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Chapter 4

Systems Design: Process Costing


Solutions to Questions
4-1
A process costing system should be
used in situations where a homogeneous product is produced on a continuous basis.
4-2
1. In job-order costing many different jobs are
worked on during each period each with its own
production requirements. In process costing, a
single product is produced on a continuous basis
and all units are identical.
2. The job cost sheet is the key document in
job-order costing while the department production report is the key document in process costing.
3. Unit costs are computed by job in job-order
costing while unit costs are computed by department in process costing.
4-3
Cost accumulation is simpler under process costing because costs only need to be assigned to departmentsnot separate jobs. A
company usually has a small number of
processing departments, whereas a job-order
costing system often must keep track of the
costs of hundreds or even thousands of jobs.
4-4
In a process costing system, a Work in
Process account is maintained for each separate
processing department.
4-5
The journal entry would be:
Work in Process, Firing......................................
XXXX
Work in Process, Mixing ...
XXXX

4-7
Under the weighted-average method,
equivalent units of production consist of units
transferred to the next department (or to finished goods) during the period plus the equivalent units in the departments ending work in
process inventory.
4-8 The company will want to distinguish between the costs of the metals used to make the
medallions, but the medals are otherwise identical and go through the same production
processes. Thus, operation costing is ideally
suited for the companys needs.
4-9 Disagree. In fact, flexible manufacturing
systems may actually increase the use of process costing over time. These systems can have
a major impact on costing since they allow for
an easy switch from producing one type of
product to another. The systems flexibility
means product switching results in little time lost
and relatively low setup costs. Therefore, companies are able to move between products with
about the same speed as they would if they
were working in a continuous processing environment. As the use of flexible manufacturing
systems grows, so should the application of process costing techniques.
4-10 The number of full-time equivalent students is 5,000 + 50%(1,250) = 5,625.

4-6
The costs that might be added in the
Firing Department include: (1) costs transferred
in from the Mixing Department; (2) materials
costs added in the Firing Department; (3) labour
costs added in the Firing Department; and (4)
overhead costs added in the Firing Department.

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Solutions Manual, Chapter 4

Exercise 4-1 (20 minutes)


a. To record issuing raw materials for use in production:
Work in ProcessMoulding Department .......
28,000
Work in ProcessFiring Department.............
5,000
Raw Materials .......................................

33,000

b. To record direct labour costs incurred:


Work in ProcessMoulding Department .......
Work in ProcessFiring Department.............
Wages Payable .....................................

18,000
5,000

23,000

c. To record applying manufacturing overhead:


Work in ProcessMoulding Department .......
Work in ProcessFiring Department.............
Manufacturing Overhead .......................

24,000
37,000

61,000

d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department:
Work in ProcessFiring Department.............
67,000
Work in ProcessMoulding Department .
67,000
e. To record transfer of finished bricks from the Firing Department to the
finished goods warehouse:
Finished Goods............................................
108,000
Work in ProcessFiring Department ......
108,000
f. To record Cost of Goods Sold:
Cost of Goods Sold ......................................
Finished Goods .....................................

106,000

106,000

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2

Managerial Accounting, 9th Canadian Edition

Exercise 4-2 (10 minutes)


Weighted-Average Method

Quantity Schedule

Units to be accounted for:


Work in process, October 1
Units started into production
Total units

25,000
195,000
220,000

Units transferred to the next department .........................................................


205,000
Ending work in process:
Materials: 15,000 units 70%
complete .................................................
15,000
Conversion: 15,000 units 50%
complete .................................................
Equivalent units of production .......................
220,000

Equivalent Units
Materials Conversion
205,000

205,000

10,500
215,500

7,500
212,500

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Solutions Manual, Chapter 4

Exercise 4-3 (10 minutes)


Weighted-Average Method
Costs per Equivalent Unit:

Total
Cost

Materials Labour Overhead

Work in process, May 1 ........$156,270 $ 14,550 $23,620 $118,100


Cost added during May ........ 174,330
88,350 14,330
71,650
Total cost (a) ......................$330,600 $102,900 $37,950 $189,750
Equivalent units of
production (b)...................
Cost per equivalent unit
(a) (b) ..........................

---------

1,200

1,100

1,100

$85.75

$34.50

$172.50

Total cost per equivalent Unit = $85.75 + $34.50 + $172.50 = $292.75

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4

Managerial Accounting, 9th Canadian Edition

Exercise 4-4 (10 minutes)


Weighted-Average Method

Materials Conversion

Ending work in process inventory:

Equivalent units of production .................


Cost per equivalent unit ..........................
Cost of ending work in process inventory .

Units completed and transferred out:

Units transferred to the next department .


Cost per equivalent unit ..........................
Cost of units completed and transferred
out ....................................................

Total

300
$31.56
$9,468

100
$9.32
$932 $10,400

1,300
$31.56

1,300
$9.32

$41,028

$12,116 $53,144

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Solutions Manual, Chapter 4

Exercise 4-5 (10 minutes)


Work in ProcessMixing ................................................
330,000
Raw Materials Inventory ...........................................

330,000

Work in ProcessMixing ................................................


260,000
Work in ProcessBaking ................................................
120,000
Wages Payable .........................................................

380,000

Work in ProcessMixing ................................................


190,000
Work in ProcessBaking ................................................
90,000
Manufacturing Overhead ...........................................

280,000

Work in ProcessBaking ................................................


760,000
Work in ProcessMixing ...........................................

760,000

Finished Goods ..............................................................


980,000
Work in ProcessBaking ...........................................

980,000

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6

Managerial Accounting, 9th Canadian Edition

Exercise 4-6 (20 minutes)


Weighted-Average Method
1.

Equivalent Units
Materials
Labour Overhead

Units transferred to the next


department ....................................
Ending work in process:
Materials: 50,000 units 60%
complete......................................
Labour: 50,000 units 20%
complete......................................
Overhead: 50,000 units 20%
complete......................................
Equivalent units of production ............

790,000

790,000

790,000

30,000
10,000
820,000

800,000

10,000
800,000

2. Cost per Equivalent Unit:


Materials Labour Overhead
Cost of beginning work in process ....... $ 68,600 $ 30,000 $ 48,000
Costs added during the period ............ 907,200 370,000 592,000
Total cost (a) ..................................... $975,800 $400,000 $640,000
Equivalent units of production (b) ....... 820,000 800,000 800,000
Cost per equivalent unit (a) (b)........
$1.19
$0.50
$0.80

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Solutions Manual, Chapter 4

Exercise 4-7 (10 minutes)


Weighted-Average Method
Equivalent Units (EU)

Labour &
Materials Overhead

Kilograms transferred to the Packing Department


during May*........................................................ 245,000
Work in process, May 31:
Materials: 10,000 kilograms 100% complete...... 10,000
Labour and overhead: 10,000 kilograms 90%
complete ..........................................................
Equivalent units of production ................................ 255,000

245,000

9,000
254,000

* Beginning WIP 15,000 + Started 240,000 Ending WIP 10,000 =


245,000 kilograms.

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8

Managerial Accounting, 9th Canadian Edition

Exercise 4-8 (30 minutes)


Weighted-Average Method
1. Equivalent Units:
Materials Conversion
Units transferred to the next process ...............320,000
320,000
Ending work in process:
Materials: 60,000 units 45% complete ....... 27,000
Conversion: 60,000 units 20% complete ......
12,000
Equivalent units of production .........................347,000
332,000
2. Costs per Equivalent Unit:
Materials Conversion
Cost of beginning work in process ..................$ 76,600
$ 34,900
Cost added during the period ......................... 410,000
234,500
Total cost (a) ................................................$486,600
$269,400
Equivalent units of production (b)................... 347,000
332,000
Cost per equivalent unit (a) (b) ................... $1.40
$0.81
3.

