Solutions Manual - Chapter 21: Process Costing

Multiple Choice Questions - Solutions

1. Process costing is used when:

   • Answer: b) Process costing is used for identical or very similar products.

2. Conversion costs include:

   • Answer: b) Conversion costs = Direct labor + Manufacturing overhead.

3. Equivalent units account for:

   • 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:

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

5. Transferred-in costs are:

   • Answer: b) Transferred-in costs come from previous processing stages.

6. In process costing, costs are accumulated by:

   • Answer: b) Costs are accumulated by process or department.

7. Cost per equivalent unit is calculated as:

   • Answer: b) Cost per equivalent unit = Total costs ÷ Equivalent units.

8. Materials equivalent units are calculated separately from conversion because:

   • Answer: b) Materials and conversion may be at different completion levels.

9. In a subsequent processing stage, transferred-in costs are treated like:

   • Answer: b) Transferred-in costs are like materials added at the beginning (100% complete).

10. Process costing is most appropriate for:

• Answer: b) Process costing is for identical products like bread production.

---

Questions - Solutions

Question 1: Definition and Use

Process costing is a costing system used when products are homogeneous (identical or very similar) and produced in large quantities through continuous processes. Costs are accumulated by process or department, and an average cost per unit is calculated.

When to use:

• Products are identical or very similar
• Large quantities produced
• Continuous or repetitive process
• Mass production environments

Examples:

• Bread baking (identical loaves)
• Soft drink bottling
• Food processing
• Chemical manufacturing
• Oil refining
• Paper production

Question 2: Conversion Costs

Conversion costs = Direct Labor + Manufacturing Overhead

Why separated from direct materials:

• Materials and conversion may be added at different stages
• Materials may be 100% complete while conversion is only partially complete
• Need to calculate equivalent units separately for materials and conversion
• Allows accurate cost allocation to partially completed units

Example: If materials are added at the beginning (100% complete) but conversion is only 50% complete, we need separate equivalent unit calculations.

Question 3: Equivalent Units

Equivalent units represent the number of complete units that could have been produced given the amount of work done on partially completed units.

Why needed:

• In process costing, units are often partially complete at period end
• Need to allocate costs between completed and in-process units
• Equivalent units convert partially completed units to equivalent completed units
• Allows accurate cost per unit calculation

Example: If 200 units are 50% complete, they represent 100 equivalent units (200 × 50% = 100).

Question 4: Calculating Equivalent Units Separately

Materials equivalent units:

• Completed units: 100% complete
• In-process units: Multiply by % complete for materials
• Total = Completed units + (In-process units × % materials complete)

Conversion equivalent units:

• Completed units: 100% complete
• In-process units: Multiply by % complete for conversion
• Total = Completed units + (In-process units × % conversion complete)

Example: 800 completed, 200 in-process (100% materials, 60% conversion):

• Materials EU = 800 + (200 × 100%) = 1,000
• Conversion EU = 800 + (200 × 60%) = 920

Question 5: Process Cost Report

A process cost report summarizes the physical flow of units, equivalent units, costs, and cost allocation for a processing department.

Contains:

• Physical flow of units (started, completed, in-process)
• Equivalent units (materials and conversion separately)
• Costs to account for (beginning WIP + costs added)
• Cost per equivalent unit
• Cost allocation (to completed units and ending WIP)
• Reconciliation of costs

Question 6: Cost Flow Through Multiple Stages

Costs flow through multiple processing stages as follows:

1. Stage 1: Materials, labor, overhead → Completed units transferred to Stage 2
2. Stage 2: Transferred-in costs (from Stage 1) + Additional materials, labor, overhead → Completed units transferred to Stage 3
3. Stage 3: Transferred-in costs (from Stage 2) + Additional materials, labor, overhead → Completed units transferred to Finished Goods

Each stage:

• Accumulates its own costs
• Receives transferred-in costs from previous stage
• Calculates equivalent units
• Allocates costs to completed and in-process units
• Transfers completed units to next stage

Question 7: Transferred-In Costs

Transferred-in costs are the costs of units transferred from a previous processing stage. They represent the accumulated costs from all previous stages.

How handled:

• Treated like materials added at the beginning (100% complete)
• Added to costs of current stage
• Included in equivalent unit calculations
• Allocated to completed and in-process units along with current stage costs

Example: If 1,000 units are transferred in at €5 per unit, transferred-in cost = €5,000. This is added to current stage costs.

