CHAPTER 18

PROCESS COSTING

OVERVIEW OF EXERCISES, PROBLEMS, CASES,

AND INTERNET ASSIGNMENTS
Learning
Exercises Topic Objectives Characteristics
18–1 Terminology 1, 2, 3, 6 Conceptual
18–2 Cost flows in an accounting system 2 Conceptual
18–3 Matching cost systems and business 1 Conceptual
activities
18–4 Equivalent units 2, 3 Mechanical
18–5 Process costing: journal entries 2, 3, 4, 5 Conceptual, mechanical
18–6 Production cost report 6 Mechanical
18–7 Costs and equivalent units 2, 3, 4, 5, 6 Mechanical

Problems
18–1 Calculating equivalent units 2, 3 Mechanical
18–2 Computing and using unit cost 2, 3, 4, 5 Mechanical, analytical
18–3 Production cost report 6 Mechanical
18–4 Process costing 2, 3, 4, 5, Conceptual, mechanical,
analytical
18–5 Process costing 2, 3, 4, 5 Conceptual, mechanical,
analytical
18–6 Calculate cost per equivalent unit 2, 3, 4 Mechanical
18–7 Production cost report 5, 6 Mechanical, analytical

Cases
18–1 Meeting management’s needs 1, 2, 3 Analytical, group

Business Week
Assignment
18–2 Business Week assignment: Cost 1 Conceptual, writing
Systems
Internet
Assignment
18–1 Manufacturing processes 1, 2 Conceptual, group
18–2 Physical and cost flows 1, 2 Conceptual, ethics

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DESCRIPTIONS OF PROBLEMS, CASES,
AND INTERNET ASSIGNMENTS
Below are brief descriptions of each problem, case, and the Internet assignments. These descriptions are
accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time
estimates assume use of the partially filled-in working papers.

Problems
18–1 Superior Lighting, Inc. 20 Easy
Compute equivalent units for two consecutive months with three categories of
inputs and beginning and ending work in process.

18–2 Sun Appliance 20 Easy

Compute per-unit costs of products and processes. Assess the usefulness of
these costs for managers.

18–3 Sun Appliance (again) 30 Medium

Produce a cost of production report based on information in 18-2.

18–4 Great Oak Furniture 35 Medium

This is a comprehensive process costing problem in which the student must
follow the flow of costs through two processing departments. Calculations
include equivalent units and production costs per unit. T-accounts are used to
determine ending balances in various inventory accounts.

18–5 Toll House 30 Medium

A process cost problem involving three processes and an explanation of the
usefulness of different unit costs. Does not include equivalent unit calculations.

18–6 Badgersize Co. 35 Medium

Determine the cost per equivalent unit with partially complete beginning and
ending work in process.

18–7 Badgersize Co. (again) 35 Medium

Prepare a production cost report using the information from problem 18-6.

84 © The McGraw-Hill Companies, Inc., 2005

Cases
18–1 Shouldn’t We Do Things Differently? 30 Strong
Students are to evaluate recommendations for changing a company’s cost
accounting methods. Requires judgment and perspective. Very challenging—
best as a group assignment to be discussed in class.

Business Week Assignment

18–2 Business Week Assignment: General Mills vs. Kellogg 20 Medium
Students write a paragraph explaining how costing systems can help Kellogg
compete with General Mills with promotion of cereals such as Special K.

Internet Assignments
18–1 The Wrigley Company 30 Medium
The student is asked to read a description of a simple production process and
prepare a flowchart of activities. The student is then asked how process
departments might be set up under a process costing system. Finally, possible
overhead sources and activity bases are to be considered.

