Financial and Managerial Accounting Study Set 1

Business

Quiz 19 :
Process Costing Systems

Quiz 19 :
Process Costing Systems

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Ethics and professional conduct in business Assume you are the division controller for Auntie M's Cookie Company. Auntie M has introduced a new chocolate chip cookie called Full of Chips, and it is a success. As a result, the product manager responsible for the launch of this new cookie was promoted to division vice president and became your boss. A new product manager, Bishop, has been brought in to replace the promoted manager. Bishop notices that the Full of Chips cookie uses a lot of chips, which increases the cost of the cookie. As a result, Bishop has ordered that the amount of chips used in the cookies be reduced by 10%. The manager believes that a 10% reduction in chips will not adversely affect sales but will reduce costs and, hence, improve margins. The increased margins would help Bishop meet profit targets for the period. You are looking over some cost of production reports segmented by cookie line. You notice that there is a drop in the materials costs for Full of Chips. On further investigation, you discover why the chip costs have declined (fewer chips). Both you and Bishop report to the division vice president, who was the original product manager for Full of Chips. You are trying to decide what to do, if anything. Discuss the options you might consider.
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Lean manufacturing:
Lean manufacturing is also referred to as just in time processing It is a method under which the management strives to earn maximum profits with high quality, lower costs, and readily availability in the market. This method aims to attain both efficiency and effectiveness.
Under lean manufacturing the workers are trained to perform multitasks at a point of time to reduce the time taken to produce the product and hence, increase the efficiency. Individual tasks are given to each individual to avoid and confusion later. It increases the efficiency of the workers and also, the equipment are properly taken care of. The basic objective of this process to increase the speed without compromising the quality of the product. This process helps in reducing wastage of resources.
In the given case:
• The treatment done by Bishop was unethical. The product was a success because of its quality and quantity. Chips used in the production process are the main ingredient of the product. Hampering its quantity will also reduce the quality of the product.
• The division controller should immediately stop the production process to avoid further degradation in the quality.
• The division controller should introduce Bishop, the product manager with the concept of lean manufacturing.
• The way adopted by product manager was ethically incorrect and should be rectified as soon as possible to maintain the quality of the product intact.
• Also, methods are adopted to increase the sales which will decrease the per unit cost automatically.

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Which type of cost system, process or job order, would be best suited for each of the following: (a) TV assembler, (b) building contractor, (c) automobile repair shop, (d) paper manufacturer, (e) custom jewelry manufacturer? Give reasons for your answers.
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(a) An assembly-type industry using mass production methods, such as TV assembly, would use the process cost system because the products are somewhat standard and lose their identities as individual items. In such industries, it is neither practical nor necessary to identify output by jobs.
(b) A job order cost system would be used by a building contractor to accumulate the costs for each individual building because the costs can be identified with each job without great difficulty.
(c) A job order cost system is best suited for an automobile repair shop because costs can be reasonably identified with each job. (d) A process cost system would be best suited for a paper manufacturer because the processes are continuous and the products are homogeneous.
(e) A job order cost system is best suited for a custom jewelry manufacturer because most of the production consists of job orders, and costs can be reasonably identified with each job.

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Entries for materials cost flows in a process cost system The Hershey Foods Company manufactures chocolate confectionery products. The three largest raw materials are cocoa, sugar, and dehydrated milk. These raw materials first go into the Blending Department. The blended product is then sent to the Molding Department, where the bars of candy are formed. The candy is then sent to the Packing Department, where the bars are wrapped and boxed. The boxed candy is then sent to the distribution center, where it is eventually sold to food brokers and retailers. Show the accounts debited and credited for each of the following business events: a. Materials used by the Blending Department b. Transfer of blended product to the Molding Department c. Transfer of chocolate to the Packing Department d. Transfer of boxed chocolate to the distribution center e. Sale of boxed chocolate
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In process costing cost of product is determined which passes through various production process. In such costing methodology cost of product determined by allocating direct and indirect cost in process account. It is generally followed by manufacturing firms having different continuous process throughout the period. Pass the journal entries and show the accounts would be debited and credited for the given business events as follows:
a. Materials used by the blending department:
img b. Transfer of blended product to the molding department:
img c. Transfer of chocolate to the packing department:
img d. Transfer of boxed chocolate to the distribution center:
img e.
Sale of boxed chocolate:
img Inventory is an asset and debit balance account, hence debited to increase and credited to decrease. Transfer of inventory (work-in-process) from one department to another is decrease of inventory in transferring department hence, credited to decrease, and increase of inventory in receiving department hence, debited to increase.

