Chapter 14

CHAPTER 14
PROCESS COSTING AND THE COST ACCOUNTING CYCLE
14-1 Dell Computer's Costing Methods
Dell almost certainly does not use job-order costing, nor can it use process costing, because units differ.
The company could use standard costing, but with such a small amount of work in Process and finished goods
inventory, it could also use backflushing.
Dell's business model requires low inventories and quick response times. Prices of computer components fall,
sometimes rapidly, so buying inventory well in advance of selling it reduces profits. We have referred to this
situation in several Insights.
14-2 Strategic Uses of Overhead Allocation
The benefit is that managers will concentrate on reducing cycle time, which is a highly desirable result.
The lower the cycle time, the faster the response, the more satisfied the customer and the higher the profit.
Allocations based on labor or machine time can encourage managers and engineers to reduce those times, but might
not lower overall costs, as the Tektronix example in Chapter 10 described. We refer to the Tektronix example to
remind students that reported costs of products play an important role in how managers (and design engineers)
approach those products.
The 8th edition of this book contained the following material that you might want to use in class.
Teijin Seiki Co., Ltd. manufactures machines and components for industries as diverse as textiles, aerospace, and
printing. Managers at a division that made reduction gears for earthmoving equipment were dissatisfied with the
standard costing system because it applied direct labor and overhead to products based on standard machine times.
The managers therefore expected that when they reduced standard machine times, costs should also drop, but results
were disappointing. The problem was that the standard machine time, which is value-adding time, was much less
than the lead time, or total time a component was in process. Lead time includes waiting time, which is, of course,
not value-adding, but which generates significant amounts of overhead.
The division changed its allocation base from standard manufacturing time to lead time, so that managers
were motivated to reduce lead time, which in turn reduced inventories and costs. The overhead rate was calculated
as
Overhead rate = Total budgeted overhead
Total lead times
The denominator, total lead times, was the sum of the lead times for all of the parts the division made. Reducing
machine time still saves costs under the new method, but the new method directs managerial attention to the entire
flow of parts through the factory.
Source: Makoto Kawada and Daniel F. Johnson, "Strategic Management AccountingWhy and How,"
Management Accounting, August 1993, 32-38.
14-3 Cost of Accounting Systems
Job-order costing is almost certainly the costliest, requiring that the company track materials and labor, as well as
any overhead drivers such as setup time, to specific jobs. Even though bar coding and other technologies can reduce
costs, job-order costing probably still leads the field.
14- 1
Backflushing is probably the cheapest system because it requires entries only at a few points in the
production/sale process. A single product factory could probably operate a standard costing or process costing
system cheaply as well.
The cost of the accounting system depends partly on the complexity of the operation, how many
parts/components, how many departments, operations, etc. A job-order system is costly partly because job-order
operations are probably more complicated than others.
14-4 Cost/Benefit of Accounting System
Caterpillar almost certainly needs the more accurate system because its manufacturing costs and inventories are
relatively much higher than Intel's. Caterpillar's cost of sales is about 77% of sales, while Intel's is about 38%.
Certainly, Intel cares about costs, but a point or two increase for Intel will not have the same negative effect as will a
similar increase for Caterpillar. The two companies’ inventories are about the same percentages of cost of sales
about 19% for both), but Intel’s is much smaller as a percentage of sales. \
Intel might still benefit from a sophisticated, costly system, particularly an ABC system, for evaluating
profitability of individual products, but Caterpillar would probably benefit more.
14-5 Basic Process Costing (15 minutes)
1. 33,000
Units completed 30,000

Equivalent units in ending inventory (5,000 x 60%) 3,000
Equivalent unit production 33,000
2. $1.40 ($6,400 + $39,800)/33,000 = $46,200/33,000
3. $4,200 3,000 x $1.40
4. $42,000 30,000 x $1.40
The assignment does not ask for a reconciliation of costs, but it is always wise to do one. The $46,200 total cost
is accounted for below.
Ending inventory $ 4,200
Transferred to finished goods 42,000
Total costs $46,200
5.
Conversion Costs $39,800
Various Credits $39,800
Work in Process Inventory $39,800

Conversion Costs $39,800
Finished Goods Inventory $42,000

14-6 Job-Order Costing--Journal Entries (20 minutes)
a. Work in Process Inventory $5,120

Materials Inventory $5,120
14- 2
b1. Direct Labor 8,760
Cash or Wages Payable 8,760
b2. Work in Process 8,760

Direct Labor 8,760
c1. Factory Overhead 9,610

Various credits 9,610
c2. Work in Process 9,610

Factory Overhead 9,610
d. Finished Goods 18,660

Work in Process 18,660
e. Cost of Goods Sold 15,200

Finished Goods 15,200
Work in Process Inventory

|
(a) $ 5,120 |
(b2) 8,760 |
(c2) 9,610 | $18,660 (d)
23,490 18,660
Bal $ 4,830
14-7 Basic Process Costing--Weighted-Average (10-15 minutes)
1. 74,000

2. $3.50, ($8,880 + $250,120)/74,000 = $259,000/74,000
3. $31,500, $3.50 x 9,000 equivalent units
4. $227,500, $3.50 x 65,000
The $259,000 total cost is accounted for below.

Total costs $259,000
14-8 Basic Process Costing--FIFO (Continuation of 14-7, Appendix) (10-15 minutes)
1. 67,600

Total 74,000
Less beginning inventory (8,000 x 80%) 6,400
14- 3
2. $3.70, $250,120/67,700
3. $33,300, $3.70 x 9,000
4. $225,700
Cost of beginning inventory $ 8,880

Cost to complete BI* (1,600 x $3.70) 5,920
Cost to start and complete 57,000 units** at $3.70 210,900
Total costs transferred $225,700
* The 1,600 units is 20% x 8,000 units

** 65,000 - 8,000
The $259,000 total cost to account for is the same regardless of the cost-flow assumption, because there is no
beginning inventory.

The difference between the results here and in the weighted-average case are not significant because the unit costs
are only $0.20 apart and the ending inventory is not large in relation to units completed.
14-9 Journal Entries (Continuation of 14-7) (14-20 minutes)
Materials Inventory $ 81,000

Cash and Accounts Payable $ 81,000
To record purchases of materials.
Work in Process Inventory 68,000 Raw Materials Inventory

68,000
To record cost of materials put into process.
Direct Labor 52,040

Cash or Accrued Payroll 52,040
Work in Process Inventory 52,040

Direct Labor 52,040
To charge direct labor cost to work in process
Manufacturing Overhead 130,080

Various Credits 130,080
To record overhead costs.

To apply manufacturing overhead to work in process
Finished Goods Inventory 227,500
To transfer costs of goods completed to finished goods.

Beginning balance $ 8,880 | Materials 68,000 |
Direct Labor 52,040 |
Overhead 120,080 | $227,500 to Finished Goods
14- 4
259,000 | $227,500
Ending Balance $ 31,500
14-10 Journal Entries (Continuation of 14-8 and 14-9) (14-20 minutes)
Note to the Instructor: If you assigned 14-9, you can compare the entries. The only difference is the transfer to
Finished Goods Inventory. Students sometimes need to be reminded that different costing methods do not affect
physical, economic events such as buying and using materials.
Materials Inventory $ 81,000

Work in Process Inventory 68,000 Raw Materials Inventory

68,000
Direct Labor 52,040


Direct Labor 52,040

Various Credits 130,080
To record overhead costs.

To apply manufacturing overhead to work in process
Work in Process Inventory Beginning balance $ 8,880 |

Materials 68,000 |
Direct Labor 52,040 |
Overhead 130,080 | $225,700 to Finished Goods
259,000 | $225,700
Ending Balance $ 33,300
14-11 Relationships--Income, Production, and Volume Variance (20 minutes)
1. $16 ($320,000/20,000 units)
Sales (20,000 x $30) $600,000

Standard gross profit 280,000
Standard cost of sales (all fixed) $320,000
2. $16,000 favorable
An intuitive approach to this part is to prepare an income statement, leaving the volume variance blank.
Sales $600,000
Standard cost of sales, all fixed 320,000
14- 5
Volume variance ?
Selling and administrative expenses 90,000
Income $174,000
3. 24,000 units
Production level used to set standard

fixed cost ($400,000/$16 standard fixed cost) 25,000
Favorable volume variance, units ($16,000/$16) 1,000
Production 24,000
4. $110,000
Sales $600,000
Fixed costs, $400,000 + $90,000 490,000
Income $110,000
An alternative approach is to work with the difference between absorption costing and variable costing incomes.
Absorption costing income $174,000

Increase in inventory (24,000 produced - 20,000 sold) 4,000
Fixed cost per unit $16
Fixed cost carried to following year 64,000
Equals variable costing income $110,000
14-12 Process CostingT-account (15 minutes)
1. $20.80 ($23,700 + $766,700)/38,000 = $790,400/38,000