18–2 Coca Cola Company 25 Easy

Students take a virtual tour of a Coca Cola plant and identify physical flows and
cost flows.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 85
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1. Cost accounting systems are chosen by enterprises to track resources consumed in the production and
delivery of products and services to customers. Mangers choose systems that best match the processes
used to create and deliver products and services.
2. Cost accounting systems: 1) provide employees with information useful in managing activities that
consume resources, 2) furnish managers with information to evaluate and reward performance, and 3)
provide information necessary for external reporting requirements such as inventory valuations and
cost of goods sold. Multiple cost systems are used in different parts of the organization for different
processes and needs of management.
3. Whether a manufacturing company should use job order costing or process costing depends upon the
nature of the company’s manufacturing operations. Job order costing is used when each unit of
product (or batch of products) has unique characteristics that may affect its manufacturing cost. The
unique product (or batch of products) is called a job, and the costs of completing each job are
accumulated separately. Thus, this method recognizes the fact that the cost of one job may differ
significantly from the cost of another.
If all of the manufactured units are essentially identical, it is neither practical nor necessary to measure
the cost of each unit or of small batches of units. Thus, companies that produce a “steady stream” of
nearly identical units, with each unit passing through the same manufacturing process, use process
costing. In process costing, the cost of performing the manufacturing process is determined for a period
of time. The cost per unit of product is then determined by dividing the cost of performing the
manufacturing process by the number of units processed during the period. Assigning the same
“average cost” to each unit produced is appropriate, as the units are essentially identical.
A company may use job order costing in accounting for some of its products and process costing in
accounting for others.
4. Northwest Power probably uses process costing. The company produces a steady stream of identical
units of product (kilowatts of electric power) and all of these units of product are produced by the same
manufacturing process. It would not be feasible to measure separately the cost of producing each
kilowatt or even small “batches” of kilowatts. Therefore, the company will determine the cost of its
manufacturing process for a period of time. The unit cost per kilowatt of electricity then can be
determined by dividing the cost of performing the manufacturing process by the number of kilowatts
produced.
5. Rodeo Drive Jewelers would use job order costing, as each product manufactured is unique.
6. Several answers are possible. Some suggestions include automobiles, office furniture, stereo
equipment, computer equipment, building supplies, etc. These products contain components that are
likely to be created by mass production of identical units and then customized to particular
specifications.
7. A production cost report summarizes the physical flows and related cost flows through a process
during a specific period of time. Managers use the production cost report to control cost and evaluate
the efficiency of their processes.
8. The four significant parts of production cost report are 1) identification of the physical inputs and
outputs, 2) calculation of the equivalent units of work completed, 3) calculation of cost per equivalent
unit, and 4) assigning total cost to production for the period.

86 © The McGraw-Hill Companies, Inc., 2005

 9. Job order concepts are more appropriate than process cost concepts to the operations of a law firm. The
law firm should view each client as a separate “job,” as the work done for each client is somewhat
unique, and the costs of the services rendered may vary greatly from one client to the next.
10. In process costing, the costs of performing each manufacturing process are accumulated separately for
the accounting period. The cost per unit of product is then determined by dividing the total cost of
performing the manufacturing process by the number of units processed during the accounting period.
If units of product pass through several manufacturing processes, the total cost of finished units is
determined by combining the unit costs of each process in the units’ manufacture.
This method results in assigning the same “average unit cost” to each unit produced during the
accounting period. This is appropriate, however, because process costing is used only when the units
processed are essentially identical, at least with respect to cost. (Note to instructor: Units may vary in
ways that do not have a significant effect upon manufacturing costs. For example, units might differ as
to color or flavor and yet be “essentially identical” with respect to the cost and process of
manufacture.)
11. In many situations, assigning the entire cost of production to units completed and transferred during
the month is a reasonable practice, even if partially complete units remain in process at the end of the
month. The practice is reasonable when the number of units in process at the end of each month is
insignificant relative to the total units processed during the entire month.
12. The costs included in the $100,000 transferred to the third work in process department would include:
(a) the direct materials, direct labor, and manufacturing overhead costs transferred to the second
processing department from the first, and (b) the additional direct materials, direct labor, and
manufacturing overhead costs incurred by the second processing department.
13. Managers use information obtained from process costing to value inventories, determine the cost of
goods sold, evaluate the production efficiency of each of its processing departments, eliminate waste,
forecast future costs, and set selling prices.
14. Equivalent units are a measure of work done during the period, including work performed on units that
were partially complete at the beginning or end of the period. The idea is that performing, say, 40% of
the work on 100 units is “equivalent” to fully processing 40 units.
In a fast-paced assembly line, units are processed very quickly. Only those units actually on the
assembly line at month-end are “in process.” Thus, the number of units in process at month-end usually
is insignificant in relation to the total number of units completed during the period. When work in
process is immaterial (or does not vary in cost from the beginning to the end of the period), the
equivalent units do not vary significantly from the number of units completed.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 87
 SOLUTIONS TO EXERCISES