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Job order versus process costing Which of the following industries would typically use job order costing, and which would typically use process costing? img Which of the following industries would typically use job order costing, and which would typically use process costing? img
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Entries for process cost system FloorMate Carpet Company manufactures carpets. Fiber is placed in process in the Spinning Department, where it is spun into yarn. The output of the Spinning Department is transferred to the Tufting Department, where carpet backing is added at the beginning of the process and the process is completed. On October 1, FloorMate Carpet Company had the following inventories: img Departmental accounts are maintained for factory overhead, and both have zero balances on October 1. Manufacturing operations for October are summarized as follows: img Instructions 1. Journalize the entries to record the operations, identifying each entry by letter. 2. Compute the October 31 balances of the inventory accounts. 3. Compute the October 31 balances of the factory overhead accounts.
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Entries for process cost system Preston Grover Soap Company manufactures powdered detergent. Phosphate is placed in process in the Making Department, where it is turned into granulars. The output of Making is transferred to the Packing Department, where packaging is added at the beginning of the process. On July 1, Preston Grover Soap Company had the following inventories: img Departmental accounts are maintained for factory overhead, which both have zero balances on July 1. Manufacturing operations for July are summarized as follows: img img Instructions 1. Journalize the entries to record the operations, identifying each entry by letter. 2. Compute the July 31 balances of the inventory accounts. 3. Compute the July 31 balances of the factory overhead accounts.
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Accounting for materials costs In papermaking operations for companies such as International Paper Company, wet pulp is fed into paper machines, which press and dry pulp into a continuous sheet of paper. The paper is formed at very high speeds (60 mph). Once the paper is formed, the paper is rolled onto a reel at the back end of the paper machine. One of the characteristics of papermaking is the creation of "broke" paper. Broke is paper that fails to satisfy quality standards and is therefore rejected for final shipment to customers. Broke is recycled back to the beginning of the process by combining the recycled paper with virgin (new) pulp material. The combination of virgin pulp and recycled broke is sent to the paper machine for papermaking. Broke is fed into this recycle process continuously from all over the facility. In this industry, it is typical to charge the papermaking operation with the cost of direct materials, which is a mixture of virgin materials and broke. Broke has a much lower cost than does virgin pulp. Therefore, the more broke in the mixture, the lower the average cost of direct materials to the department. Papermaking managers will frequently comment on the importance of broke for keeping their direct materials costs down. a. How do you react to this accounting procedure? b. What "hidden costs" are not considered when accounting for broke as described?
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In job order cost accounting, the three elements of manufacturing cost are charged directly to job orders. Why is it not necessary to charge manufacturing costs in process cost accounting to job orders?
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Flowchart of accounts related to service and processing departments Alcoa Inc. is the world's largest producer of aluminum products. One product that Alcoa manufactures is aluminum sheet products for the aerospace industry. The entire output of the Smelting Department is transferred to the Rolling Department. Part of the fully processed goods from the Rolling Department are sold as rolled sheet, and the remainder of the goods are transferred to the Converting Department for further processing into sheared sheet. Prepare a chart of the flow of costs from the processing department accounts into the finished goods accounts and then into the cost of goods sold account. The relevant accounts are as follows: img
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Units to be assigned costs Lilac Skin Care Company consists of two departments, Blending and Filling. The Filling Department received 45,000 ounces from the Blending Department. During the period, the Filling Department completed 42,800 ounces, including 4,000 ounces of work in process at the beginning of the period. The ending work in process inventory was 6,200 ounces. How many ounces were started and completed during the period? Keystone Steel Company has two departments, Casting and Rolling. In the Rolling Department, ingots from the Casting Department are rolled into steel sheet. The Rolling Department received 8,500 tons from the Casting Department. During the period, the Rolling Department completed 7,900 tons, including 400 tons of work in process at the beginning of the period. The ending work in process inventory was 1,000 tons. How many tons were started and completed during the period?
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Cost of production report Fresh Mountain Coffee Company roasts and packs coffee beans. The process begins by placing coffee beans into the Roasting Department. From the Roasting Department, coffee beans are then transferred to the Packing Department. The following is a partial work in process account of the Roasting Department at March 31, 2016: img Instructions 1. Prepare a cost of production report, and identify the missing amounts for Work in Process-Roasting Department. 2. Assuming that the March 1 work in process inventory includes $5,700 of direct materials, determine the increase or decrease in the cost per equivalent unit for direct materials and conversion between February and March.
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Cost of production report Bavarian Chocolate Company processes chocolate into candy bars. The process begins by placing direct materials (raw chocolate, milk, and sugar) into the Blending Department. All materials are placed into production at the beginning of the blending process. After blending, the milk chocolate is then transferred to the Molding Department, where the milk chocolate is formed into candy bars. The following is a partial work in process account of the Blending Department at October 31, 2016: img Instructions 1. Prepare a cost of production report, and identify the missing amounts for Work in Process-Blending Department. 2. Assuming that the October 1 work in process inventory includes direct materials of $38,295, determine the increase or decrease in the cost per equivalent unit for direct materials and conversion between September and October.