Ending work in process inventory:


Equivalent units of production
(see above) ........................
Cost per equivalent unit (see
above) ...............................
Cost of ending work in process
inventory ............................

Materials Conversion
27,000

12,000

$1.40

$0.81

$37,800

$9,720

Total

$47,520

Units completed and transferred out:


Units transferred to the next
department ........................
Cost per equivalent unit
(see previous exercise)........
Cost of units completed and
transferred out.

320,000

320,000

$1.40

$0.81

$448,000

$259,200

$707,200

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Solutions Manual, Chapter 4

Exercise 4-9 (20 minutes)


Cost Reconciliation
Cost accounted for as follow:
Transferred to Packaging Dept:
25,000 rolls x $17.10
Work in process, January 31:
Materials, $9.50 per EU
Conversion , $7.60 per EU
Total cost accounted for

Total Cost

Materials

$427,500

25,000

$22,800
$13,680
36,480
$463,980

2,400

Conversion
25,000
1,800

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10

Managerial Accounting, 9th Canadian Edition

Problem 4-10 (45 minutes)


Weighted-Average Method
1. Equivalent Units of Production
Transferred to next department........................
Ending work in process:
Materials: 80,000 units 75% complete ........
Conversion: 80,000 units 25% complete .....
Equivalent units of production ..........................
2. Cost per Equivalent Unit
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) (b) ...............

Materials Conversion
450,000

60,000
510,000

450,000

20,000
470,000

Materials Conversion
$ 36,550
391,850
$428,400
510,000
$0.84

$ 13,500
267,300
$280,800
470,000
$0.597*

*rounded
3.

Applying Costs to Units

Materials Conversion

Ending work in process inventory:


Equivalent units of production
(materials: 80,000 units 75%
complete; conversion: 80,000
units 25% complete) ......
60,000
Cost per equivalent unit .......
$0.84
Cost of ending work in process
inventory ...........................
$50,400
Units completed and transferred out:
Units transferred to the next
department .......................
450,000
Cost per equivalent unit .......
$0.84
Cost of units completed and
transferred out...................
$378,000

Total

20,000
$0.597
$11,940

$62,340

450,000
$0.597

$1.437

$268,650

$646,650

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Solutions Manual, Chapter 4

11

Problem 4-10 (continued)


4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($36,550 + $13,500)..................................
Costs added to production during the period
($391,850 + $267,300) ..............................
Total cost to be accounted for .......................
Costs accounted for as follows:
Transferred to next department:
450,000 units x $1.437 .....................................
Work in process June 30
Materials at $0.84 per EU .............................
Conversion at $0.597 per EU ........................
Total cost accounted for ...............................

$ 50,050
659,150
$709,200
$646,650
50,400
11,940
62,340
$708,990*

*off $210 due to rounding

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12

Managerial Accounting, 9th Canadian Edition

Problem 4-11 (45 minutes)


Weighted-Average Method
1. Equivalent Units of Production
Transferred to next department* ......................
Ending work in process:
Materials: 55,000 units 65% complete ........

Materials Conversion
395,000

35,750

Conversion: 55,000 units 30% complete .....


Equivalent units of production ..........................

395,000

16,500
430,750

411,500

*Units transferred to the next department = Units in beginning work in


process + Units started into production Units in ending work in
process = 85,000 + 365,000 55,000 = 395,000
2. Cost per Equivalent Unit

Materials

Cost of beginning work in process ................


Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................

$ 101,000
462,000
$563,000
430,750

Cost per equivalent unit, (a) (b) ...............

$1.31

Conversion
$ 51,000
213,000
$264,000
411,500

$0.64

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Solutions Manual, Chapter 4

13

Problem 4-11 (continued)


3. Cost of Ending Work in Process Inventory and Units Transferred Out

Materials Conversion

Ending work in process inventory:


Equivalent units of production
(materials: 55,000 units 65%
complete; conversion: 55,000
units 30% complete) ......
35,750
Cost per equivalent unit .......
$1.31
Cost of ending work in process
inventory ...........................
$46,833
Units completed and transferred out:
Units transferred to the next
395,000
department .......................
Cost per equivalent unit .......
$1.31
Cost of units completed and
transferred out...................
$517,450

Total

16,500
$0.64
$10,560

$57,393

395,000
$0.64

$1.95

$252,800

$770,250

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14

Managerial Accounting, 9th Canadian Edition

Problem 4-11 (continued)


4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($101,000 + $51,000) ....................................
Costs added to production during the period
($462,000 + $213,000) ..................................
Total Cost
Costs accounted for as follows:
Transferred to the Coating Department
395,000 x $1.95
Work in process, May 31
Materials at $1.31 per EU
Conversion at $0.64 per EU
Total ending Work in process
Total cost

$152,000
675,000
$827,000
$770,250
46,833
10,560
57,393
*$827,643

*Difference of $643 due to rounding of the per unit costs

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Solutions Manual, Chapter 4

15

Problem 4-12 (30 minutes)


Weighted-Average Method
1. Total units transferred to the next department ...
Less units in the May 1 inventory ......................
Units started and completed in May...................
2. The equivalent units were:

30,000
5,000
25,000

Materials Conversion

Transferred to next department..................


Ending work in process:
Materials: 4,000 units 75% complete ....
Conversion: 4,000 units 50% complete .
Equivalent units of production ....................

30,000

30,000

3,000

2,000
32,000

33,000

3. The costs per equivalent unit were:


Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) (b) ...............

Materials Conversion
9,000
57,000
66,000
33,000
2.00

4,400
30,800
35,200
32,000
1.10

4. The ending work in process figure is verified as follows:


Ending work in process inventory:
Equivalent units of production
(see above) .................................
Cost per equivalent unit .................
Cost of ending work in process
inventory .....................................

Materials Conversion
3,000
2.00
6,000

Total

2,000
1.10
2,200 8,200

5. Multiplying the unit cost figure of 3.10 per unit by 1,000 units does not
provide a valid estimate of the incremental cost of processing an additional 1,000 units through the department. If there is sufficient idle capacity to process an additional 1,000 units, the incremental cost per unit
is almost certainly less than 3.10 per unit because the conversion costs
are likely to include fixed costs.

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16

Managerial Accounting, 9th Canadian Edition

Problem 4-13 (45 minutes)


Weighted-Average Method
1. Equivalent Units of Production

Materials Conversion

Transferred to next department* ...................... 270,000


Ending work in process:
Materials: 45,000 kilograms 100% complete .. 45,000
Conversion: 45,000 kilograms 2/3 complete ..
Equivalent units of production .......................... 315,000
*35,000 + 280,000 45,000 = 270,000.
2. Cost per Equivalent Unit
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) (b) ...............

