18: CHAPTER SPOILAGE, REWORKED UNITS, AND SCRAP TRUE/FALSE 1. Reducing defects helps to reduce costs, but does not make the business more competitive. Answer: False Difficulty: 2 Reducing defects does make the business more competitive. 2. Objective: 1
Reworked goods are unacceptable units of production usually not capable of being repaired or converted into a salable product. Answer: False Difficulty: 2 Objective: 1 Reworked goods are unacceptable units of production that can be repaired into a salable product.
3.
The value of scrap material can have either a high or low sales value relative to the product with which it is associated. Answer: False Difficulty: 2 Scrap material by definition has a low sales value. Objective: 1
4.
Normal spoilage adds to the cost of the job to which it is attributed in a job order costing system. Answer: True Difficulty: 2 Objective: 2
5.
When calculating normal spoilage rates, the base should be actual units started in production. Answer: False Difficulty: 2 The base should be good units started into production. Objective: 2
6.
Abnormal spoilage is spoilage that should arise under efficient operating conditions. Answer: False Difficulty: 2 Objective: Abnormal spoilage should not arise under efficient operating conditions. 2
7.
A company whose goal is zero defects would usually treat all spoilage as abnormal. Answer: True Difficulty: 2 Objective: 2
8.
Counting spoiled units as part of output units in a process-costing system usually results in a higher cost per unit. Answer: False Difficulty: 3 Objective: Counting spoiled units usually results in a lower cost per unit.
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3
9.
Costs in beginning inventory are pooled with costs in the current period when determining the costs of good units under the weighted-average method of process costing. Answer: True Difficulty: 2 Objective: 3
10.
Under the weighted-average method, the costs of normal spoilage are added to the costs of their related good units. Hence, the cost per good unit completed and transferred out equals the total costs transferred out divided by the number of good units produced. Answer: True Difficulty: 3 Objective: 3
11.
Under the FIFO method, all spoilage costs are assumed to be related to units completed during this period using the unit costs of the current period. Answer: True Difficulty: 3 Objective: 4
12.
When spoiled goods have a disposal value, the net cost of spoilage is computed by adding the disposal value to the costs of the spoiled goods accumulated to the inspection point. Answer: False Difficulty: 2 Objective: 4 The net cost of spoilage is computed by subtracting the disposal value from the costs of the spoiled goods accumulated to the inspection point.
13.
Normal spoilage costs are usually deducted from the costs of good units. Answer: False Difficulty: 2 Objective: Normal spoilage is usually added to the cost of the good units. 5
14.
Costs of abnormal spoilage are separately accounted for as losses of the period. Answer: True Difficulty: 2 Objective: 5
15.
In job costing, costs of abnormal spoilage are not considered as inventoriable costs and are therefore written off as costs of the period in which detection occurs. Answer: True Difficulty: 3 Objective: 6
16.
In both job costing and process costing, normal spoilage attributable to a specific job is assigned to that job. Answer: False Difficulty: 3 Objective: In process costing, spoilage costs are not assigned to that job. 6
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17.
When rework is normal and not attributable to any specific job, the costs of rework are charged to manufacturing overhead, and spread through overhead allocation over all jobs. Answer: True Difficulty: 3 Objective: 7
18.
Scrap is usually divided between normal and abnormal scrap. Answer: False There is no abnormal scrap. Difficulty: 2 Objective: 8
19.
If scrap is returned to the company's storeroom and thus inventoried, it should not have any value in the accounting records. Answer: False Difficulty: 3 Objective: 8 The scrap will be inventoried. It might not have a value in dollars but it will have a physical quantity value.
20.
Many companies track scrap only in nonfinancial terms (liters, for example) and record its sale as another revenue item. Answer: True Difficulty: 2 Objective: 8
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MULTIPLE CHOICE 21. Managers often cite reductions in the costs of spoilage as a(n) a. major justification for implementing a just-in-time production system. b. measurement of improved output quality. c. immaterial item that is not to be tracked. d. indication of improvement in the accounting system. Answer: 22. a Difficulty: 2 Objective: 1
Unacceptable units of production that are discarded or are sold for reduced prices are referred to as a. reworked units. b. spoilage. c. scrap. d. defective units. Answer: b Difficulty: 1 Objective: 1
23.
Unacceptable units of production that are subsequently repaired and sold as acceptable finished goods are a. reworked units. b. spoilage. c. scrap. d. defective units. Answer: a Difficulty: 1 Objective: 1
24.
Costs of poor quality production include a. the opportunity cost of the plant and workers. b. the effect on current customers. c. the effect on potential customers. d. all of the above are costs of poor quality production. Answer: d Difficulty: 2 Objective: 1
25.
Material left over when making a product is referred to as a. reworked units. b. spoilage. c. scrap. d. defective units. Answer: c Difficulty: 1 Objective: 1
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26.
A production process which involves spoilage and rework occurs in a. the manufacture of high precision tools. b. semiconductor units. c. the manufacture of clothing. d. all of the above involve spoilage and rework. Answer: a Difficulty: 2 Objective: 1
27.