Question 8: Journal Entries

Key journal entries:

1. Purchase materials: Debit Raw Materials, Credit Accounts Payable
2. Issue materials to process: Debit Work in Process - [Department], Credit Raw Materials
3. Record direct labor: Debit Work in Process - [Department], Credit Wages Payable
4. Apply overhead: Debit Work in Process - [Department], Credit Manufacturing Overhead
5. Transfer between processes: Debit Work in Process - [Next Department], Credit Work in Process - [Previous Department]
6. Transfer to finished goods: Debit Finished Goods, Credit Work in Process - [Final Department]
7. Sell products: Debit Accounts Receivable, Credit Sales Revenue; Debit COGS, Credit Finished Goods

Question 9: Luxembourg Manufacturing SME Applications

Process costing applies to Luxembourg manufacturing SMEs that:

• Produce identical products in large quantities
• Use continuous production processes
• Need average cost per unit for pricing
• Want to monitor process efficiency

Considerations:

• PCN accounts for each process/department
• VAT on materials and sales
• Social charges included in labor costs
• Inventory valuation compliance
• Cost record requirements
• Process efficiency monitoring

Question 10: Key Differences

Aspect	Job Order Costing	Process Costing
Products	Unique, customized	Identical, homogeneous
Cost Tracking	By job	By process/department
Cost Calculation	Total job cost	Average cost per unit
Work in Process	Multiple jobs	Units in process
Cost Reports	Job cost sheets	Process cost reports
When Used	Custom products	Mass production

---

Problems Set A - Solutions

Problem A-1: Equivalent Units - Materials

• Units completed: 800 (100% complete)
• Units in process: 200 (100% complete for materials)
• Materials equivalent units = 800 + (200 × 100%) = 1,000

Problem A-2: Equivalent Units - Conversion

• Units completed: 800 (100% complete)
• Units in process: 200 (60% complete for conversion)
• Conversion equivalent units = 800 + (200 × 60%) = 800 + 120 = 920

Problem A-3: Cost per Equivalent Unit

• Total costs: €5,000
• Equivalent units: 1,000
• Cost per equivalent unit = €5,000 ÷ 1,000 = €5.00

Problem A-4: Cost Allocation

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

Allocation:

• To completed units: 900 × €5.00 = €4,500
• To in-process units: 50 × €5.00 = €250
• Total allocated: €4,750

Problem A-5: Conversion Costs

• Direct labor: €2,000
• Manufacturing overhead: €1,500
• Total conversion costs = €2,000 + €1,500 = €3,500

---

Problems Set B - Solutions

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
• Total costs: €6,500

Equivalent Units:

• Materials: 1,800 + (200 × 100%) = 2,000
• Conversion: 1,800 + (200 × 50%) = 1,900

Cost per Equivalent Unit:

• Materials: €4,000 ÷ 2,000 = €2.00
• Conversion: €2,500 ÷ 1,900 = €1.32 (rounded)

Cost Allocation:

• Completed units:

  • Materials: 1,800 × €2.00 = €3,600
  • Conversion: 1,800 × €1.32 = €2,376
  • Total: €5,976

• In-process units:

  • Materials: 200 × €2.00 = €400
  • Conversion: 100 × €1.32 = €132
  • Total: €532

Process Cost Report:

• Physical flow: Started 2,000, Completed 1,800, In-process 200
• Equivalent units: Materials 2,000, Conversion 1,900
• Cost per EU: Materials €2.00, Conversion €1.32
• Costs allocated: Completed €5,976, In-process €532
• Total: €6,508 (rounding difference: €8)

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
• Total costs: €7,700

Equivalent Units:

• Transferred-in: 1,700 + (100 × 100%) = 1,800
• Conversion: 1,700 + (100 × 40%) = 1,740

Cost per Equivalent Unit:

• Transferred-in: €6,300 ÷ 1,800 = €3.50
• Conversion: €1,400 ÷ 1,740 = €0.80 (rounded)

Cost Allocation:

• Completed units:

  • Transferred-in: 1,700 × €3.50 = €5,950
  • Conversion: 1,700 × €0.80 = €1,360
  • Total: €7,310

• In-process units:

  • Transferred-in: 100 × €3.50 = €350
  • Conversion: 40 × €0.80 = €32
  • Total: €382

Process Cost Report:

• Physical flow: Transferred in 1,800, Completed 1,700, In-process 100
• Equivalent units: Transferred-in 1,800, Conversion 1,740
• Cost per EU: Transferred-in €3.50, Conversion €0.80
• Costs allocated: Completed €7,310, In-process €382
• Total: €7,692 (rounding difference: €8)

Problem B-3: Multi-Stage Process

Stage 1:

• Materials: €2,000
• Labor: €1,000
• Overhead: €500
• Total Stage 1 cost: €3,500
• Cost per unit (1,000 units): €3.50