Materials

$ 43,400
397,600
$441,000
315,000
$1.40

270,000

30,000
300,000

Conversion
$ 20,300
189,700
$210,000
300,000
$0.70

3. Cost of Ending Work in Process Inventory and Units Transferred Out

Materials Conversion

Ending work in process inventory:


Equivalent units of production
(see above) .......................
45,000
Cost per equivalent unit .......
$1.40
Cost of ending work in process
inventory ...........................
$63,000
Units completed and transferred out:
Units transferred to the next
department .......................
270,000
Cost per equivalent unit .......
$1.40
Cost of units completed and
transferred out...................
$378,000

Total

30,000
$0.70
$21,000

$84,000

270,000
$0.70

$2.10

$189,000

$567,000

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Solutions Manual, Chapter 4

17

Problem 4-13 (continued)


4. In computing unit costs, the weighted-average method mixes costs of
the prior period with current period costs. Thus, under the weightedaverage method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant
when attempting to measure performance in the current period. Good
(or bad) cost control in the current period might be concealed by the
costs that have been brought forward in the beginning inventory.

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18

Managerial Accounting, 9th Canadian Edition

Problem 4-14 (60 minutes)


Weighted-Average Method
1. The equivalent units are:
Units completed during the year .....................
Work in process, Dec. 31:
Materials: 30,000 units 100% complete ....
Conversion: 30,000 units 50% complete ...
Equivalent units of production ........................

Materials

790,000
30,000
820,000

Conversion
790,000

15,000
805,000

The costs per equivalent unit are:


Work in process, Jan. 1..................................
Cost added during the year ............................
Total cost (a) ................................................
Equivalent units of production (b)...................
Cost per equivalent unit (a) (b) ...................

Materials

Conversion

$ 22,000 $ 48,000
880,000 2,367,000
$902,000 $2,415,000
820,000
805,000
$1.10
$3.00

2. The amount of cost that should be assigned to the ending inventories is:
Ending work in process inventory:
Equivalent units of production
(see above) .......................
Cost per equivalent unit .......
Cost of ending work in process
inventory ...........................
Finished goods inventory:
Equivalent units ...................
Cost per equivalent unit .......
Cost of units completed and
transferred out...................

Materials Conversion

Total

30,000
$1.10

15,000
$3.00

$33,000

$45,000

$78,000

50,000
$1.10

50,000
$3.00

$4.10

$55,000

$150,000

$205,000

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Solutions Manual, Chapter 4

19

Problem 4-14 (continued)


3. The necessary adjustments would be:

Work in
Process

Finished
Goods

Total

Total cost that should be assigned


to inventories (see above) ............................................
$ 78,000 $205,000 $283,000
Year-end balances in the accounts ..................................
95,000
201,000 296,000
Error..............................................................................
$(17,000) $ 4,000 $(13,000)
Finished Goods Inventory................................................
4,000
Cost of Goods Sold .........................................................
13,000
Work in Process Inventory ......................................... 17,000
4. The cost of goods sold can be determined as follows:
Beginning finished goods inventory..................................
0
Units completed during the year ......................................
790,000
Units available for sale ....................................................
790,000
Less units in ending finished goods inventory ...................50,000
Units sold during the year ...............................................
740,000
Cost per whole unit ($1.10 + $3.00) ................................
$4.10
Cost of goods sold ..........................................................
$3,034,000
Alternative computation:
Total manufacturing cost incurred:
Materials (part 1. above) ..............................................
$ 902,000
Conversion (part 1. above) ...........................................
2,415,000
Total manufacturing cost ................................................
3,317,000
Less cost assigned to inventories (part 3. above)..............
283,000
Cost of goods sold ..........................................................
$3,034,000

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20

Managerial Accounting, 9th Canadian Edition

Problem 4-15 (30 minutes)


Weighted-Average Method
1. a. Work in ProcessBlending .............................................
495,000
115,000
Work in ProcessBottling
610,000
Raw Materials ...........................................................
b. Work in ProcessBlending .............................................
72,000
Work in ProcessBottling ...............................................
18,000
Salaries and Wages Payable ......................................
90,000
c. Manufacturing Overhead ................................................
225,000
Accounts Payable ......................................................
225,000
d. Work in ProcessBlending .............................................
181,000
Manufacturing Overhead ...........................................
181,000
Work in ProcessBottling ...............................................
42,000
Manufacturing Overhead ...........................................
42,000
e. Work in ProcessBottling ...............................................
740,000
Work in ProcessBlending ........................................
740,000
f. Finished Goods ..............................................................
950,000
Work in ProcessBottling ..........................................
950,000
g. Accounts Receivable .......................................................
1,500,000
Sales ........................................................................
1,500,000
Cost of Goods Sold .........................................................
890,000
Finished Goods .........................................................
890,000

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Solutions Manual, Chapter 4

21

Problem 4-15 (continued)


2.

Work in ProcessBottling
Bal.
65,000 (f)
950,000

Work in ProcessBlending
Bal.
38,000 (e)
740,000

(a)

115,000

(a)

495,000

(b)

18,000

(b)

72,000

(d)

42,000

(d)

181,000

(e)

740,000

Bal.

30,000

Bal.

46,000

Bal.

Finished Goods
20,000 (g)
890,000

Manufacturing Overhead
(c)
225,000 (d)
181,000
(d)
Bal.
Bal.
Bal.

42,000

2,000

(f)

950,000

Bal.

80,000

Raw Materials
681,000 (a)
610,000

Accounts Payable
(c)
225,000

71,000

Salaries and Wages Payable


(b)
90,000

Sales
(g)

Accounts Receivable
1,500,000

Cost of Goods Sold


890,000

(g)

(g)

1,500,000

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22

Managerial Accounting, 9th Canadian Edition

Problem 4-15 (continued)


3. Production Report Blending Department
Quantity
Schedule
Units to be accounted for:
Work in process, March 1

20,000

Started into production

390,000

Total Units

410,000
Equivalent Units (EU)
Material

Labour

Overhead

Units accounted for as follows:


Transferred to Bottling
Work in process March 31
Total units and equivalent
units of production

370,000 370,000 370,000


40,000

30,000

370,000

10,000

10,000

410,000 400,000 380,000

380,000

Costs per Equivalent Unit:


Total cost

Material

Labour Overhead

Cost to be accounted for:


Work in process, March 1

$38,000 $25,000

$4,000

$9,000

Cost added by the Blending


Department

748,000 495,000

72,000

181,000

$786,000 520,000

76,000

190,000

400,000 380,000

380,000

Total Cost
Equivalent units of production
Cost per equivalent unit

$1.30

$0.20

$0.50

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Solutions Manual, Chapter 4

23

Case 4-16 (120 minutes)


This case is difficultparticularly part 3, which requires analytical skills.
Because there are no beginning inventories, it makes no difference
whether the weighted-average or FIFO method is used by the company.
You may choose to specify that the FIFO method be used rather than
the weighted-average method.
1. Computation of the Cost of Goods Sold:
Units completed and sold.......................
Ending work in process:
Transferred in:
20,000 units 100% complete ..........
Conversion:
20,000 units 25% complete............
Equivalent units of production ................
Cost of beginning work in process ..........
Cost added during the period .................
Total cost (a) ........................................
Equivalent units of production (b) ..........
Cost per equivalent unit, (a) (b) .........