Spoilage that is an inherent result of the particular production process and arises under efficient operating conditions is referred to as a. ordinary spoilage. b. normal spoilage. c. abnormal spoilage. d. there is no special term for this type of spoilage. Answer: b Difficulty: 2 Objective: 2
28.
Spoilage that should not arise under efficient operating conditions is referred to as a. ordinary spoilage. b. normal spoilage. c. abnormal spoilage. d. there is no special term for this type of spoilage. Answer: c Difficulty: 2 Objective: 2
29.
Costs of normal spoilage are usually accounted for as a. part of the cost of goods sold. b. part of the cost of goods manufactured. c. a separate line item in the income statement. d. an asset in the balance sheet. Answer: b Difficulty: 2 Objective: 2
30.
Costs of abnormal spoilage are usually accounted for as a. part of the cost of goods sold. b. part of the cost of goods manufactured. c. a separate line item in the income statement. d. an asset in the balance sheet. Answer: c Difficulty: 2 Objective: 2
31.
The loss from abnormal spoilage account would not appear a. on the balance sheet. b. as a detailed item in the retained earnings schedule of the balance sheet. c. as a detailed item on the income statement. d. on either (a) or (b). Answer: d Difficulty:
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Objective:
2
32.
Normal spoilage should be computed using as the base a. total units completed. b. total good units completed. c. total actual units started into production. d. none of the above. Answer: b Difficulty: 2 Objective: 2
33.
Companies that attempt to achieve zero defects in the manufacturing process treat spoilage as a. scrap. b. reworked units. c. abnormal spoilage. d. normal spoilage. Answer: c Difficulty: 2 Objective: 2
34.
Which one of the following conditions usually exists when comparing normal and abnormal spoilage to controllability? a. b. c. d. Normal Spoilage Controllable Controllable Uncontrollable Uncontrollable d Abnormal Spoilage Controllable Uncontrollable Uncontrollable Controllable Difficulty: 2 Objective: 2
Answer: 35.
Not counting spoiled units in the equivalent-unit calculation results in a. lower cost per good unit. b. higher cost per good unit. c. better management information. d. both (a) and (c). Answer: b Difficulty: 2 Objective: 2
36.
Recognition of spoiled units when computing output units a. highlights the costs of normal spoilage to management. b. distorts the accounting data. c. focuses management's attention on reducing spoilage. d. results in both (a) and (c). Answer: d Difficulty: 2 Objective: 2
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 37 THROUGH 41. Astoria Computer Systems, Inc., manufactures printers. All direct materials are added at the inception of the production process. During January, the accounting department noted that there was no beginning inventory. Direct materials purchases totaled $100,000 during the month. Work-in-process records revealed that 4,000 cards were started in January, 2,000 cards were complete, and 1,500 units were spoiled as expected. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. 37. What are the respective direct material costs per equivalent unit, assuming spoiled units are recognized or ignored? a. $20.00; $35.00 b. $25.00; $40.00 c. $30.00; $45.00 d. $35.00; $50.00 Answer: b Difficulty: 2 Recognized $100,000 4,000 $ 25.00 Objective: Problem # (37) 2 Ignored $100,000 2,500 $ 40.00
Cost to account for: Divided by equivalent units Cost per equivalent unit Assigned to: Good units completed (2,000 x $25; $40) Normal spoilage (1,500 x $25) Costs transferred out WIP ending inventory (500 x $25; $40) Cost accounted for: 38.
$ 50,000 37,500 87,500 12,500 $100,000 (38/39) (40)
$ 80,000 0 80,000 20,000 $100,000
What is the direct material cost assigned to good units completed when spoilage units are recognized? a. $50,000 b. $100,000 c. $80,000 d. $87,500 Answer: d Difficulty: See question #37 for computations. 3 Objective: 2
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39.
What is the cost transferred out assuming spoilage units are ignored? a. $87,500 b. $80,000 c. $50,000 d. $77,500 Answer: b Difficulty: See question #37 for computations. 3 Objective: 2
40.
What are the amounts allocated to the work-in-process ending inventory assuming spoilage units are recognized and ignored, respectively? a. $20,000; $24,500 b. $30,000; $34,250 c. $12,500; $20,000 d. $37,500; $40,000 Answer: c Difficulty: See question #37 for computations. 3 Objective: 2
41.
Spoilage costs allocated to ending work in process are larger by which method and by how much? a. When spoiled units are recognized by $2,500 b. When spoiled units are recognized by $4,250 c. When spoiled units are ignored by $7,500 d. When spoiled units are recognized by $7,500 Answer: c Difficulty: 3 $20,000- $12,500 = $7,500 or $15.00 x 500 units = $7,500 Objective: 2
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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 42 THROUGH 47. Craft Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to nondetectible materials defects. Inspection occurs when units are 50% converted. Spoiled units generally constitute 5% of the good units. Data for December 20x3 are as follows: WIP, beginning inventory 12/1/20x3 Direct materials (100% complete) Conversion costs (75% complete) Started during December Completed and transferred out 12/31/20x3 WIP, ending inventory 12/31/20x3 Direct materials (100% complete) Conversion costs (65% complete) Costs for December: WIP, beginning Inventory: Direct materials Conversion costs Direct materials added Conversion costs added 42. What is the number of total spoiled units? a. 1,600 units b. 2,000 units c. 2,700 units d. 3,600 units Answer: d Difficulty: 2 Objective: 2 Spoiled units = (10,000 units + 40,000) - (38,400 units + 8,000) = 3,600 units 43. Normal spoilage totals a. 1,600 units. b. 2,000 units. c. 1,920 units. d. 2,700 units Answer: c Difficulty: 2 Normal spoilage = 5% x 38,400 units = 1,920 spoiled units 44. Abnormal spoilage totals a. 1,600 units. b. 2,000 units. c. 1,680 units. d. 1,920 units. Answer: c Difficulty: 3 Abnormal spoilage = 3,600 units - 1,920 units = 1,680 units
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10,000 units 40,000 units 38,400 units 8,000 units
$ 50,000 30,000 100,000 140,000
Objective:
2
Objective:
2
45.
