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ch18 slides - Spoilage, Rework, and Scrap Chapter 18 1...

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1 Spoilage, Spoilage, Rework, Rework, and Scrap and Scrap Chapter 18
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2 Distinguishing among spoilage, rework, and scrap.
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3 Terminology Spoilage refers to unacceptable units discarded or sold for reduced prices. Rework is units that are repaired. Scrap (Waste) is material left over.
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4 Accounting for normal and abnormal spoilage.
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5 Normal Spoilage Normal spoilage is spoilage that is an inherent result of the particular production process and arises even under efficient operating conditions. Normal spoilage rates should be computed using total good units completed as the base, not total actual units started in production.
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6 Abnormal Spoilage Abnormal spoilage is spoilage that should not arise under efficient operating conditions. Companies record the units of abnormal spoilage and keep a separate Loss from Abnormal Spoilage account.
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7 Product Product Product Product Product Product Product Product Design Waste (Scrap) A 4’x8’ sheet of material @ cost of $96 yields 8 circles/ $12 each
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8 Process Costing and Spoilage Example Big Mountain, Inc., manufactures skiing accessories. All direct materials are added at the beginning of the production process. In October, $95,200 in direct materials were introduced into production. Assume that 35,000 units were started, 30,000 good units were completed, and 1,000 units were spoiled (all normal spoilage).
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9 Process Costing and Spoilage Example Ending work in process was 4,000 units (each 100% complete as to direct material costs). Spoilage is detected upon completion of the process. Spoilage is typically assumed to occur at the stage of completion where inspection takes place.
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10 Process Costing and Spoilage Example Approach A recognizes spoiled units when computing output in equivalent units. Approach B does not count spoiled units when computing output in equivalent units.
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11 Approach A Example Costs to account for $95,200 Divide by equivalent units 35,000 Cost per equivalent unit 2.72 Good units completed: 30,000 × $2.72 $81,600 Add normal spoilage: 1,000 × $2.72 2,720 Costs of good units transferred out $84,320 Work in process: 4,000 × $2.72 10,880 Costs accounted for $95,200 Spoiled units accounted for separately
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12 Approach B Example Costs to account for $95,200 Divide by equivalent units 34,000 Cost per equivalent unit $ 2.80 Good units completed: 30,000 × $2.80 $84,000 Costs of good units transferred out $84,000 Work in process, ending: 4,000 × $2.80 11,200 Costs accounted for $95,200 Spoiled units “netted” out here (built into unit costs) Cost difference of $.08 ($2.80 vs 2.72) is inventory value difference of $11,200 vs. $10,880 or $320 (4,000 units x $.08)
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13 Accounting for spoilage in process costing using the weighted-average method.
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14 5 Steps 1. Summarize the Flow of Physical Units of Output.
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ch18 slides - Spoilage, Rework, and Scrap Chapter 18 1...

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