of normal spoilage).
Abnormal spoilage loss
$44,800
Work in process inventory
To record the cost of abnormal spoilage during January.

$44,800

6.27 Victoria’s Closet-B
A. This problem is identical to problem 6.26, except that the FIFO method is used instead of
the weighted average method. The first two parts of the process cost report are identical
under the two methods. Therefore, the following solution shows only the last two parts

of the process cost report.
3. Calculate Cost per Equivalent Unit: FIFO
Direct materials:

_____________Direct materials cost_____________
Equivalent units for total work performed this period

= $1,480,000
74,000

=$20.0000

Conversion costs:

______________Conversion costs______________
Equivalent units for total work performed this period

= $942,000
78,250

= 12.0383

Total cost per equivalent unit:

$32.0383


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6-16 Cost Management

4. FIFO Process Cost Report for Victoria’s Closet
Computation
Beginning WIP
Costs to complete beginning WIP:
Direct materials
Conversion costs
Total costs added this period

Costs
$ 250,000

0x$20
8,250*$12.0383

0
99,316
99,316

_____

Total cost of beginning WIP transferred out

11,000

New units started, completed, and transferred out

50,000*$32.0383

Normal spoilage

6,600*$32.0383

Units completed and transferred out

349,316

50,000

1,601,915

______

211,453

61,000

Abnormal spoilage

1,400*$32.0383

Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost

16,000 x $20
12,000 x $12.0383

Total Good Units Accounted For
Total Costs Accounted For

Units
11,000

2,162,684
44,854

16,000
320,000
144,460
464,460

_____
85,000-8,000

77,000
$2,671,998

B. A standard cost report would be the same as the FIFO cost report from a format
standpoint. However, the standard costs would be used instead of equivalent unit costs.
That is the only difference.
C. If Victoria’s Closet wants to set a benchmark for productivity, standard costs are
appropriate. A standard cost is an estimate of cost under efficient operations and
therefore acts as a benchmark or budget with which actual costs can be compared. The
standards need to be updated regularly, though.

6.28 Kim Mills-A
Summary of information given in the problem:
Beginning
Started

Ending

WIP Units
20,000
????
90,000
completed
7,000
17,000

Summary of Spoilage
Good

Normal spoilage

3,600

Spoiled

Abnormal spoilage
Total

????
7,000

A. Abnormal spoilage = 7,000 – 3,600 = 3,400 units
B. Spoilage costs = 7,000 x $1,000 = $7,000,000

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Chapter 6: Process Costing 6-17
C. The opportunity costs of spoilage can be measured in several ways. First, in addition to
the cost of the spoiled units, there is also the contribution margin foregone because the
products could not be sold. In addition, there are the opportunity costs of bad units that
are sold because they pass through inspection without having been detected as spoiled.
Through word of mouth or services such as Consumer Reports or Good Housekeeping, a
company’s reputation may suffer and the organization loses market share. These costs
can be considerable, especially if competitors have reputations for high quality with
similar prices.

6.29 Kim Mills-B
A. If inspection occurs when units are 40% complete, direct materials have already been
added, but conversion costs will only be 40% added.
Equivalent units for direct materials = 100% x 7,000 units = 7,000 units
Equivalent units for conversion costs = 40% x 7,000 units = 2,800 units
B. Abnormal spoilage for conversion costs = 2,800 (total spoilage per Part A) – 1,800
(normal spoilage) = 1,000 units.
C. Here are several advantages of inspecting units earlier in their manufacturing process:
Kim saves the rest of the conversion cost that would be added.
Units are removed from further handling (storage and control), except to dispose
of them.
If the manufacturing process further down the line would tend to hide the defects,
a larger number of defective units are identified, and Kim avoids selling defective
units to customers.