Stage 2:

• Transferred-in (1,000 units × €3.50): €3,500
• Additional materials: €500
• Labor: €600
• Overhead: €400
• Total Stage 2 cost: €5,000
• Cost per unit (1,000 units): €5.00

Stage 3:

• Transferred-in (1,000 units × €5.00): €5,000
• Materials: €300
• Labor: €400
• Overhead: €300
• Total Stage 3 cost: €6,000
• Cost per unit (1,000 units): €6.00

Total cost per unit: €6.00

Problem B-4: Cost Flow Journal Entries

a) Purchase materials €5,000:

Raw Materials                   5,000
    Accounts Payable                               5,000

b) Issue €4,000 to Process 1:

Work in Process - Process 1    4,000
    Raw Materials                                  4,000

c) Direct labor in Process 1: €2,000:

Work in Process - Process 1    2,000
    Wages Payable                                  2,000

d) Apply overhead to Process 1: €1,500:

Work in Process - Process 1    1,500
    Manufacturing Overhead                         1,500

e) Transfer from Process 1 to Process 2: €7,500:

Work in Process - Process 2    7,500
    Work in Process - Process 1                   7,500

f) Transfer to Finished Goods: €8,000:

Finished Goods                  8,000
    Work in Process - Process 2                     8,000

g) Sell for €12,000 (cost €8,000):

Accounts Receivable            12,000
    Sales Revenue                                 12,000

Cost of Goods Sold              8,000
    Finished Goods                                 8,000

---

Comprehensive Problem 21 - Solutions

1. Process 1 - Mixing Department

a) Equivalent Units:

• Materials: 9,000 + (1,000 × 100%) = 10,000 kg
• Conversion: 9,000 + (1,000 × 60%) = 9,600 kg

b) Cost per Equivalent Unit:

• Materials: €6,000 ÷ 10,000 = €0.60 per kg
• Conversion: €3,500 ÷ 9,600 = €0.365 per kg (rounded)

c) Cost Allocation:

• Completed units (9,000 kg):

  • Materials: 9,000 × €0.60 = €5,400
  • Conversion: 9,000 × €0.365 = €3,285
  • Total: €8,685

• In-process units (1,000 kg):

  • Materials: 1,000 × €0.60 = €600
  • Conversion: 600 × €0.365 = €219
  • Total: €819

d) Process Cost Report - Mixing:

• Physical flow: Started 10,000 kg, Completed 9,000 kg, In-process 1,000 kg
• Equivalent units: Materials 10,000 kg, Conversion 9,600 kg
• Cost per EU: Materials €0.60, Conversion €0.365
• Costs: Materials €6,000, Labor €2,000, Overhead €1,500, Total €9,500
• Allocation: Completed €8,685, In-process €819
• Total: €9,504 (rounding difference: €4)

2. Process 2 - Drying Department

a) Equivalent Units:

• Transferred-in: 8,500 + (500 × 100%) = 9,000 kg
• Materials: 8,500 + (500 × 100%) = 9,000 kg (materials added at beginning)
• Conversion: 8,500 + (500 × 50%) = 8,750 kg

b) Cost per Equivalent Unit:

• Transferred-in: €8,685 ÷ 9,000 = €0.965 per kg (rounded)
• Materials: €500 ÷ 9,000 = €0.056 per kg (rounded)
• Conversion: €2,000 ÷ 8,750 = €0.229 per kg (rounded)

c) Cost Allocation:

• Completed units (8,500 kg):

  • Transferred-in: 8,500 × €0.965 = €8,203
  • Materials: 8,500 × €0.056 = €476
  • Conversion: 8,500 × €0.229 = €1,947
  • Total: €10,626

• In-process units (500 kg):

  • Transferred-in: 500 × €0.965 = €483
  • Materials: 500 × €0.056 = €28
  • Conversion: 250 × €0.229 = €57
  • Total: €568

d) Process Cost Report - Drying:

• Physical flow: Transferred in 9,000 kg, Completed 8,500 kg, In-process 500 kg
• Equivalent units: Transferred-in 9,000, Materials 9,000, Conversion 8,750
• Cost per EU: Transferred-in €0.965, Materials €0.056, Conversion €0.229
• Costs: Transferred-in €8,685, Materials €500, Labor €1,200, Overhead €800, Total €11,185
• Allocation: Completed €10,626, In-process €568
• Total: €11,194 (rounding difference: €9)

3. Process 3 - Packaging Department

a) Equivalent Units:

