1. Spoilage, Rework and Scrap 1 Lecture 24 Readings Chapter 18,Cost Accounting, Managerial Emphasis, 14 th edition by Horengren

2. Learning Objectives Compute the predetermined overhead rate and apply overhead to products in a standard cost system. Compute and interpret the fixed overhead budget and volume variances. Accounting for spoilage under different methods of inventory systems and standard costing Accounting for rework in different situations under different costing methods Accounting for Scrap in different situations under different costing method Examples of spoilage 2

3. Accounting for Spoilage Costs Spoilage represents the amount of resources that go into the process, but DO NOT result in finished product. Managers face key problems related to spoilage: 1. Identifying whether it exists. 2. Determining whether it can be eliminated. 3. Deciding whether eliminating it is worthwhile. 4. Determining the cost of spoilage. The 5-step approach discussed earlier can be modified by including spoilage Spoilage represents the amount of resources that go into the process, but DO NOT result in finished product. Managers face key problems related to spoilage: 1. Identifying whether it exists. 2. Determining whether it can be eliminated. 3. Deciding whether eliminating it is worthwhile. 4. Determining the cost of spoilage. The 5-step approach discussed earlier can be modified by including spoilage

4. Accounting for Spoilage Costs Abnormal spoilage is the result of unusual operating problems. Abnormal spoilage is in addition to normal spoilage, and is recorded as a loss of the period. Normal spoilage occurs as a part of the regular operations of an efficient process. We will illustrate the spoilage using the December data for Spirit Beverages, but without the transferred-in costs.

5. Accounting for Spoilage Costs Spoilage is found at an inspection when 20% of the material has been added and the conversion is 50% complete.

6. Beginning Inventory 2,000 units 12,000 units started Spoilage 500 units 14,000 units 10,000 units completed Accounting for Spoilage Costs Complete the five-step process to assign costs to units completed and to units left in process for December. Ending Inventory 3,500 units

7. Accounting for Spoilage Costs

8. Units completed and transferred are 100% complete for both material and conversion.

9. Accounting for Spoilage Costs 20% of 500 units 50% of 500 units

10. 25% of 3,500 units60% of 3,500 units Accounting for Spoilage Costs

12. $22,000 ÷ 10,975 equivalent units $8,000 ÷ 12,350 equivalent units Accounting for Spoilage Costs

13. 10,000 equivalent units @ $2.0046 10,000 equivalent units @ $0.6478 Accounting for Spoilage Costs

14. 100 equivalent units @ $2.0046 250 equivalent units @ $0.6478 Accounting for Spoilage Costs

15. 875 equivalent units @ $2.0046 2,100 equivalent units @ $0.6478 Accounting for Spoilage Costs

16. Rework Rework is units of productions that are inspected, determined to be unacceptable, repaired and sold as acceptable finished goods. We again distinguish: Normal rework attributed to a specific job Normal rework, to all jobs Abnormal rework

17. Normal Rework Attributed to a Specific Job If rework is normal but occurs because of the requirements of a specific job, the rework costs are charged to that job. The journal entry would be: Work in process (specific job)3800 Material Control800 Wages Payable Control2000 Manufacturing Overhead Allocated1000

18. Normal Rework Common to All Jobs When rework is normal and not attributable to a specific job, the costs of rework are charged to manufacturing overhead and are spread through overhead allocation, to all jobs. Manufacturing Overhead Control3800 Material Control800 Wages Payable Control2000 Manufacturing Overhead Allocated1000 Yes, we both debit and credit manufacturing overhead control. Why?

19. Abnormal Rework If rework is abnormal, it is recorded by charging abnormal rework to a loss account. Loss from Abnormal Rework3800 Material Control800 Wages Payable Control2000 Manufacturing Overhead Allocated1000 To eliminate rework and simplify accounting, some companies set a standard of zero rework. All rework is then treated as abnormal and is written off as a cost of current period.