Transferred In
250,000

Conversion
250,000

20,000
270,000

Transferred In

5,000
255,000

Conversion

$
0 $
0
49,221,000 16,320,000
$49,221,000 $16,320,000
270,000
255,000
$182.30
$64.00

Cost of goods sold = 250,000 units ($182.30 + $64.00) per unit =


$61,575,000.
2. The estimate of the percentage completion of ending work in process
inventories affects the unit costs of finished goods and therefore the
cost of goods sold. Jason Bieler would like the estimated percentage
completion of the ending work in process to be increased. The higher
the percentage of completion of ending work in process, the higher the
equivalent units for the period and the lower the unit costs.
3. Increasing the percentage of completion can increase operating income
by reducing the cost of goods sold. To increase operating income by
$62,500, the cost of goods sold would have to be decreased by $62,500
from $61,575,000 down to $61,512,500. See the next page for the necessary calculations.
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Managerial Accounting, 9th Canadian Edition

Case 4-16 (continued)


The percentage of completion, X, affects the cost of goods sold by its
effect on the unit cost, which can be determined as follows:
Unit cost = $182.30 +

$16,320,000
250,000 + 20,000X

And the cost of goods sold can be computed as follows:


Cost of goods sold = 250,000 Unit cost
Since cost of goods sold must be reduced down to $61,512,500, the unit
cost must be $246.05 ($61,512,500 250,000 units). Thus, the required percentage completion, X, to obtain the $62,500 reduction in cost
of goods sold can be found by solving the following equation:

$182.30 +

$16,320,000
= $246.05
250,000 + 20,000X

$16,320,000
= $246.05 - $182.30
250,000 + 20,000X

$16,320,000
= $63.75
250,000 + 20,000X
250,000 + 20,000X
1
=
$16,320,000
$63.75
250,000 + 20,000X =

$16,320,000
$63.75

250,000 + 20,000X = 256,000


20,000X = 256,000 - 250,000
20,000X = 6,000

Thus, changing the percentage completion to 30% will decrease cost


of goods sold and increase net operating income by $62,500 as verified
on the next page.

X=

6,000
= 30%
20,000

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Solutions Manual, Chapter 4

25

Case 4-16 (continued)


3. (continued)
Computation of the Cost of Goods Sold:
Units completed and sold.......................
Ending work in process:
Transferred in:
20,000 units 100% complete ..........
Conversion:
20,000 units 30% complete............
Equivalent units of production ................
Cost of beginning work in process ..........
Cost added during the period .................
Total cost (a) ........................................
Equivalent units of production (b) ..........
Cost per equivalent unit, (a) (b) .........

Transferred In
250,000

Conversion
250,000

20,000
270,000

Transferred In

6,000
256,000

Conversion

$
0 $
0
49,221,000 16,320,000
$49,221,000 $16,320,000
270,000
256,000
$182.30
$63.75

Cost of goods sold = 250,000 units ($182.30 per unit + $63.75 per
unit) = $61,512,500.
4. Carol is in a very difficult position. Collaborating with Jason Bieler in
subverting the integrity of the accounting system is unethical by almost
any standard. To put the situation in its starkest light, Bieler is suggesting that the production managers lie in order to get their bonus. Having
said that, the peer pressure to go along in this situation may be intense.
It is difficult on a personal level to ignore such peer pressure. Moreover,
Carol probably prefers not to risk alienating people she might need to
rely on in the future. On the other hand, Carol should be careful not to
accept at face value Bielers assertion that all of the other managers are
doing as much as they can to pull this bonus out of the hat. Those
who engage in unethical or illegal acts often rationalize their own behaviour by exaggerating the extent to which others engage in the same
kind of behaviour. Other managers may actually be very uncomfortable
pulling strings to make the target profit for the year.

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26

Managerial Accounting, 9th Canadian Edition

Case 4-16 (continued)


From a broader perspective, if the profit figures reported by the
managers in a division cannot be trusted, then the company would be
foolish to base bonuses on the net profit figures. A bonus system based
on divisional profits presupposes the integrity of the accounting system.
The company should perhaps reconsider how it determines the bonus. It
is quite common for companies to pay an all or nothing bonus contingent on making a particular target. This inevitably creates powerful incentives to bend the rules when the target has not quite been attained.
It might be better to have a bonus without this all or nothing feature.
For example, managers could be paid a bonus of x% of profits above
target profits rather than a bonus that is a preset percentage of their
base salary. Under such a policy, the effect of adding that last dollar of
profits that just pushes the divisional net profits over the target profit
will add a few pennies to the managers compensation rather than thousands of dollars. Therefore, the incentives to misstate the operating income are reduced. Why tempt people unnecessarily?

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Solutions Manual, Chapter 4

27

Case 4-17 (45 minutes)


Weighted-Average Method
1. The revised computations follow:

Quantity Schedule and Equivalent Units of Production

Transferred to next department........................


Ending work in process:
Transferred in: 5,000 units 100% complete .
Materials: 5,000 units 0% complete ............
Conversion: 5,000 units 2/5 complete ..........
Equivalent units of production ..........................

Costs per equivalent unit


Cost of beginning work in process ...................
Cost added during the period ..........................
Total cost (a) .................................................
Equivalent units of production (b) ...................
Cost per equivalent unit, (a) (b) ..................

Transferred
In
100,000

5,000
105,000

Transferred
In
$ 8,820
81,480
$90,300
105,000
$0.86

Materials

100,000
0
100,000

Materials

$ 3,400
27,600
$31,000
100,000
$0.31

Conversion
100,000

2,000
102,000

Conversion
$ 10,200
96,900
$107,100
102,000
$1.05

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Managerial Accounting, 9th Canadian Edition

Case 4-17 (continued)

Cost reconciliation

Units completed and transferred out:


Units transferred to the next department .........
Cost per equivalent unit ..................................
Cost of units completed and transferred out ....
Ending work in process inventory:
Equivalent units of production (see above) ..
Cost per equivalent unit .............................
Cost of ending work in process inventory ....

Transferred
In

Materials

Conversion

Total

100,000
$0.86
$86,000

100,000
$0.31
$31,000

100,000
$1.05
$105,000

$2.22
$222,000

5,000
$0.86
$4,300

0
$0.31
$0

2,000
$1.05
$2,100

$6,400

2. The unit cost computed above is $2.22 (= $0.86 + $0.31 + $1.05) versus $2.284 on the original report. The unit cost on the report prepared by the accountant is high because none of the cost incurred during the month was assigned to the units in the ending work in process inventory.

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Solutions Manual, Chapter 4

29

Case 4-18 (60 minutes)

MEMORANDUM
DATE:
TO:
FROM:
SUBJECT:

September 2010
Rachel Archer
Ed Switzer
Ending Work in Process and Finished Goods Inventory Balances

As agreed, I have calculated the ending inventory balances to be included


in the Balance Sheet of Rachels Real Root Beer as at August 30. The calculations assume process costing using the weighted average method. My
calculations indicate an ending balance in Finished Goods Inventory of
$6,456 and an ending Work in Process balance of $1,944. Details of my
calculations are presented in the attached Production Report for the month
of August.

