Question

Questions: 1. Under what conditions would it be appropriate to use a process costing system? 2. Why is cost accumulation simpler in a process costing system than it is in a job-order costing system? 3. What is meant by the term "equivalent units for production" when the weighted average method is used? Problem: Clopack Company manufactures one product that goes through one processing department called Mixing. All raw materials are introduced at the start of work in the Mixing Department. The company uses the weighted average method of process costing. Its Work in Process T-account for the Mixing Department for June follows (all forthcoming questions pertain to June): Work in Process-Mixing Department 28,00 Completed and transferred to Finished Goods 0 June 1 balance ? Materials 120,0 00 Direct labor 79,50 0 Overhead 97.00 0 June 30 balance ? The June 1 work in process inventory consisted of 5,000 units with $16,000 in materials cost and $12,000 in conversion cost. The June 1 work in process inventory was 100% complete with respect to materials and 50% complete with respect to conversion. During June, 37,500 units were started into production. The June 30 work in process inventory consisted of 8,000 units that were 100% complete with respect to materials and 40% complete with respect to conversion Required: 1. Prepare the journal entries to record the raw materials used in production and the direct labor cost incurred 2. Prepare the journal entry to record the overhead cost applied to production 3. How many units were completed and transferred to finished goods during the period? 4. Compute the equivalent units of production for materials.

Answer 1

1. Process costing is appropriate to be used in below circumstances

· When there is no customer specific order

· When units are produced on mass scale basis

· Production of units passes through multiple departments before final output is produced

· When units produced are identical and homogenous

· When production is done to meet market demand and requirement

· The selling price of the unit is standardized

· Costs are accumulated at department or process level

· Manufacture involves normal and abnormal gains and losses

2. Process costing is the cost accounting method at process or departmental level. The production is on mass scale basis. Hence costs are accumulated at overall departmental level unlike job costing which requires maintenance of individual and detailed record for material, labor and overheads. Hence process costing is much simpler compared to job order costing

3. The equivalent units for production is the way of expressing closing work in process in terms of completion of the work. For example if units in closing WIP are 5,000 units and work completed is 50% equivalent units are 2,500. The purpose of equivalent units is to calculate the unit cost that helps in computing cost of work completed and transferred and closing WIP for a particular month

Credit Debit $199,500 General Journal 1 Work in process - Mixing Department Raw Material inventory Wages payable (To record material issued and wages payable) $120,000 $79,500 2 Credit Debit $97,000 General Journal Work in process - Mixing Department Manufacturing overhead (To record overhead applied to production) $97,000 3 Units completed and transferred to finished goods 34,500 Unit Reconciliation: Units to account for: Beginning WIP Inventory Units Started During Period Total Units To Account for 5,000 37,500 42,500 Total Units accounted for From Beginning WIP in Inventory Units started and completed during Period Units completed and transferred out Units in Ending WIP Inventory Total Units Accounted for 5,000 29,500 34,500 8,000 42,500 4 Equivalent units of production for material 42,500 5 Equivalent units of production for Conversion 37,700 Equivalent Units of Production - Weighted average method Units % Materials 100% 100% Equivalent units EUP % EUP Materials Conversion Conversion 34,500 100% 34,500 8,000 40% 3,200 42,500 37,700 Units completed and transferred out Units in Ending WIP Inventory Total 34,500 8,000 42,500 6 cost of beginning WIP inventory plus the cost added during the period for materials $136,000 7 cost of beginning WIP inventory plus the cost added during the period for Conversion $188,500 Cost per equivalent unit of production Cost from Beginning WIP Inventory Current Period Costs Total cost Equivalent units of production 8 & 9 Cost per equivalent unit of production (rounded to 2 decimal places) Materials $16,000 $120,000 $136,000 Costs 42,500 EUP $3.201 Conversion $12,000 $176,500 $188,500 A 37,700 B $5.00 A/B Costs EUP 10 cost of ending work in process inventory for materials $25,600 11 cost of ending work in process inventory for Conversion $16,000 12 cost of materials transferred to finished goods $110,400 13 cost of conversion transferred to finished goods $172,500 EUP Cost per EUP Total Cost 34,500 $3.20 $5.00 $110,400 $172,500 34,500 $282,900 Total Cost accounted for : Cost of units completed and transferred out Direct Material Conversion Cost of units completed and transferred out Costs of ending work in process Direct Material Conversion Total cost of ending Work in process Total costs accounted for EUP 8,000 Cost per EUP Total Cost $3.20 $25,600 $5.00 $16,000 3,2001 $41,600 $324,500 14 Credit Debit $282,900 General Journal Finished Goods Work in process - Mixing Department (To record transfer of finished goods from WIP) $282,900 15-a Total cost to be accounted for $324,500 Total Costs to be accounted for : Opening WIP Direct Material Conversion Cost Total Cost to be accounted for $28,000 $120,000 $176,500 $324,500 15-b Total cost accounted for $324,500 Cost of units completed and transferred out Cost of Ending Work in process Total cost accounted for $282,9001 $41,6001 $324,500