Chapter 21
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DO IT!
Compare Job
Order and Process
Cost Systems
Action Plan
✔ Use job order costing
in situations where
unit costs are high,
unit volume is low, and
products are unique.
✔ Use process costing
when there is a large
volume of relatively
homogeneous products.
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Process Costing
Indicate whether each of the following statements is true or false.
1. A law firm is likely to use process costing for major lawsuits.
2. A manufacturer of paintballs is likely to use process costing.
3. Both job order and process costing determine product costs at the end of a period of
time, rather than when a product is completed.
4. Process costing does not keep track of manufacturing overhead.
Solution
1. False.
2. True.
3. False.
4. False.
Related exercise material: E21-1 and DO IT! 21-1.
DO IT!
Manufacturing
Costs in Process
Costing
Ruth Company manufactures ZEBO through two processes: blending and bottling. In
June, raw materials used were Blending $18,000 and Bottling $4,000. Factory labor costs
were Blending $12,000 and Bottling $5,000. Manufacturing overhead costs were Blending
$6,000 and Bottling $2,500. The company transfers units completed at a cost of $19,000 in
the Blending Department to the Bottling Department. The Bottling Department transfers
units completed at a cost of $11,000 to Finished Goods. Journalize the assignment of these
costs to the two processes and the transfer of units as appropriate.
Solution
Action Plan
✔ In process cost
accounting, keep separate
work in process accounts
for each process.
✔ When the costs are
assigned to production,
debit the separate work
in process accounts.
✔ Transfer cost of
completed units to
the next process or to
Finished Goods.
The entries are:
Work in Process—Blending
Work in Process—Bottling
Raw Materials Inventory
(To record materials used)
Work in Process—Blending
Work in Process—Bottling
Factory Labor
(To assign factory labor to production)
Work in Process—Blending
Work in Process—Bottling
Manufacturing Overhead
(To assign overhead to production)
18,000
4,000
22,000
12,000
5,000
17,000
6,000
2,500
8,500
Work in Process—Bottling
Work in Process—Blending
(To record transfer of units to the Bottling
Department)
19,000
Finished Goods Inventory
Work in Process—Bottling
(To record transfer of units to finished goods)
11,000
19,000
Related exercise material: BE21-1, BE21-2, BE21-3, E21-2, E21-4, and DO IT! 21-2.
D-106
11,000
DO IT!
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DO IT!
Equivalent Units
Action Plan
✔ To measure the
work done during the
period, expressed in fully
completed units, compute
equivalent units of
production.
✔ Use the appropriate
formula: Units completed
and transferred out 1
Equivalent units of ending
work in process 5
Equivalent units of
production.
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D-107
The fabricating department has the following production and cost data for the current month.
Beginning
Work in Process
Units
Transferred Out
Ending
Work in Process
–0–
15,000
10,000
Materials are entered at the beginning of the process. The ending work in process units are
30% complete as to conversion costs. Compute the equivalent units of production for
(a) materials and (b) conversion costs.
Solution
(a) Since materials are entered at the beginning of the process, the equivalent units of
ending work in process are 10,000. Thus, 15,000 units 1 10,000 units 5 25,000
equivalent units of production for materials.
(b) Since ending work in process is only 30% complete as to conversion costs, the equivalent units of ending work in process are 3,000 (30% 3 10,000 units). Thus, 15,000
units 1 3,000 units 5 18,000 equivalent units of production for conversion costs.
Related exercise material: BE21-4, BE21-9, E21-5, E21-6, E21-8, E21-9, E21-10, E21-11, E21-13,
E21-14, E21-15, and DO IT! 21-3.
DO IT!
Cost Reconciliation
Schedule
In March, Rodayo Manufacturing had the following unit production costs: materials $6
and conversion costs $9. On March 1, it had zero work in process. During March, Rodayo
transferred out 12,000 units. As of March 31, 800 units that were 25% complete as to conversion costs and 100% complete as to materials were in ending work in process. Assign
the costs to the units transferred out and in process.
Solution
Action Plan
✔ Assign the total
manufacturing cost of
$15 per unit to the
12,000 units transferred
out.
✔ Assign the materials
cost and conversion costs
based on equivalent units
of production to units in
ending work in process.
The assignment of costs is as follows.