Equivalent unit production--weighted-average 38,000
2. Ending inventory $ 62,400 ($20.80 x 3,000)

Transfers 728,000 ($20.80 x 35,000)
Total $790,400
3. Work in Process Inventory

Beginning balance $ 23,700 |
Current costs 766,700 | $728,000 To finished goods
790,400 | 728,000
Ending balance $ 62,400
14-13 Process Costing (Extension of 14-12, Appendix) (15 minutes)
1. $20.50 $766,700/37,400

Total 38,000
Less beginning inventory (3,000 x 20%) 600
Equivalent unit production--FIFO 37,400
2. Ending inventory ($20.50 x 3,000) $ 61,500

Transfers:
Beginning inventory $ 23,700
Cost to complete* ($20.50 x 2,400) 49,200
14- 6
Started and completed** ($20.50 x 32,000) 656,000
Total transfers 728,900
Total $790,400
* 80% x 3,000 = 2,400

** 35,000 - 3,000 = 32,000
3.
969,600 | 728,900
14-14 Backflush Costing (5 minutes)
Ending inventory (10,000 x $7.60) $ 76,000

Cost of goods sold (90,000 x $7.60) 684,000
Unit cost = ($410,000 + $350,000)/100,000 = $7.60
Note to the Instructor: This simple exercise and the ones that follow show how straightforward and simple
backflushing is. Of course, the conditions must be right to use backflushing--no significant inventories.
14-15 Backflush Costing, Journal Entries (Continuation of 14-14) (5-10 minutes)
Materials and In-Process Inventory $410,000

Cash, Accounts Payable $410,000
Conversion Costs 350,000

Cash, Accounts Payable, Accumulated Depreciation 350,000
Cost of Sales 684,000

Materials and In-Process Inventory 410,000
Conversion Costs 350,000
14-16 Backflush Costing with Standards (Continuation of 14-14) (10 minutes)
The use of standard costs with backflushing does not appear in the text, but the principle should be clear. Show
inventories at standard cost and variances as adjustments to standard cost of sales.
Ending inventory, 10,000 x $7.20 $ 72,000

Standard cost of sales, 90,000 x $7.20 $648,000
Variances* 40,000U
Cost of sales 688,000
Materials Conversion Costs
Actual cost $410,000 $350,000
Standard cost, $4.00 x 100,000, 400,000
$3.20 x 100,000 320,000
Variance $ 10,000 U $ 30,000 U
14-17 Process Costing--Two Departments (20 minutes)
14- 7
1. $0.30 for Mixing ($25,620/85,400); $0.75 for Distilling ($60,000/80,000)
Mixing Distilling
Gallons completed 80,000 80,000
Ending inventory (9,000 x 60%) 5,400 0
Equivalent production 85,400 80,000
2. $1,620 (5,400 x $0.30)

3. Cost of goods sold, $68,250 (65,000 x $1.05, which is $0.30 + $0.75)
Ending inventory, $15,750 (15,000 x $1.05)
The reconciliation of total costs follows.
Ending inventory of work in Process (requirement 2) $ 1,620 Transferred to finished goods (80,000 x $1.05)
84,000
Total production costs ($25,620 + $60,000) $85,620
14-18 RelationshipsIncome, Sales, and Volume Variance (15 minutes)
1. $18, $1,836,000/102,000
The simplest approach is to prepare an income statement so far as we know the numbers.
Sales ?
Standard cost of sales (102,000 x [$6 + $8]) 1,428,000
Standard gross profit ?
Volume variance 16,000F
Actual gross margin ($200,000 + $224,000) 424,000
Income $ 224,000
We can see that actual gross margin is $424,000 ($200,000 + $224,000) and standard gross margin must then be
$408,000 because of the $16,000 favorable volume variance. Sales are then $1,836,000 ($408,000 + $1,428,000).
2. 100,000 The volume variance was $16,000 favorable, which means that production of 102,000 (inventories were
unchanged per the assignment) was 2,000 units ($16,000/$8) above the volume used to set the $8 standard fixed
cost.
3. $800,000 $8 x 100,000
14-19 Process Costing (20-25 minutes)
1. Equivalent production
Materials Conversion Costs Gallons completed 180,000 180,000
Ending inventory (30,000 x 100%, 80%) 30,000 24,000
2. Unit costs
Beginning inventory $ 3,240 $ 9,620

July costs 42,960 127,060
Totals $ 46,200 $136,680
Divided by equivalent production 210,000 204,000
Equals unit cost $ 0.22 $ 0.67
Total unit cost = $0.89 ($0.22 + $0.67)
14- 8
3. Finished Goods Inventory (180,000 x $0.89) $160,200
4.
182,880 | 160,200
Beginning balance = $3,240 + $9,620; July costs = $42,960 + $127,060
5. Proof of inventory
Equivalent units in inventory 30,000 24,000
Cost per unit $0.22 $0.67
Inventory cost $ 6,600 $16,080
Total inventory cost = $22,680
14-20 Equivalent Production and Unit Costs (20-25 minutes)
1. Equivalent production
Materials Conversion Costs Units completed 150,000 150,000
Ending inventory (20,000 x 100%, 60%) 20,000 12,000
2. Unit costs
Beginning inventory $ 14,650 $ 19,400

July costs 366,150 571,900
Totals $380,800 $591,300
Equals unit cost $ 2.24 $ 3.65
Total unit cost = $5.89 ($2.24 + $3.65)
3. $88,600 ending inventory, $883,500 transferred

Equivalent units in inventory 20,000 12,000
Cost per unit $2.24 $3.65
Inventory cost $44,800 $43,800
Total inventory cost = $88,600
Units transferred 150,000

Total unit cost $5.89
Total cost transferred $883,500
The components of the transfer are:
Materials (150,000 x $2.24) $336,000

Conversion costs (150,000 x $3.65) 547,500
Total transfer $883,500
Note to the Instructor: You might wish to do a reconciliation of costs to reinforce the point that it is a good idea.

Total costs from above $380,800 $591,300
14- 9
Less ending inventory 44,800 43,800
Transferred $336,000 $547,500
14-21 Equivalent Units and Standard Costs (Appendix) (14-20 minutes)
1. 2,300 units
14- 10
Units started and completed in June
(2,000 units completed - 300 units
started in prior month) 1,700
Work done on units started in prior month
(300 units x 1/2) 150
Work done on units started in June but not
yet completed (600 x 3/4) 450
Equivalent units 2,300
2. Costs
Budgeted Actual Variance
Material [($10,000/2,000) x 2,300] $11,500 $11,400 $ 100F
Labor [($20,000/2,000) x 2,300] 23,000 21,500 1,500F
Variable overhead [($15,000/2,000) x 2,300 17,250 15,400 1,850F
Fixed overhead 18,000 18,800 800U
Totals $69,750 $67,100 $2,650F
14-22 Costing Methods and Pricing (15 minutes)
1. The sales manager will find that he is on a circular path, sometimes called "the death spiral." If he sets the price
at $32, volume will be less than the volume on which he based the price and fixed costs per unit will be higher. At
$32, volume will be 18,000 units, giving unit fixed costs of $8.89 ($160,000/18,000). Total cost per unit will be
$16.89 and the desired margin will not be earned. The price required at that volume is $33.78. But at that price it is
likely that volume will be less than 18,000 units, and so the vicious circle will continue.
The sales manager is starting with volume, then deriving a price, instead of considering volume and price
simultaneously. He also fails to recognize that a fixed cost per unit figure holds at only one volume.
2. $28
Price Options
1 2 3
Selling price $28 $30 $32
Variable cost 8 8 8 Contribution margin $20 $22 $24
Volume expected at that price 24,000 20,000 18,000
Total contribution margin $480,000 $440,000 $432,000
There is no need to consider fixed costs because they will be the same under all three prices.
14-23 Overhead Rates, Standard Cost Income Statement (14-20 minutes)
Dickson Company
Income Statement for 20X5
Sales (80,000 units) $1,600,000

Standard cost of sales (80,000 x $12) (a) 960,000
Manufacturing variances (b):
Materials $10,000F
Direct labor 10,000U
Variable overhead 10,000U
Fixed overhead budget 20,000U
Volume variance (c) 30,000U 60,000U
Actual gross profit 580,000
Administrative expenses 400,000
Income $ 180,000
(a) Computation of standard cost
14- 11
Budgeted / Budgeted Production = Standard
Cost 100,000 Units Cost
Materials $ 400,000 100,000 $4