What is the total cost per equivalent unit using the weighted-average method of process costing? a. $3.00 b. $3.60 c. $6.60 d. $4.60 Answer: c Difficulty: 2 Objective: 3
WIP, beginning inventory Costs added during period Total cost to account for Divide by equivalent units Equivalent-unit costs
Direct Materials $ 50,000 100,000 150,000 50,000 $ 3.00
Conversion Costs $ 30,000 140,000 170,000 47,200 $ 3.60
Total cost per equivalent unit = $3.00 + $3.60 = $6.60 46. What cost is allocated to abnormal spoilage using the weighted-average process-costing method? a. $0 b. $ 7,360 c. $11,088 d. $16,400 Answer: c Difficulty: 1,680 units x $6.60 = $11,088 47. 2 Objective: 3
What are the amounts of direct materials and conversion costs assigned to ending work in process using the weighted-average process-costing method? a. $18,720; $24,000 b. $22,900; $19,820 c. $24,000; $18,720 d. $28,560; $14,160 Answer: c Difficulty: 2 Direct materials = 8,000 units x $3.00 = $24,000 Conversion costs = 5,200 units x $3.60 = $18,720 Objective: 3
48.
The cost per good unit in the weighted-average method is equal to a. the total cost of direct materials and conversion costs per equivalent unit, plus a share of normal spoilage. b. the sum of the costs per equivalent unit of direct materials, and conversion costs. c. the total costs divided by total equivalent units. d. none of the above. Answer: a Difficulty: 2 Objective: 3
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49.
Under the FIFO method, all spoilage costs are assumed to be a. related to the units in beginning inventory, plus the units completed during the period. b. related to the units completed during the period. c. related to the units in ending inventory. d. related to the units in both beginning and ending inventory plus the units completed during the period. Answer: b Difficulty: 2 Objective: 4
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 50 THROUGH 53. Cartwright Custom Carpentry manufactures chairs in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to nondetectible material defects. Spoiled units generally constitute 3% of the good units. Data provided for March 20x3 are as follows: WIP, beginning inventory 3/1/20x3 Direct materials (100% complete) Conversion costs (89.5% complete) Started during March Completed and transferred out WIP, ending inventory 3/31/20x3 Direct materials (100% complete) Conversion costs (75% complete) Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added 50. 30,000 units
80,000 units 86,000 units 20,000 units
$ 70,000 40,000 160,000 120,000
What are the normal and abnormal spoilage units, respectively, for March when using FIFO? a. 2,580 units; 1,420 units b. 1,950 units; 1,390 units c. 1,690 units; 1,050 units d. 1,420 units; 2,000 units Answer: a Difficulty: 3 Normal spoilage = 3% x 86,000 units = 2,580 spoiled units Abnormal spoilage = 4,000 units - 2,580 = 1,420 units Objective: 4
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51.
What costs would be associated with normal and abnormal spoilage, respectively, using the FIFO method of process costing? a. $5,890.64; $9,133.20 b. $5,890.64; $5,826.00 c. $6,469.64; $7,690.36 d. $9,133.20; $5,026.80 Answer: d Difficulty: 3 Objective: 4
Direct Materials WIP, beginning inventory Costs added during period Total cost to account for Divided by equivalent units Equivalent-unit costs $ $160,000 160,000 80,000* 2.00
Conversion Costs $ 120,000 120,000 78,150** $ 1.54
(56,000 + 2,580 + 1,420 + 20,000) = 80,000 units (3,150 + 56,000 + 2,580 + 1,420 + 15,000) = 78,150 units Normal Spoilage = 2,580 units x $3.54 = $9,133.20 Abnormal Spoilage = 1,420 units x $3.54 = $5,026.80 52. What costs are allocated to the ending work-in-process inventory for direct materials and conversion costs, respectively, using the FIFO method of process costing? a. $38,250; $24,850 b. $40,000; $23,100 c. $40,000; $21,590 d. $49,500; $13,600 Answer: b Difficulty: 3 Direct materials: 20,000 units x $2.00 = $40,000 Conversion costs: 15,000 units x $1.54 = $23,100 Objective: 4
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53.