Costs accounted for
Transferred out (12,000 3 $15)
Work in process, March 31
Materials (800 3 $6)
Conversion costs (200a 3 $9)
Total costs
$180,000
$4,800
1,800
6,600
$186,600
a
800 3 25%
Related exercise material: BE21-5, BE21-6, BE21-7, BE21-8, E21-5, E21-6, E21-7, E21-8, E21-9, E21-10,
E21-11, E21-12, E21-13, E21-14, E21-15, and DO IT! 21-4.
D-108
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21 Process Costing
DO IT!
JIT and ABC
Indicate whether each of the following statements is true or false.
1. Continuous process manufacturing often results in a reduction of inventory.
Action Plan
✔ JIT manufacturing
is dedicated to having
the right amounts of
materials, parts, or
products just as they
are needed.
✔ ABC focuses on the
activities performed in
producing a product. It
recognizes that to have
accurate and meaningful
cost data, more than one
basis of allocating costs
to products is needed.
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2. Companies that use just-in-time processing complete and store finished goods all the
time to meet rush orders from customers.
3. A major benefit of just-in-time processing is production cost savings from the improved
flow of goods through the processes.
4. An ABC system is similar to traditional costing systems in accounting for manufacturing costs but differs in regard to period costs.
5. The primary benefit of ABC is more accurate and meaningful costs.
6. In recent years, the amount of direct labor used in many industries has greatly increased and total overhead costs have significantly decreased.
Solution
1. False.
2. False.
3. True.
4. False.
5. True.
6. False.
Related exercise material: BE21-11 and DO IT! 21-5.
Comprehensive DO IT!
Essence Company manufactures a high-end after-shave lotion, called Eternity, in 10-ounce
plastic bottles. Because the market for after-shave lotion is highly competitive, the company is very concerned about keeping its costs under control. Eternity is manufactured
through three processes: mixing, filling, and corking. Materials are added at the beginning
of each of the processes, and labor and overhead are incurred uniformly throughout each
process. The company uses a weighted-average method to cost its product. A partially
completed production cost report for the month of May for the Mixing Department is
shown below.
ESSENCE COMPANY
Mixing Department
Production Cost Report
For the Month Ended May 31, 2014
Equivalent Units
QUANTITIES
Physical
Units
Units to be accounted for
Step 1
Work in process, May 1
Started into production
1,000
2,000
Total units
Units accounted for
Transferred out
Work in process, May 31
Total units
Materials
Conversion
Costs
Step 2
3,000
2,200
800
?
?
?
?
3,000
?
?
DO IT!
COSTS
D-109
Materials
Conversion
Costs
Total
?
Unit costs Step 3
Costs in May
(a)
?
?
Equivalent units
(b)
?
?
?
?
Unit costs [(a) 4 (b)]
Costs to be accounted for
Work in process, May 1
Started into production
?
$ 56,300
119,320
Total costs
$175,620
COST RECONCILIATION SCHEDULE Step 4
Costs accounted for
Transferred out
Work in process, May 31
Materials
Conversion costs
?
?
?
Total costs
?
?
Additional information:
Work in process, May 1, 1,000 units
Materials cost, 1,000 units (100% complete)
$49,100
Conversion costs, 1,000 units (70% complete)
7,200
$56,300
Materials cost for May, 2,000 units
$100,000
Conversion costs for May
$19,320
Work in process, May 31, 800 units, 100% complete as to materials and 50%
complete as to conversion costs.
Instructions
(a) Prepare a production cost report for the Mixing Department for the month of May.
(b) Prepare the journal entry to record the transfer of goods from the Mixing Department
to the Filling Department.
(c) Explain why Essence Company is using a process cost system to account for its costs.
Solution to Comprehensive
Action Plan
✔ Compute the physical
unit flow—that is, the
units to be accounted for
and the units accounted for.
✔ Compute the
equivalent units of
production.
✔ Compute the unit
production costs, expressed
in terms of equivalent units
of production.
✔ Prepare a cost
reconciliation schedule,
which shows that the
total costs accounted for
equal the total costs to be
accounted for.
DO IT!
(a) A completed production cost report for the Mixing Department is shown below.
Computations to support the amounts reported follow the report.