Ex. 18–1 a. Process costing

b. Conversion costs
c. Equivalent units
d. Production cost report
e. Job order costing

Ex. 18–2 a. (1) Materials Inventory ................................................................... XXX

Accounts Payable ........................................................... XXX
To record the purchase of direct materials.
(2) Work in Process Inventory ....................................................... XXX
Materials Inventory ....................................................... XXX
To record cost of direct materials used.

b. (1) Direct Labor ............................................................................... XXX

Cash................................................................................. XXX
To record factory payroll paid to direct workers.
(2) Work in Process Inventory ....................................................... XXX
Direct Labor ................................................................... XXX
To record cost of direct labor applied to production of the
period.

c. (1) Manufacturing Overhead ......................................................... XXX

Cash (or Accounts Payable) .......................................... XXX
To record factory overhead cost (such as payroll for
indirect labor) incurred.
(2) Work in Process Inventory ....................................................... XXX
Manufacturing Overhead.............................................. XXX
To record factory overhead costs applied to production of
the period.

d. (1) Finished Goods Inventory ......................................................... XXX

Work in Process Inventory ........................................... XXX
To record transfer of cost of completed goods to the
Finished Goods Inventory account.
(2) Cost of Goods Sold..................................................................... XXX
Finished Goods Inventory ............................................. XXX
To record cost of goods sold.

88 © The McGraw-Hill Companies, Inc., 2005

Ex. 18–3 a. 1 and 3: A law firm is likely to use job order costing and could benefit from activity
based costing.

b. 3: Retail establishments do not make their own products and thus do not use either job
order or process costing methods. However, activity based costing would help
Wal-Mart track their overhead costs to stores, types of products and supplier related
costs.

c. 2 and 3: Johnson & Johnson makes many different types of products, but each of those
products is mass produced and unit cost would be determined with process costing
methods.

d. 1: Handyman Special, Inc. probably does odd jobs for home owners and would benefit
from a job order costing system. It is not clear whether activity based costing would be
beneficial.

e. 1, 2 and 3: Carpet Makers manufactures large amounts of carpeting, in batches of

identical units. Thus, they are likely to use process costing within the batch and job
order costing between batches. Activity based costing should be helpful in tracking
various types of overhead to individual jobs.

Ex. 18–4 a. Equivalent Units Produced in January

Direct Materials Labor and Overhead

Beg. Work in Process 0 0
Started & Completed1 150 150
End. Work in Process 50 20 (50 × .4)
Total Equivalent Units 200 170

b. Equivalent Units Produced in February

Direct Materials Labor and Overhead

30 (50 × .6)
2
Beg. Work in Process 0
Started & Completed1 200 200
End. Work in Process 100 75 (100 × .75)
Total Equivalent Units 300 305
1
Number of units started and completed:
Jan. Feb.
Units transferred to finished goods................................................. 150 250
Less: Units in beginning work in process....................................... (0) (50)
Units started and completed........................................................ 150 200
2
Note: The units in beginning work in process in February were already complete with
respect to direct materials, but required 60% of the necessary labor and overhead to
finish them.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 89
Ex. 18–5 a. Work in Process Inventory............................................................... 159,000
Direct Materials.................................................................... 89,750
Direct Labor.......................................................................... 28,975
Manufacturing Overhead .................................................... 40,275
To record the costs applied to production during June.

b. Finish Goods Inventory ................................................................... 159,000

Work in Process Inventory.................................................. 159,000
To record the transfer of 13,250 completed units to finished
goods during June at a unit cost of $12 ($159,000 ÷
13,250 units).

c. Accounts Receivable......................................................................... 250,000

Sales ....................................................................................... 250,000
To record the sale of 10,000 units in June at $25 per unit.