Direct labor 300,000 100,000 3
Variable overhead 200,000 100,000 2
Fixed overhead 300,000 100,000 3
Totals $1,200,000 $12
(b) Computation of variances
Flexible Budget Actual

for 90,000 Units Cost Variance
Materials $360,000 $350,000 $10,000F
Direct labor 270,000 280,000 10,000U
Variable overhead 180,000 190,000 10,000U
Fixed overhead budget 300,000 320,000 20,000U
(c) Fixed overhead volume variance is budgeted cost of $300,000 less overhead
applied of $270,000 (90,000 units x $3 per unit).
14-24 Standard Cost System--Journal Entries (35-40 minutes)
1. Journal entries
(a) Material Inventory (120,000 x $4) $ 480,000

Material Price Variance $ 25,000
Cash or Accounts Payable 455,000
To record purchases of materials, charging inventory at
standard cost.
(b-1) Direct Labor (151,000 x $10) 1,510,000

Direct Labor Rate Variance 20,000
Cash, Accrued Payroll 1,490,000
To record direct labor cost incurred and isolate
direct labor rate variance.
(b-2) Work in Process (48,000 x $30) 1,440,000

Direct Labor Efficiency variance 70,000
Direct Labor 1,510,000
To charge work in process with standard direct labor
cost and isolate efficiency variance.
(c-1) Variable Overhead (151,000 x $6) 906,000

Variable Overhead Spending Variance 11,000
Cash, etc. 895,000
To record variable overhead costs and spending variance.
(c-2) Work in Process (48,000 x $18) 864,000

Variable Overhead Efficiency Variance 42,000
Variable Overhead 906,000
To charge work in process with standard variable cost
and record efficiency variance.
(d-1) Fixed Overhead (budgeted) 500,000
14- 12
Fixed Overhead Budget Variance 10,000
Cash, etc. 490,000
To record fixed overhead incurred and budget variance.
(d-2) Work in Process (48,000 x $10) 480,000

Volume Variance [(50,000 - 48,000) x $10] 20,000
Fixed Overhead 500,000
To charge work in process with standard fixed overhead
and record volume variance.
(e) Work in Process (48,000 x $8) 384,000

Material Use Variance 4,000
Material Inventory 380,000
To record cost of materials put into process and
material use variance.
(f) Finished Goods (48,000 x $66) 3,168,000

Work in Process 3,168,000
To transfer standard cost of 48,000 units to
finished goods (48,000 x $66).
(g-1) Cash, Accounts Receivable 4,500,000

Sales (45,000 x $100) 4,500,000
To record sales of 45,000 units.
(g-2) Cost of Goods Sold (45,000 x $66) 2,970,000

Finished Goods 2,970,000
To record cost of goods sold at standard cost.
14-25 Process CostingJournal Entries (25-35 minutes)
1. Raw Material Inventory $ 286,000

2. Direct Labor 289,000


Direct Labor 289,000
3. Work in Process Inventory 271,000 Raw Materials Inventory

271,000
4. Indirect Labor 46,000

Supervision and Other Salaries 182,000
Utilities and Insurance 23,500
Depreciation expense 72,000
Other Miscellaneous Costs 112,000
Accumulated Depreciation 72,000
Cash and Accrued Expenses 363,500

Indirect Labor 46,000
14- 13
Supervision and Other Salaries 182,000
Utilities and Insurance 23,500
Depreciation expense 72,000
Other Miscellaneous Costs 112,000
To accumulate overhead costs in one account.

Manufacturing Overhead (35,000 x $12) 420,000
To apply manufacturing overhead to work in process.
5. Finished Goods Inventory 863,000
6. Cash and Accounts Receivable 1,314,000

Sales 1,314,000
To record sales for the year.
7. Cost of Goods Sold 818,000

To record cost of goods sold during year.
8. Selling and Administrative Expenses 387,000

To record other expenses incurred during the year.
2. Inventory balances
Raw Materials Work in Process

| |
Beginning | Beginning |
balance $ 34,000 | balance $ 67,000 |
(1) 286,000 | $271,000 (3) (2) 289,000 |
320,000 | 271,000 (3) 271,000 |
End bal. $ 49,000 (4) 420,000 | $863,000 (5)
1,047,000 | 863,000
End bal. $ 184,000
Finished Goods
|
Beg bal $125,000 |
(5) 863,000 | $818,000 (7)
988,000 | 818,000
Balance $170,000
3. Income statement for 20X6
Sales $1,314,000
Cost of goods sold 818,000
Gross profit 496,000
Underapplied overhead ($435,500 - $420,000) 15,500
Adjusted gross profit 480,500
Income $ 93,500
14-26 Product Costing and CVP Analysis (20-25 minutes)
14- 14
The results are caused by the changes in fixed costs in the inventories. The cost of goods sold figures can be
computed as follows.
April May June

Beginning inventory $ 0 $ 76,800 $ 87,500
Production costs:
Variable* 200,000 160,000 128,000
Fixed 120,000 120,000 120,000 Cost of goods available 320,000 356,800
335,500
Ending inventory** 76,800 87,500 19,375
Cost of goods sold $243,200 $269,300 $316,125
*50,000 x $4; 40,000 x $4; 32,000 x $4
** April May June

Production costs for month $320,000 $280,000 $248,000
Divided by units produced 50,000 40,000 32,000
Equals cost per unit $6.40 $7.00 $7.75
Inventory in units
50,000 - 38,000 12,000
12,000 + 40,000 - 39,500 12,500
12,500 + 32,000 - 42,000 2,500
Ending inventory $ 76,800 $ 87,500 $ 19,375
One can hardly blame the president for being puzzled. In one month sales were just above the break-even point
and profits were $30,800, which is much more than he would have expected at sales of 42,000 units, the highest
month experienced. Income under variable costing in June would have been $18,000 [(42,000 x $4) - fixed costs of
$150,000]. In May, when sales were such as to give the target profit of $8,000, actual profits were over twice the
expected amount. And in June, when sales were well above those needed to provide the $8,000 target profit, a loss
was sustained.
The explanation that changes in the volume of production, differences between sales and production volumes,
caused the differences between expected profits and actual profits might not be convincing to the president. One
alternative is to provide income statements based on variable costing.
Income Statements--Variable Costing

April May June
Sales $380,000 $395,000 $420,000
Variable cost of sales at $4 152,000 158,000 168,000
Gross profit 228,000 237,000 252,000
Variable selling and administrative
expenses at $2 76,000 79,000 84,000
Contribution margin 152,000 158,000 168,000
Fixed costs ($120,000 + $30,000) 150,000 150,000 150,000
Profit before taxes $ 2,000 $ 8,000 $ 18,000
14-27 Process Costing (30-35 minutes)
1. Mixing Department
Labor and
Materials Overhead
Units completed 75,000 75,000
Equivalent units in ending inventory
Materials (9,000 x 100%) 9,000
Labor and overhead (9,000 x 60%) 5,400
14- 15
Boiling Department
Prior
Department Labor and
Costs Overhead
Units completed 68,000 68,000
Equivalent units in ending inventory
Prior department costs (15,000 x 100%) 15,000
Labor and overhead (15,000 x 40%) 6,000
2. Cost per Unit--Mixing Department
Labor and
Materials Overhead
Costs in beginning inventory $ 1,680 $ 4,020
Costs incurred during February 18,480 32,160
Totals $20,160 $36,180
Equals cost per unit $0.24 $0.45
3. Journal Entry
Work in Process Inventory--Boiling Department

($0.24 + $0.45) x 75,000 $51,750
Work in Process Inventory--Mixing Department $51,750
To transfer cost of 75,000 gallons from mixing
department to boiling department.
4. Cost per Unit--Boiling Department

Prior
Department Labor and
Costs Overhead
Costs in beginning inventory $ 6,350 $ 2,220
Costs transferred from mixing department 51,750
Costs incurred during February 25,900
Totals $58,100 $28,120
Equals cost per unit $0.70 $0.38
Total unit cost ($0.70 + $0.38) $1.08
5. Finished Goods Inventory (68,000 x $1.08) $73,440

Work in Process Inventory--Boiling Department $73,440
To transfer cost of 68,000 completed gallons from boiling department to finished goods.
6. Work in Process Inventory

Mixing Department
Costs incurred 50,640 | $51,750 transferred out
56,340 | 51,750
14- 16
Work in Process Inventory Boiling Department
Costs transferred in 51,750 |
Costs incurred 25,900 | $73,440 transferred out
86,220 | 73,440
Ending balance $12,780
Verifications:
Mixing Department
Equivalent Cost Total
Units per Unit Cost
Materials 9,000 $0.24 $2,160
Labor and overhead 5,400 $0.45 2,430
Ending inventory $4,590
Boiling Department
Prior department costs 15,000 $0.70 $10,500

