CHAPTER 6
DISCUSSION QUESTIONS
Q6-1. The basic objective of process costing is to (h) Process, unless different fabrics are used
determine the costs of the products manufac- for different models, in which case the
tured by the company. Determining the cost of conversion costs may be accounted for
the products manufactured is necessary in using process, but the materials using job
order to properly cost ending inventories for order
external reporting purposes (i.e., reporting to Q6-4. Three product flow formats are: sequential,
creditors and owners of the company, the parallel, and selective.
SEC, and the IRS) and to evaluate the prof- Sequential means that the product flows or is
itability of the manufacturing activity. In order manufactured in an unchanging fixed set of
to cost products, the costs must be deter- operations, going from one department to the
mined for materials, labor, and factory over- next.
head used to process each unit of product Parallel means that certain operational
through each department. phases take place simultaneously in other
Q6-2. The products manufactured within a depart- departments and the partially completed units
ment (or cost center) during the period can be or parts are brought together in subsequent
heterogeneous if job order costing is used, departments.
but must be homogeneous if process costing Selective refers to the fact that a product does
is used. In job order costing, products are not necessarily move through every depart-
accounted for in batches. The cost of each ment. Depending upon the character or shape
unit of product manufactured on a job is deter- of the final product, different departments are
mined by dividing the total cost charged to the engaged in completing the desired product.
job by the number of units produced on the Q6-5. Materials Costs—In job order costing, materi-
job. Since the manufacturing cost of each job als requisitions are used and charges are
is accounted for separately, accurate and made to jobs; in process costing, charges for
useful product cost can be determined even materials issued to production are made to
when the products manufactured on different departments, with infrequent use of materials
jobs are substantially different. By contrast, in requisitions.
process costing, all manufacturing costs are Labor Costs—Time tickets are used in job
charged to the department, and the unit cost order costing to accumulate labor costs for
is determined by dividing the cost charged to each job; in process costing, labor costs are
the department by the number of units pro- charged to departments, and, therefore,
duced. As a consequence, the units of prod- detailed time records are not necessary.
uct manufactured within a department must Factory Overhead—Job order costing
be essentially alike in order for the cost allo- requires the use of predetermined rates for
cated to each unit to be meaningful (i.e., to charging overhead to jobs; in process costing,
reasonably reflect the actual cost of the actual overhead may be used. (However, pre-
resources used to manufacture the product). determined rates are often used in order to
Q6-3. (a) Process smooth overhead that is not incurred at the
(b) Process, unless significantly different same rate as production activity.)
models are manufactured Summarizing Costs—A job order cost sheet is
(c) Process used to accumulate the costs of an order in job
(d) Job order order costing; a cost of production report is
(e) Process used in process costing. In job order costing,
(f) Process costs are summarized on completion of the
(g) Job order job; in process costing, costs charged to the
6-1
,6-2 Chapter 6
department and costs accounted for are sum- products, prepare journal entries to record the
marized in the cost of production report each transfer of costs between departments, and
month (or sometimes each week). control costs.
Q6-6. Predetermined overhead rates can and Q6-8. The sections commonly found in a cost of pro-
should be used if the pattern of overhead cost duction report are: (a) a quantity schedule
incurrence does not follow the pattern of pro- indicating the source and disposition of the
duction activity. Some items of overhead are units of product, (b) a cost charged to the
fixed and not responsive to changes in produc- department section, indicating the cost in total
tion activity. If production volume varies each and per unit for the cost transferred in from
month, then predetermined overhead rates the preceding department, as well as materi-
should be used. Some items of overhead are als, labor and overhead charged to the
incurred only at certain times during the year, department, and (c) a cost accounted for sec-
but benefit production throughout the year tion indicating the amount of cost assigned to
(e.g., payroll taxes, insurance, property taxes, the units transferred out of the department, as
vacation pay, etc.). These items can be well as the cost of ending inventory.