Which of the following journal entries correctly represents the transfer of completed goods for the current period using the FIFO method of process costing? a. Finished Goods $ 10,560.28 Loss from Spoilage $ 10,560.28 b. Loss from Spoilage $ 5,026.80 Finished Goods $ 5,026.80 c. Finished Goods $327,251.00 Work in Process $327,251.00 d. Finished Goods $401,700.00 Work in Process $401,700.00 Answer: c Difficulty: $ 3 Objective: 4
Abnormal spoilage Beginning WIP - completed Costs added Started and completed Normal spoilage Total cost transferred out 54.
5,026.80 110,000.00 4,851.00 198,240.00 9,133.20 $327,251.00
The standard-costing method a. adds a layer of complexity to the calculation of equivalent-unit costs in a processcosting environment. b. makes calculating equivalent-unit costs unnecessary. c. requires an analysis of the spoilage costs in beginning inventory. d. requires an analysis of the spoilage costs in ending inventory. Answer: b Difficulty: 2 Objective: 5
55.
The inspection point is a. the stage of the production cycle where products are checked to determine whether they are acceptable or unacceptable units. b. the point at which costs are allocated between normal and abnormal spoilage. c. the point at which the calculation of equivalent units is made. d. none of the above. Answer: a Difficulty: 2 Objective: 5
56.
When spoiled goods have a disposal value, the net cost of the spoilage is computed by a. deducting disposal value from the costs of the spoiled goods accumulated to the inspection point. b. adding the costs to complete a salable product to the costs accumulated to the inspection point. c. calculating the costs incurred to the inspection point. d. none of the above. Answer: a Difficulty: 2 Objective: 5
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57.
The costs of normal spoilage are allocated to the units in ending work-in-process inventory, in addition to completed units a. if the units in ending inventory have not passed the inspection point. b. if the units in ending work-in-process inventory have passed the inspection point. c. if the units in ending work in process inventory are more than 50% complete. d. if the units in ending work-in-process inventory are less than 50% complete. Answer: b Difficulty: 3 Objective: 5
58.
The Harleysville Manufacturing Shop produces motorcycle parts. Typically, 10 pieces out of a job lot of 1,000 parts are spoiled. Costs are assigned at the inspection point, $50.00 per unit. Spoiled pieces may be disposed of at $10.00 per unit. The spoiled goods must be inventoried appropriately when the normal spoilage is detected. The current job requires the production of 2,500 good parts. Which of the following journal entries properly reflects the recording of spoiled goods? a. Materials Control $ 200 Manufacturing Overhead Control $ 800 Work-in-Process Control $1,000 b. Materials Control $ 250 Manufacturing Overhead Control $1,000 Work-in-Process Control $1,250 c. Work-in-Process Control $1,250 Materials Control $ 250 Manufacturing Overhead Control $1,000 d. Manufacturing Overhead Control $1,000 Materials Control $ 200 Work-in-Process Control $ 800 Answer: b Difficulty: 2 Objective: 6
Materials Control: Manufacturing Overhead Control: WIP Control:
25 pieces x $10.00 = $250 25 pieces x ($50.00 - $10.00) = $1,000 25 pieces x $50.00 = $1,250
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59.
The Harleysville Manufacturing Shop produces motorcycle parts. Typically, 10 pieces out of a job lot of 1,000 parts are spoiled. Costs are assigned at the inspection point, $50.00 per unit. Spoiled pieces may be disposed of at $10.00 per unit. The spoiled goods must be inventoried appropriately when the normal spoilage is detected. Job 101 requires the production of 2,500 good parts. Which of the following journal entries would be correct if the spoilage occurred due to specifications required for Job 101? a. Work-in-Process Control $100 Materials Control $100 b. Materials Control $100 Work-in-Process Control $100 c. Materials Control $250 Work-in-Process Control $250 d. Work-in-Process Control $250 Materials Control $250 Answer: c 25 pieces x $10.00 = $250 Difficulty: 2 Objective: 6
60.
A difference between job costing and process costing is a. that job-costing systems usually do not distinguish between normal spoilage attributable to all jobs and normal spoilage attributable to a specific job. b. that job-costing systems usually distinguish between normal spoilage attributable to a specific job and spoilage common to all jobs. c. that process costing normally does not distinguish between normal spoilage attributable to a specific job and spoilage common to all jobs. d. both (b) and (c). Answer: d Difficulty: 2 Objective: 6
61.
Which of the following entries reflects the original cost assignment before production items are reworked? a. Work-in-Process Control XXX Materials Control XXX Wages Payable Control XXX Manufacturing Overhead Allocated XXX b. Finished Goods Control XXX Work-in-Process Control XXX c. Manufacturing Overhead Allocated XXX Materials Control XXX Wages Payable Control XXX Work-in-Process Control XXX d. Materials Control XXX Wages Payable Control XXX Work-in-Process Control XXX Manufacturing Overhead Allocated XXX Answer: a Difficulty: 2 Objective: 7
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62.
Accounting for rework in a process-costing system a. accounts for normal rework in the same way as a job-costing system. b. requires abnormal rework to be distinguished from normal rework. c. if the rework is normal, then rework is accounted for in the same manner as accounting for normal rework common to all jobs. d. all of the above are correct. Answer: d Difficulty: 2 Objective: 7
63.