20. Scrap Scrap is residual material that results from manufacturing a product. It has low sales value compared with the total sales value of the product. No distinction is made between normal and abnormal scrap because low cost is assigned to scrap. The only distinction made is between scrap attributable to a specific job and scrap, to all jobs.

21. Scrap There are two aspects of accounting for scrap. Planning and control, including physical tracking. Inventory costing, including when and how scrap effects operating income. Initial entries to scrap records are commonly in physical terms.

22. Scrap Scrap is either: Sold or disposed of quickly. Or stored for later sale, disposal, or reuse.

23. Recognizing Scrap at the Time of Sale When the dollar amount of scrap is immaterial, the simplest accounting is to record the physical quantity of scrap returned to the storeroom and to regard scrap sales as a separate line item on the income statement. The following is the journal entry when the scrap is sold: Cash$XXX Scrap Revenues$XXX

24. Recognizing Scrap at the Time of Sale-- Sale Attributable to a Specific Job If the scrap can be traced to a specific job, the journal entry would be. Cash$XXX Work in process ( specific job)$XXX Remember, unlike spoilage and rework, there is no cost assigned to the scrap, and no distinction is made between normal and abnormal scrap. All scrap revenues, whatever the amount, are credited to the specific job. Scrap revenues reduce the cost of the job.

25. Recognizing Scrap at the Time of Sale-- Scrap Common to All Jobs When scrap is common to all jobs, the credit would be to manufacturing overhead. Crediting manufacturing overhead, would reduce the cost to all jobs. Cash$XXX Manufacturing Overhead$XXX

26. Two Important Questions with Regard to Scrap When should the value of scrap be recognized in the accounting records – at the time scrap is produced or at the time scrap is sold? How should the revenues from scrap be accounted for?

27. Example The Mendoza Company has an extensive job costing facility that uses a variety of metals. Consider each requirement independently.

28. Example Job 372 uses a particular alloy that is not used for any other job. Assume that scrap is material in amount and sold for $490 quickly after it is produced. Prepare the journal entry. Cash$490 Work in process$490

29. Example The scrap from job 372 consists of a metal used by many other jobs. No record is maintained at the time the scrap is generated by individual jobs. Assume the scrap is accounted for at the time of sale. Scrap totaling $4000 is sold. Prepare two alternative journal entries that could be used to account for the sale of the scrap.

30. Example If we regard the scrap sale as a separate line item of revenue (used when scrap amount is immaterial). Cash$4000 Sale of Scrap$4000 Regard scrap sale as offset against manufacturing overhead (used when scrap amount is material). Cash$4000 Manufacturing Overhead$4000

31. Example Suppose the scrap generated in requirement 2 is returned to the store room for future use and a journal entry is made to record the scrap. A month later, the scrap is reused as direct material on a subsequent job. Prepare the journal entry to record these transactions.

32. Example Materials Control$4000 Manufacturing Overhead$4000 To record value of scrap returned. Work in Process$4000 Materials Control$4000 To record reuse of scrap on a job

33. Some Spoilage Examples

34. Accounting for Normal Spoilage Two methods: Include the spoiled units in equivalent units Do not include the spoiled units in equivalent units

35. Illustration Physical UnitsDirect Materials Beginning work in process inventory0 Started during month10,000 Good units completed and transferred out5,000 Normal spoilage1,000 Ending work in process inventory4,000 Degree of completion of ending work in process 100% Direct material costs added in May $270,000 In this example inspection takes place at the end of the process so all spoiled units are 100% complete as to direct materials and conversion costs.

36. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output Costs per equivalent unit Assignment of cost: Good units completed: Add normal spoilage Total cost of good units completed and transferred out Ending work in process Costs accounted for

37. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,000 Costs per equivalent unit Assignment of cost: Good units completed: Add normal spoilage Total cost of good units completed and transferred out Ending work in process Costs accounted for Note normal abnormal spoiled units are included in this figure.

38. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,000 Costs per equivalent unit$27 Assignment of cost: Good units completed: Add normal spoilage Total cost of good units completed and transferred out Ending work in process Costs accounted for

39. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,000 Costs per equivalent unit$27 Assignment of cost: Good units completed:$135,000 Add normal spoilage Total cost of good units completed and transferred out Ending work in process Costs accounted for 5,000 units x $27 per unit

40. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,000 Costs per equivalent unit$27 Assignment of cost: Good units completed:$135,000 Add normal spoilage27,000 Total cost of good units completed and transferred out Ending work in process Costs accounted for 1,000 units x $27 per unit

41. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,000 Costs per equivalent unit$27 Assignment of cost: Good units completed:$135,000 Add normal spoilage27,000 Total cost of good units completed and transferred out 162,000 Ending work in process Costs accounted for

42. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,000 Costs per equivalent unit$27 Assignment of cost: Good units completed:$135,000 Add normal spoilage27,000 Total cost of good units completed and transferred out 162,000 Ending work in process108,000 Costs accounted for 4,000 units x $27 per unit

43. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,000 Costs per equivalent unit$27 Assignment of cost: Good units completed:$135,000 Add normal spoilage27,000 Total cost of good units completed and transferred out 162,000 Ending work in process108,000 Costs accounted for$270,000

44. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,0009,000 Costs per equivalent unit$27 Assignment of cost: Good units completed:$135,000 Add normal spoilage27,000 Total cost of good units completed and transferred out 162,000 Ending work in process108,000 Costs accounted for$270,000

45. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,0009,000 Costs per equivalent unit$27$30 Assignment of cost: Good units completed:$135,000 Add normal spoilage27,000 Total cost of good units completed and transferred out 162,000 Ending work in process108,000 Costs accounted for$270,000

46. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,0009,000 Costs per equivalent unit$27$30 Assignment of cost: Good units completed:$135,000$150,000 Add normal spoilage27,000 Total cost of good units completed and transferred out 162,000 Ending work in process108,000 Costs accounted for$270,000 5,000 units x $30 per unit

47. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,0009,000 Costs per equivalent unit$27$30 Assignment of cost: Good units completed:$135,000$150,000 Add normal spoilage27,0000 Total cost of good units completed and transferred out 162,000 Ending work in process108,000 Costs accounted for$270,000

48. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,0009,000 Costs per equivalent unit$27$30 Assignment of cost: Good units completed:$135,000$150,000 Add normal spoilage27,0000 Total cost of good units completed and transferred out 162,000150,000 Ending work in process108,000 Costs accounted for$270,000

49. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,0009,000 Costs per equivalent unit$27$30 Assignment of cost: Good units completed:$135,000$150,000 Add normal spoilage27,0000 Total cost of good units completed and transferred out 162,000150,000 Ending work in process108,000120,000 Costs accounted for$270,000 4,000 units x $30 per unit

50. Example Approach A: Count UnitsApproach B: Do Not Count Units Costs to account for$270,000 Divide by equivalent units of output 10,0009,000 Costs per equivalent unit$27$30 Assignment of cost: Good units completed:$135,000$150,000 Add normal spoilage27,0000 Total cost of good units completed and transferred out 162,000150,000 Ending work in process108,000120,000 Costs accounted for$270,000

51. Best Method Method A (include the spoiled units in equivalent units) is the best method as it more accurately allocates costs, and therefore will be used in working problems in this chapter.

52. Process Costing and Spoilage Let’s now look at an example of process costing with spoilage when there is beginning inventory ( not illustrated in previous example) using both weighted average and FIFO methodologies.

53. Example 1-Weighted Average Alston company uses weighted average. It has two departments: cleaning and milling. For the cleaning department, conversion costs are added evenly and direct materials are added at the beginning of the process. Spoiled costs are detected at the end of the process and are disposed of at net zero disposal value. All completed work is transferred to the milling department.