recorded as prepaid expenses and amortized Q6-9. Separate departmental cost of production
uniformly to each month if actual overhead is reports are used to accumulate costs more
charged to production. Alternatively, estimates accurately and to provide more detailed data
of such costs can be included in the predeter- for cost control purposes than a plant-wide
mined overhead rate, and the actual cost cost of production report could provide. In
charged to overhead when incurred. The use some cases (e.g., a manufacturing plant that
of predetermined rates is often simpler than has a selective production flow for its prod-
the allocation of actual costs because a single ucts), a plant-wide cost of production report
predetermined rate requires only one over- cannot be used.
head charge to each department each month. Q6-10. An equivalent unit of production is the amount
In contrast, the capitalization and amortiza- of a resource (e.g., materials, labor, or over-
tion of each item of actual overhead would head) that would be required to complete one
require numerous charges each month. unit of the product with respect to the cost ele-
Q6-7. A cost of production report is an effective ment being considered. The total number of
monthly (or weekly) summary of the cost of equivalent units, with respect to a particular
materials, labor, and overhead consumed by element of cost, represents the number of
each department or cost center, along with a units of the product that could have been
record of the quantity of products manufactured. completed with the resources used during the
It provides information necessary to cost period.
,Chapter 6 6-3
EXERCISES
E6-1
(1) Cost from
Preceding Factory
Department Materials Labor Overhead
Equivalent units transferred out ................. 20,000 20,000 20,000 20,000
Equivalent units in ending inventory:
Cost from preceding department
(100% × 5,000) ................................ 5,000
Materials (100% × 5,000) .................... 5,000
Labor (80% × 5,000) .............................. 4,000
Factory overhead (60% × 5,000) ......... 3,000
Total equivalent units................................... 25,000 25,000 24,000 23,000
(2) Cost from
Preceding Factory
Department Materials Labor Overhead
Cost in beginning inventory........................ 0 0 0 0
Cost added during current period .............. $40,000 $15,000 $ 9,600 $16,330
Total cost to be accounted for .................... $40,000 $15,000 $ 9,600 $16,330
Divided by total equivalent units ................ 25,000 25,000 24,000 23,000
Cost per equivalent unit .............................. $ 1.60 $ .60 $ .40 $ .71
E6-2
Work in Process—Department X ............................................. 50,000
Work in Process—Department Y ............................................. 40,000
Materials ........................................................................ 90,000
Work in Process—Department X ............................................. 80,000
Work in Process—Department Y ............................................. 70,000
Payroll ............................................................................ 150,000
Work in Process—Department X ............................................. 180,000
Work in Process—Department Y ............................................. 70,000
Factory Overhead ........................................................ 250,000
Work in Process—Department Y ............................................. 300,000
Work in Process—Department X ................................ 300,000
Finished Goods Inventory........................................................ 448,000
Work in Process—Department Y................................. 448,000
, 6-4 Chapter 6
E6-3 Tyndol Fabricators Inc.
Cutting and Forming Department
Cost of Production Report
For November
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 800
Started in process this period ............... 3,200
4,000
Transferred to Assembling Department 3,400
Ending Inventory ..................................... 75% 40% 25% 600
4,000
Cost Charged to Department Total Equivalent Unit
Beginning inventory: Cost Units* Cost**
Materials ..................................................................................... $ 17,923
Labor .......................................................................................... 2,352
Factory overhead....................................................................... 3,800
Total cost in beginning inventory.................................... $ 24,075
Cost added during current period:
Materials ..................................................................................... $ 68,625 3,850 $22.48
Labor........................................................................................... 14,756 3,640 4.70
Factory overhead....................................................................... 29,996 3,550 9.52
Total cost added during current period............................ $113,377
Total cost charged to department .................................................. $137,452 $36.70
%
Cost Accounted for as Follows Units Complete Unit Cost Total Cost
Transferred to Assembling Department 3,400 100% $36.70 $124,780
Work in Process, ending inventory:
Materials ............................................ 600 75% $22.48 $10,116
Labor .................................................. 600 40% 4.70 1,128
Factory overhead .............................. 600 25% 9.52 1,428 12,672
Total cost accounted for ........................ $137,452
*Total number of equivalent units required in the cost accounted for section determined as follows:
Materials Labor Overhead
Equivalent units transferred out ............ 3,400 3,400 3,400
Equivalent units in ending inventory .... 450 240 150
Total equivalent units.............................. 3,850 3,640 3,550
** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section
DISCUSSION QUESTIONS
Q6-1. The basic objective of process costing is to (h) Process, unless different fabrics are used
determine the costs of the products manufac- for different models, in which case the
tured by the company. Determining the cost of conversion costs may be accounted for
the products manufactured is necessary in using process, but the materials using job
order to properly cost ending inventories for order
external reporting purposes (i.e., reporting to Q6-4. Three product flow formats are: sequential,
creditors and owners of the company, the parallel, and selective.
