Exercises

Exercise 1

The following cost data relate to Taylor Products Company for the year ended June 30, 2005.
Direct Materials $ 55,600
Direct Labor 72,400
Factory Overhead 36,500
Work in process inventory, July 1, 2004 38,200
Work in process inventory, June 30, 2005 34,800

Required:
1. Calculate the manufacturing costs for the year.
2. Calculate the cost of goods manufactured for the year.

Exercise 2

Iowa Products Company accumulated the following data for 2005.

Jan 1, 2005 Dec 31, 2005
Inventories:
Finished Goods $ 52,000 $ 54,000
Work in Process 29,600 27,800
Raw materials 14,200 15,000
Direct M. labor 95,000
Raw material purchase s 138,000
Indirect M. labor 15,300
Indirect materials and supplies 10,800
Factory utilities 18,600
Depreciation expense- Factory 14,000
Factory rent 18,000
Payroll taxes- Factory wages 8,100
Repairs and maintenance- Factory 6,000
Insurance incurred- Factory 6,800
Miscellaneous factory costs 5,200
Sales 710,000
Sales discount 12,000
Selling expenses 95,600
General expenses 75,300
Interest expenses 7,000

Required:
1. Prepare a statement of cost of goods manufactured.
2. Prepare an income statement (assume an income tax rate of 30%)

Lecture notes by Abdu Yi. Page 1

Recording the Cost Flow at Each Stage of Work Flow
Assume that on October 1,19x4 these balances in the following accounts were available:-
Raw materials 40,000 Br
Work; in process 30,000
Finished goods 24,000
1. Additional raw materials were purchased during the month of October at a cost of Br.60,000.
Raw materials 60,000
Vouchers payable (accounts payable) 60,000
2. During the month raw material costing 70,000 Birr were used as follows:-
Direct materials charged to the work in process Br. 68, 000
Indirect materials charged to the manufacturing over head control was Br. 2, 000
Work in process 68,000
Manufacturing overhead control 2,000
Raw materials 70,000
3. During the month wages and salaries totaling 84,000 Birr were earned by the factory
employees and charged from the factory payroll register.
Factory payroll clearing 84,000
Salaries and wages payable 84,000
4. An analysis of records indicates that labor costs of 84,000 Birr is allocated as follows:-
Direct labor chargeable to the work in process 60,000
Indirect labor chargeable to man over head control 24,000
Work in process 60,000
Manufacturing over head control 24,000
Factory payroll clearing 84,000
5. In addition to indirect materials and indirect labors other manufacturing overhead costs
totaling 14,000 Birr incurred during the month were charged form various journals.
Manufacturing overhead control 14,000
Vouchers payable (accounts payable) 14,000
6. It is estimated that over head costs totaling 38,000 Birr are applied or charged to jobs worked
on during the month
Work in process 38,000
Manufacturing overhead control 38,000
7. During the month, some jobs were completed and transferred to the finished goods ware
house. The jobs cost were Br. 180, 000
Finished goods 180,000
Work in process 180,000
8. During the month, finished goods costing Br. 170, 000 were sold to various customers.
Cost of goods sold 170,000
Finished goods 170,000

Lecture notes by Abdu Yi. Page 2

 Chapter Four
Process Costing System
 Used where large number of identical or very similar products are manufactured in a
continues flow.
 Industries using process costing include paper, petroleum, chemical, textiles, food
processing and electronics.

Comparison of Job-order costing and Process costing system

 Have the same purpose: Assignment of production costs to units of outputs.
 Flow of costs through the manufacturing accounts is the same.

 Direct
Material costs
 Direct Labor Work-in- Finished Cost of
costs Process Goods Goods
 Manufacturing Inventor Sold
Inventory
overhead costs y

Differences:

Job-Order Costing System:-

 For distinct/identifiable units of products.
 Costs are accumulated by job order.
 Costs are recorded on job cost sheet.
 The cost of each unit in a particular job order is found by dividing the total cost of the job
order by the number of units in the job.