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30

Managerial Accounting, 9th Canadian Edition

Rachels Real Root Beer


Production Report for August (weighted average method)
Quantity Schedule and Equivalent Units
Quantity
Units to be accounted for:
Work in process, August 1 (75%
complete for material, 60% for
550
conversion)
Started into production
3,000
Total units
3,550
Equivalent Units
Materials
Conversion
Units accounted for as follows:
Transferred to Finished Goods
Work in process, August 30
(75% complete for material,
50% for conversion)
Total units and equivalent units
Cost per Equivalent Unit
Cost to be accounted for:
Work in process, August 1
Cost added during the month
Total cost
Equivalent units of production
Cost per equivalent unit
Total cost per equivalent unit
Cost reconciliation:
Cost accounted for as follows:
Transferred to Finished Goods
2,400 units x $2.69
Work in process, August 30:
Materials at $1.38 per EU
Conversion at $1.31 per EU
Total Work in process, Aug 30
Total cost accounted for:

2,400

2,400

2,400

1,150
3,550
Total Cost

863
3,263
Materials

575
2,975
Conversion

$1,080
7,320
$8,400

$650
3,840
$4,490
3,263
$1.38

$430
3,480
$3,910
2,975
$1.31

$2.69
Total Cost

Materials

$6,456

$2,400

1,191
753
1,944
$8,400

863

Conversion

$2,400

575

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Solutions Manual, Chapter 4

31

Research and Application 4-19 (120 minutes)


1. The processing departments for BICs ballpoint pen manufacturing process are listed below in sequential order. The raw material inputs are
listed in parentheses next to the department where they are added to
the manufacturing process.
Ball and point production department (hardening and grinding)
(Tungsten carbide balls, metal points and point supports are added
to production).
The Moulding department (plastic casing materials moulded here).
The Cartridge Filling department (ink cartridges are centrifuged and
quality checked here).
The Assembly department (no raw materials are added).
The Quality Control department (no raw materials added here).
The Packaging department (boxes are filled and shrink wrapped for
shipping here).
2. The production process consumes fairly large amounts of manufacturing
overhead costs. This should be apparent to students based on the photographs that accompany the on-line tour. There are many pictures of
large pieces of capital equipment used to mould pen body assemblies,
grind pen balls and set them into their metal points. In addition, the assembly process is described as highly automated with employees really
only monitoring the output of the assembly machines.
The depreciation costs associated with the equipment as well as the utility and maintenance costs incurred to run the equipment are three examples of overhead costs. It is also worth noting that the equipment
shown in the photographs is large in size, thereby suggesting that BICs
pen-making facilities occupy a large amount of floor spaceall of which
needs lighting, heat, insurance, etc. These are additional examples of
manufacturing overhead costs

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32

Managerial Accounting, 9th Canadian Edition

3.

The T-account model is shown below:

Wages Payable

Manufacturing Overhead

Work in Process: Ball point


production
XXX

Work in Process: Molding


XXX
XXX

The T-account model shown above assumes that labour cost is incurred
at each step of the process to operate and maintain the equipment.
4. While the on-line tour does not provide sufficient information to answer
this question, it is reasonable to expect students to speculate that operation costing may be appropriate because BICs stationary line includes
many different types of pens, some of which may go through a slightly
different manufacturing process. This suggests that some material costs
and conversion costs may be assigned to particular batches of production rather than being spread over the entire volume of production for a
given period without regard to the type of pen being manufactured.

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Solutions Manual, Chapter 4

33

Appendix 4A FIFO Method


Questions
4A-1 Under the weighted-average method, each unit transferred out of the department is counted as
one equivalent unitregardless of in what period the work was done to complete the units. Under the
FIFO method, only the work done in the current period is counted. Units transferred out are divided into
two parts. One part consists of the units transferred out from beginning inventory. Only the work needed
to complete these units is shown as part of the equivalent units for the current period. The other part of
the units transferred out consists of the units started and completed during the current period.
4A-2The weighted-average method mixes costs from the current period with costs from the prior period.
Thus, under the weighted-average method, the departments apparent performance in the current period
is influenced to some extent by what happened in a prior period. In contrast, the FIFO method cleanly
separates the costs and work of the current period from those of the prior period. This makes the FIFO
method superior to the weighted-average method for cost control because current performance should
be measured in relation to costs of the current period only.

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34

Managerial Accounting, 9th Canadian Edition

Exercise 4A-1 (10 minutes)


FIFO Method
To complete beginning work in process:
Materials: 400 units (100% 75%).................
Conversion: 400 units (100% 25%) .............
Units started and completed during the period
(42,600 units started 500 units in ending
inventory) .........................................................
Ending work in process
Materials: 500 units 80% complete .................
Conversion: 500 units 30% complete ..............
Equivalent units of production ................................

Materials Conversion
100

42,100
400
42,600

300
42,100
150
42,550

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Solutions Manual, Chapter 4

35

Exercise 4A-2(10 minutes)


FIFO method
Cost added during May (a).....
Equivalent units of
production (b) ....................
Cost per equivalent unit
(a) (b) ............................

Materials

Labour

$41,280 $26,460

Overhead

$66,150

8,000

7,000

7,000

$5.16

$3.78

$9.45

Total

$18.39

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36

Managerial Accounting, 9th Canadian Edition

Exercise 4A-3(15 minutes)


FIFO Method

Materials Conversion

Ending work in process inventory:

Equivalent units of production ...............


Cost per equivalent unit ........................
Cost of ending work in process inventory

Total

800
$4.40
$3,520

200
$1.30
$260

$3,780

$2,700

$380

$3,080

400
$4.40

700
$1.30

$1,760

$910

7,000
$4.40

7,000
$1.30

$30,800

$9,100

Units transferred out:

Cost in beginning work in process


inventory .........................................

Cost to complete the units in beginning


work in process inventory:
Equivalent units of production required
to complete the beginning inventory
Cost per equivalent unit ......................
Cost to complete the units in beginning
inventory .......................................

Cost of units started and completed this period:


Units started and completed this period
(8,000 units completed and transferred to the next department
1,000 units in beginning work in
process inventory) ..........................
Cost per equivalent unit ......................
Cost of units started and completed
this period .....................................
Total cost of units transferred out ..........

2,670

39,900
$45,650

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Solutions Manual, Chapter 4

37

Exercise 4A-4 (20 minutes)


FIFO Method
1.

Materials Labour Overhead

To complete beginning work in process:


Materials: 80,000 litres
(100% 80%) ................................ 16,000
Labour: 80,000 litres
(100% 75%) ................................
20,000
Overhead: 80,000 litres
(100% 75%) ................................
Units started and completed during the
period (790,000 80,000) ................... 710,000 710,000
Ending work in process:
Materials: 50,000 litres 60% ............. 30,000
Labour: 50,000 litres 20% ................
10,000
Overhead: 50,000 litres 20% ............
Equivalent units of production ................ 756,000 740,000

2.

20,000
710,000

10,000
740,000

Materials Labour Overhead

Cost added during the period (a) ............ $907,200 $370,000 $592,000
Equivalent units of production (b) ........... 756,000 740,000 740,000
Cost per equivalent unit (a) (b) ......... ` $1.20
$0.50
$0.80

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38

Managerial Accounting, 9th Canadian Edition

Exercise 4A-5 (45 minutes)


FIFO method
1. Computation of the total cost per equivalent unit of production:
Cost per equivalent unit of production for material .............
Cost per equivalent unit of production for conversion .........
Total cost per equivalent unit of production .......................

$18.20
23.25
$41.45

2. Computation of equivalent units in ending inventory:


Units in ending inventory .........
Percentage completed .............
Equivalent units of production ..

Materials
300
80 %
240

Conversion
300
40 %
120

3. Computation of equivalent units required to complete the beginning inventory:


Units in beginning inventory.....
Percentage uncompleted .........
Equivalent units of production ..

Materials
400
30 %
120

Conversion

4. Units transferred to the next department .............


Less units from the beginning inventory ..............
Units started and completed during the period .....

400
70 %
280
4,400
400
4,000

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Solutions Manual, Chapter 4

39

Exercise 4A-5 (continued)


5.

Ending work in process inventory:


Equivalent units of production ...................................................
Cost per equivalent unit ............................................................
Cost of ending work in process inventory ...................................