Cost of Goods Sold ........................................................................... 120,000

Finished Goods Inventory ................................................... 120,000
To record the cost of the 10,000 units sold in June at a unit cost
of $12.

90 © The McGraw-Hill Companies, Inc., 2005

Ex. 18-6
Shamrock Industries
Product Cost Report
For the month of June
Part I. Physical Flow Total Units
Inputs:
• Beginning WIP -0-
• Started 13,250
Units to account for: 13,250
Outputs:
• Units completed 13,250
• Ending WIP -0-
Units accounted for: 13,250
Part II. Equivalent Units Direct Materials Conversion Costs
Based on monthly input:
• Beginning WIP -0- -0-
• Units started 13,250 13,250
Equivalent units of input 13,250 13,250
Based on monthly output:
• Units completed 13,250 13,250
• Ending WIP -0- -0-
Equivalent units of output 13,250 13,250
Part III. Cost Per Equivalent Unit Total Unit Cost Direct Materials Conversion Costs
Input costs $89,750 $69,250
Divide by equivalent units ÷13,250 ÷13,250
Costs per equivalent unit $12.00 $6.77 $5.23
Part IV. Total Cost Assignment Total Costs Direct Materials Conversion Costs
Costs to account for:
• Cost of beginning WIP $ -0-
• Cost added during the period 159,000
Total cost to account for $159,000
Costs accounted for:
• Cost of goods transferred
Beginning WIP last period $ -0- $ -0- $ -0-
Beginning WIP this period -0- -0- -0-
Started and completed 159,000 89,750a 69,250b
Total cost transferred $159,000 $89,750 $69,250
• Add ending WIP -0- -0- -0-
Total cost accounted for $159,000 $89,750 $69,250
a
13,250 EU @ $6.77 = $89,750
b
13,250 EU @ $5.23 = $69,250
*Students may have rounding errors.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 91
Ex. 18–7 a. Equivalent full units of production:

March April
Beg. WIP 4,900 (7,000 × .7) 1,920 (4,800 × .4)
Started & Completed 11,500 (18,500 – 7,000) 18,200 (23,000 – 4,800)
End. WIP 2,880 (4,800 × .6) 2,240 (6,400 × .35)
Total Equivalent Units 19,280 22,360

b. March April
Total manufacturing costs .................................................. $ 6,979,360 $ 7,781,280
÷ Equivalent units produced .......................................... ÷ 19,280 ÷ 22,360
Total manufacturing cost per equivalent unit .............. $ 362 $ 348
Thus, manufacturing costs per equivalent unit decreased between March and April.

c. March April
Direct Materials costs.......................................................... $ 978,460 $ 1,168,310
÷ Equivalent units produced .......................................... ÷ 19,280 ÷ 22,360
Total direct materials cost per equivalent unit............. $ 50.75 $ 52.25
Thus, direct materials cost per equivalent unit increased between March and April.

92 © The McGraw-Hill Companies, Inc., 2005

 SOLUTIONS TO PROBLEMS
20 Minutes, Easy PROBLEM 18–1
SUPERIOR LIGHTING

a. Equivalent Units Produced in June

Body Materials Wiring Materials Labor & Overhead

Beg. WIP 0 0 170 (850 × .2)
Started & Completed 2,650 2,650 2,650
End. WIP 1,200 0 360 (1,200 × .3)
Total Eq. Units 3,850 2,650 3,180

Note: Since the units in beginning work in process were 80% complete, no body or
wiring materials were needed to complete them. However, 20% of the labor and over-
head was required to finish these units. Similarly, since the units in ending work in
process were 30% complete, all of the body materials had been added but none of the
wiring materials had yet been added. Also, 30% of the labor and overhead had been
added to the ending WIP units.

b. Equivalent Units Produced in July

Body Materials Wiring Materials Labor & Overhead

Beg. WIP 0 1,200 840 (1,200 × .7)
Started & Completed 2,100 2,100 2,100
End. WIP 900 900 540 (900 × .6)
Total Eq. Units 3,000 4,200 3,480