In accounting for scrap, which one of the following statements is FALSE? a. Normal scrap is accounted for separately from abnormal scrap. b. In accounting for scrap, there is no distinction between the scrap attributable to a specific job and scrap common to all jobs. c. Initial entries to scrap accounting records are most often made in dollar terms. d. All of the above are false. Answer: d Difficulty: 3 Objective: 7
64.
When the amount of scrap is immaterial, the easiest accounting entry when recording scrap sold for cash is a. Sales of Scrap Cash b. Cash Manufacturing Overhead Control c. Cash Sales of Scrap d. Accounts Receivable Sales of scrap Answer: c Difficulty: 2 Objective: 8
65.
Assume the amount of scrap is material and the scrap is sold immediately after it is produced. If the scrap attributable to a specific job is sold on account, the journal entry is: a. Work-in-Process Control Cash b. Work-in-Process Control Accounts Receivable c. Accounts Receivable Work-in-Process Control d. Work-in-Process Control Accounts Receivable Answer: c Difficulty: 3 Objective: 8
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66.
If scrap, common to jobs, all is returned to the storeroom and the time between the scrap being inventoried and its disposal is quite lengthy, the journal entry is: a. Work-in-Process Control Materials Control b. Materials Control Work-in-Process Control c. Manufacturing Overhead Control Materials Control d. Materials Control Manufacturing Overhead Control Answer: d Difficulty: 3 Objective: 8
67.
The accounting for scrap under process costing is similar to a. the accounting under job costing when scrap is different for each job. b. the accounting under job costing when scrap is common to all jobs. c. the accounting under process costing when scrap is different for each job. d. the accounting under process costing when scrap is a common to all jobs. Answer: b Difficulty: 2 Objective: 8
68.
Which of the following is NOT a major consideration when accounting for scrap? a. Keeping detailed records of physical quantities of scrap at all stages of the production process b. Inventory costing including when and how scrap affects operating income c. Planning and control including physical tracking d. Decisions as to whether to group scrap with reworked units Answer: d Difficulty: 2 Objective: 8
69.
Normal spoilage is computed on the basis of a. the number of good units that pass inspection during the current period. b. the number of units that pass the inspection point during the current period. c. the number of units that are 100% complete as to materials. d. none of the above. Answer: a Difficulty: 2 Objective: A
70.
Which of the following INCORRECTLY reflects what units passed inspection this period? Assume beginning work in process was completed and ending work in process was started during the period. Inspection Point at Completion Level 10% 50% 100% a. Beginning work in process (30% complete) No Yes Yes b. Started and completed Yes Yes Yes c. Ending work in process (40% complete) Yes No No d. Beginning work in process (5% complete) Yes No No Answer: d Difficulty: 3 Objective: A
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EXERCISES AND PROBLEMS 71. Distinguish among spoilage, reworked units, and scrap. Give an example of each. Answer: Spoilage refers to unacceptable units of production that are discarded or are sold for reduced prices. Both partially completed or fully completed units of output can be spoiled. Examples are defective clothes sold as seconds. Reworked units are unacceptable units of production that are subsequently repaired and sold as acceptable finished goods. Defective units of product (such as pagers, computer disk drives, computers, and telephones) detected during production or immediately after production but before units are shipped to customers, can sometimes be reworked and sold as good products. Scrap is material left over when making a product. It has low sales value compared with the sales value of the product. Examples are shavings and short lengths from woodworking operations and edges left over from plastic molding operations. Difficulty: 72. 1 Objective: 1
For each of the following items identify whether it is spoilage, reworked units, or scrap. _______________ _______________ _______________ _______________ _______________ _______________ _______________ Answer: a. b. c. d. e. f. g. spoilage scrap scrap spoilage spoilage and rework scrap spoilage (usually too complex to rework) 2 Objective: 1 a. b. c. d. e. f. g. Defective jeans sold as seconds Shavings Edges from plastic moldings Carpets sold as seconds Precision tools that are not built successfully to the necessary tolerance, but can be successfully converted to a saleable product Rock extracted as a result of mining processing Complex defective products such as semiconductors
Difficulty:
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73.
What are the objectives in accounting for spoilage? Answer: The key objectives in accounting for spoilage are determining the magnitude of the costs of the spoilage and distinguishing between the costs of normal and abnormal spoilage. In order to effectively manage a company (or a division of a business), a manager needs information concerning how his business is performing. Spoilage is a cost, which should be controlled and minimized. The dimensions of the cost must be known (the dollar amount of the spoilage). The accounting system must be capable of determining the dollar amount of the spoilage costs while distinguishing between normal and abnormal spoilage. This information must be reported and available to management on a timely basis. Difficulty: 2 Objective: 2
74.