SEC, and the IRS) and to evaluate the prof- Sequential means that the product flows or is
itability of the manufacturing activity. In order manufactured in an unchanging fixed set of
to cost products, the costs must be deter- operations, going from one department to the
mined for materials, labor, and factory over- next.
head used to process each unit of product Parallel means that certain operational
through each department. phases take place simultaneously in other
Q6-2. The products manufactured within a depart- departments and the partially completed units
ment (or cost center) during the period can be or parts are brought together in subsequent
heterogeneous if job order costing is used, departments.
but must be homogeneous if process costing Selective refers to the fact that a product does
is used. In job order costing, products are not necessarily move through every depart-
accounted for in batches. The cost of each ment. Depending upon the character or shape
unit of product manufactured on a job is deter- of the final product, different departments are
mined by dividing the total cost charged to the engaged in completing the desired product.
job by the number of units produced on the Q6-5. Materials Costs—In job order costing, materi-
job. Since the manufacturing cost of each job als requisitions are used and charges are
is accounted for separately, accurate and made to jobs; in process costing, charges for
useful product cost can be determined even materials issued to production are made to
when the products manufactured on different departments, with infrequent use of materials
jobs are substantially different. By contrast, in requisitions.
process costing, all manufacturing costs are Labor Costs—Time tickets are used in job
charged to the department, and the unit cost order costing to accumulate labor costs for
is determined by dividing the cost charged to each job; in process costing, labor costs are
the department by the number of units pro- charged to departments, and, therefore,
duced. As a consequence, the units of prod- detailed time records are not necessary.
uct manufactured within a department must Factory Overhead—Job order costing
be essentially alike in order for the cost allo- requires the use of predetermined rates for
cated to each unit to be meaningful (i.e., to charging overhead to jobs; in process costing,
reasonably reflect the actual cost of the actual overhead may be used. (However, pre-
resources used to manufacture the product). determined rates are often used in order to
Q6-3. (a) Process smooth overhead that is not incurred at the
(b) Process, unless significantly different same rate as production activity.)
models are manufactured Summarizing Costs—A job order cost sheet is
(c) Process used to accumulate the costs of an order in job
(d) Job order order costing; a cost of production report is
(e) Process used in process costing. In job order costing,
(f) Process costs are summarized on completion of the
(g) Job order job; in process costing, costs charged to the
6-1
,6-2 Chapter 6
department and costs accounted for are sum- products, prepare journal entries to record the
marized in the cost of production report each transfer of costs between departments, and
month (or sometimes each week). control costs.
Q6-6. Predetermined overhead rates can and Q6-8. The sections commonly found in a cost of pro-
should be used if the pattern of overhead cost duction report are: (a) a quantity schedule
incurrence does not follow the pattern of pro- indicating the source and disposition of the
duction activity. Some items of overhead are units of product, (b) a cost charged to the
fixed and not responsive to changes in produc- department section, indicating the cost in total
tion activity. If production volume varies each and per unit for the cost transferred in from
month, then predetermined overhead rates the preceding department, as well as materi-
should be used. Some items of overhead are als, labor and overhead charged to the
incurred only at certain times during the year, department, and (c) a cost accounted for sec-
but benefit production throughout the year tion indicating the amount of cost assigned to
(e.g., payroll taxes, insurance, property taxes, the units transferred out of the department, as
vacation pay, etc.). These items can be well as the cost of ending inventory.