Note: Since the units in beginning work in process were 30% complete, only wiring
materials were required to complete them (the body materials had been added in
June). However, 70% of the labor and overhead was required to finish these units.
Similarly, since the units in ending work in process were 60% complete, all the body
and wiring materials had been added, while 60% of the labor and overhead had been
added.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 93
20 Minutes, Easy PROBLEM 18–2
SUN APPLIANCE

a. (1) $45 [($150,000 + $12,000 + $18,000) ÷ 4,000 units]

(2) $30 [($96,000 + $18,000 + $6,000) ÷ 4,000 units]
(3) $75 ($45 + $30)
(4) $37.50 ($150,000 ÷ 4,000 units)
(5) $4.50 ($18,000 ÷ 4,000 units)

b. In evaluating the overall efficiency of the motor department, management would look
at the monthly per-unit cost incurred by that department, which is the cost of
assembling and installing a motor ($30 in part a).

94 © The McGraw-Hill Companies, Inc., 2005

30 Minutes, Medium PROBLEM 18–3
SUN APPLIANCE

Part I. Physical Flow Total Units

Inputs:
• Beginning WIP -0-
• Started 4,000
Dishwashers to account for: 4,000
Outputs:
• Units completed 4,000
• Ending WIP -0-
Dishwashers accounted for: 4,000
Part II. Equivalent Units Direct Materials Conversion Costs
Based on monthly input:
• Beginning WIP -0- -0-
• Units started 4,000 4,000
Equivalent units of input 4,000 4,000
Based on monthly output:
• Units completed 4,000 4,000
• Ending WIP -0- -0-
Equivalent units of output 4,000 4,000
Part III. Cost Per Equivalent Unit Total Unit Cost Direct Materials Conversion Costs
Materials from Tub Department $180,000
Materials from Motor Department 96,000
TOTAL $276,000 $24,000
Divide by equivalent units ÷4,000 ÷4,000
Costs per equivalent unit $75.00 $69.00 $6.00
Part IV. Total Cost Assignment Total Costs Direct Materials Conversion Costs
Costs to account for:
• Cost of beginning WIP $ -0-
• Cost added during the period 300,000
Total cost to account for $300,000
Costs accounted for:
• Cost of goods transferred
Beginning WIP last period $ -0- $ -0- $ -0-
Beginning WIP this period -0- -0- -0-
Started and completed 300,000 276,000a 24,000b
Total cost transferred $300,000 $276,000 $24,000
• Add ending WIP -0- -0- -0-
Total cost accounted for $300,000 $276,000 $24,000
a
4,000 EU @ $69.00 = $276,000
b
4,000 EU @ $6.00 = $24,000

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 95
35 Minutes, Medium PROBLEM 18–4
GREAT OAK FURNITURE

a. Equivalent units of production—Assembly Department

Direct Materials Labor Overhead

Beg. WIP 0 0 0
Started & Completed 575 575 575
End. WIP 175 70 (175 × .4) 70 (175 × .4)
Total Eq. Units 750 645 645

Equivalent units of production—Finishing Department

Direct Materials Labor Overhead

Beg. WIP 0 0 0
Started & Completed 435 435 435
End. WIP 140 28 (140 × .2)1 84 (140 × .6)
Total Eq. Units 575 463 519
1
Note: Since direct labor is added evenly over the last half of the finishing process, the units in
ending work in process, which are 60% complete, are only 20% complete with respect to labor.

b.

Assembly costs per rocking chair produced during January:

Direct material costs ($29,025/750 eq. units) $ 3 8 70
Direct labor costs ($11,610/645 eq. units) 1 8 00
Manufacturing overhead ($14,190/645 eq. units) 2 2 00
Assembly cost per chair $ 7 8 70

Finishing costs per rocking chair produced during January:

Direct material costs ($7,760/575 eq. units) $ 1 3 50
Direct labor costs ($15,580/463 eq. units) 3 3 65
Manufacturing overhead ($6,228/519 eq. units) 1 2 00
Finishing cost per chair $ 5 9 15

Total cost per rocking chair ($78.70 + $59.15) $ 1 3 7 85

96 © The McGraw-Hill Companies, Inc., 2005

 PROBLEM 18–4
GREAT OAK FURNITURE (continued)

c. Work in Process: Assembly Department 5 4 8 2 5

Materials Inventory 2 9 0 2 5
Direct Labor 1 1 6 1 0
Manufacturing Overhead 1 4 1 9 0
Summary of costs incurred by the Assembly Department
in January.