The Clay Shop manufactures pottery products. All direct materials are included at the inception of the production process. For April, there was no beginning inventory in the processing plant. Direct materials totaled $310,000 for the month. Work-in-process records revealed that 5,000 tons were started in April and that 3,000 tons were finished; 1,000 tons were spoiled as expected. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. Required: a. What is the cost per equivalent unit if spoiled units are recognized or ignored? b. What are the costs assigned to completed units when spoilage units are recognized or when they are not recognized? c. What are the costs transferred out if spoilage units are recognized or ignored? d. What are the amounts allocated to the work-in-process ending inventory when spoilage units are recognized or ignored? Answer: a. Cost to account for Divided by equivalent units Cost per equivalent unit b. Assigned to good units completed: (3,000 x $62) (3,000 x $77.50) Transferred out - Finished Normal spoilage (1,000 x $62) Total Ending work-in-process inventory: (1,000 x $62) (1,000 x $77.50) 2 Objective: Recognized $310,000 5,000 $ 62 $186,000 $232,500 $186,000 62,000 $248,000 $ 62,000 $ 77,500 2 $232,500 0 $232,500 Ignored $310,000 4,000 $ 77.50
c.
d.
Difficulty:
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75.
Endicott Shoes manufactures shoes. All direct materials are included at the inception of the production process. For March, there were 1,400 units in beginning inventory with a direct material cost of $700. Direct materials totaled $15,000 for the month. Work-inprocess records revealed that 35,000 shoes were started in March and that 30,000 were finished. Normal spoilage of 2% of units finished was incurred. Ending work-inprocess units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. Endicott uses the weighted-average method. Required: a. b. What are the direct materials costs assigned to completed good units when spoilage units are recognized or when they are ignored? What are the direct material amounts allocated to the work-in-process ending inventory when spoilage units are recognized or ignored?
Answer: a. Equivalent units (spoilage recognized) = 1,400 + 35,000 = 36,400 Equivalent units (spoilage ignored) = 1,400 +35,000 - (30,000 x 0.02) = 35,800 Recognized Cost to account for: Beginning work in process Current period Total costs to account for Divided by equivalent units Cost per equivalent unit Assigned to good units: (29,400 x $0.431) (29,400 x $0.439) b. Ending work in process: (6,400 x $0.431) (6,400 x $0.439) 3 Objective: 3 $ 700 15,000 $15,700 36,400 $ 0.431 $12,671 $12,907 $ 2,758 $ 2,810 Ignored $ 700 15,000 $15,700 35,800 $ 0.439
Difficulty:
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76.
Viking Sports is a manufacturer of sportswear. It produces all of its products in one department. The information for the current month is as follows: Beginning work in process Units started Units completed Ending work in process Spoilage Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labor during month 20,000 units 40,000 units 50,000 units 8,000 units 2,000 units $12,000 $ 4,000 $60,000 $20,000
Beginning work in process was half complete as to conversion. Direct materials are added at the beginning of the process. Factory overhead is applied at a rate equal to 50% of direct manufacturing labor. Ending work in process was 60% complete. All spoilage is normal and is detected at end of the process. Required: Prepare a production cost worksheet if spoilage is recognized and the weighted-average method is used. Answer: PRODUCTION COST WORKSHEET Flow of Production Work in process, beginning Started during period To account for Good units completed Normal spoilage Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs Physical units 20,000 40,000 60,000 50,000 2,000 8,000 60,000 Totals $ 16,000 90,000 106,000 $ 1.80 Direct materials Conversion
50,000 2,000 8,000 60,000 Direct Materials $12,000 60,000 72,000 60,000 $ 1.20
50,000 2,000 4,800 56,800 Conversion $ 4,000 30,000 34,000 56,800 $ 0.60
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76.
(continued) Assignment of costs Costs transferred out (50,000 x $1.80) Normal spoilage (2,000 x $1.80) Work in process, ending Direct materials (8,000 x $1.20) Conversion (8,000 x $0.60 x 0.60) Costs accounted for Difficulty: 2 Objective: 3 $ 90,000 3,600 9,600 2,880 $106,080
(Differences may be due to rounding)
77.
New Image Sports uses a process-costing system. For March, the company had the following activities: Beginning work-in-process inventory (1/3 complete) Units placed in production Good units completed Ending work-in-process inventory Cost of beginning work in process Direct material costs, current Conversion costs, current 6,000 units 24,000 units 18,000 units 10,000 units $ 5,000 $18,000 $13,800
Direct materials are placed into production at the beginning of the process. All spoilage is normal and is detected at the end of the process. Ending WIP is 50% completed as to conversion. Required: Prepare a production cost worksheet using the FIFO method.
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77.
Answer: Normal spoilage = 6,000 + 24,000 - 18,000 - 10,000 = 2,000 Started and completed = 18,000 - 6,000 = 12,000 PRODUCTION COST WORKSHEET Flow Of Production Physical Units Work in process, beginning 6,000 Started during period 24,000 To account for 30,000 Good units completed: Beginning work in process Started and completed Normal spoilage Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs 6,000 12,000 2,000 10,000 30,000 Totals $ 5,000 31,800 $36,800 $ 1.35 Direct Materials Conversion
12,000 2,000 10,000 24,000 Direct Materials $18,000 $18,000 24,000 $ 0.75
4,000 12,000 2,000 5,000 23,000 Conversion $13,800 $13,800 23,000 $ 0.60
Assignment of cost: Work in process, beginning Completion of beginning (4,000 x $0.60) Total beginning inventory Started and completed (12,000 x $1.35) Normal spoilage (2,000 x $1.35) Total costs transferred out Work in process, ending Direct materials (10,000 x $0.75) Conversion (10,000 x $0.60 x 0.5) Costs accounted for Difficulty: 3 Objective: 4
$ 5,000 2,400 7,400 16,200 2,700 26,300 $7,500 3,000 10,500 $36,800
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78.