6.30 Red Dog Products
A and B. Weighted average and FIFO process costing reports:
Summarize Physical and Equivalent Units

Physical Units
Equivalent Units:
Direct Materials
Conversion Costs

Beginning
WIP (30%)
20,000

20,000
6,000

Complete
Beginning
WIP (70%)
0

0
14,000

Work This Period
Start
Start
Total Work
Total
and
Ending
Performed
Units to

Complete
WIP (50%) This Period
Account for
68,000
12,000
80,000
100,000

68,000
68,000

12,000
6,000

80,000
88,000

Total Work
100,000
94,000


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6-18 Cost Management
Calculate Actual Cost Per Equivalent Unit
First-in, First-out:
Direct materials:

_____________Direct materials cost_____________

Equivalent units for total work performed this period

= $220,000
80,000

=$ 2.75

Conversion costs:

______________Conversion costs______________
Equivalent units for total work performed this period

= $74,000
88,000

=

Total cost per equivalent unit:

0.84

$3.59

Weighted Average:
Direct materials:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$245,000

100,000

=$ 2.45

Conversion costs:

Beginning WIP + Direct materials cost =
Equivalent units for total work

$77,000
94,000

=

Total cost per equivalent unit:

0.82

$3.27

Process Cost Reports for Molding Department: May

Beginning WIP
Costs to complete beginning
WIP:
Direct materials
Conversion costs
Total costs added this period

First-in, First-Out

Computation
Units
Costs
From April
cost report
20,000
$ 28,000

0x$2.75
14,000x$0.84

Total cost of beginning WIP
transferred out
New units started, completed, and
transferred out

68,000x$3.59

Total units completed and
transferred out
Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost
Total Accounted For

_____

0
11,760

11,760

20,000

39,760

68,000

244,120

88,000

283,880

Weighted Average
Computation
Units
Costs

(88,000)x$3.27

12,000
12,000x$2.75
6,000x$0.84

88,000

$287,760

12,000

_____

33,000
5,040
38,040

100,000

$321,920

12,000x$2.45
6,000x$0.82
_____

29,400
4,920
34,320

100,000

$322,080

The total costs to account for disagree with the total calculated in part 1 because of differences
due to rounding the cost per equivalent unit. If students used a spreadsheet for these calculations
they would have no error.
C. Factors that would affect the choice of accounting method include:
The stability of input prices
The need for current price information

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Chapter 6: Process Costing 6-19
Whether managers want to compare a standard cost to actual costs
Whether beginning and ending inventory levels are large or small

6.31 Empire Forging
Summary of information given in the problem:
Beginning
Started

Ending

WIP Units
60,000
????
420,000
completed
36,000
68,000

Summary of Spoilage
Good

Normal spoilage

12,600

Spoiled

Abnormal spoilage
Total

??
36,000

A. Abnormal spoilage = Total spoilage – Normal spoilage
= 36,000 – 12,600 = 23,400 units
B. Units started in May: Refer to the above T-Account, and solve for the unknown number
of units started
60,000 + Started – 420,000 – 36,000 = 68,000
Started = 464,000
C. Percentage of good units allowed for spoilage is 3% (12,600/420,000). Total spoiled
units as a percentage of good units is 8.6% (36,000/420,000). When spoilage rates
increase dramatically, it is likely that more spoiled units are sold as good units because
they have been overlooked in the inspection process. This leads to more returns and
potential loss of market share. In addition, the cost of good units increases, and so the
contribution margin on those units decreases. It is also possible that more units have
been reworked, and these could be lower quality than first run units, and rework also
increases the cost of good units.
D. Below are examples of arguments that could be made; students may think of additional
arguments.
The costs of undetected spoiled units can be quite high. Customers are unhappy with
defective units and may not purchase the goods again, so market share could be lost. In
addition, if the defect causes any type of harm, the company could be subject to legal
action and may have to pay a settlement or high legal fees. These costs are difficult to
value. It is much easier to determine the cost of quality improvements, such as more
frequent inspections, quality circles with employees to elicit suggestions for
improvements, or redesigning the product or manufacturing process to reduce defects.