Work in Process: Finishing Department 2 9 5 6 8

Materials Inventory 7 7 6 0
Direct Labor 1 5 5 8 0
Manufacturing Overhead 6 2 2 8
Summary of costs incurred by the Finishing Department
in January.

d. WIP—Finishing (575 units transferred out × $78.70 cost/unit) 4 5 2 5 3

WIP—Assembly 4 5 2 5 3
To transfer costs of completely processed units from the
Assembly Dept. to the Finishing Dept.

Finished Goods Inventory (435 units transferred out

× $137.85 cost/unit) 5 9 9 6 5
WIP—Finishing 5 9 9 6 5
To transfer costs of completely processed units from the
Finishing Dept. to Finished Goods Inventory.

e. Sales Revenue (400 units sold × $220/unit) 8 8 0 0 0

Cash, Accounts Receivable 8 8 0 0 0
To record sales made during January.

Cost of Goods Sold (400 units sold × $137.85 cost/unit) 5 5 1 4 0

Finished Goods Inventory 5 5 1 4 0
To record the cost of goods sold during January.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 97
 PROBLEM 18–4
GREAT OAK FURNITURE (concluded)

f.
Work in Process—Assembly
Direct Materials 29,025
Direct Labor 11,610
MO-applied 14,190 45,253 Transferred to Finishing
Ending Balance 9,572

Work in Process—Finishing
From Assembly 45,253
Direct Materials 7,760
Direct Labor 15,580
MO-applied 6,228 59,965 Transferred to Finished
Ending Balance 14,856 Goods Inventory

Finished Goods Inventory

From Finishing 59,965
55,140 Cost of Goods Sold
Ending Balance 4,825

98 © The McGraw-Hill Companies, Inc., 2005

30 Minutes, Medium PROBLEM 18–5
TOLL HOUSE

a. Work in Process: Mixing Dept. 1 2 6 0 0

Materials Inventory 3 6 0 0
Direct Labor 3 0 0 0
Manufacturing Overhead 6 0 0 0
Summary of costs incurred in mixing 14,000 lb. of cookie
dough in May. Cost per lb., $0.90 ($12,600 ÷ 14,000 lb.).

b.
May 31 Work in Process: Baking Dept. 1 2 6 0 0
Work in Process: Mixing Dept. 1 2 6 0 0
To record transfer of 14,000 lb. of cookie dough to the baking
dept. during May.

c. Work in Process: Baking Dept. 1 3 8 0 0

Direct Labor 1 8 0 0
Manufacturing Overhead 1 2 0 0 0
Summary of costs incurred in baking department in baking
4,000 gross of cookies in May. Cost per gross, $3.45
($13,800 ÷ 4,000 gross).

d.
May 31 Work in Process: Packaging Dept. 2 6 4 0 0
Work in Process: Baking Dept. 2 6 4 0 0
To transfer cost of 4,000 gross of cookies sent to the packaging
department in May.

e. Work in Process: Packaging Dept. 4 3 2 0

Materials Inventory 1 0 2 0
Direct Labor 2 1 0 0
Manufacturing Overhead 1 2 0 0
To summarize packaging department’s costs in packaging
48,000 boxes of cookies. Cost per box, $0.09
($4,320 ÷ 48,000 boxes).

f.
May 31 Finished Goods Inventory 3 0 7 2 0
Work in Process: Packaging Dept. 3 0 7 2 0
To record the completion of 48,000 boxes of cookies in May.
Cost per box, $0.64 ($30,720 ÷ 48,000 boxes).

g. Management will use the unit costs appearing in entries a, c, and e, in separately evaluating the effi-
ciency of the three production departments during May. The cost per box appearing in entry f is
used in valuing inventory and in recording the cost of goods sold. Also, the overall cost per box may
be used in pricing decisions.

