Case Study:

Process Costing System

Riccardo Sacchetti
Edoardo Scacco
Qiao Li
Ziqiao Zhao
Luca Biazzo
Introduction

Carol Lee: manages the plant located in Kanasa City, Missouri.

Thad Kostowski: manages the plant in Roseville, Oregon.
Paid in salary + 10% of their base salary if the entire division meets its
target profits for the year

The managers are $62,500 within the year’s target profit

The final processing department in Carol’s production facility began the year
with no work in process inventories

270,000 units were transferred in from the prior processing department

250,000 units were completed and sold

Costs transferred in from the prior department totaled $49,221,000

No materials are added in the final processing department

$16,320,000 of conversion cost was incurred in the final processing

department during the year
Required
1. Jean Jackson estimated that the units in ending inventory in the final processing
department were 25$ complete with respect to the conversion costs of the final processing
department. If this estimate of the percentage completion is used, what would be the cost
of goods sold for the year?

2. Does Thad Kostowski want the estimated percentage completion to be increased or

decreased? Explain why.

3. What percentage completion figure would result in increasing the reported net operating
income by $62,500 over the net operating income that would be reported if the 25$ figure
were used?

4. Do you think Carol Lee should go along with the request to alter estimates of the
percentage completion? Why or why not?
 DEPARTMENT A

Because of there is no beginning or ending inventory in WIP account for

Department A, thus the costs of products per unit are computed as:

UNIT COST (DEPT.A) = Sum of production costs/Production quantity

= 49,221,000 $ / 270,000 = 182.3 $ per unit

 DEPARTMENT B (I)

Since there are no materials added in Department B, the total costs of the period
for Department B turn out to be consistent with Conversion Costs.

EQUIVALENT UNITS OF PRODUCTION FOR THE PERIOD = (Completion

percentage) x (Total quantity of units transferred from Dept.A - Total quantity of
units completed and sold) = 25% x (270,000 - 250,000) = 5000 units

TOTAL EQUIVALENT UNITS = 250,000+5,000 = 255,000

COST PER EQUIVALENT UNIT (DEPT.B) = Cost of the period/(Total quantity of

units completed and sold + Equivalent units of production for the period) =
16,320,000 $ /(255,000) = 64 $ per unit
 DEPARTMENT B (II)

TOTAL COST PER EQUIVALENT UNIT = Cost per Unit Dept.A + Cost per
Equivalent Unit Dept. B = (182.3 + 64) $ per unit = 246.3 $ per unit

Question 1:
COST OF GOODS SOLD = (Total cost per Equivalent Unit) x (Total quantity of
units completed and sold) = 246.3 $ per unit x 250,000 = 61,575,000 $
Question 2:

Does Thad Kostowski want the estimated percentage completion to be

increased or decreased? Explain why.

Thad Kostowski wants to increase the percentage of completion in order to

lower the Cost per Equivalent Unit for the Department B and, therefore, the
Costs of Goods Sold account. Given that COGS in the Income Statement is a
“negative” item (it should be deducted from “Sales “ to compute the “Gross
Margin”), reducing it means to increase the Net Operating Income.
Question 3:

Goal to be achieved = gain extra 62,500 $ (lowering the COGS by this amount).
new COGS = (61,575,000 - 62,500) $ = 61,512,500 $

a) (182,3 + x)$ 250,000 = 61,512,500 $

x250,000= (61,512,500 - 45,575,000) $

x = 63,75 $ per unit (new Cost per Equivalent Unit for Department B)
b) [16,320,000 $ / (250,000 + x)] = 63,75 $

new EQUIVALENT UNITS OF PRODUCTION FOR THE PERIOD

x= 6,000 units

c) 6,000 u : 20,000 u = x : 100%

new Completation Percentage (inflated)

x= 0,3 = 30%
Question 4:

Carol Lee shouldn’t go along with the request to alter the estimate of completion
percentage coming from Thad Kostowski.

First of all, it’s unethical to inflate/deflate an item in accountability just because

this action would lead the team to reach a reward. Indeed, a bonus is so-called
due to the circumstances in which it’s delivered : when someone (a team or a
single employee) reaches properly or overcomes honestly a goal needed to be
achieved.

In addition, it wouldn’t be respectful towards Jean Jackson’s work.