Materials Conversion
240
$18.20
$4,368

Units transferred out:


Cost from the beginning work in process inventory.....................
$4,897
Cost to complete the units in beginning work in process inventory:
Equivalent units of production required to complete the units
in beginning inventory.......................................................
120
Cost per equivalent unit .......................................................
$18.20
Cost to complete the units in beginning inventory ..................
$2,184
Cost of units started and completed this period:
Units started and completed this period.................................
4,000
Cost per equivalent unit .......................................................
$18.20
Cost of units started and completed this period...................... $72,800
Total cost of units transferred out .............................................

Total

120
$23.25
$2,790

$7,158

$2,989

$7,886

280
$23.25
$6,510

8,694

4,000
$23.25
$93,000

165,800
$182,380

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40

Managerial Accounting, 9th Canadian Edition

Exercise 4A-6 (15 minutes)


FIFO Method

Labour &
Materials Overhead

To complete the beginning work in process:


Materials: 15,000 kilograms (100% 100%) ....
0
Labour and overhead:
15,000 kilograms (100% 55%) ...................
Kilograms started and completed during May
(240,000 kilograms started 10,000 kilograms
in ending inventory) ............................................ 230,000
Ending work in process:
Materials: 10,000 kilograms 100% complete...... 10,000
Labour and overhead: 10,000 kilograms 90%
complete ..........................................................
Equivalent units of production ................................ 240,000

6,750
230,000

9,000
245,750

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Solutions Manual, Chapter 4

41

Problem 4A-7 (45 minutes)


FIFO method
1. Equivalent Units of Production
To complete beginning work in process:
Materials: 70,000 units (100% 70%) ......
Conversion: 70,000 units (100% 40%) ...
Units started and completed during the period
(460,000 units started 80,000 units in ending inventory) ...............................................
Ending work in process:
Materials: 80,000 units 75% complete .......
Conversion: 80,000 units 25% complete ....
Equivalent units of production ...........................
2. Cost per Equivalent Unit
Cost added during the period (a) ..............
Equivalent units of production (b) .............
Cost per equivalent unit (a) (b) .............

Materials Conversion
21,000

380,000
60,000
461,000

42,000
380,000
20,000
442,000

Materials Conversion
$391,850
461,000
$0.85

$267,300
442,000
$0.605

3. See the next page.


4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($36,550 + $13,500)..........................................
$ 50,050
Costs added to production during the period
($391,850 + $267,300) ......................................
659,150
Total cost to be accounted for ................................
$709,200
Costs accounted for as follows:
Cost of ending work in process inventory ................
$ 63,100
Costs of units transferred out .................................
646,210
Total cost accounted for ........................................ *$709,310
*Off $110 due to rounding.

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42

Managerial Accounting, 9th Canadian Edition

Problem 4A-7 (continued)


3. Costs of Ending Work in Process Inventory and Units Transferred Out
Ending work in process inventory:
Equivalent units of production .................................................
Cost per equivalent unit ..........................................................
Cost of ending work in process inventory .................................

Materials Conversion
60,000
$0.85
$51,000

Units transferred out:


Cost in beginning work in process inventory ............................ $36,550
Cost to complete the units in beginning work in process inventory:
Equivalent units of production required to complete the beginning inventory ............................................................
21,000
Cost per equivalent unit .....................................................
$0.85
Cost to complete the units in beginning inventory ................ $17,850
Cost of units started and completed this period:
Units started and completed this period .............................. 380,000
Cost per equivalent unit .....................................................
$0.85
Cost of units started and completed this period ................... $323,000
Cost of units transferred out ...................................................

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Solutions Manual, Chapter 4

43

Total

20,000
$0.605
$12,100

$63,100

$13,500

$50,050

42,000
$0.605
$25,410

43,260

380,000
$0.605
$229,900

552,900
$646,210

Problem 4A-8 (45 minutes)


FIFO Method
1. Equivalent Units of Production
To complete beginning work in process:
Materials: 50,000 units (100% 60%) ......
Conversion: 50,000 units (100% 30%) ...
Units started and completed during the period
(500,000 units started 60,000 units in ending inventory) ...............................................
Ending work in process:
Materials: 60,000 units 80% complete .......
Conversion: 60,000 units 40% complete ....
Equivalent units of production ...........................
2. Cost per Equivalent Unit
Cost added during the period (a) ..............
Equivalent units of production (b) .............
Cost per equivalent unit (a) (b) .............

Materials Conversion
20,000

440,000
48,000
508,000

35,000
440,000
24,000
499,000

Materials Conversion
$457,200
508,000

$349,300
499,000

$0.90

$0.70

3. See the next page.


4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($17,000 + $3,000) ............................................
Costs added to production during the period
($457,200+ $349,300) .......................................
Total cost to be accounted for ................................
Costs accounted for as follows:
Cost of ending work in process inventory ................
Costs of units transferred out .................................
Total cost accounted for ........................................

$ 20,000
806,500
$826,500
$ 60,000
766,500
$826,500

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44

Managerial Accounting, 9th Canadian Edition

Problem 4A-8 (continued)


3. Costs of Ending Work in Process Inventory and Units Transferred Out
Ending work in process inventory:
Equivalent units of production .................................................
Cost per equivalent unit ..........................................................
Cost of ending work in process inventory .................................

Materials Conversion
48,000
$0.90
$43,200

Units transferred out:


Cost in beginning work in process inventory ............................ $17,000
Cost to complete the units in beginning work in process inventory:
Equivalent units of production required to complete the beginning inventory ............................................................
20,000
Cost per equivalent unit .....................................................
$0.90
Cost to complete the units in beginning inventory ................ $18,000
Cost of units started and completed this period:
Units started and completed this period .............................. 440,000
Cost per equivalent unit .....................................................
$0.90
Cost of units started and completed this period ................... $396,000
Cost of units transferred out ...................................................

Total

24,000
$0.70
$16,800

$60,000

$3,000

$20,000

35,000
$0.70
$24,500

42,500

440,000
$0.70
$308,000

704,000
$766,500

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Solutions Manual, Chapter 4

45

Case 4A-9 (60 minutes)


FIFO Method
1.
To complete beginning work in process:
Transferred in: 8,000 units 0% ..................................
Materials: 8,000 units 0% .........................................
Conversion: 8,000 units (1 7/8)..............................
Units completed during the period (100,000 units started
8,000 units in beginning inventory) ................................
Ending work in process:
Transferred in: 5,000 units x 100% complete
Materials: 5,000 units 0% complete ...........................
Conversion: 5,000 units 2/5 complete ........................
Equivalent units of production ...........................................
Cost added during the period (a) .......................................
Equivalent units of production (b) ......................................
Cost per equivalent unit (a) (b) ......................................

Transferred In
0

92,000
5,000
97,000

Transferred In
$81,480
97,000
$0.84

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46

Managerial Accounting, 9th Canadian Edition

Materials Conversion
0
92,000
0
92,000

1,000
92,000

2,000
95,000

Materials Conversion
$27,600
92,000
$0.30

$96,900
95,000
$1.02

Case 4A-9 (continued)


Ending work in process inventory:
Equivalent units of production ..........................
Cost per equivalent unit ...................................
Cost of ending work in process inventory ..........