Weather Instruments assembles products from component parts. It has two departments that process all products. During January, the beginning work in process in the assembly department was half complete as to conversion and complete as to direct materials. The beginning inventory included $12,000 for materials and $4,000 for conversion costs. Overhead is applied at the rate of 50% of direct manufacturing labor costs. Ending work-in-process inventory in the assembly department was 40% complete. All spoilage is considered normal and is detected at the end of the process. Beginning work in process in the finishing department was 75% complete as to conversion and ending work in process was 25% converted. Direct materials are added at the end of the process. Beginning inventories included $16,000 for transferred-in costs and $10,000 for direct manufacturing labor costs. Overhead in this department is equal to direct manufacturing labor costs. Additional information about the two departments follows: Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Direct manufacturing labor Required: Prepare a production cost worksheet using weighted-average for the assembly department and FIFO for the finishing department. Assembly 20,000 40,000 50,000 8,000 $44,000 $16,000 Finishing 24,000 ? 54,000 20,000 $28,000 $24,000
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78.
Answer: Normal spoilage in assembly = 20,000 + 40,000 - 50,000 - 8,000 = 2,000 PRODUCTION COST WORKSHEET Assembly Department Weighted-Average Method Flow of production Physical Units Work in process, beginning 20,000 Started during period 40,000 To account for 60,000 Good units completed and Transferred out Normal spoilage Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs 50,000 2,000 8,000 60,000 Totals $16,000 68,000 84,000 $ 1.44 Direct Materials Conversion
50,000 2,000 8,000 60,000 Direct materials $12,000 44,000 56,000 60,000 $ 0.93 $72,000 2,880 74,880 $7,440 1,632 9,072 $83,952
50,000 2,000 3,200 55,200 Conversion $ 4,000 24,000 28,000 55,200 $ 0.51
Assignment of costs Transferred out (50,000 x $1.44) Normal spoilage (2,000 x $1.44) Total costs transferred out Work in process, ending Direct materials (8,000 x $0.93) Conversion (8,000 x 0.40 x $0.51) Costs accounted for
(Differences may be due to rounding)
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78.
(continued) PRODUCTION COST WORKSHEET Finishing Department FIFO Method Flow of Production Work in process, beginning Started during period To account for Good units completed: Beginning work in process Started and completed Work in process, ending Accounted for Physical Units 24,000 50,000 74,000 24,000 30,000 20,000 74,000 Physical Units $ 36,000 150,880 186,880 $ 3.19 $ Direct Materials Transferred Conversion ___In___
24,000 30,000 0 54,000 Direct Materials $28,000 28,000 54,000 0.52 $
6,000 30,000 5,000 41,000
30,000 20,000 50,000
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
Transferred Conversion ___In___ $48,000 48,000 41,000 1.17 $ 36,000 $74,880 74,880 50,000 $ 1.50
Assignment of costs: Work in process, beginning Completion of beginning: Direct materials (24,000 x $0.52) Conversion costs (24,000 x 0.25 x $1.17) Total beginning inventory Started and completed (30,000 x $3.19) Total costs transferred out Work in process, ending Transferred in (20,000 x $1.50) Conversion costs (20,000 x $1.17 x 0.25) Costs accounted for
$12,480 7,020
19,500 55,500 95,700 151,200
$30,000 5,850
35,850 $187,050
(Differences may be due to rounding)
Difficulty:
3
Objective:
4
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79.
Valentine Florists operate a flower shop. Because most of their orders are via telephone or fax, numerous orders have to be reworked. The average cost of the reworked orders is $6: $3.75 for labor, $1.50 for more flowers, and $0.75 for overhead. This ratio of costs holds for the average original order. On a recent day, the shop reworked 48 orders out of 249. The original cost of the 48 orders totaled $720. The average cost of all orders is $18.75, including rework, with an average selling price of $30 Required: Prepare the necessary journal entry to record the rework for the day if the shop charges such activities to Arrangement Department Overhead Control. Prepare a journal entry to transfer the finished goods to Finished Goods Inventory. Answer: Arrangement Department Overhead Control Materials Control (48 x $1.50) Wages Payable Control (48 x $3.75) Shop Overhead Control (48 x $0.75) Finished Goods Work-in-Process Control Difficulty: 2 Objective: 7 $288 $ 72 180 36 $720 $720
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80.