Work-in-Process
 Direct Inventory
Material costs

 Direct Labor Finished Cost of

costs Goods Goods
Inventory Sold
 Manufacturing
overhead costs

Process Costing System:-

 For masses of identical/similar units of products.
 Costs are accumulated by department rather than by job order (batch).

Lecture notes by Abdu Yi. Page 3

  The cost per unit is found by averaging the total costs incurred over units produced.

 Direct Work-in-Process Inventory:

Material costs Production Department A
 Direct Labor
costs
 Manufacturing
overhead costs Work-in-Process Inventory:
Production Department B

Finished Goods Inventory

Cost of Goods Sold

Illustration of Process Costing System

Suppose that Pacific Electronics manufactures a variety of cell phone models. These models are
assembled in the assembly department. Upon completion, units are transferred to the testing
department. Focus on the assembly department process for one model, SG-40. All units of SG-40
are identical and must meet a set of demanding performance specifications. The process-costing
system for SG-40 in the assembly department has a single direct-cost category—direct
materials—and a single indirect-cost category—conversion costs. Direct materials are added at
the beginning of the assembly process. Conversion costs are added evenly during assembly.
 Case 1—Process costing with zero beginning and zero ending work-in-process inventory
of SG-40. (That is, all units are started and fully completed within the accounting period.)
 Case 2—Process costing with zero beginning work-in-process inventory and some
ending work-in-process inventory of SG-40.
 Case 3—Process costing with both some beginning and some ending work-in-process
inventory of SG-40.

Case 1: Process Costing with No Beginning and Zero Ending Work-in-Process

Inventory
On January 1, 2012, there was no beginning inventory of SG-40 units in the assembly
department. During the month of January, Pacific Electronics started, completely assembled, and
transferred out to the testing department 400 units.
Data for the assembly department for January 2012 are as follows:

Lecture notes by Abdu Yi. Page 4

Physical Units for January 2012
Work in process, beginning inventory (January 1)………………….. 0 units
Started during January…………………………………………….. 400 units
Completed and transferred out during January…………………… 400 units
Work in process, ending inventory (January 31) …………………….0 units

Physical units refer to the number of output units, whether complete or incomplete. In January
2012, all 400 physical units started were completed. Pacific Electronics records direct material
costs and conversion costs in the assembly department as these costs are incurred.
Total Costs for January 2012
Direct material costs added during January…………….. $32,000
Conversion costs added during January …………………..24,000
Total assembly department costs added during January… $56,000
Required: What is the average cost of SG-40 (Cost per unit?)
Solution:
Case 1 shows that in a process-costing system, average unit costs are calculated by dividing total
costs in a given accounting period by total units produced in that period. Because each unit is
identical, we assume all units receive the same amount of direct material costs and conversion
costs. Thus by averaging, assembly cost of SG-40 is $56,000/400 units = $140 per unit, itemized
as follows:
Direct material cost per unit ($32,000/400 units)………..$ 80
Conversion cost per unit ($24,000/400 units) ……………...60
Assembly department cost per unit ………………………$140
Case 2: Process Costing with Zero Beginning and Some Ending Work-in-
Process Inventory
In February 2012, Pacific Electronics places another 400 units of SG-40 into production.
Because all units placed into production in January were completely assembled, there is no
beginning inventory of partially completed units in the assembly department on February 1.
Some customers order late, so not all units started in February are completed by the end of the
month. Only 175 units are completed and transferred to the testing department.
Data for the assembly department for February 2012 are as follows:
Physical Direct Conversion Total Costs
Units Materials Costs (4) =
(1) (2) (3) (2) + (3)
Work in process, beginning inventory, Feb 0
Started during February 400
Completed & transferred out during Feb 175
Work in process, ending inventory (Feb 28) 225
Degree of Completion of Ending WIP 100% 60%
Total Costs added during February $32,000 $18,600 $50,600
Required: Calculate the cost of fully assembled units in February 2012, and the cost of partially
assembled units still in process at the end of that month.