Transferred In Materials Conversion


5,000
$0.84
$4,200

Units transferred out:


Cost in beginning work in process inventory .....
$8,820
Cost to complete units in beginning work in process inventory:
Equivalent units of production required to
complete the beginning inventory (see
above) ....................................................
0
Cost per equivalent unit ..............................
$0.84
Cost to complete units in beginning
inventory.................................................
$0
Cost of units started and completed this period:
Units started and completed this period .......
92,000
Cost per equivalent unit ..............................
$0.84
Cost of units started and completed this
period .....................................................
$77,280
Cost of units transferred out ............................

Total

0
$0.30
$0

2,000
$1.02
$2,040

$6,240

$3,400

$10,200

$22,420

0
$0.30

1,000
$1.02

$0

$1,020

92,000
$0.30

92,000
$1.02

$27,600

$93,840

$1,020

$198,720
$222,160

2. The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is that
the FIFO method keeps the costs of the current period separate from the costs of the prior period.
Thus, under the FIFO method, the company will be able to compare unit costs of the current period
to those of the prior period to see how effective the cost-cutting program has been. Under the
weighted-average method, however, costs carried over from the prior period are averaged in with
costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort.
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Solutions Manual, Chapter 4

47

Appendix 4B Service Department Allocations


Questions
4B-1 Operating departments are the units in an organization within which the central purposes of the
organization are carried out; these departments usually generate revenue. By contrast, service departments provide support or assistance to the operating departments. Examples of service departments include laundry services in a hotel or hospital, internal auditing, airport maintenance services (ground
crews), cafeteria, personnel, cost accounting, and so on.
4B-2 Service department costs are allocated to products and services in two stages. Service department
costs are first allocated to the operating departments. These allocated costs are then included in the operating departments overhead rates, which are used to cost products and services.
4B-3 Interdepartmental services exist whenever two service departments provide services to each other.
4B-4 Under the direct method, interdepartmental services are ignored; service department costs are allocated directly to operating departments. Under the step-down method, the costs of the service department performing the greatest amount of service for the other service departments are allocated first, the
costs of the service department performing the next greatest amount of service are allocated next, and
so forth through all the service departments. Once a service departments costs have been allocated,
costs are not reallocated back to it under the step-down method.
4B-5 The reciprocal method allocates interdepartmental services by simultaneously assigning costs of
one department to another and vice versa. It differs from the step method in that the step method allocates services from the larger provider to the smaller but not vice versa. The step method allocates interdepartmental service work in one direction only and thus does not account for work done in the other
direction.

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Managerial Accounting, 9th Canadian Edition

Exercise 4B-1 (15 minutes)

Service Departments
Physical
AdminiPlant
stration
Services

Departmental costs before


allocations ....................... $1,500,000
Allocations:
Administration costs
(40/50, 10/50) ............ (1,500,000)
Physical Plant costs
(25/30, 5/30)*
Total costs after allocation .. $

$654,000

(654,000)
0

Operating Departments
Undergraduate
Programs

Graduate
Programs

$32,650,000

$1,890,000

1,200,000

300,000

545,000

109,000

$34,395,000

$2,299,000

Total
$36,694,000

$36,694,000

*Based on the space occupied by the two operating departments, which is 30,000 square metres.

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Solutions Manual, Chapter 4

49

Exercise 4B-2 (15 minutes)

Departmental costs before allocations ..


Allocations:
Administration costs (320/3,200,
2,720/3,200, 160/3,200)* .............
Building Services costs
(9,500/10,000, 500/10,000) ........
Total costs after allocation ...................

Service
Departments
AdminiBuilding
stration
Services

$200,000

$60,000

(200,000)

20,000

(80,000)
$
0

Operating
Departments
Coffee
Groceries
Shop

$3,860,000 $340,000
170,000

Total

$4,460,000

10,000

76,000
4,000
$4,106,000 $354,000

$4,460,000

*Based on employee hours in the other three departments, 320 + 2,720 + 160 = 3,200.
Based on space occupied by the two operating departments, 9,500 + 500 = 10,000.
Both the Building Services Department costs of $60,000 and the Administration costs of $20,000 that
have been allocated to the Building Services Department are allocated to the two operating departments.

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50

Managerial Accounting, 9th Canadian Edition

Exercise 4B-3 (20 minutes)

Service
Departments
Admini- JaniMaintestrative torial
nance

Operating
Departments
Prep

Finishing

Costs before allocation .......................... $84,000 $67,800 $36,000 $256,100 $498,600


Allocation:
Administrative: (60/1,200; 240/1,200;
600/1,200; 300/1,200)..................... (84,000) 4,200 16,800
42,000
21,000
Janitorial: (1,000/10,000;
2,000/10,000; 7,000/10,000)............
(72,000)
7,200
14,400
50,400
Maintenance: (10,000/40,000;
30,000/40,000) ...............................
(60,000)
15,000
45,000
Total cost after allocations ..................... $
0 $
0 $
0 $327,500 $615,000

Total

$942,500

$942,500

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51

Exercise 4B-4 (20 minutes)

Service
Departments

Costs before allocation .....................


Allocation:
Administrative: (600/900; 300/900)
Janitorial:
(2,000/9,000; 7,000/9,000) .........
Equipment Maintenance:
(10,000/40,000; 30,000/40,000) .
Total cost after allocations ................

Administrative

Equipment
Maintenance

Janitorial

$84,000 $67,800 $36,000


(84,000)
(67,800)
$

(36,000)
$
0

Operating
Departments

Prep

$256,100 $498,600
56,000

28,000

15,067

52,733

9,000
27,000
$336,167 $606,333

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52

Finishing

Managerial Accounting, 9th Canadian Edition

Total

$942,500

$942,500

Problem 4B-5 (45 minutes)

Food
Admin.
X-Ray
Services Services Services

Variable costs ................................................................


$73,150 $ 6,800 $38,100
Food Services allocation:
$1.90 per meal 1,000 meals.....................................
(1,900)
1,900
$1.90 per meal 500 meals .......................................
(950)
950
$1.90 per meal 7,000 meals .....................................
(13,300)
$1.90 per meal 30,000 meals ...................................
(57,000)
Admin. Services allocation:
$0.50 per file 1,500 files .........................................
(750)
$0.50 per file 3,000 files .........................................
(1,500)
$0.50 per file 900 files ............................................
(450)
$0.50 per file 12,000 files .......................................
(6,000)

750

Outpatient
Clinic

OB
Care

General
Clinic

$11,700 $ 14,850 $ 53,400

1,500

13,300

450

57,000

6,000

X-Ray Services allocation:


$4 per X-ray 1,200 X-rays........................................ (4,800)
4,800
$4 per X-ray 350 X-rays .......................................... (1,400)
1,400
$4 per X-ray 8,400 X-rays........................................ (33,600)
33,600
Total variable costs ........................................................
$
0 $
0 $
0 $18,000 $ 30,000 $150,000

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Solutions Manual, Chapter 4

53

Problem 4B-5 (continued)

Food
Admin.
X-Ray
Services Services Services

Fixed costs ....................................................................