Springfield Sign Shop manufactures only specific orders. It uses a standard cost system. During one large order for the airport authority, an unusual number of signs were spoiled. The normal spoilage rate is 10% of units started. The point of first inspection is half way through the process, the second is three-fourths through the process, and the final inspection is at the end of the process. Other information about the job is as follows: Signs started Signs spoiled 3,000 450
Direct materials put into process at beginning $ 60,000 Conversion costs for job $120,000 Standard direct material costs per sign $27 Standard conversion cost per sign $54 Average point of spoilage is the 3/4 completion point Average current disposal cost per spoiled sign $15 Required: Make necessary journal entries to record all spoilage. Answer: Average cost per sign when spoiled: Direct material cost Conversion ($54 x 3/4) Total cost per spoiled sign Abnormal spoilage $27.00 40.50 $67.50
= Total spoilage - normal spoilage = 450 - 300 = 150 $ 6,750 7,875 15,750 $30,375
Materials Control (450 x $15) Loss from Abnormal Spoilage (150 x $52.50) Manufacturing Overhead Control (300 x $52.50) Work-in-Process Control, airport job (450 x 67.50) Difficulty: 3 Objective: A
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CRITICAL THINKING 81. Busy Hands Craft Company is a small manufacturing company that specializes in arts and crafts items. It recently bought an old textile mill that it has refurbished to manufacture and dye special cloth to be sold in its craft shops. However, it discovered something new for its accounting system. The company never before had finished goods that did not meet standard, leftover materials from processing runs, or unacceptable outputs. Required: As the business consultant for the company, explain how it can handle the items mentioned. Include any potential problems with the accounting procedures. Answer: First, an explanation of each item is needed. 1. 2. 3. Rework units are those units that are defective but can be reworked and sold as acceptable finished goods. Scrap is leftover material that may have a minimal sales value. Scrap may be either sold, disposed of, or reused in another job or processing run. Spoilage is the production outputs that cannot be reworked. These units are discarded or sold for minimal value.
The potential problem with these areas is that they may be treated differently by the accounting system. The company should establish an acceptable and consistent method of handling each area. A consistent policy also aids the managers who are being evaluated by their department's efforts. Difficulty: 82. 2 Objective: 1
You are the chief financial officer of a lumber mill, and are becoming quite concerned about the spoilage, scrap, and reworked items associated with your production processes. Your firm produces mainly products for the building industry. Required: Discuss the problems associated with these items, and the methods your company can use to reduce spoilage, scrap, and reworked items. Answer: The problems associated with these items include: 1. Your company pays for the total raw material not just the portion converted into a salable product. 2. The cost of disposing of these unsalable or unused items, both the disposal costs and the costs and problems associated with finding a landfill site or other disposal site. 3. These disposed of or unused items can create an eyesore, and attract the wrath of the environmentalists. 4. Developing high-value added products that can be produced from these various items.
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82.
(continued) The methods your company can use to reduce these items include: 1. Calculating the costs of these problems. An accurate assessment of the total costs should certainly provide an incentive to your firm to investigate possible actions. 2. Exploring methods of redesigning the production process to minimize these costs. 3. Investing in more sophisticated capital equipment that can be designed to reduce these costs. Difficulty: 3 Objective: 1
83.
Harriet has been reviewing the accounting system for her company and is very concerned about the accounting for spoilage. It appears that spoilage is accounted for only at the end of the processing cycle. While this concept is acceptable in general, Harriet believes that a better method can be found to properly account for the spoilage when it occurs. She believes that there must be something better than the weightedaverage method of accounting for spoilage. She would like the company to use a method that provides closer tracking of the spoilage with the accounting for the spoilage. Required: Discuss the problems Harriet is having with the accounting system. Answer: The main problem Harriet has is that she does not understand the accounting system. The use of weighted-average or FIFO is not for addressing the problems of spoilage tracking. While the methods do differ slightly in the tracking of costs, FIFO keeps beginning inventories separate, and the point of accounting for spoilage is not affected by the accounting method. If the company can account for spoilage at different stages of completion, these stages can be converted into percentage of completion points, and the spoilage can be accounted for as the process completes each stage. Difficulty: 3 Objective: 2
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84.
Shazam Machines produces numerous types of money change machines. All machines are made in the same production department and many use exactly the same processes. Because customers have such different demands for the machine characteristics, the company uses a job-costing system. Unfortunately, some of the production managers have been upset for the last few months when their jobs were charged with the spoilage that occurred over an entire processing run of several types of machines. Some of the best managers have even threatened to quit unless the accounting system is changed. Required: What recommendations can you suggest to improve the accounting for spoilage? Answer: Since the manufacturing process uses similar workstations for the products, it may be best to let the spoilage be considered a manufacturing problem rather than a job problem. With this assumption, the spoilage will be spread over the entire production process with each job being charged an appropriate amount of spoilage, thereby relieving some jobs of bearing the entire burden of spoilage just because they were being worked on when the machines or process malfunctioned. Difficulty: 2 Objective: 6
85.
For each of the following (actual real-world examples) develop products that can be sold from the listed scrap. a. b. c. The Federal Reserve Banks destroy old money. Burning this money is usually forbidden under the environmental laws of most municipalities. A manufacturer of cotton undergarments for female prisoners has much cotton left over. The manufacturer is located in a very rural area of Alabama. A hog renderer that has hog bristles as a result of the slaughtering process.
Answer: a. The Federal Reserve Banks bag up the shredded money and sell it in gift shops. This is a very efficient use of the scrap. The purchasers pay a price in excess of what the Federal Reserve would receive from any other source. Other uses might include selling for use as packaging materials. b. The above manufacturer sells the scrap for use in the cleaning of guns. Other uses would include similar cleaning uses or dyeing the cloth and selling it for ornaments. The hog bristles can be used in shaving equipment and for bristle brushes. 2 Objective: 8
c.
Difficulty:
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