Labor and overhead 6,000 $0.38 2,280
Ending inventory $12,780
14-28 Process Costing, Extension of 14-27 (20-30 minutes)
1. Conversion
Materials Costs
Equivalent production, weighted average,
from 14-27 84,000 80,400
Less, equivalent units in beginning inventory:
8,000 x 60% 4,800
8,000 x 70% 5,600 Equivalent production, FIFO 79,200 74,800
Divided into costs incurred this month of $18,480 $32,160
Equals, FIFO unit cost $0.2333 $0.43
2. $51,920 ($7,479 + $44,441)
Costs transferred from beginning inventory:

Materials:
Costs incurred last month $1,680
8,000 x 40% x $0.2333 747
Conversion costs:
Costs incurred last month 4,020
8,000 x 30% x $0.43 1,032
Costs transferred for units started and completed this month

(75,000 - 8,000 = 67,000)
Materials (67,000 x $0.2333) $15,631
Conversion costs (67,000 x $0.43) 28,810
3.
Work in Process - Mixing
Beg. bal. $ 5,700 |
Materials 18,480 |
14- 17
Conversion 32,160 | $51,920 transferred to Boiling
56,340 | 51,920
Materials (9,000 x 100% x $0.2333) $2,100
Conversion costs (9,000 x 60% x $0.43) 2,322
Total $4,422
(The $2 difference is from rounding conversion costs from $0.4299 to $0.43.)
Note to the Instructor: Students should be able to handle this assignment with only the information in the text,
though no text example incorporates all of the items in the assignment. In assignment 14-40 we extend the problem
to include similar calculations for the Boiling Department. Some instructors might wish to challenge their students
with the special problems of the FIFO assumption where prior-department costs are involved.
14- 18
14-29 Standard Costs--Performance Evaluation (20-25 minutes)
1. Arnold Company
Budgeted Income Statement for 20XX
Sales (80,000 x $20) $1,600,000

Cost of goods sold:
Variable manufacturing costs (100,000 x $8) $ 800,000
Fixed costs applied (100,000 x $3)* 300,000
1,100,000
Less ending inventory [20,000 x ($8 + $3)] 220,000 880,000
Volume variance (20,000 x $3) 60,000
Income $ 360,000
* Budgeted fixed costs of $360,000/120,000 normal capacity = $3 per unit
2. Arnold Company
Income Statement for 20XX
Sales (77,000 x $20) $1,540,000

Cost of goods sold:
Variable manufacturing costs (118,000 x $8) $ 944,000
Fixed manufacturing costs applied (118,000 x $3) 354,000
1,298,000
Less ending inventory (41,000 x $11) 451,000
Standard cost of goods sold 847,000 Standard gross profit
693,000
Variances:
Variable costs ($954,000 - $944,000) 10,000U
Fixed overhead budget ($370,000 - $360,000) 10,000U
Volume (2,000 x $3) 6,000U 26,000U Gross profit
667,000
Income $ 367,000
3. Performance appears to be better than budgeted if income is the only criterion examined. However, sales were
2,000 fewer units than budgeted, resulting in a loss in contribution margin of $24,000 ($12 per unit). Variable and
fixed production costs were higher than expected for the production level. The only favorable factor, if it can be
called that, is the reduction in the volume variance from $60,000 to $6,000. This reduction was caused by producing
18,000 units more than budgeted. The critical question is whether the higher production is good or bad. Since sales
were below expectations, it might be assumed that the higher production was unwise. That conclusion would not
hold true if sales in the second year were expected to be higher than the 100,000 originally budgeted.
Note to the Instructor: The income statements prepared by students for requirements 1 and 2 may show only the
standard cost of goods sold. The computations are presented in the statements here to reduce the explanatory notes.
14-30 Standard Cost Income Statement--Relationships and Variances (35 minutes)
1. $6.50
Materials (3 lbs. x $0.50) (a) $1.50

Direct labor (1/2 hr. x $4) (b) 2.00
14- 19
Variable overhead ($2 per direct labor hour) (c) 1.00
Standard variable cost 4.50
Fixed overhead (d) 2.00
Total standard cost $6.50
(a) $300,000 materials/200,000 units is $1.50 standard cost per unit. From the problem it is known that the
standard cost per pound is $0.50, so a unit of product must require 3 pounds of material.
(b) $400,000 labor/200,000 units is $2.00 standard cost per unit. From the problem it is known that the standard
rate per hour is $4, so a unit of product requires one-half hour of labor.
(c) The problem indicates that the variable overhead rate per labor hour is $2 and from (b) the labor per unit is one-
half hour, so the variable overhead rate per unit is $1.
(d) Budgeted fixed costs of $500,000/250,000 budgeted production units = $2 per unit.
Note that the computations in (a), (b), and (c) are relatively straightforward because the problem shows the
components of cost of sales at standard.
2. $4.50 (see requirement 1)
3. 240,000 units [250,000 -($20,000 unabsorbed overhead/$2 per unit)
4. $260,000 [(240,000 units produced - 200,000 sold) x $6.50]
5. $493,000 ($500,000 - $7,000 favorable budget variance)
6. $403,000 (800,000 lbs. x $0.50) + $3,000 unfavorable price variance (# 7)
7. $9,000 unfavorable [$12,000 - $3,000 (total unfavorable variance minus unfavorable price variance)]
8. 738,000 lbs. (240,000 x 3 lbs. = 720,000 lbs.) + 18,000 unfavorable variance in lbs. ($9,000/$.50)
9. $16,000 favorable [(120,000 standard hours for 240,000 units - 116,000 hours worked = 4,000) x $4]
10. $2,000 favorable ($18,000 total favorable variance - $16,000 favorable efficiency variance)
11. $462,000 ($4 x 116,000 hours) - $2,000 favorable rate variance
12. $236,000 (116,000 x $2) + $4,000 unfavorable budget variance
13. $3.50 ($10 selling price - $6.50 standard cost)
14. $5.50 ($3.50 + the $2 reduction in underabsorbed overhead)
14-31 Interpretation of Standard Cost Statement (20 minutes)
1. $3 for both fixed and variable standard costs per unit, since each is 50% of total standard cost and total standard
cost is $6 per unit ($120,000 cost of sales/20,000 units)
2. $90,000 ($3 per unit x 30,000 units at normal capacity)
3. 22,000 Since the volume variance is $24,000 unfavorable, production was 8,000 units ($24,000/$3) below
normal activity of 30,000 units.
4. $72,000
Beginning inventory (10,000 units) $ 60,000
14- 20
Fixed production costs (22,000 x $3) 66,000
Variable production costs(22,000 x $3) 66,000
Total available $192,000
Less cost of goods sold 120,000
An alternative is to add the standard cost of 2,000 units (the increase in inventory) of $12,000 to the beginning
inventory of $60,000.
14-32 Income Statement for Standard Costing, Practical Capacity (Continuation of 14-31 (15 minutes)
C-Trin Company
Income Statement for June, 20X4
Sales $200,000
Standard cost of sales* 105,000
Manufacturing variances:
Materials $2,000U
Direct labor 1,000F
Overhead budget 1,000U 2,000U
93,000
Volume variance (18,000 x $2.25) 40,500U
Gross profit--actual 52,500
Selling, general, administrative expenses 48,000
Income $ 4,500
* Standard fixed cost is $2.25 per unit ($90,000/40,000) and total standard cost is $5.25 per unit ($3 variable + $2.25
fixed). Total fixed costs go:
To production (22,000 x $2.25) $49,500

Volume variance (18,000 x $2.25) 40,500
Total fixed costs $90,000
14-33 Standard Costs, Budgets, Variances, Journal Entries (50-60 minutes)
1. Warner Company
Budgeted Income Statement for 20X6
Sales (100,000 x $10) $1,000,000

Cost of goods sold: *
Material (140,000 x $1.50) $ 210,000
Labor (140,000 x $3) 420,000
Variable overhead (140,000 x 1 hr. x $1) 140,000
Fixed overhead applied (140,000 x $2) 280,000
1,050,000
Less change in inventory, at standard
(140,000 - 100,000) x ($1.50 + $3 + $1 + $2) 300,000
Cost of goods sold, at standard 750,000 Gross profit, at standard
250,000 Volume variance (10,000 x $2) 20,000 Gross profit
230,000
Selling and administrative costs 180,000 Income $ 50,000
* Standard costs per unit for components of manufacturing were computed by dividing budgeted cost by budgeted
production.
2.
14- 21
(a) Material Inventory (250,000 x $0.75) $187,500
Material Price Variance 5,000
Cash or Accounts Payable $192,500
To record the acquisition of materials, charging the inventory account for the standard cost
[($210,000/140,000)/2 lbs. per unit].
Work in Process (130,000 x $1.50) 195,000

Material Use Variance 18,000
Material Inventory (236,000 x $0.75) 177,000
To record standard cost of materials used and material use variance.
(b) Direct Labor (133,000 x $3) 399,000

Cash, Accrued Payroll 402,000
To record labor cost and labor rate variance.
Work in Process (130,000 x $3) 390,000

Direct Labor Efficiency Variance (3,000 x $3) 9,000
Direct Labor 399,000
(c) Variable Overhead (133,000 x $1) 133,000

Fixed Overhead (budgeted) 300,000
Fixed Overhead Budget Variance 15,000
Cash, Accruals, Accumulated Depreciation 413,000
To record overhead at budgeted amounts and budget variances.