Lecture notes by Abdu Yi. Page 5

 Solution:
Five steps required to calculate the above requirements. The Five steps of process costing are:-
1. Summarize the flow of physical units of output.
2. Compute output in terms of equivalent units.
3. Summarize total costs to account for.
4. Compute cost per equivalent unit.
5. Assign total costs to units completed and to units in ending work in process.
Physical Units and Equivalent Units (Steps 1 and 2)
Physical units are the number of output units, whether complete or incomplete. Equivalent units
is a derived amount of output units that (1) takes the quantity of each input (factor of production)
in units completed and in incomplete units of work in process and (2) converts the quantity of
input into the amount of completed output units that could be produced with that quantity of
input. Note that equivalent units are calculated separately for each input (such as direct materials
and conversion costs). Moreover, every completed unit, by definition, is composed of one
equivalent unit of each input required to make it. This chapter focuses on equivalent-unit
calculations in manufacturing settings.

(Step 1) (Step 2)
Equivalent Units
Physical Units Direct Conversion
Flow of Production Materials Costs
Work in process, beginning 0
Started during current period 400
To account for 400
Completed & transferred out during current period 175 175 175
Work in process, ending a 225
(225*100%, 225*60%) 225 135
Accounted for 400
Equivalent units work done in current period 400 310
a
degree of completion in this department; direct materials, 100%; conversion costs, 60%.

Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Production Materials Costs
Costs
Costs added during February $50,600 $32,000 $18,600
Step (3) Total Costs to account for
$50,600 $32,000 $18,600
Costs added in current period $50,600 $32,000 $18,600
Step (4) Divide by equivalent units work done in current /400 /310
Cost per equivalent unit $ 80 $ 60
Assignment of costs:
Step (5) Completed and transferred out (175 units) $24,500 (175*$80) (175*$60)
Work in process, ending (225 units) 26,100 (225*$80) (135*$60)
Total costs accounted for $50,600 $32,000 $18,600

Lecture notes by Abdu Yi. Page 6

Journal Entries:
Journal entries in process-costing systems are similar to the entries made in job-costing systems
with respect to direct materials and conversion costs. The main difference is that, in process
costing, there is one Work in Process account for each process. In our example, there are
accounts for Work in Process—Assembly and Work in Process—Testing. Pacific Electronics
purchases direct materials as needed. These materials are delivered directly to the assembly
department. Journal entries for February are as follows:

1. Work in Process—Assembly……….. 32,000

Accounts Payable Control…………… 32,000
To record direct materials purchased and used in production during February.
2. Work in Process—Assembly………… 18,600
Various accounts such as Wages Payable Control and
Accumulated Depreciation…………………………………..18,600
To record conversion costs for February; examples include energy,
manufacturing supplies, all manufacturing labor, and plant depreciation.
3. Work in Process—Testing………………. 24,500
Work in Process—Assembly……………………….24,500
To record cost of goods completed and transferred from assembly to testing during February.

Case 3: Process Costing with Some Beginning and Some Ending Work-in-
Process Inventory
At the beginning of March 2012, Pacific Electronics had 225 partially assembled SG-40 units in
the assembly department. It started production of another 275 units in March. Data for the
assembly department for March are as follows:

Physical Direct Conversion Total Costs

Units Materials Costs (4) =
(1) (2) (3) (2) + (3)
Work in process, beginning inventory, March 225 $18,000 $8,100 $26,100
Degree of Completion of beginning WIP 100% 60%
Started during March 275
Completed & transferred out during March 400
Work in process, ending inventory (March 31) 100
Degree of Completion of Ending WIP 100% 50%
Total Costs added during March $19,800 $16,380 $36,180

We can still use the five steps described earlier to calculate (1) cost of units completed and
transferred out and (2) cost of ending work in process. To assign costs to each of these
categories, however, we first need to choose an inventory-valuation method. We next describe
the five-step approach for two important methods—the weighted-average method and the first-
in, first-out method. These different valuation methods produce different amounts for cost of
units completed and for ending work in process when the unit cost of inputs changes from one
period to the next.

