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Chapter 21 – Exercises & Cases

Multiple Choice Questions​

  1. Process costing is used when:
    a) Products are unique
    b) Products are identical or very similar
    c) Small batches
    d) Custom orders
    Answer: b) Process costing is used for identical or very similar products.

  2. Conversion costs include:
    a) Only direct materials
    b) Direct labor + Manufacturing overhead
    c) Only direct labor
    d) Only manufacturing overhead
    Answer: b) Conversion costs = Direct labor + Manufacturing overhead.

  3. Equivalent units account for:
    a) Only completed units
    b) Partially completed units
    c) Only materials
    d) Only conversion
    Answer: b) Equivalent units account for work done on partially completed units.

  4. If 1,000 units are completed and 200 units are 50% complete, equivalent units are:
    a) 1,000
    b) 1,100
    c) 1,200
    d) 800

    Answer: b) 1,000 + (200 × 50%) = 1,100 equivalent units.

  5. Transferred-in costs are:
    a) Costs added in current stage
    b) Costs from previous stages
    c) Only materials
    d) Only conversion
    Answer: b) Transferred-in costs come from previous processing stages.

  6. In process costing, costs are accumulated by:
    a) Individual job
    b) Process or department
    c) Customer
    d) Product line
    Answer: b) Costs are accumulated by process or department.

  7. Cost per equivalent unit is calculated as:
    a) Total units ÷ Total costs
    b) Total costs ÷ Equivalent units
    c) Equivalent units ÷ Total costs
    d) Total costs × Equivalent units
    Answer: b) Cost per equivalent unit = Total costs ÷ Equivalent units.

  8. Materials equivalent units are calculated separately from conversion because:
    a) They are always the same
    b) Materials and conversion may be at different completion levels
    c) Only materials matter
    d) Only conversion matters
    Answer: b) Materials and conversion may be at different completion levels.

  9. In a subsequent processing stage, transferred-in costs are treated like:
    a) Materials added throughout
    b) Materials added at the beginning
    c) Conversion costs
    d) Overhead costs
    Answer: b) Transferred-in costs are like materials added at the beginning (100% complete).

  10. Process costing is most appropriate for:
    a) Custom furniture
    b) Bread production (identical loaves)
    c) Construction projects
    d) Consulting services
    Answer: b) Process costing is for identical products like bread production.

Questions​

  1. What is process costing? When is it used?

  2. What are conversion costs? Why are they separated from direct materials?

  3. What are equivalent units? Why are they needed in process costing?

  4. How do you calculate equivalent units for materials and conversion separately?

  5. What is a process cost report? What information does it contain?

  6. How do costs flow through multiple processing stages?

  7. What are transferred-in costs? How are they handled?

  8. What journal entries are needed for a process costing system?

  9. How does process costing apply to Luxembourg manufacturing SMEs?

  10. What are the key differences between job order and process costing?

Problems Set A​

Problem A-1: Equivalent Units - Materials

Calculate materials equivalent units:

  • Units completed: 800
  • Units in process: 200 (100% complete for materials)

Problem A-2: Equivalent Units - Conversion

Calculate conversion equivalent units:

  • Units completed: 800
  • Units in process: 200 (60% complete for conversion)

Problem A-3: Cost per Equivalent Unit

Total costs: €5,000 Equivalent units: 1,000

Calculate cost per equivalent unit.

Problem A-4: Cost Allocation

Cost per equivalent unit: €5.00 Units completed: 900 Units in process: 100 (equivalent units: 50)

Allocate costs to completed and in-process units.

Problem A-5: Conversion Costs

Direct labor: €2,000 Manufacturing overhead: €1,500

Calculate total conversion costs.

Problems Set B​

Problem B-1: Complete Process Cost Report - Initial Stage

Physical Flow:

  • Units started: 2,000
  • Units completed: 1,800
  • Units in process: 200 (100% materials, 50% conversion)

Costs:

  • Direct materials: €4,000
  • Direct labor: €1,500
  • Manufacturing overhead: €1,000

Prepare complete process cost report.

Problem B-2: Subsequent Processing Stage

Physical Flow:

  • Units transferred in: 1,800
  • Units completed: 1,700
  • Units in process: 100 (100% transferred-in, 40% conversion)

Costs:

  • Transferred-in: €6,300
  • Direct labor: €800
  • Manufacturing overhead: €600

Prepare process cost report for this stage.