recorded as prepaid expenses and amortized Q6-9. Separate departmental cost of production
uniformly to each month if actual overhead is reports are used to accumulate costs more
charged to production. Alternatively, estimates accurately and to provide more detailed data
of such costs can be included in the predeter- for cost control purposes than a plant-wide
mined overhead rate, and the actual cost cost of production report could provide. In
charged to overhead when incurred. The use some cases (e.g., a manufacturing plant that
of predetermined rates is often simpler than has a selective production flow for its prod-
the allocation of actual costs because a single ucts), a plant-wide cost of production report
predetermined rate requires only one over- cannot be used.
head charge to each department each month. Q6-10. An equivalent unit of production is the amount
In contrast, the capitalization and amortiza- of a resource (e.g., materials, labor, or over-
tion of each item of actual overhead would head) that would be required to complete one
require numerous charges each month. unit of the product with respect to the cost ele-
Q6-7. A cost of production report is an effective ment being considered. The total number of
monthly (or weekly) summary of the cost of equivalent units, with respect to a particular
materials, labor, and overhead consumed by element of cost, represents the number of
each department or cost center, along with a units of the product that could have been
record of the quantity of products manufactured. completed with the resources used during the
It provides information necessary to cost period.
,Chapter 6 6-3
EXERCISES
E6-1
(1) Cost from
Preceding Factory
Department Materials Labor Overhead
Equivalent units transferred out ................. 20,000 20,000 20,000 20,000
Equivalent units in ending inventory:
Cost from preceding department
(100% × 5,000) ................................ 5,000
Materials (100% × 5,000) .................... 5,000
Labor (80% × 5,000) .............................. 4,000
Factory overhead (60% × 5,000) ......... 3,000
Total equivalent units................................... 25,000 25,000 24,000 23,000
(2) Cost from
Preceding Factory
Department Materials Labor Overhead
Cost in beginning inventory........................ 0 0 0 0
Cost added during current period .............. $40,000 $15,000 $ 9,600 $16,330
Total cost to be accounted for .................... $40,000 $15,000 $ 9,600 $16,330
Divided by total equivalent units ................ 25,000 25,000 24,000 23,000
Cost per equivalent unit .............................. $ 1.60 $ .60 $ .40 $ .71
E6-2
Work in Process—Department X ............................................. 50,000
Work in Process—Department Y ............................................. 40,000
Materials ........................................................................ 90,000
Work in Process—Department X ............................................. 80,000
Work in Process—Department Y ............................................. 70,000
Payroll ............................................................................ 150,000
Work in Process—Department X ............................................. 180,000
Work in Process—Department Y ............................................. 70,000
Factory Overhead ........................................................ 250,000
Work in Process—Department Y ............................................. 300,000
Work in Process—Department X ................................ 300,000
Finished Goods Inventory........................................................ 448,000
Work in Process—Department Y................................. 448,000
, 6-4 Chapter 6
E6-3 Tyndol Fabricators Inc.
Cutting and Forming Department
Cost of Production Report
For November
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 800
Started in process this period ............... 3,200
4,000
Transferred to Assembling Department 3,400
Ending Inventory ..................................... 75% 40% 25% 600
4,000
Cost Charged to Department Total Equivalent Unit
Beginning inventory: Cost Units* Cost**
Materials ..................................................................................... $ 17,923
Labor .......................................................................................... 2,352
Factory overhead....................................................................... 3,800
Total cost in beginning inventory.................................... $ 24,075
Cost added during current period:
Materials ..................................................................................... $ 68,625 3,850 $22.48
Labor........................................................................................... 14,756 3,640 4.70
Factory overhead....................................................................... 29,996 3,550 9.52
Total cost added during current period............................ $113,377
Total cost charged to department .................................................. $137,452 $36.70
%
Cost Accounted for as Follows Units Complete Unit Cost Total Cost
Transferred to Assembling Department 3,400 100% $36.70 $124,780
Work in Process, ending inventory:
Materials ............................................ 600 75% $22.48 $10,116
Labor .................................................. 600 40% 4.70 1,128
Factory overhead .............................. 600 25% 9.52 1,428 12,672
Total cost accounted for ........................ $137,452
*Total number of equivalent units required in the cost accounted for section determined as follows:
Materials Labor Overhead
Equivalent units transferred out ............ 3,400 3,400 3,400
Equivalent units in ending inventory .... 450 240 150
Total equivalent units.............................. 3,850 3,640 3,550
** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section