Lecture notes by Abdu Yi. Page 7

 Weighted-Average Method
The weighted-average process-costing method calculates cost per equivalent unit of all work
done to date (regardless of the accounting period in which it was done) and assigns this cost to
equivalent units completed and transferred out of the process and to equivalent units in ending
work-in-process inventory. The weighted-average cost is the total of all costs entering the Work
in Process account (whether the costs are from beginning work in process or from work started
during the current period) divided by total equivalent units of work done to date.
The weighted-average cost of inventory is calculated by merging together the costs of beginning
inventory and the manufacturing costs of a period and dividing by the total number of units in
beginning inventory and units produced during the accounting period.
Equivalent units—are done differently. We use the relationship shown in the following equation:
(Equivalent units in beginning work in process + Equivalent units of work done in current
period) = (Equivalent units completed and transferred out in current period + Equivalent
units in ending work in process)
(Step 1) (Step 2)
Equivalent Units
Physical Units Direct Conversion
Flow of Production Materials Costs
Work in process, beginning 225
Started during current period 275
To account for 500
Completed & transferred out during current period 400 400 400
a
Work in process, ending 100
(100*100%, 100*50%) 100 50
Accounted for 500
Equivalent units work done to date 500 450
a
degree of completion in this department; direct materials, 100%; conversion costs, 50%.

Total Direct Conversion

Production Materials Costs
Costs
Work in process, beginning $26,100 $18,000 $8,100
Step (3)
Costs added in the current period 36,180 19,800 16,380
Total Costs to account for $62,280 $37,800 $24,480

Costs incurred to date $37,800 $24,480

Step (4) Divide by equivalent units work done to date /500 /450
Cost per equivalent unit of work done to date $ 75.60 $ 54.40
Assignment of costs:
Step (5) Completed and transferred out (400 units) $52,000 (400*$75.60) (400*$54.40)
Work in process, ending (100 units) 10,280 (100*$75.60) (50*$54.40)
Total costs accounted for $62,280 $37,800 $24,480

Lecture notes by Abdu Yi. Page 8

The summary journal entries under the weighted average method for March 2012 at Pacific
Electronics are as follows:

1. Work in Process—Assembly…………… 19,800

Accounts Payable Control……… 19,800
To record direct materials purchased and used in production during March.

2. Work in Process—Assembly……………. 16,380

Various accounts such as Wages Payable Control and
Accumulated Depreciation ……………………..16,380
To record conversion costs for March; examples include energy, manufacturing supplies, all
manufacturing labor, and plant depreciation.

3. Work in Process—Testing…………………52,000
Work in Process—Assembly…………………52,000
To record cost of goods completed and transferred from assembly to testing during March.

First-in-First out
The first-in, first-out (FIFO) process-costing method

(1) assigns the cost of the previous accounting period’s equivalent units in beginning work-
in-process inventory to the first units completed and transferred out of the process, and

(2) assigns the cost of equivalent units worked on during the current period first to complete
beginning inventory, next to start and complete new units, and finally to units in ending
work-in-process inventory.

The FIFO method assumes that the earliest equivalent units in work in process are completed
first. A distinctive feature of the FIFO process-costing method is that work done on beginning
inventory before the current period is kept separate from work done in the current period. Costs
incurred and units produced in the current period are used to calculate cost per equivalent unit of
work done in the current period.

In contrast, equivalent-unit and cost-per-equivalent-unit calculations under the weighted-average

method merge units and costs in beginning inventory with units and costs of work done in the
current period.