Variable Overhead Efficiency Variance
(3,000 x $1) 3,000
Volume Variance (150,000 - 130,000) x $2 40,000
To charge work in process with standard overhead costs and record variable overhead efficiency
variance and volume variance.
(d) Selling and Administrative Expenses 175,000
Cash, etc. 175,000
To record selling and administrative expenses.
(e) Finished Goods (130,000 x $7.50) 975,000
To transfer standard cost of production to finished goods.
(f) Accounts Receivable 950,000

Cost of Goods Sold (95,000 x $7.50) 712,500
Sales 950,000
Finished Goods 712,500
To record sales and cost of goods sold at standard.
14- 22
3. Warner Company
Income Statement for 20X6
Sales (95,000 units x $10) $950,000

Cost of goods sold:
Beginning inventory (13,000 x $7.50) $ 97,500
Production costs:
Materials (130,000 x $1.50) 195,000
Labor (130,000 x $3) 390,000
Variable overhead (130,000 x $1) 130,000
Fixed overhead applied (130,000 x $2) 260,000
Cost of goods available for sale 1,072,500
Less ending inventory
(13,000 + 130,000 - 95,000) x $7.50 360,000
Standard cost of goods sold 712,500
Variances:
Material price 5,000U
Labor rate 3,000U
Material use 18,000F
Labor efficiency 9,000U
Variable overhead spending 5,000F
Variable overhead efficiency 3,000U
Fixed overhead budget 15,000F
Volume 40,000U 22,000
Selling and administrative costs 175,000
Income $ 40,500
14-34 Actual Process Costing, Journal Entries, and Income Statement (30-40 minutes)
1. Journal entries under actual process costing
1. Materials Inventory $ 39,600

2. Direct Labor 28,850
Direct Labor 28,850
3. Variable Overhead 15,690
4. Fixed Overhead 23,500
Cash, Accrued Expenses, Accumulated
Depreciation 23,500

5. Work in Process Inventory (11,000 x $3.30) 36,300
Materials Inventory 36,300
6. Finished Goods Inventory (7,200 x $14.10) 101,520
Total costs charged to work in process were $104,340 ($28,850 + $15,690 + $23,500 + $36,300). Equivalent
production was 7,400 units [7,200 + (500 x 40%)], and $104,340/7,400 = $14.10.
14- 23
7. Cash and Accounts Receivable (6,500 x $50) 325,000
Sales 325,000
Cost of Goods Sold (6,500 x $14.10) 91,650
2. Income statement under actual process costing
Sales $325,000
Cost of sales* 91,650
Income $127,350
* Detail of cost of goods sold:

Materials put into process $ 36,300
Direct labor 28,850
Variable overhead 15,690
Fixed overhead 23,500
Total 104,340
Less ending work in process, (500 units x 40%) x $14.10 2,820
Costs transferred to finished goods 101,520
Less ending finished goods, (7,200 - 6,500) x $14.10 9,870
Equals cost of goods sold $ 91,650
14-35 Standard Process Costing, Journal Entries, and Income Statement (Continuation of 14-34) (40-50 minutes)
1. Journal entries under standard process costing
1. Materials Inventory (12,000 x $3.20) $ 38,400

Material Price Variance (12,000 x $0.10) 1,200
2. Direct Labor (1,700 x $16) 27,200

Work in Process Inventory (7,400 units x $4) 29,600

Direct Labor Efficiency Variance 2,400
Direct Labor 27,200
3. Variable Overhead (1,700 hours x $8) 13,600

Work in Process Inventory (7,400 x $2) 14,800

Variable Overhead Efficiency Variance 1,200
4. Fixed Overhead [Budgeted amount (2,000 x $12)] 24,000
Fixed Overhead Budget Variance 500
Cash, Accrued Expenses, Accumulated
Depreciation 23,500
Work in Process Inventory (7,400 units x $3) 22,200
14- 24
Volume Variance [(1,850 std hours - 2,000
hours used to set standard) x $12 per hour] 1,800
5. Work in Process (7,400 x $4.80) 35,520

Material Use Variance 320
Material Inventory (11,000 x $3.20) 35,200
6. Finished Goods Inventory (7,200 x $13.80) 99,360
7. Cash and Accounts Receivable 325,000

Sales 325,000
Cost of Sales (6,500 x $13.80) 89,700

2. Income statement under standard costing
Sales $325,000
Cost of sales at standard 89,700
Plus variances:
Material price $1,200U
Material use 320F
Direct labor rate 1,650U
Direct labor efficiency 2,400F
Variable overhead spending 2,090U
Variable overhead efficiency 1,200F
Fixed overhead budget 500F
Fixed overhead volume 1,800U 2,320U
Income $126,980
Summary of Variances:
Materials
Budget for
Actual Purchases 12,000 pounds
$39,600 $38,400
$1,200 U
Actual Use at Standard Cost for

Standard Price 7,400 Equivalent Units
$3.20 x 11,000 lbs. $3.20 x 1.5 x 7,400 or

$4.80 x 7,400
$35,200 $35,520
$320 F
Direct Labor
14- 25
Budget for Standard Cost for
Actual Cost 1,700 Hours 7,400 Units
$16 x 1,700 $4 x 7,400

$28,850 $27,200 $29,600
$1,650 U $2,400 F
Variable overhead
$8 x 1,700 $2 x 7,400
$15,690 $13,600 $14,800
$2,090 U $1,200 F
Fixed Overhead
$23,500 $24,000 $22,200 (7,400 x $3)

$500 F $1,800 U
14-36 Special Order (20 minutes)
1. The order should be accepted because it will return contribution margin of $0.80 per case, or $20,000 in total.
The standard cost per unit of $6 contains $2 fixed cost, calculated from the information about the volume variance
and base for determining unit fixed cost. [The volume variance of $120,000 is for 60,000 units (400,000 - 340,000),
giving $2 fixed cost per unit at standard.] The variable costing income statements show this clearly, and it may be
helpful to start with requirement 2.
2. Without
Order With Order
Sales
300,000 at $8 $2,400,000
25,000 at $4.80; 300,000 at $8 $2,520,000
Variable costs at $4 per unit 1,200,000 1,300,000
Contribution margin 1,200,000 1,220,000
Fixed production costs 800,000 800,000
Gross profit $ 400,000 $ 420,000
The $800,000 fixed production cost is $2 x 400,000 units (the base used to compute standard fixed cost per unit).
3. With Order
Sales $2,520,000
Standard cost of sales 1,950,000
Volume variance [(400,000 - 365,000) x $2] (70,000)
Actual gross profit $ 500,000
Note to the Instructor: This problem illustrates several points. One is that increases in sales without increases in
production result in increases in income equal to sales price minus standard cost per unit times the increase in sales.
In this case, the result was a $30,000 decrease because the selling price of $4.80 was $1.20 less than standard cost
and $30,000 is $1.20 x 25,000 units. However, if sales and production change in the same amount, income will
change by contribution margin per unit times the change in volume. This is because the volume variance will be
reduced by fixed cost per unit times the change in volume of production, and standard gross profit by the selling
price minus standard cost times the change in volume. Hence, while standard cost of sales will rise, the volume
variance will fall by the same amount, leaving a net increase equal to contribution margin.
When absorption costing is used, the criterion discussed in Chapter 5-- that an action should be taken if it results
in an increase in profit--must be modified. The modification is that inventory levels remain at what they would have
been if the special order were not accepted, which is shown in requirement 3.
14- 26
Finally, some students will have a great deal of trouble starting this problem because the fixed cost per unit is not
given. In order to concentrate on the other aspects of the problem, you may wish to tell the class ahead of time that
the fixed cost included in the standard cost is $2.
14-37 Job-order Costing--Standards and Variances (25-30 minutes)
1. Standard costs for jobs