• Transferred-in: 8,000 + (500 × 100%) = 8,500 kg
• Materials: 8,000 + (500 × 100%) = 8,500 kg (packaging materials added at beginning)
• Conversion: 8,000 + (500 × 30%) = 8,150 kg

b) Cost per Equivalent Unit:

• Transferred-in: €10,626 ÷ 8,500 = €1.25 per kg (rounded)
• Materials: €1,600 ÷ 8,500 = €0.188 per kg (rounded)
• Conversion: €1,400 ÷ 8,150 = €0.172 per kg (rounded)

c) Cost Allocation:

• Completed units (8,000 kg):

  • Transferred-in: 8,000 × €1.25 = €10,000
  • Materials: 8,000 × €0.188 = €1,504
  • Conversion: 8,000 × €0.172 = €1,376
  • Total: €12,880

• In-process units (500 kg):

  • Transferred-in: 500 × €1.25 = €625
  • Materials: 500 × €0.188 = €94
  • Conversion: 150 × €0.172 = €26
  • Total: €745

d) Process Cost Report - Packaging:

• Physical flow: Transferred in 8,500 kg, Completed 8,000 kg, In-process 500 kg
• Equivalent units: Transferred-in 8,500, Materials 8,500, Conversion 8,150
• Cost per EU: Transferred-in €1.25, Materials €0.188, Conversion €0.172
• Costs: Transferred-in €10,626, Materials €1,600, Labor €800, Overhead €600, Total €13,626
• Allocation: Completed €12,880, In-process €745
• Total: €13,625 (rounding difference: €1)

4. Journal Entries

a) Material Purchases and Issuances:

Purchase materials (Process 1):

Raw Materials                   6,000
VAT Recoverable                 1,020
    Accounts Payable                               7,020

Issue materials to Process 1:

Work in Process - Mixing        6,000
    Raw Materials                                  6,000

Purchase additional materials (Process 2):

Raw Materials                     500
VAT Recoverable                    85
    Accounts Payable                                 585

Issue materials to Process 2:

Work in Process - Drying          500
    Raw Materials                                    500

Purchase packaging materials (Process 3):

Raw Materials                   1,600
VAT Recoverable                   272
    Accounts Payable                               1,872

Issue materials to Process 3:

Work in Process - Packaging     1,600
    Raw Materials                                  1,600

b) Direct Labor:

Work in Process - Mixing        2,000
Work in Process - Drying       1,200
Work in Process - Packaging       800
    Wages Payable                                  4,000

c) Apply Overhead:

Work in Process - Mixing        1,500
Work in Process - Drying         800
Work in Process - Packaging       600
    Manufacturing Overhead                         2,900

d) Transfers Between Processes:

Work in Process - Drying        8,685
    Work in Process - Mixing                        8,685

Work in Process - Packaging    10,626
    Work in Process - Drying                       10,626

e) Transfer to Finished Goods:

Finished Goods                 12,880
    Work in Process - Packaging                    12,880

f) Sale and Cost of Goods Sold: Sale (7,000 kg × €2.00 = €14,000, VAT 17% = €2,380):

Accounts Receivable            16,380
    Sales Revenue                                 14,000
    VAT Payable                                     2,380

Cost of Goods Sold (7,000 kg × €1.61 = €11,270):

Cost of Goods Sold             11,270
    Finished Goods                                 11,270

5. Cost Analysis

a) Total Cost per kg of Finished Product:

• Total cost of completed units: €12,880
• Units completed: 8,000 kg
• Cost per kg: €12,880 ÷ 8,000 = €1.61 per kg

b) Cost of Goods Sold:

• Units sold: 7,000 kg
• Cost per kg: €1.61
• COGS: 7,000 × €1.61 = €11,270

c) Gross Profit:

• Sales: €14,000
• COGS: €11,270
• Gross profit: €2,730
• Gross profit margin: 19.5%

d) Cost by Process:

• Mixing: €9,500 total (€8,685 completed, €819 in-process)
• Drying: €11,185 total (€10,626 completed, €568 in-process)
• Packaging: €13,626 total (€12,880 completed, €745 in-process)
• Total production cost: €34,311

6. Inventory Valuation

a) Work in Process - Mixing (ending balance):

• €819 (1,000 kg in-process: €600 materials + €219 conversion)

b) Work in Process - Drying (ending balance):

• €568 (500 kg in-process: €483 transferred-in + €28 materials + €57 conversion)

c) Work in Process - Packaging (ending balance):

• €745 (500 kg in-process: €625 transferred-in + €94 materials + €26 conversion)

d) Finished Goods (ending balance):

• Units completed: 8,000 kg
• Units sold: 7,000 kg
• Units remaining: 1,000 kg
• Cost per kg: €1.61
• Finished Goods: 1,000 × €1.61 = €1,610