Because of the uncertainty of the costs of spoiled units, the company should analyze costs
for returned units and warranty work, develop better tracking systems so that all spoiled
units are counted (whether they are reworked or not), and hire a marketing company to
identify customers who have quit using its products to determine if quality was a factor in


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6-20 Cost Management
this decision. Once the managers have more information, they will better understand the
costs and benefits of quality problems and quality initiatives.

6.32 The Rally Company
A sample spreadsheet showing the solution for this problem is available on the Instructor’s web
site for the textbook (available at www.wiley.com/college/eldenburg).
A. Weighted average: Following are excerpts from the sample spreadsheet for this problem.
A

B

C

D

E

F

G

H

I

J

1
2 Input Area for Assumptions
3 Work Performed:
4
Work in Process:
5
Units
6
% complete direct materials
7
% complete conversion costs
8
Units started
9
Units completed and transferred out
10
Spoiled Units:
11
Normal
12
Abnormal
13
14 Costs:
15

Beginning Work in Process:
16
Direct materials
17
Conversion costs
18
Costs Added This Month:
19
Direct materials
20
Conversion costs
21
A
23
24
25
26
27
28
29

B

C

Beg. WIP End. WIP
2,000
Ending WIP Units were not given,
100%
100%

so they must be calculated:
80%
25%
Beginning WIP
18,000
Units started
14,800
Total to account for
Transferred out*
1,000
Normal spoilage
1,000
Abnormal spoilage
Ending WIP

D

* Note: Only good units
are transferred out

$4,000
$3,200
$36,000
$32,000

E

F

G

H

1. Summarize Total Costs to Account For
Beginning WIP
Current period costs
Total costs to account for

2,000
18,000
20,000
-14,800
-1,000
-1,000
3,200

Direct
Conversion
Materials
Costs
$4,000
$3,200
$36,000
$32,000
$40,000
$35,200

Total
Costs
$7,200

$68,000
$75,200

I

J


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Chapter 6: Process Costing 6-21
A

B

C

D

E

F

30
31
32
33
34
35
36

37
38
39
40
41
42
43
44

2. Summarize Physical and Equivalent Units

45
46
47
48
49
50
51
52
53
54

3. Calculate Cost Per Equivalent Unit

55
56
57
58
59
60

61
62
63
64
65
66
67
68
69
70
71
72

4. Weighted Average Process Cost Report for January

G

H

Work Performed This Period
Beginning Complete
Start
Start
Total Work
WIP
Beg. WIP
and
End. WIP Performed
80%
20%

Complete
25%
This Period
2,000
0
14,800
3,200
18,000

Physical Units
Equivalent Units:
Direct Materials
Conversion Costs

2,000
1,600

0
400

14,800
14,800

3,200
800

18,000
16,000

I

Total
Units to
Acct for
20,000

Spoiled
Units
100%
(2,000)

20,000
17,600

(2,000)
(2,000)

Total Spoilage
Less Normal Spoilage
Abnormal Spoilage

A

B

C

2,000
1,000
1,000

D

E

F

G

Weighted Average:

H

I

J

Direct Materials:

Total
Cost
$40,000

Total
Units
20,000

$2.0000

Conversion Costs:

$35,200

17,600

$2.0000

Total Cost Per Equivalent Unit

A

J

B

C

$4.0000

D

E

F
Cost Per
Unit

G

H

I

J

Equivalent
Units

Spoiled
Units

Good
Units

Total

Total units completed and transferred out:
Good units
Normal spoilage
Total transferred out

$4.0000
$4.0000

1,000

$59,200
$4,000
$63,200

Abnormal spoilage

$4.0000

1,000

$4,000

Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost

$2.0000
$2.0000

Total Good Units Accounted For
Total Accounted For

14,800

3,200
3,200
800
_____
(Total to account for - Total spoiled)

$6,400
$1,600
$8,000

18,000
$75,200

B. Journal entries for weighted average method:
Work in process inventory
$36,000
Raw materials inventory
To record the cost of raw materials used in production during July.