Job 82 Job 83
80 Units of 50 Units of
Model 803 Model 407 Totals Materials:
Wood (80 x $24) $ 1,920 (50 x $58) $ 2,900 $ 4,820
Fabric (80 x $46) 3,680 (50 x $92) 4,600 8,280
Other (80 x $13) 1,040 (50 x $21) 1,050 2,090
Total materials 6,640 8,550 15,190 Direct labor (80 x $65) 5,200 (50 x $90)
4,500 9,700 Variable overhead (80 x $104) 8,320 (50 x $144) 7,200 15,520 Total standard variable
cost $20,160 $20,250 $40,410
2. Variances
Actual Use at Standard
Standard Price Cost Variance
Material use:
Wood $ 4,855 $ 4,820 $ 35U
Fabric 8,360 8,280 80U
Other 2,090 2,090 0
Totals $15,305 $15,190 $ 115U
Direct labor efficiency 10,250 9,700 550U
Variable overhead efficiency (2,050 x $8) 16,400 15,520 880U
Variable overhead budget ($16,850 - $16,400) 450U
Total variances $1,995U
3. Carlson Company
Income Statement for June
Sales $97,000
Cost of sales--standard 40,410
Variable cost variances, unfavorable 1,995
Fixed costs:
Production $24,600
Selling and administrative 18,700 43,300
Income $11,295
Note to the Instructor: To focus on the question of using standard costs in a job-order system, we did not
provide data on the costs chargeable to each job (actual quantities at standard prices). Thus, the variances
attributable to each job cannot be calculated. This information would be valuable, especially if it highlighted
changes in conditions that might make it desirable to change standards. (For example, persistent variances such as
material use or labor efficiency for a particular model might indicate that the standards should be revised.)
You could point out in class that most companies would, if possible, keep track of material and labor use for each
job, thereby allowing the isolation of efficiency variances by job-order.
14- 27
14-38 Comprehensive Problem on Costing Methods (35-40 minutes)
Absorption Costing
(a) (b) (c)
Budgeted Practical
Actual Production Capacity
Sales (160,000 units) $2,400,000 $2,400,000 $2,400,000
Cost of sales: Production costs:

Materials-actual 375,000
-standard (1) 360,000 360,000
Labor-actual 580,000
-standard (2) 540,000 540,000
VOH-actual 395,000
-standard (3) 360,000 360,000
FOH-actual 208,000
-applied (4) 180,000 144,000
Total 1,558,000 1,440,000 1,404,000
Less ending inventory (5) 173,112 160,000 156,000 Standard cost of goods sold 1,280,000
1,248,000
Variances: Materials ($360,000 - $375,000) 15,000U 15,000U
Labor ($540,000 - $580,000) 40,000U 40,000U
VOH ($360,000 - $395,000) 35,000U 35,000U
Fixed overhead budget
($200,000 - $208,000) 8,000U 8,000U
Volume (6) 20,000U 56,000U
Total variances 118,000U 154,000U
Cost of goods sold 1,384,888 1,398,000 1,402,000
Gross profit 1,015,112 1,002,000 998,000
S & A expenses 700,000 700,000 700,000
Income $ 315,112 $ 302,000 $ 298,000
Variable Costing
(d) (e)
Standard Actual Sales (160,000 units) $2,400,000 $2,400,000
Cost of sales: Production costs:
-standard (1) 360,000
-standard (2) 540,000
Variable overhead-actual 395,000
-standard (3) 360,000
Total 1,260,000 1,350,000
Less ending inventory (5) 140,000 150,000
Standard cost of goods sold 1,120,000
Variances:
Materials ($360,000 - $375,000) 15,000U
Labor ($540,000 - $580,000) 40,000U
Variable overhead ($360,000 - $395,000) 35,000U
Total variances 90,000U
Cost of goods sold 1,210,000 1,200,000
Gross profit 1,190,000 1,200,000
Fixed overhead ( 208,000) ( 208,000)
Selling and administrative expenses ( 700,000) ( 700,000)
Income $ 282,000 $ 292,000
14- 28
(1) (Budgeted material cost of $400,000/200,000 budgeted production = $2 standard cost per unit) x 180,000 =
$360,000
(2) (Budgeted labor cost of $600,000/200,000 budgeted production = $3 standard cost per unit) x 180,000 =
$540,000
(3) (Budgeted variable overhead of $400,000/200,000 budgeted production = $2 standard cost per unit) x 180,000 =
$360,000
(4) Fixed costs are computed as follows:
(b) (Budgeted fixed costs of $200,000/200,000 budgeted production = $1 standard cost per unit) x
180,000 = $180,000
(c) (Budgeted fixed costs of $200,000/250,000 practical capacity = $.80 standard cost per unit) x
180,000 = $144,000
(5) Inventories are at the relevant unit cost, as follows:
(a) 20,000 units x $8.6556 ($1,558,000/180,000) = $173,112
(b) 20,000 units x $8 ($2 + $3 + $2 + $1) = $160,000
(c) 20,000 units x $7.80 ($2 + $3 + $2 + $.80) = $156,000
(6) Volume variances are as computed below:
(b) $1 x (200,000 - 180,000) = $20,000U
(c) $.80 x (250,000 - 180,000) = $56,000U
2. The differences in incomes relate to the differences in inventories. The two "actual" income, (a) and (e), were
higher than the related standard incomes because part of the unfavorable variances were deferred in inventory.
Production exceeded sales, so all variations of absorption costing produced incomes higher than those under
variable costing; and the income based on practical capacity was lower than that based on budgeted production
because a lower fixed standard cost per unit is deferred in ending inventory.
14-39 Comprehensive Problem on Costing Methods (Continuation of 14-38) (35-40 minutes)

Absorption Costing
(a) (b) (c)
Budgeted Practical
Actual Production Capacity
Sales (160,000 units) $3,000,000 $3,000,000 $3,000,000
Cost of sales:
Beginning inventory 173,112 160,000 156,000
Production costs:
-standard (1) 380,000 380,000
-standard (2) 570,000 570,000
VOH-actual 410,000
-standard (3) 380,000 380,000
FOH-actual 215,000
-applied (4) 253,327 152,000
Total 1,788,112 1,743,327 1,638,000
Less ending inventory (5) 85,000 83,333 78,000 Standard cost of goods sold 1,659,994
1,560,000
Variances:
Materials ($400,000 - $380,000) 20,000U 20,000U
Labor ($590,000 - $570,000) 20,000U 20,000U
VOH ($410,000 - $380,000) 30,000U 30,000U
Fixed overhead budget
($200,000 - $208,000) 15,000U 15,000U
Volume (6) 53,327F 48,000U
Total variances 31,673U 133,000U
Cost of goods sold 1,703,112 1,691,667 1,693,000
14- 29
Gross profit 1,296,888 1,308,333 1,307,000
S & A expenses 720,000 720,000 720,000
Income $ 576,888 $ 588,333 $ 587,000
Variable Costing
(d) (e)
Standard Actual Sales (160,000 units) $3,000,000 $3,000,000
Cost of sales:
Beginning inventory 140,000 150,000 Production costs:
-standard (1) 380,000
-standard (2) 570,000
Variable overhead-actual 410,000
-standard (3) 380,000
Total 1,470,000 1,550,000
Less ending inventory (5) 70,000 73,684
Standard cost of goods sold 1,400,000
Variances:
Materials ($400,000 - $380,000) 20,000U
Labor ($590,000 - $570,000) 20,000U
Variable overhead ($410,000 - $380,000 30,000U
Total variances 70,000U
Cost of goods sold 1,470,000 1,476,316
Gross profit 1,530,000 1,523,684
Fixed overhead ( 215,000) ( 215,000)
Selling and administrative expenses ( 720,000) ( 720,000)
Income $ 595,000 $ 588,684
(4) Fixed overhead applied to production:
(b) 190,000 x $1.3333 ($200,000/150,000) = $253,327
(c) 190,000 x $.80 = $152,000
(5) Inventory of 10,000 units (20,000 + 190,000 - 200,000) at the relevant cost, as follows
(a) 10,000 x $8.50 ($1,615,000/190,000) = $85,000
(b) 10,000 x $8.3333 ($7 + 1.3333) = $83,333
(c) 10,000 x $7.80 = $78,000
(d) 10,000 x $7 = $70,000
(e) 10,000 x $7.3684 = [($400,000 + $590,000 + $410,000)/190,000] = $73,684
(3) Volume variances are computed as follows:
(b) $1.3333 x (150,000 - 190,000) = $53,333 (adjusted to $53,327 for the income statement to agree with
the amount applied in excess of budgeted)
(c) $0.80 x (250,000 - 190,000) = $48,000
14-40 Standard Costs and Product Profitability (30 minutes)
This problem contains much irrelevant information. The solution requires only the contribution margins of each
product, their required machine-hours, and total available machine-hours. A first step is to determine the
contribution margins per machine-hour--the capacity limitation.
Two-inch Three-inch Four-inch Six-inch

Selling price $17.00 $24.00 $31.00 $40.00
Standard variable costs 8.00 11.00 16.00 19.00
Contribution margins 9.00 13.00 15.00 21.00
Machine-hours required per carton .30 .40 .60 .80
Contribution margin per machine-hour
(contribution margins/hours) $30.00 $32.50 $25.00 $26.25
14- 30
The six-inch folder is more profitable than the four-inch folder, less profitable than the others. The firm is now
expecting to use 41,200 machine hours distributed as follows.
Size Folder Volume Time Required Total Hours
Two-inch 44,000 .30 13,200
Three-inch 25,000 .40 10,000
Four-inch 30,000 .60 18,000
Total 41,200
Add hours required for special order (24,000 x .80) 19,200