Lecture notes by Abdu Yi. Page 9

 (Step 1) (Step 2)
Equivalent Units
Physical Units Direct Conversion
Flow of Production Materials Costs
(Work done before
Work in process, beginning 225 current period)
Started during current period 275
To account for 500
Completed & transferred out during current period:
From beginning work in process a 225
[225 × (100% – 100%); 225 × (100% – 60%)] 0 90
Started and completed 175b
(175*100%; 175*100%) 175 175
Work in process, ending c 100
(100*100%; 100*50%) 100 50
Accounted for 500
Equivalent units work done in current period 275 315
a
degree of completion in this department; direct materials, 100%; conversion costs, 60%.
b
400 physical units completed and transferred out minus 225 physical units completed and transferred out from beginning work-in-process
inventory.
c
Degree of completion in this department: direct materials, 100%; conversion costs, 50%.

Total Direct Conversion

Production Materials Costs
Costs
Work in process, beginning $26,100 $18,000 $8,100
Step (3)
Costs added in the current period 36,180 19,800 16,380
Total Costs to account for $62,280 $37,800 $24,480

Costs added in current period $19,800 $16,380

Step (4) Divide by equivalent units work done in current period /275 /315
Cost per equivalent unit of work done in current period $ 72 $ 52

Assignment of costs:
Step (5) Completed and transferred out (400 units):
Work in process, beginning (225 units) $26,100 $18,000 $8,100
Costs added to beginning work in process in current period 4,680 (0*$72) (90*$52)
Total from beginning inventory $30,780
Started and Completed (175 units) 21,700 (175*$72) (175*$52)
Total costs of units completed and transferred out $52,480
Work in process, ending (100 units) 9,800 (100*$72) (50*$52)
Total costs accounted for $62,280 $37,800 $24,480

Lecture notes by Abdu Yi. Page 10

 Transferred-In Costs in Process Costing
Many process-costing systems have two or more departments or processes in the production
cycle. As units move from department to department, the related costs are also transferred by
monthly journal entries. Transferred-in costs (also called previous-department costs) are costs
incurred in previous departments that are carried forward as the product’s cost when it moves to
a subsequent process in the production cycle.

Pacific Electronics As the assembly process is completed, the assembly department of Pacific
Electronics immediately transfers SG-40 units to the testing department. Conversion costs are
added evenly during the testing department’s process. At the end of the process in testing, units
receive additional direct materials, including crating and other packing materials to prepare units
for shipment. As units are completed in testing, they are immediately transferred to Finished
Goods. Computation of testing department costs consists of transferred-in costs, as well as direct
materials and conversion costs that are added in testing.

Physical Transferred Direct Conversion

Units -in costs Materials Costs
Work in process, beginning inventory, March 240 $33,600 $0 $18,000
Degree of Completion of beginning WIP 100% 0% 62.5%
Transferred in during March 400
Completed & transferred out during March 440
Work in process, ending inventory (March 31) 200
Degree of Completion of Ending WIP 100% 0% 80%
Total Costs added during March
Direct materials and conversion costs $13,200 $48,600
Transferred in (Weighted average) $52,000
Transferred in (FIFO) $52,480
The transferred-in costs during March are different under the weighted-average method and the
FIFO method. In our example, beginning work-in-process inventory, $51,600 ($33,600 + $0 +
$18,000) is the same under both the weighted-average and FIFO inventory methods because we
assume costs per equivalent unit to be the same in both January and February. If costs per equivalent
unit had been different in the two months, work-in-process inventory at the end of February
(beginning of March) would be costed differently under the weighted-average and FIFO methods.
The basic approach to process costing with transferred-in costs, however, would still be the same as
what we describe in this section.

Required:-
Using the weighted-average method and the FIFO method, Compute (1) cost of units completed
and transferred out and (2) cost of ending work in process. Use the five steps of process costing.

Lecture notes by Abdu Yi. Page 11

Example:

In our example as the assemble process is completed the department transfers the units to its
Testing Department. Here the units receive additional direct materials, such as packing materials
for shipment, at the end of the process. Conversion costs are added evenly during the Testing
Department’s process. As units are completed in Testing, they are immediately transferred to
Finished Goods.