$36,000

Work in process inventory
$32,000
Wages and accounts payable
To record the conversion costs incurred in production during July.

$32,000


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6-22 Cost Management

Finished goods
$63,200
Work in process inventory
$63,200
To record the cost of 14,800 units transferred to finished goods during July
(includes the cost of normal spoilage).

Abnormal spoilage loss
Work in process inventory
To record the cost of abnormal spoilage during July.

$4,000
$4,000

C. FIFO: Following are excerpts from the sample spreadsheet for this problem.
The input section and the sections for steps 1 and 2 are identical to the spreadsheet shown
in Part A above. Therefore, only the sections for steps 3 and 4 are shown below.
3. Calculate Cost Per Equivalent Unit
FIFO:
Direct Materials:

Current
Cost
$36,000

Current
Units
18,000

$2.0000

Conversion Costs:

$32,000

16,000

$2.0000

Total Cost Per Equivalent Unit

$4.0000

4. FIFO Process Cost Report for January
Beginning WIP
Costs to complete beginning WIP:
Direct materials
Conversion costs
Total costs added this period

Cost Per
Unit

Equivalent
Units

$2.0000
$2.0000

0
400

Spoiled
Units

Total cost of beginning WIP transferred out
Good units started, completed, and trans. out

$4.0000

Normal spoilage

$4.0000

1,000

Total units completed and transferred out
Abnormal spoilage

$4.0000

Ending WIP:
Direct materials
Conversion costs
Total ending WIP cost

$2.0000
$2.0000

Total Good Units Accounted For
Total Accounted For

Good
Units
2,000

Total

$7,200

_____

$0
$800
$800

2,000

$8,000

12,800

$51,200

_____

$4,000

14,800

$63,200

1,000

$4,000
3,200

3,200

800
_____

(Total to account for - Total spoiled)

$6,400
$1,600
$8,000

18,000
$75,200

D. Several factors affect accountants’ choices of costing systems. For process costing, the
two main factors are ease of calculations (although with spreadsheets and software


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Chapter 6: Process Costing 6-23
programs that currently of little concern) and the usefulness of more current cost
information. If costs do not change rapidly and there is no need for the most current cost
information, then weighted average is easier to calculate and understand. However, if
managers want to monitor current period costs more closely, then FIFO is a better
method because it better reflects the most current costs.
It appears that Rally’s costs did not change from last period to this period. If costs
change slowly, the weighted average method would be the easiest report to prepare.

6.33 Toddler Toys
Solutions below are provided first for the weighted average method. Then solutions for the FIFO
method are presented.

WEIGHTED AVERAGE SOLUTION
A. If a student chose the weighted average method, its main advantage is that it is a little less
complex to calculate. The disadvantage is that the cost information is not as current as
FIFO information.
B. Here is a cost report using the weighted average method.
1. Summarize Total Costs to Account For
Beginning WIP
Current period costs
Total costs to account for

Transferred-in Direct Materials Conversion Costs Total Cost
$ 4,000
$ 2,000
$ 1,600
$ 7,600
36,000
18,000
16,000
70,000
$40,000
$20,000
$17,600
$77,600

2. Summarize Physical and Equivalent Units

Physical Units

Complete
Beginning Beginning

WIP (80%) WIP (20%)
2,000
0

Equivalent Units:
Transferred in
Direct Materials
Conversion Costs
Normal spoilage
Abnormal Spoilage
Total spoilage

2,000
2,000
1,600

0
0
400

Work Performed This Period
Start
Start
Total Work
and
Ending
Performed
Complete WIP (25%) This Period
14,800
3,200

18,000

14,800
14,800
14,800

3,200
0
800

18,000
14,800
16,000

Total
Spoiled
Units to
Units
Account for
(100%)
20,000 (2,000)
Total Work
20,000
16,800
17,600