Total hours required 60,400
Practical capacity 50,000 Required reduction 10,400
Reduction in number of cartons of four-inch folders
(10,400/.6) 17,333 Contribution margin lost (17,333 x $15)
$259,995
Contribution margin gained ($21 x 24,000) 504,000
Net gain $244,005
The volume variance will disappear if the six-inch folders were sold, but that is not the critical point. The change
in contribution is more important.
Note to the Instructor: Some students will try to calculate the fixed overhead per machine-hour, which is $16
(any of the standard fixed costs divided by the number of hours required per carton), and the total fixed
manufacturing costs, $800,000 ($16 x 50,000 hours). These figures are unnecessary, but you may wish to ask for
them in order to see if the students understand their derivations. An extension of this problem is to ask the value of
additional hours of capacity, which is $25 per hour because the only product that can be made and sold is the four-
inch folder, which has a contribution margin of $25 per machine-hour. The $16 fixed cost per hour is irrelevant.
14-41 Review Problem (40-45 minutes)
1. 5,000 units, the top of the relevant range. Though relevant range was not discussed specifically in relation to
capacity computations, students should be able to see the relationship.
2. 3,000 units (2,500 units sold + 500 units of ending inventory)
3. 9,500 yards [(3,000 units produced x 3 yds. per unit) + 500 yds. of ending inventory]
4. 2 hours (given)
5. $9.00
Material (3 yds. x $2) $6.00

Labor (2 hrs. x $0.50) 1.00
Variable overhead (2 hrs. x $1) 2.00
Total $9.00
6. $10
Variable manufacturing cost (from 5) $ 9.00

Fixed manufacturing cost ($3,000/3,000) 1.00
Total $10.00
7. $18 [$30 - $9 - 10%($30)]
8. $9, variable manufacturing cost
9. $10 This answer is, for this particular month, the same as the total manufacturing cost using a predetermined
14- 31
overhead rate because the budgeted production for May is equal to normal capacity, upon which the predetermined
overhead rate is based. Students should be reminded that the two amounts will not always coincide.
10. $9, the variable manufacturing cost
11. $12, the variable manufacturing cost plus the variable selling cost of $3 (10% x $30)
12. $.50 per hour ($3,000/6,000 hours) or $1.00 per dress
Normal capacity 3,000 units

Labor hours per unit 2
Normal capacity, in labor hours 6,000
13. $30,000 [(3,000 x $9) + $3,000]
14. $3,000 + $9X, where X = production
15. $0.30 per hour ($3,000/10,000 hours) or $0.60 per dress
Practical capacity 5,000 units

Labor hours per unit 2
Practical capacity, in labor hours 10,000
16. The answer here depends on the costing method used. Under variable costing, income is $36,000, computed as
follows:
Contribution margin (2,500 units x $18) $45,000

Fixed costs ($3,000 + $6,000) 9,000
Income $36,000
Under absorption costing, income is $36,500, computed as follows:
Sales (2,500 x $30) $75,000

Cost of sales:
Variable production costs (3,000 x $9) $27,000
Fixed production costs applied
(3,000 x $1) 3,000
30,000
Less ending inventory (500 x $10) 5,000 25,000
Gross profit 50,000
Selling and administrative expenses:
Variable ($75,000 x 10%) 7,500
Fixed 6,000 13,500
Income $36,500
The difference in the incomes is equal to the amount of fixed cost in the
ending inventory under absorption costing (500 units @ $1).
17. 500 units (fixed costs of $9,000/$18 contribution margin per unit)
18. 2,000 units (budgeted units of 2,500 - the break-even point of 500 units)
19. $18, the contribution margin
14- 32
14-42 Process Costing--Second Department (Continuation of 14-27 and 14-28) (30-40 minutes)
Note to the Instructor: This is a very difficult assignment, and we include it only for those of you who wish
either to pursue the complications of accumulating costs under FIFO or to challenge students to apply text principles
in situations not covered by the text. In either case, you might wish to assign this problem to be done in class, so
that students won't get too frustrated with their independent efforts. And, because the answer depends on the
amount of cost transferred from the prior department, it would be helpful to give students the amount of the cost
transferred (computed in 14-27 as $51,922) before they attempt to do this assignment.
1. $0.37
Equivalent production, weighted average, from 14-27 74,000

Less equivalent production in beginning inventory,
8,000 x 50% 4,000
Equals equivalent production, FIFO 70,000
Divided into current month's costs of $25,900
Equals cost per equivalent unit $0.37
2. $73,788
Costs transferred for units in beginning inventory:

Prior department costs $ 6,350
Conversion costs 2,220
Costs to finish beginning inventory this month,
$0.37 x 8,000 x 50% 1,480
Total cost transferred for units in beginning inventory 10,050
Costs transferred for units started and completed
Prior department's costs:
Costs transferred this month (14-27) $51,922
Divided by no. of units transferred in 75,000
Equals prior department's cost per unit $0.6923
Times units started and completed this month,
68,000 - 8,000 in beginning inventory 60,000
Equals prior department's cost $41,538
Conversion costs (60,000 x $0.37) 22,200 63,738
Total costs transferred to finished goods $73,788
3.
Work in Process Inventory -- Boiling
|
Transferred in (14-27) 51,922 | $73,788 Transferred out
Conversion costs 25,900 |
86,392 | 73,788
Ending balance $12,604
Verification of ending balance:

Prior department costs (15,000 x 100% x $0.6923) $10,384
Conversion costs (15,000 x 40% x $0.37) 2,220
Total ending inventory $12,604
14-43 Review of Chapters 11, 12, 13, and 14 (40 minutes)
1. Variances, 20X3
14- 33
Materials
Actual Cost at Actual Quantity

Actual Quantity at Standard Price
$1,425,000 $1,400,000 (7,000,000 lbs. x $.20)

$25,000 U
price variance
Actual Quantity Used

at Standard Price Standard Cost
6,450,000 x $0.20 260,000 x 25 x $0.20
$1,290,000 $1,300,000
$10,000 F
use variance
Direct Labor
Actual Cost for Actual Quantity Used

Actual Quantity at Standard Price Standard Cost
53,000 x $10 260,000 x .20 x $10

$520,000 $530,000 $520,000
$10,000 F $10,000 U
rate variance efficiency variance
Variable Overhead
Actual Cost for Actual Quantity Used Actual Quantity at Standard Price
Standard Cost
53,000 x $5 260,000 x .20 x $5

$270,000 $265,000 $260,000
$5,000 U $5,000 U
spending variance efficiency variance
Fixed Overhead Standard rate = $6 = $1,500,000/250,000 units
Actual Overhead Budgeted Overhead Applied Overhead
260,000 x $6
$1,480,000 $1,500,000 $1,560,000
$20,000 F $60,000 F
budget variance volume variance
(Note that the above variances relate only to the income statement using absorption costing.)
Summary of Variances
Variable Absorption
Costing Costing
Material price variance $25,000 U $25,000 U
Material use variance 10,000 F 10,000 F
Labor rate variance 10,000 F 10,000 F
Labor efficiency variance 10,000 U 10,000 U
Variable overhead spending variance 5,000 U 5,000 U
14- 34
Variable overhead efficiency variance 5,000 U 5,000 U
Fixed overhead budget variance 20,000 F 20,000 F
Fixed overhead volume variance 60,000 F Total $ 5,000 U
$55,000 F
2. Income Statements
ARC Industries
Income Statements for 20X3
Variable Absorption
Costing Costing
Sales (230,000 x $20) $4,600,000 $4,600,000
Cost of sales at standard:
Beginning inventory 0 0
Variable production costs (260,000 x $8) 2,080,000 2,080,000
Fixed production costs (260,000 x $6) 1,560,000
Available for sale 2,080,000 3,640,000
Ending inventory: 30,000 x $8 240,000
30,000 x $14 ($8 + $6 = $14) 420,000
Cost of sales at standards of $8 and $14 1,840,000 3,220,000
Standard gross profit 2,760,000 1,380,000
Variances (unfavorable) (5,000) 55,000
Actual gross profit 2,755,000 1,435,000
Selling and administrative expenses 800,000 800,000
Fixed production costs--budgeted 1,500,000 Total other costs 2,300,000
800,000
Profit $ 455,000 $ 635,000
It is also possible to short-cut the income statements because standard cost of sales under either method is
standard unit cost times the 230,000 rolls sold.
Some students might ask about the format of our solution, where the fixed production cost budget variance is
shown as part of the calculation of actual gross profit. An alternative is to show it as a separate item along with
budgeted fixed production costs. We showed it this way because the problem states that there should be a single
figure for variances on each statement. The important point for students to get is that the format of the income
statement is largely a matter of choice. Aside from some "unacceptable" practices, the selection of format depends
on the managers' preferences regarding what they want highlighted and what sequence they want.
14-44 Review of Chapters 11, 12, 13, and 14 (Extension of 14-43) (40 minutes)
Material price $30,000F $1,240,000 budget for 6,200,000 lbs.