7. Luxembourg Considerations

a) PCN Accounts Used:

• Raw Materials: PCN 31xx (Inventories - Raw Materials)
• Work in Process - Mixing: PCN 31xx (Inventories - Work in Process)
• Work in Process - Drying: PCN 31xx (Inventories - Work in Process)
• Work in Process - Packaging: PCN 31xx (Inventories - Work in Process)
• Finished Goods: PCN 31xx (Inventories - Finished Goods)
• Cost of Goods Sold: PCN 60xx (Cost of Sales)
• Direct Labor: PCN 64xx (Personnel Expenses)
• Manufacturing Overhead: PCN 62xx (Operating Expenses)

b) VAT Handling:

• VAT on materials purchased: Recorded as VAT Recoverable (PCN 4451)
• VAT on sales: Recorded as VAT Payable (PCN 4457)
• VAT rate: 17% (standard rate for most goods)
• Internal cost calculations exclude VAT
• VAT collected on sales is a liability, not revenue

c) Social Charges:

• Included in direct labor costs
• Employer social charges: ~24% of gross salary
• Should be allocated to processes based on labor hours
• Part of conversion costs
• Must be included in product costs

d) Cost Record Requirements:

• Maintain detailed process cost records
• Track costs by department/process
• Document equivalent unit calculations
• Keep supporting documentation (invoices, time sheets)
• Records needed for inventory valuation and tax compliance

e) Inventory Valuation Compliance:

• Use proper costing method (process costing)
• Value inventory at cost (materials + labor + overhead)
• Include all manufacturing costs
• Properly allocate costs to completed and in-process units
• Comply with PCN and tax requirements
• Regular inventory counts and reconciliations

---

Case Solutions

Case 21-1: Choosing a Costing System

1. Factors to Consider:

• Nature of products (custom vs. standard)
• Production volume (small batches vs. mass production)
• Production process (unique vs. continuous)
• Cost tracking needs
• Pricing requirements
• Management information needs

2. Using Both Systems:

• Yes, a business can use both systems
• Use job order costing for custom products
• Use process costing for standard products
• Track costs separately for each product type
• Allocate overhead appropriately to each system

3. Advantages and Disadvantages:

Job Order Costing:

• Advantages: Detailed cost tracking, accurate job costs, good for custom work
• Disadvantages: More complex, higher record-keeping costs, not efficient for mass production

Process Costing:

• Advantages: Efficient for mass production, simpler for identical products, average costs
• Disadvantages: Less detailed, assumes identical units, not suitable for custom work

4. Tracking Costs:

• Custom products: Track by job using job order costing
• Standard products: Track by process using process costing
• Maintain separate cost accounts
• Allocate overhead based on appropriate method for each

5. Recommendation:

• Use both systems if products are clearly different
• Use job order for custom/unique products
• Use process costing for standard/mass-produced products
• Ensure proper cost allocation and separation
• Consider software that supports both systems

6. Luxembourg Compliance:

• Use appropriate PCN accounts for each system
• Maintain proper cost records
• Comply with inventory valuation requirements
• Include all costs (materials, labor, overhead, social charges)
• Proper VAT handling
• Regular cost reviews and adjustments

Case 21-2: Process Improvement

1. Identifying Cost Problems:

• Process cost reports show costs by department
• Compare costs across periods
• Identify high-cost processes
• Analyze cost per equivalent unit trends
• Review cost allocation and efficiency

2. Information Needed:

• Process cost reports
• Equivalent unit calculations
• Cost per equivalent unit by process
• Physical flow data
• Cost trends over time
• Industry benchmarks

3. Using Equivalent Units:

• Low equivalent units relative to physical units indicates inefficiency
• High conversion costs per equivalent unit suggests problems
• Compare equivalent units across periods
• Identify bottlenecks in processes
• Analyze completion percentages

4. Metrics to Monitor:

• Cost per equivalent unit (by process)
• Equivalent units vs. physical units
• Completion percentages
• Cost trends over time
• Process efficiency ratios
• Waste and spoilage rates

5. Reducing Costs:

• Improve process efficiency
• Reduce waste and spoilage
• Optimize labor utilization
• Negotiate better material prices
• Control overhead costs
• Improve quality to reduce rework
• Invest in process improvements

6. Pricing and Profitability:

• Accurate process costs support pricing decisions
• Know true cost per unit
• Set prices to cover costs plus margin
• Identify unprofitable products
• Focus on high-margin products
• Regular cost reviews and price adjustments

---

End of Chapter 21 Solutions