Problem B-3: Multi-Stage Process

A product goes through three stages:

  • Stage 1: Materials €2,000, Labor €1,000, Overhead €500
  • Stage 2: Transferred-in from Stage 1, Additional materials €500, Labor €600, Overhead €400
  • Stage 3: Transferred-in from Stage 2, Materials €300, Labor €400, Overhead €300

Calculate total cost per unit if 1,000 units are completed through all stages.

Problem B-4: Cost Flow Journal Entries

Record journal entries for: a) Purchase materials €5,000
b) Issue €4,000 to Process 1
c) Direct labor in Process 1: €2,000
d) Apply overhead to Process 1: €1,500
e) Transfer from Process 1 to Process 2: €7,500 f) Transfer to Finished Goods: €8,000 g) Sell for €12,000 (cost €8,000)

Comprehensive Problem​

Comprehensive Problem 21: Complete Process Costing System

Luxembourg Food Processing Company produces pasta through a three-stage process.

Company Information:

  • Process 1: Mixing Department
  • Process 2: Drying Department
  • Process 3: Packaging Department

November Production Data:

Process 1 - Mixing:

  • Units started: 10,000 kg
  • Units completed: 9,000 kg
  • Units in process (end): 1,000 kg (100% materials, 60% conversion)
  • Direct materials: €6,000
  • Direct labor: €2,000
  • Manufacturing overhead: €1,500

Process 2 - Drying:

  • Units transferred in: 9,000 kg
  • Units completed: 8,500 kg
  • Units in process (end): 500 kg (100% transferred-in, 50% conversion)
  • Additional materials: €500
  • Direct labor: €1,200
  • Manufacturing overhead: €800

Process 3 - Packaging:

  • Units transferred in: 8,500 kg
  • Units completed: 8,000 kg (packaged)
  • Units in process (end): 500 kg (100% transferred-in, 30% conversion)
  • Packaging materials: €1,600
  • Direct labor: €800
  • Manufacturing overhead: €600

Sales:

  • Sold 7,000 kg for €14,000 (excluding VAT), VAT 17%

Required:

  1. Process 1 - Mixing Department:
    a) Calculate equivalent units for materials and conversion
    b) Calculate cost per equivalent unit
    c) Allocate costs to completed and in-process units
    d) Prepare process cost report

  2. Process 2 - Drying Department:
    a) Calculate equivalent units (transferred-in, materials, conversion)
    b) Calculate cost per equivalent unit
    c) Allocate costs
    d) Prepare process cost report

  3. Process 3 - Packaging Department:
    a) Calculate equivalent units
    b) Calculate cost per equivalent unit
    c) Allocate costs
    d) Prepare process cost report

  4. Journal Entries:
    a) Record all material purchases and issuances
    b) Record all direct labor
    c) Record and apply all overhead
    d) Record transfers between processes
    e) Record transfer to finished goods f) Record sale and cost of goods sold

  5. Cost Analysis:
    a) Calculate total cost per kg of finished product
    b) Calculate cost of goods sold
    c) Calculate gross profit
    d) Analyze cost by process

  6. Inventory Valuation:
    a) Work in Process - Mixing (ending balance)
    b) Work in Process - Drying (ending balance)
    c) Work in Process - Packaging (ending balance)
    d) Finished Goods (ending balance)

  7. Luxembourg Considerations:
    a) PCN accounts used
    b) VAT handling
    c) Social charges (if applicable)
    d) Cost record requirements
    e) Inventory valuation compliance

Cases​

Case 21-1: Choosing a Costing System

A Luxembourg business produces both custom products and standard products. Management is unsure whether to use job order costing, process costing, or both.

Questions for Analysis:

  1. What factors should determine the costing system choice?

  2. Can a business use both systems? How?

  3. What are the advantages and disadvantages of each?

  4. How should costs be tracked for custom vs. standard products?

  5. What system would you recommend? Why?

  6. What are the Luxembourg compliance considerations?

Case 21-2: Process Improvement

A Luxembourg food processor is experiencing high costs in one processing stage. Management wants to identify the problem and improve efficiency.

Questions for Analysis:

  1. How can process costing help identify cost problems?

  2. What information is needed to analyze process costs?

  3. How can equivalent units help identify inefficiencies?

  4. What metrics should be monitored?

  5. How can costs be reduced in a specific process?

  6. What are the implications for pricing and profitability?

Solutions are published in supplementary/instructor/solutions/chapter_21_solutions.md.