1,210,000 actual cost
$ 30,000F
Material use $20,000F $1,200,000 standard for 240,000 rolls at $5

1,180,000 budget for 5,900,000 lbs. at $0.20
$ 20,000F
Labor rate $5,000U $475,000 actual cost

470,000 budget for 47,000 hours at $10
$ 5,000U
Labor efficiency $10,000F $480,000 standard for 240,000 rolls at $2

470,000 budget for 47,000 hours
$ 10,000F
Variable overhead $240,000 actual cost

spending $5,000U 235,000 budget for 47,000 hours at $5
$ 5,000U
14- 35
Variable overhead efficiency $240,000 standard for 240,000 rolls at $1
$5,000F 235,000 budget for 47,000 hours
$ 5,000F
Fixed overhead budget $10,000U $1,510,000 actual cost
1,500,000 budgeted cost
$ 10,000U
Fixed overhead volume $60,000U $1,500,000 budgeted cost

1,440,000 applied at $6 x 240,000 rolls
$ 60,000U
Summary of Variances:
Variable Absorption
Costing Costing
Material price variance $30,000 F $30,000 F

Material use variance 20,000 F 20,000 F
Labor rate variance 5,000 U 5,000 U
Labor efficiency variance 10,000 F 10,000 F
Variable overhead spending variance 5,000 U 5,000 U
Variable overhead efficiency variance 5,000 F 5,000 F
Fixed overhead budget variance 10,000 U 10,000 U
Fixed overhead volume variance 60,000 U
Total $45,000 F $15,000 U
ARC Industries
Income Statements for 20X4
Variable Absorption
Costing Costing
Sales (250,000 x $20) $5,000,000 $5,000,000
Cost of sales at standard:
Beginning inventory (14-42) 240,000 $ 420,000
Variable production costs (240,000 x $8) 1,920,000 1,920,000
Fixed production costs (240,000 x $6) 1,440,000
Available for sale 2,160,000 3,780,000
Ending inventory: 20,000 x $8 160,000
20,000 x $14 280,000
Cost of sales at standard of $8 and $14 2,000,000 3,500,000
Standard gross profit 3,000,000 1,500,000
Variances (unfavorable) 45,000 (15,000)
Actual gross profit 3,045,000 1,485,000
Selling and administrative expenses 810,000 810,000
Budgeted fixed production costs 1,500,000
Total other costs 2,310,000 810,000 Profit $ 735,000 $ 675,000
Again, we could prepare much shorter income statements by taking advantage of the relationship that standard
cost of sales is the unit standard cost times the number of units sold. The reconciliation of incomes in 20X4 is:
Income under variable costing $735,000

Less fixed costs in beginning inventory (30,000 x $6) 180,000
Subtotal 555,000
Plus fixed costs in ending inventory (20,000 x $6) 120,000
Income under absorption costing $675,000
14-45 Unit Costs (30 minutes)
14- 36
The major difficulty with this problem might be identifying the components for which unit costs must be
calculated. The text does not cover the possibility of different percentages of completion for different materials.
1. Equivalent units
Quilted Conversion
Wrap Boxes Costs
Complete beginning WIP inventory 0 10,000 6,000 Started and completed 30,000
30,000 30,000 Ending WIP inventory 10,000 10,000 8,000 Equivalent units of
production 40,000 50,000 44,000
2. Cost per equivalent unit
October Costs Equivalent Units Unit Costs

Quilted Wrap $80,000 40,000 $2.00
Boxes $50,000 50,000 1.00
Conversion costs $88,000 44,000 2.00
Equivalent unit cost $5.00
Prior department cost 3.00
Total unit cost $8.00
3. If $5,000 is considered immaterial, the additional overhead incurred would be charged to the cost of goods sold
for the month of October. If the amount is material, the underapplied overhead should be prorated among the cost of
goods sold, work in Process inventory, and finished goods inventory.
14-46 Cost of Rejected Units
Students will either get requirement 2 or not get it, so we have no time estimate. Chapter 16 discusses quality
costs in much greater depth, but you might still want to pursue some aspects of quality cost. For instance, does the
$58,000 cost of rejects capture the cost of poor quality. If some poor units go to customers and fail in the field, the
costs are much higher than $58,000 because of future lost sales.
1. 19,000, which is any of the three figures divided by the related per unit amount. $418,000/$22 = 19,000,
$684,000/$36 = 19,000, $1,102,000/$58 = 19,000.
2. The solution is to calculate the standard cost of total production (20,000 units here) to determine efficiency or
inefficiency, and calculate the standard cost of the 1,000 rejected units as quality cost.
Standard Cost for Standard Cost for

Actual Cost Total Output Good Output
Materials $451,000 $440,000 $418,000

$11,000 U $22,000 U
use variance rejected units
$33,000 U
total variance
Conversion $712,000 $720,000 $684,000

$8,000 F $36,000 U
efficiency variance rejected units
$28,000 U
total variance
The picture we get now is clearer because the $58,000 (1,000 x $58) standard cost of rejected units is separated
from the $3,000 ($11,000 U - $8,000 F) variances related to efficiency. It is possible for the plant to be efficient, but
to produce poor product, and it is important to distinguish between two causes of high costs--inefficiency and
making defective units. Cost accountants might use the term "spoilage" to refer to our rejected units variance. We
14- 37
do not wish to discuss normal and abnormal spoilage, nor ways to account for either, but to focus on the cost of poor
quality.
14- 38

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CHAPTER 14

PROCESS COSTING AND THE COST ACCOUNTING CYCLE

14-1 Dell Computer's Costing Methods

14-2 Strategic Uses of Overhead Allocation

14-3 Cost of Accounting Systems

14-4 Cost/Benefit of Accounting System

14-5 Basic Process Costing (15 minutes)

Units completed 30,000

2. $1.40 ($6,400 + $39,800)/33,000 = $46,200/33,000

3. $4,200 3,000 x $1.40

4. $42,000 30,000 x $1.40

Work in Process Inventory $39,800

Finished Goods Inventory $42,000

14-6 Job-Order Costing--Journal Entries (20 minutes)

a. Work in Process Inventory $5,120

b2. Work in Process 8,760

c1. Factory Overhead 9,610

c2. Work in Process 9,610

d. Finished Goods 18,660

e. Cost of Goods Sold 15,200

Work in Process Inventory

14-7 Basic Process Costing--Weighted-Average (10-15 minutes)

Units completed 65,000

2. $3.50, ($8,880 + $250,120)/74,000 = $259,000/74,000

3. $31,500, $3.50 x 9,000 equivalent units

4. $227,500, $3.50 x 65,000

The $259,000 total cost is accounted for below.

Ending inventory $ 31,500

14-8 Basic Process Costing--FIFO (Continuation of 14-7, Appendix) (10-15 minutes)

Units completed 65,000

3. $33,300, $3.70 x 9,000

Cost of beginning inventory $ 8,880

* The 1,600 units is 20% x 8,000 units

Ending inventory $ 33,300

14-9 Journal Entries (Continuation of 14-7) (14-20 minutes)

Materials Inventory $ 81,000

Work in Process Inventory 68,000 Raw Materials Inventory

Direct Labor 52,040

Work in Process Inventory 52,040

Manufacturing Overhead 130,080

Work in Process Inventory 130,080

Work in Process Inventory

Materials Inventory $ 81,000

Work in Process Inventory 68,000 Raw Materials Inventory

Direct Labor 52,040

Work in Process Inventory 52,040

Manufacturing Overhead 130,080

Work in Process Inventory 130,080

Work in Process Inventory Beginning balance $ 8,880 |

14-11 Relationships--Income, Production, and Volume Variance (20 minutes)

1. $16 ($320,000/20,000 units)

Sales (20,000 x $30) $600,000

Production level used to set standard

Absorption costing income $174,000

14-12 Process CostingT-account (15 minutes)

1. $20.80 ($23,700 + $766,700)/38,000 = $790,400/38,000

Units completed 35,000

2. Ending inventory $ 62,400 ($20.80 x 3,000)

3. Work in Process Inventory

14-13 Process Costing (Extension of 14-12, Appendix) (15 minutes)

Units completed 35,000

2. Ending inventory ($20.50 x 3,000) $ 61,500

* 80% x 3,000 = 2,400