Data for the Testing Department for the month of March 2012 are:
Physical Units for March 2012
Work in Process, beginning inventory (March 1) 240 units
Transferred-in costs (100% complete)
Direct Materials (0% complete)
Conversion costs (62.5% complete)
Transferred in during March 400 units
Completed during March 440 units
Work in Process, ending inventory (March 31) 200 units
Transferred-in costs (100% complete)
Direct Materials (0% complete)
Conversion costs (80% complete)
Costs of Testing Department for March 2001
Work in process, beginning inventory
Transferred-in costs (240 equivalent units*140/ equ. Un) Br. 33,600
Direct materials 0
Conversion costs (150 equivalent units * Br.120/unit) 18,000 Br. 51,600
Transferred-in costs during March
Weighted-average 52,000
FIFO 52,480
Direct materials costs added during March 13,200
Conversion costs added during March 48,600

A. Transferred-in costs and the Weighted-Average Method

Equivalent Units
Flow of Production Physical Transferred DM CC
Units in costs
Work in process, beginning 240
Transferred in during current period 400
To account for 640
Completed and transferred out during
current period 440 440 440 440
Work in process, ending 200
200*100%; 200*0%; 200*80% 200 0 160
Accounted for 500
Work done to date 640 440 600

Lecture notes by Abdu Yi. Page 12

 Total Transferred DMs CCs
Production in costs
Costs
(Step 3) Work in process, beginning Br.51,600 Br.33,600 Br.0 Br.18,000
Costs added in the current period 113,800 52,000 13,200 48,600
Total costs to account for Br.165,400 Br.85,600 Br.13,200 Br. 66,600

(Step 4) Costs incurred to date Br.85,600/ Br.13,200/ Br 66,600/

divided by E.units of work done to date 640 440 600
Cost per equivalent unit of work done Br.133.75 Br.30 Br.111

(Step 5) Assignment of Costs

Completed & transferred out (440 units) Br.120,890 (440*133.75) +(440*30) +(440*111)
Work in process, ending (200 units) + 44,510 +200*133.75 +0*30 160*111
Total costs accounted for Br. 165,400 Br. 85,600 Br.13,200 Br.66,600

To record cost of goods completed and transferred from Testing to finished goods.

Finished Goods Control 120,890

Work-in Process: Testing 120,890

B. Transferred-in costs and the FIFO Method

Equivalent Units
Flow of Production Physical Transferred- Direct Conversion
Units in costs Materials costs
Work in process, beginning 240
Transferred-in current period 400
To account for 640
Completed & transferred out during current
period:
From beginning work in process 240
240*0%; 240*(100%-0%); 200* (100%-62.5%) 0 240 90
Started and Completed
200*100%; for the three 200 200 200 200
Work in process, ending
200*100%; 200*0%;200*80% 200 200 0 160
Accounted for 640
Equ. Units of Work done in current period 400 440 450

Lecture notes by Abdu Yi. Page 13

 Total Transferred DMs CCs
Production -in cost
Costs
(Step 3)Work in process, beginning Br.51,600 Br.33,600 Br.0 Br.18,000
Costs added in the current period 114,280 52,480 13,200 48,600
Total costs to account for Br.165,880 Br.86,080 Br.13,200 Br.66,600

(Step 4) Costs added in the current 52,480/ 13,200/ 48,600/

period 400 440 450
Divided by EU of WD in current period Br.131.20 Br. 30 Br. 108
Costs per EU of WD in current period

(Step 5)Assignment of Costs

Completed & transferred out (440 units) Br.51,600 33,600 +0 +18,000
Work in process, beginning (240 units) 16,920 0*131.20 +240*30 +90*108
Costs added to Beginning WIPI 68,520
Total from beginning inventory 53,840 200*131.20 +200*30 +200*108
Started and completed (200 units) 122,360
Total costs of units comp. & trans. 43,520 200*131.20 +0*30 +160*108
Work in process, ending (200 units) Br. 165,880 Br.86,080 Br.13,200 Br.66,600
Total costs accounted for
To record cost of goods completed and transferred from Testing to finished goods.
Finished Goods Control 122,360
Work-in Process: Testing 122,360

Lecture notes by Abdu Yi. Page 14