$48,000 $33,040 $59,520
Food Services allocation:
2% $48,000..........................................................
(960)
960
1% $48,000..........................................................
(480)
17% $48,000 ..........................................................
(8,160)
80% $48,000 ..........................................................
(38,400)
Admin. Services allocation:
10% $34,000 ..........................................................
(3,400)
20% $34,000 ..........................................................
(6,800)
30% $34,000 ..........................................................
(10,200)
40% $34,000 ..........................................................
(13,600)

Outpatient
Clinic

General
Clinic

$26,958 $ 99,738 $344,744

480

3,400

OB
Care

6,800

8,160

10,200

38,400

13,600

X-Ray Services allocation:


13% $63,400 .......................................................... (8,242)
8,242
3% $63,400 .......................................................... (1,902)
1,902
84% $63,400 .......................................................... (53,256)
53,256
Total fixed costs ............................................................
0
0
0
42,000 120,000 450,000
Total overhead costs ......................................................
$
0 $
0 $
0 $60,000 $150,000 $600,000

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54

Managerial Accounting, 9th Canadian Edition

Problem 4B-5 (continued)


Computation of allocation rates:
Variable Food Services:

Variable food service cost


$73,150
=
=$1.90 per meal
Total meals served
38,500 meals
Variable Admin. Services:

Variable administrative cost $6,800+$1,900


=
=$0.50 per file
Files processed
17,400 files
Variable X-Ray Services:

Variable X-ray cost $38,100+$950+$750


=
=$4.00 per X-ray
X-rays taken
9,950 X-rays

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Solutions Manual, Chapter 4

Problem 4B-6 (30 minutes)


1. Direct Method
Allocate Accounting dept. (AD) costs to Consulting depts.:
Allocate to Accounting Consulting (AC)
= 60% / (60% + 20%) = 75%
= 75% x $10,000 = $7,500
Allocate to Legal Consulting (LC)
= 20% / (60% + (20%) = 25%
= 25% x $10,000 = $2,500
Allocate Legal dept.(LD) costs to Consulting depts.:
Allocate to Accounting Consulting (AC)
= 10% / (10% + 40%) = 20%
= 20% x $15,000 = $3,000
Allocate to Legal Consulting (LC)
= 40% / (10% + 40%) = 80%
= 80% x $15,000 = $12,000
Income Statement
Accounting
Legal
Consulting
Consulting
Revenue ..............................................................
$40,000
$25,500
Costs AC = 30% $20,000
LC = 70% $20,000
(6,000)
(14,000)
Allocated costs AD*, LD** ....................................
(10,500)
(14,500)
Net income ..........................................................
$23,500
$ (3,000)
* ($7,500 + $3,000), ** ($2,500 + $12,000)

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Managerial Accounting, 9th Canadian Edition

2. Step-down Method
Start with Legal Department costs:
Allocate to AD: 50% x $15,000 = $7,500
Allocate to AC: 10% x $15,000= $1,500
Allocate to LC: 40% x $15,000 = $6,000
Now Allocate Accounting Department costs:
Allocate to AC:
60%/ (60% + 20%) of ($10,000 + $7,500 from LD) = $13,125
Allocate to LC:
20%/(60% + 20%) x ($10,000 +$7,500 from LD) = $4,375

Income Statement
Accounting
Legal
Consulting
Consulting
Revenue ..............................................................
$40,000
$25,500
Costs AC = 30% $20,000
LC = 70% $20,000
(6,000)
(14,000)
Allocated AD*, LD** ............................................
(14,625)
(10,375)
Net income ..........................................................
$19,375
$ 1,125
* ($1,500+$13,125), ** ($6,000+$4,375)
The step-down method is preferable since it allows the firm to recognize
that some service departments use the services of other service departments (in this case, it recognizes that the Accounting Department uses services of the Legal Department). Although this method does not also recognize that the Legal Department uses Accounting Department services, it is
still a more accurate method than the direct allocation method. Sometimes
accuracy comes at a higher cost, but in this case the cost of a slightly more
complex system is worthwhile. Note that Legal Consulting operated at a
loss under the Direct Method, but actually shows a positive Net Income
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Solutions Manual, Chapter 4

under the step-down method. This is due to the fact that the Accounting
Department uses a significant amount of Legal Department services; therefore, the direct method under-allocates costs to the Accounting Consulting
department.

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58

Managerial Accounting, 9th Canadian Edition

Case 4B-7 (90 minutes)


1. Step-down method:
Total costs before allocations...............
Allocations:
Cafeteria (40/500; 60/500; 100/500;
300/500)1 .....................................
Custodial Services (10,000/70,000;
40,000/70,000; 20,000/70,000)2 ....
Machinery Maintenance
(160,000/200,000;
40,000/200,000)3 ..........................
Total overhead after allocations ...........

Custodial
Cafeteria Services

Machinery
Maintenance

Finishing

$320,000

$65,400

(320,000)

25,600

38,400

64,000

192,000

(91,000)

13,000

52,000

26,000

$ 93,600

Milling

(145,000)
$
0

$416,000 $166,000

116,000
29,000
$648,000 $413,000

Based on 40+60+100+300=500 employees


Based on 10,000+40,000+20,000=70,000 square metres
3
Based on 160,000+ 40,000 = 200,000 machine-hours
2

Milling predetermined
overhead rate

$648,000
160,000 machine hr.

= $4.05 per
machine hr.

Finishing predetermined overhead rate

$413,000
70,000 direct labour hr.

= $5.90 per
DLH

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Solutions Manual, Chapter 4

59

Case 4B-7 (continued)


2. Direct method:

Custodial Machinery
Cafeteria Services Maintenance

Total costs before allocations................. $320,000 $65,400


Allocations:
Cafeteria (100/400; 300/400)1 ............ (320,000)
Custodial Services (40,000/60,000;
20,000/60,000)2 ..............................
(65,400)
Machinery Maintenance
(160,000/200,000; 40,000/200,000)3 .
Total overhead after allocations ............. $
0 $
0
Divide by machine-hours.......................
Divide by direct labour-hours ................
Predetermined overhead rate ................
1
2
3

$93,600

(93,600)
$
0

Based on 100 + 300 = 400 employees.


Based on 40,000 + 20,000 = 60,000 square metres.
Based on 160,000 + 40,000 = 200,000 machine-hours.

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Managerial Accounting, 9th Canadian Edition

Milling

Finishing

$416,000 $166,000
80,000

240,000

43,600

21,800

74,880
18,720
$ 614,480 $446,520
160,000
70,000
$
3.84 $
6.38

Case 4B-7 (continued)


3. a. The amount of overhead cost assigned to the job would be:

Step-down method:

Milling Department:
2,000 machine-hours $4.05 per machine-hour .......
Finishing Department:
13,000 DLHs $5.90 per DLH .................................
Total overhead cost ....................................................

$ 8,100
76,700
$84,800

Direct method:

Milling Department:
2,000 machine-hours $3.84 per machine-hour .......
Finishing Department:
13,000 DLHs $6.38 per DLH .................................
Total overhead cost ....................................................

$ 7,680
82,940
$90,620

b. The step-down method provides a better basis for computing


predetermined overhead rates than the direct method because it
gives recognition to services provided between service departments.
If this interdepartmental service is not recognized, then either too
much or too little of a service departments costs may be allocated to
a producing department. The result will be an inaccuracy in the
producing departments predetermined overhead rate.
For example, notice from the computations in (2) above that using
the direct method and ignoring interdepartmental services causes the
predetermined overhead rate in the Milling Department to fall to
$3.84 per machine-hour (from $4.05 per machine-hour when the
step-down method is used), and causes the predetermined overhead
rate in the Finishing Department to rise to $6.38 per direct labourhour (from $5.90 per direct labour-hour when the step-down method
is used). These inaccuracies in the predetermined overhead rate affect bids for jobs. Since the direct method in this case understates the
rate in the Milling Department and overstates the rate in the Finishing
Department, it is not surprising that the company tends to bid low on
jobs requiring a lot of milling work and tends to bid too high on jobs
that require a lot of finishing work.

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61