(2,000)
(2,000)
1,000
1,000

2,000


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6-24 Cost Management
3. Calculate Cost Per Equivalent Unit (Weighted Average)
Transferred-in:

Beginning WIP + Transferred-in costs
Equivalent units for total work

=

$40,000 =$ 2.0000
20,000

Direct materials:

Beginning WIP + Direct materials cost
Equivalent units for total work

=

$20,000 =1.1905
16,800

Conversion costs: Beginning WIP + Direct materials cost
Equivalent units for total work

=

$17,600 = 1.0000
17,600
______

Total cost per equivalent unit:

$4.1905

4. Process Cost Reports for Assembly Department in August (Weighted Average)
Computation
Units
Units completed and transferred out
14,800*$4.1905
14,800
Normal spoilage
1,000 x $4.1905
Total cost transferred out
Abnormal spoilage
Ending work in process:
Transferred-in
Direct materials
Conversion costs
Total ending WIP cost
Total Accounted For

Costs
$62,020
4,190

66,210

1,000 x $4.1905

4,190
3,200

3,200 x $2.0
0 x $1.1905
800 x $1.00
_____
18,000

6,400
0
800
7,200
$77,600

C. Journal entries:
Work in process inventory-Assembly Dept.
$36,000
Work in process inventory-Plastics Dept.
$36,000
To record the cost of units transferred from the plastics department during
August.
Work in process inventory-Assembly Dept.
$18,000
Raw materials inventory
$18,000

To record the cost of raw materials used in production during August.
Work in process inventory-Assembly Dept.
$16,000
Wages and accounts payable
$16,000
To record the conversion costs incurred in production during August.
Finished goods inventory
$66,210
Work in process inventory-Assembly Dept.
$66,210
To record the cost of 14,800 units transferred to finished goods during August
(includes the cost of normal spoilage).


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Chapter 6: Process Costing 6-25

Abnormal spoilage loss
$4,190
Work in process inventory-Assembly Dept.
To record the cost of abnormal spoilage during August.

$4,190

FIFO SOLUTION
A. If a student chose FIFO, its main advantage is that the costs are more current, the
disadvantage is that it is a bit more complex to calculate.
B. Here is a cost report using the FIFO method. Notice that the first two parts are identical
to the report under the weighted average method.

1. Summarize Total Costs to Account For
Beginning WIP
Current period costs
Total costs to account for

Transferred-in Direct Materials Conversion Costs Total Cost
$ 4,000
$ 2,000
$ 1,600
$ 7,600
36,000
18,000
16,000
70,000
$40,000
$20,000
$17,600
$77,600

2. Summarize Physical and Equivalent Units

Physical Units

Complete
Beginning Beginning
WIP (80%) WIP (20%)
2,000
0

Equivalent Units:

Transferred in
Direct Materials
Conversion Costs

2,000
2,000
1,600

0
0
400

Work Performed This Period
Start
Start
Total Work
and
Ending
Performed
Complete WIP (25%) This Period
14,800
3,200
18,000

14,800
14,800
14,800

3,200
0

800

18,000
14,800
16,000

Total
Spoiled
Units to
Units
Account for
(100%)
20,000 (2,000)
Total Work
20,000
16,800
17,600

Normal spoilage
Abnormal Spoilage
Total spoilage

(2,000)
(2,000)
1,000
1,000
2,000

3. Calculate Cost Per Equivalent Unit (FIFO)
Transferred-in: _________Transferred-in costs__________ =

Equiv. units for work performed this period

$36,000
18,000

=$2.0000

Direct materials: __________Direct materials cost_________ =
Equiv. units for work performed this period

$18,000
14,800

=1.2162

Conversion costs:___________Conversion costs__________ =
Equiv. units for work performed this period

$16,000
16,000

= 1.0000
______

Total cost per equivalent unit:

$4.2162