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Analyzing unit costs Midstate Containers Inc. manufactures cans for the canned food industry. The operations manager of a can manufacturing operation wants to conduct a cost study investigating the relationship of tin content in the material (can stock) to the energy cost for enameling the cans. The enameling was necessary to prepare the cans for labeling. A higher percentage of tin content in the can stock increases the cost of material. The operations manager believed that a higher tin content in the can stock would reduce the amount of energy used in enameling. During the analysis period, the amount of tin content in the steel can stock was increased for every month, from April to September. The following operating reports were available from the controller: img Differences in materials unit costs were entirely related to the amount of tin content. Interpret this information and report to the operations manager your recommendations with respect to tin content.
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In a job order cost system, direct labor and factory overhead applied are debited to individual jobs. How are these items treated in a process cost system and why?
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Entries for flow of factory costs for process cost system Domino Foods, Inc. , manufactures a sugar product by a continuous process, involving three production departments-Refining, Sifting, and Packing. Assume that records indicate that direct materials, direct labor, and applied factory overhead for the first department, Refining, were $372,000, $143,000, and $98,400, respectively. Also, work in process in the Refining Department at the beginning of the period totaled $29,400, and work in process at the end of the period totaled $28,700. Journalize the entries to record (a) the flow of costs into the Refining Department during the period for (1) direct materials, (2) direct labor, and (3) factory overhead, and (b) the transfer of production costs to the second department, Sifting.
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Equivalent units of materials cost The Filling Department of Lilac Skin Care Company had 4,000 ounces in beginning work in process inventory (70% complete). During the period, 42,800 ounces were completed. The ending work in process inventory was 6,200 ounces (40% complete). What are the total equivalent units for direct materials if materials are added at the beginning of the process? The Rolling Department of Keystone Steel Company had 400 tons in beginning work in process inventory (20% complete). During the period, 7,900 tons were completed. The ending work in process inventory was 1,000 tons (30% complete). What are the total equivalent units for direct materials if materials are added at the beginning of the process?
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Equivalent units and related costs; cost of production report; entries White Diamond Flour Company manufactures flour by a series of three processes, beginning with wheat grain being introduced in the Milling Department. From the Milling Department, the materials pass through the Sifting and Packaging departments, emerging as packaged refined flour. The balance in the account Work in Process-Sifting Department was as follows on July 1, 2016: img The following costs were charged to Work in Process-Sifting Department during July: img During July, 15,500 units of flour were completed. Work in Process-Sifting Department on July 31 was 1,100 units, 4/5 completed. Instructions 1. Prepare a cost of production report for the Sifting Department for July. 2. Journalize the entries for costs transferred from Milling to Sifting and the costs transferred from Sifting to Packaging. 3. Determine the increase or decrease in the cost per equivalent unit from June to July for direct materials and conversion costs. 4. Discuss the uses of the cost of production report and the results of part (3).
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Equivalent units and related costs; cost of production report; entries Dover Chemical Company manufactures specialty chemicals by a series of three processes, all materials being introduced in the Distilling Department. From the Distilling Department, the materials pass through the Reaction and Filling departments, emerging as finished chemicals. The balance in the account Work in Process-Filling was as follows on January 1, 2016: img The following costs were charged to Work in Process-Filling during January: img During January, 53,000 units of specialty chemicals were completed. Work in Process-Filling Department on January 31 was 2,700 units, 30% completed. Instructions 1. Prepare a cost of production report for the Filling Department for January. 2. Journalize the entries for costs transferred from Reaction to Filling and the costs transferred from Filling to Finished Goods. 3. Determine the increase or decrease in the cost per equivalent unit from December to January for direct materials and conversion costs. 4. Discuss the uses of the cost of production report and the results of part (3).
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Decision making Jamarcus Bradshaw, plant manager of Georgia Paper Company's papermaking mill, was looking over the cost of production reports for July and August for the Papermaking Department. The reports revealed the following: img Jamarcus was concerned about the increased cost per ton from the output of the department. As a result, he asked the plant controller to perform a study to help explain these results. The controller, Leann Brunswick, began the analysis by performing some interviews of key plant personnel in order to understand what the problem might be. Excerpts from an interview with Len Tyson, a paper machine operator, follow: Len: We have two papermaking machines in the department. I have no data, but I think paper machine No. 1 is applying too much pulp and, thus, is wasting both conversion and materials resources. We haven?t had repairs on paper machine No. 1 in a while. Maybe this is the problem. Leann: How does too much pulp result in wasted resources? Len: Well, you see, if too much pulp is applied, then we will waste pulp material. The customer will not pay for the extra weight. Thus, we just lose that amount of material. Also, when there is too much pulp, the machine must be slowed down in order to complete the drying process. This results in a waste of conversion costs. Leann: Do you have any other suspicions? Len: Well, as you know, we have two products-green paper and yellow paper. They are identical except for the color. The color is added to the papermaking process in the paper machine. I think that during August these two color papers have been behaving very differently. I don?t have any data, but it just seems as though the amount of waste associated with the green paper has increased. Leann: Why is this? Len: I understand that there has been a change in specifications for the green paper, starting near the beginning of August. This change could be causing the machines to run poorly when making green paper. If this is the case, the cost per ton would increase for green paper. Leann also asked for a database printout providing greater detail on August's operating results. img Assuming that you're Leann Brunswick, write a memo to Jamarcus Bradshaw with a recommendation to management. You should analyze the August data to determine whether the paper machine or the paper color explains the increase in the unit cost from July. Include any supporting schedules that are appropriate.
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Why is the cost per equivalent unit often determined separately for direct materials and conversion costs?
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