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35 Minutes, Medium PROBLEM 18–6
BADGERSIZE COMPANY

a. The equivalent units are computed as follows:

Direct Materials Conversion

1. Beginning WIP (20% at start of
0 20,000 units × 80% = 16,000
period)
2. Started and Completed (Transferred –
40,000 40,000
Beg. WIP = 60,000 – 20,000 = 40,000)
3. Ending WIP (70%)
(Beg. WIP + Started – Ending WIP = 10,000 7,000
20,000 + 50,000 – 60,000 = 10,000)
TOTAL EQUIVALENT
50,000 63,000
UNITS FOR AUGUST

b. The total cost per equivalent unit is as follows:

Direct Materials = $150,000 ÷ 50,000 equivalent units = $3.00 per equivalent unit
Conversion = ($120,000 + $145,000) ÷ 63,000 equivalent units = $4.206
Total cost per equivalent unit = $3.00 + $4.21 = $7.21

100 © The McGraw-Hill Companies, Inc., 2005

35 Minutes, Medium PROBLEM 18–7
BADGERSIZE COMPANY

a. Production Cost Report

Forming Department, Month of August
Part I. Physical Flow Total Units
Inputs:
• Beginning WIP 20,000
• Started 50,000
Units to account for: 70,000
Outputs:
• Units completed 60,000
• Ending WIP 10,000
Units accounted for: 70,000
Part II. Equivalent Units Direct Materials Conversion Costs
Based on monthly input:
• Beginning WIP -0- 16,000
• Units started 50,000 47,000
Equivalent units of input 50,000 63,000
Based on monthly output:
• Units completed 40,000 56,000
• Ending WIP 10,000 7,000
Equivalent units of output 50,000 63,000
Part III. Cost Per Equivalent Unit Total Unit Cost Direct Materials Conversion Costs
Input costs $150,000 $265,000
Divide by equivalent units ÷50,000 ÷63,000
Costs per equivalent unit $7.206 $3.00 4.206
Part IV. Total Cost Assignment Total Costs Direct Materials Conversion Costs
Costs to account for:
• Cost of beginning WIP $104,000
• Cost added during the period 415,000
Total cost to account for $519,000
Costs accounted for:
• Cost of goods transferred
Beginning WIP last period $104,000 $ 80,000 $ 24,000
Beginning WIP this period 67,296 -0- 67,296a
Started and completed 288,240 120,000b 168,240c
Total cost transferred $459,536 $200,000 $259,536
• Add ending WIP 59,442 30,000d $ 29,442e*
Total cost accounted for $518,978* $230,000 $288,978*
* Rounding error
a
16,000 EU @ $4.206 = $67,296
b
40,000 EU @ $3.00 = $120,000
c
40,000 EU @ $4.206 = $168,240
d
10,000 EU @ $3.00 = $30,000
e
7,000 EU @ $4.206 = $29,442

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 101
 PROBLEM 18–7
BADGERSIZE COMPANY (continued)

b.

Management can compare production cost reports from month to month to help control costs and
assess efficiency of their processes. For example, the equivalent units can be tracked over time to
understand and evaluate capacity utilization. In addition, the cost per equivalent unit can be
evaluated over time to determine if costs are out of control for either direct materials or conversion
costs. For example, if material costs are rising per equivalent unit over time, management could
investigate if suppliers are charging more or if the production process is creating more scrap and
waste and needs to be adjusted.