ESSENCE COMPANY
Mixing Department
Production Cost Report
For the Month Ended May 31, 2014
Equivalent Units
QUANTITIES
Physical
Units
Units to be accounted for
Step 1
Work in process, May 1
Started into production
1,000
2,000
Total units
3,000
Materials
Conversion
Costs
Step 2
D-110
21 Process Costing
Equivalent Units
QUANTITIES
Physical
Units
Units accounted for
Transferred out
Work in process, May 31
Total units
Materials
Conversion
Costs
2,200
800
2,200
800
2,200
400
3,000
3,000
2,600
COSTS
Unit costs Step 3
Materials
Conversion
Costs
Total
$175,620
Costs in May
(a)
$149,100
$26,520
Equivalent units
(b)
3,000
2,600
$49.70
$10.20
Unit costs [(a) 4 (b)]
(800 3 50%)
Costs to be accounted for
Work in process, May 1
Started into production
$59.90
$ 56,300
119,320
Total costs
$175,620
COST RECONCILIATION SCHEDULE Step 4
Costs accounted for
Transferred out (2,200 3 $59.90)
Work in process, May 31
Materials (800 3 $49.70)
Conversion costs (400 3 $10.20)
$131,780
$39,760
4,080
Total costs
43,840
$175,620
Additional computations to support production cost report data:
Materials cost—$49,100 1 $100,000
Conversion costs—$7,200 1 $19,320 ($119,320 2 $100,000)
(b) Work in Process—Filling
Work in Process—Mixing
131,780
131,780
(c) Companies use process cost systems to apply costs to similar products that are massproduced in a continuous fashion. Essence Company uses a process cost system
because production of the after-shave lotion, once it begins, continues until the
after-shave lotion emerges. The processing is the same for the entire run—with
precisely the same amount of materials, labor, and overhead. Each bottle of Eternity
after-shave lotion is indistinguishable from another.
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DO IT! Review
Compare job order and
process cost systems.
(LO 1, 2), C
DO IT! 21-1 Indicate whether each of the following statements is true or false.
1. Many hospitals use job order costing for small, routine medical procedures.
2. A manufacturer of computer flash drives would use a job order cost system.
3. A process cost system uses multiple work in process accounts.
4. A process cost system keeps track of costs on job cost sheets.
DO IT!
Assign and journalize
manufacturing costs.
D-111
DO IT! 21-2 Kopa Company manufactures CH-21 through two processes: Mixing and
Packaging. In July, the following costs were incurred.
(LO 4), AP
Raw materials used
Factory labor costs
Manufacturing overhead costs
Mixing
Packaging
$10,000
8,000
12,000
$28,000
36,000
54,000
Units completed at a cost of $21,000 in the Mixing Department are transferred to the
Packaging Department. Units completed at a cost of $106,000 in the Packaging Department are transferred to Finished Goods. Journalize the assignment of these costs to the
two processes and the transfer of units as appropriate.
Compute equivalent units.
(LO 5), AP
DO IT! 21-3 The assembly department has the following production data for the current month.
Beginning
Work in Process
Units
Transferred Out
Ending
Work in Process
–0–
20,000
12,000
Materials are entered at the beginning of the process. The ending work in process units are
70% complete as to conversion costs. Compute the equivalent units of production for
(a) materials and (b) conversion costs.
Prepare cost reconciliation
schedule.
(LO 6, 7), AP
DO IT! 21-4 In March, Kelly Company had the following unit production costs: materials
$10 and conversion costs $8. On March 1, it had zero work in process. During March,
Kelly transferred out 22,000 units. As of March 31, 4,000 units that were 40% complete as
to conversion costs and 100% complete as to materials were in ending work in process.
(a) Compute the total units to be accounted for.
(b) Compute the equivalent units of production.
(c) Prepare a cost reconciliation schedule, including the costs of materials transferred out
and the costs of materials in process.
Answer questions about JIT
and ABC.
(LO 8, 9), C
DO IT! 21-5 Indicate whether each of the following statements is true or false.
1. Just-in-time processing is also known as just-in-case processing.
2. Companies that use just-in-time processing complete finished goods just in time to be sold.
3. A major benefit of just-in-time processing is enhanced product quality.
4. An ABC system is similar to conventional costing systems in accounting for period
costs but differs in regard to manufacturing costs.
5. The primary benefit of ABC is significant reduction or elimination of manufacturing
inventories.
6. In recent years, the amount of direct labor used in many industries has greatly decreased
and total overhead costs have significantly increased.