102 © The McGraw-Hill Companies, Inc., 2005

 SOLUTIONS TO CASES
30 Minutes, Strong CASE 18–1
SHOULDN’T WE DO THINGS DIFFERENTLY

Mr. Brown:
Thank you for your recent memo. I am glad to see that you have become familiar with our cost
accounting methods and have constructive suggestions. You are correct that we could use job order
costing and, also, that we could base our unit cost computations upon equivalent units, rather than
upon units completed. But let me explain briefly why we are currently doing what we do.
I will first address our use of process costing. It is true that our beer is brewed in batches, which could
be identified as jobs. But once the beer is bottled, the concept of the batch becomes insignificant. As
we produce only one line of beer, we would not charge a different price nor record a different cost of
goods sold based upon the batch from which particular bottles came. Thus, information about the
costs of different batches would serve little purpose. What we really need is information about the
per-unit cost of various brewing processes. This enables us to quickly identify the causes of changes in
our total unit cost.
Next, we assign all manufacturing costs to units completed during the period because it is more
convenient than computing equivalent units, and produces essentially the same results. If you compute
our equivalent units, you will find this measurement to be nearly identical to the number of bottles
produced.
Given that we have a substantial amount of work in process in our fermenting tanks, you may ask,
Why? The answer is that we always have the same quantity of beer in our fermenting tanks. As the
amount of our work in process does not change from month to month, our productive effort is essen-
tially equivalent to the amount of finished product coming off our bottling line.
Please do not be discouraged by my response to your suggestions. You are observant and have ideas—
that’s what we need from our cost analysts. If we begin brewing a variety of specialty beers, we may
well adopt your suggestion of job order costing.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 103
20 Minutes, Medium CASE 18–2
BUSINESS WEEK ASSIGNMENT:
GENERAL MILLS VERSUS KELLOGG CO.

Student answers will vary, however, they should center around the management accounting
framework developed in chapter 16. That framework consists of the role of management accounting
in allocating decision making authority, providing information for decision making and evaluating
decisions made. Responses are likely to focus on the second and third parts of the framework,
providing information for decision making and decision evaluation. Decisions about which product to
produce and which to market all require specific information about product profitability. To calculate
profitability, costs are subtracted from revenues. Thus, the cost information provided by the process
costing system will help managers know which products are more profitable. In addition, the process
cost information can be used to evaluate and control costs as production occurs.

104 © The McGraw-Hill Companies, Inc., 2005

 SOLUTION TO INTERNET ASSIGNMENTS
30 Minutes, Medium INTERNET 18–1
THE WRIGLEY COMPANY

a. A sample flowchart of the activities involved in manufacturing chewing gum could be constructed
as follows:

Grinding

↓
Filtering

↓
Mixing

↓
Rolling

↓
Scoring

↓
Conditioning

↓
Wrapping

↓
Packing

b. One configuration of processing departments could include a “Production Department” and a

“Finishing Department.” The Production Department would handle the activities of grinding,
filtering, mixing, rolling, and scoring. The Finishing Department would handle conditioning,
wrapping, and packing activities. Other configurations may also be acceptable.

c. Major overhead costs at Wrigley might include the cost of maintaining the various machines in-
volved in production and packaging, and the costs of factory space. Machine hours and square
feet of factory space could be used to assign these overhead costs to processing departments.

Solutions Manual Vol. II, Financial and Managerial Accounting 13/e, Williams et al 105
25 Minutes, Easy INTERNET 18–2
PROCESSES AND PRODUCT COSTS
AT COCA COLA

a. There are 10 steps in the process for the virtual plant tour: 1) ingredient delivery, 2) washing and
rinsing, 3) mixing and blending, 4) filling, 5) capping, 6) labeling, 7) coding, 8) inspection, 9)
packaging, 10) warehouse and delivery.

b. The composition of conversion costs for the virtual plant seem to consist mostly of overhead and
some direct labor. Descriptions of each step suggest the steps are highly mechanized. For example,
inspection is done at many points in the process and mostly by automated equipment. However, in
some international locations, the process is likely to be more labor intensive.

c. Direct materials include: sweetener, secret formula, CO2, water, bottles, packaging, and labels.

d. The final step in the process, warehouse and delivery is not typically considered a product cost.

e. Student answers will vary. Some students may believe some of the environmental costs are
product costs, such as purifying and filtering water. However, most of the cost of these activities
should be classified as period costs. The ethics associated with the selective disclosure of good
works can be debated, but students must remember that this is Coca Cola’s website and it is not
required to meet regulatory guidelines about disclosures.

106 © The McGraw-Hill Companies, Inc., 2005