54. Example 1—Weighted Average Physical UnitsDirect Materials Conversion Costs Beginning work in process1,000$1,000$800 Degree of completion beginning work in process 100%80% Started9,000 Good units completed and transferred out7,400 Ending work in process1,600 Degree of completion ending work in process 100%25% Total costs added during May$9,000$8,000 Normal spoilage as a percentage of good units 10% Degree of completion of normal spoilage100% Degree of completion of abnormal spoilage100% Note: this only equals 9,000 units!

55. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current. To account for Good units completed and transferred out Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done to date

56. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for Good units completed and transferred out Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done to date

57. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done to date

58. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out 7400 Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done to date Remember this is weighted average, so we multiply physical units by 100% in each category

59. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out 7400 Normal spoilage740 Abnormal spoilage Ending work in process Accounted for Work done to date Normal spoilage is given, but if it were not, then we would multiply the 10% good spoilage rate by good units (not total units).

60. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out 7400 Normal spoilage740 Abnormal spoilage Ending work in process Accounted for Work done to date Important point. Since we are told that spoilage is detected at the end of the process, then the product is 100% complete for both direct materials and conversion costs.

61. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out 7400 Normal spoilage740 Abnormal spoilage260 Ending work in process Accounted for Work done to date Okay, how do we get this number? It is not given. We would take total units to account for of 10,000 units, subtract ending work-in- process of 1,600 units, normal spoilage of 740 units and good units transferred out of 7,400.

62. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out 7400 Normal spoilage740 Abnormal spoilage260 Ending work in process Accounted for Work done to date Since spoilage (both normal and abnormal) is determined at the end of the process, equivalent units for direct materials and conversion costs are both 100% of physical units.

63. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out 7400 Normal spoilage740 Abnormal spoilage260 Ending work in process1600 400 Accounted for Work done to date EWIP is given as 100% complete EWIP is given as 25% complet e

64. Equivalent Units Flow of ProductionPhysical Units Direct Materials Conversio n Costs Beginning work in process1000 Started during current.9000 To account for10000 Good units completed and transferred out 7400 Normal spoilage740 Abnormal spoilage260 Ending work in process1600 400 Accounted for10000 Work done to date (equiv. units)100008800 Now, just like in the previous chapter, we will use equivalent units in determining equivalent unit cost for direct materials and conversion costs.

65. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period Costs incurred to date Divide by equivalent units of work done to date Cost per equivalent unit Total cost to account for Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage Normal spoilage (740 units) Total cost of good units completed and transferred out Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

66. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date Divide by equivalent units of work done to date Cost per equivalent unit Total cost to account for Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage Normal spoilage (740 units) Total cost of good units completed and transferred out Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

67. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date Cost per equivalent unit Total cost to account for Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage Normal spoilage (740 units) Total cost of good units completed and transferred out Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

68. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit Total cost to account for Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage Normal spoilage (740 units) Total cost of good units completed and transferred out Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

69. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage Normal spoilage (740 units) Total cost of good units completed and transferred out Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

70. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for$18800 Assignment of costs: Good units completed and transferred out (7400 units) Costs before any normal spoilage$14800(7,400 x $1) + (7,400 + $1) Normal spoilage (740 units) Total cost of good units completed and transferred out Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

71. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for$18800 Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage$14800(7,400 x $1) + (7,400 + $1) Normal spoilage (740 units)1480(740 x $1) + (740 x $1) Total cost of good units completed and transferred out Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

72. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for$18800 Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage$14800(7,400 x $1) + (7,400 + $1) Normal spoilage (740 units)1480(740 x $1) + (740 x $1) Total cost of good units completed and transferred out16280 Abnormal spoilage (260 units) Ending work in process (1600 units) Total cost account for

73. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for$18800 Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage$14800(7,400 x $1) + (7,400 + $1) Normal spoilage (740 units)1480(740 x $1) + (740 x $1) Total cost of good units completed and transferred out16280 Abnormal spoilage (260 units)520($260 x $1) + ($260 x $1) Ending work in process (1600 units) Total cost account for While the normal spoilage are charged against the total cost of good units completed and transferred out, we will write off the abnormal spoilage against an income statement loss account.

74. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for$18800 Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage$14800(7,400 x $1) + (7,400 + $1) Normal spoilage (740 units)1480(740 x $1) + (740 x $1) Total cost of good units completed and transferred out16280 Abnormal spoilage (260 units)520($260 x $1) + ($260 x $1) Ending work in process (1600 units) Total cost account for Also note that since the cost of normal spoilage is included in the cost of goods transferred out, that the unit cost of these good which go into finished work in process is $16,280/7,400 units = $2.20 per unit).

75. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for$18800 Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage$14800(7,400 x $1) + (7,400 + $1) Normal spoilage (740 units)1480(740 x $1) + (740 x $1) Total cost of good units completed and transferred out16280 Abnormal spoilage (260 units)520($260 x $1) + ($260 x $1) Ending work in process (1600 units)2000(1600 x $1) + (400 x $1) Total cost account for

76. Total Production Costs Direct materials Conversion costs Beginning work in process$1800$1000$800 Costs incurred in current period1700090008000 Costs incurred to date100008800 Divide by equivalent units of work done to date100008800 Cost per equivalent unit$1 Total cost to account for$18800 Assignment of costs: Good units completed in transferred out (7400 units) Costs before any normal spoilage$14800(7,400 x $1) + (7,400 + $1) Normal spoilage (740 units)1480(740 x $1) + (740 x $1) Total cost of good units completed and transferred out16280 Abnormal spoilage (260 units)520($260 x $1) + ($260 x $1) Ending work in process (1600 units)2000(1600 x $1) + (400 x $1) Total cost account for$18800

77. Example 2– Weighted Average Spoilage Direct materials added at the beginning of the process. Conversion costs are added evenly. Spoiled units are not detectable before inspection of finished goods. Spoiled units are disposed of at zero net disposal value. Company uses weighted average method for process costing.

78. Physical Units Direct Materials Conversio n Costs Beginning work in process400$64,000$10,200 Degree of completion BWIP100% 30% Started during September 1700 Good units completed and transferred out1400 Ending work in process300 Degree of completion of EWIP100% 40% Total cost added September $378,000$153,600 Normal spoilage as a percentage of good units 15% Degree of completion of normal spoilage100% Degree of completion of abnormal spoilage 100%

79. Example 2 Before going too far, let’s do a little analysis on the data they have given us. Remember the beginning work in process plus started or transferred in must equal units completed and transferred out plus ending work in process. In this case we’re 400 units short! We are told the 15% of good units consist of normal spoilage (15% x 1400 = 210) Thus abnormal spoilage must be 400 -210 = 190 units.

80. Steps 1 and 2 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process400 Started current period1700 To account for2100 Goods completed and transferred out1400 Normal spoilage Abnormal spoilage Ending work in process Accounted for Work to date Up to here there’s nothing new, the same calculations as in the previous chapter.

81. Steps 1 and 2 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process400 Started current period1700 To account for2100 Goods completed and transferred out1400 Normal spoilage210 Abnormal spoilage Ending work in process Accounted for Work to date 15% x 1400 = 210 physical units normal storage. Since this is the weighted average method, we are 100% complete for direct materials and conversion costs.

82. Steps 1 and 2 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process400 Started current period1700 To account for2100 Goods completed and transferred out1400 Normal spoilage210 Abnormal spoilage190 Ending work in process Accounted for Work to date As mentioned earlier, 400 units - 210 units = 190 units which must be abnormal spoilage. Again, since we inspect at the end of the process, it is 100% completed.

83. Steps 1 and 2 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process400 Started current period1700 To account for2100 Goods completed and transferred out1400 Normal spoilage210 Abnormal spoilage190 Ending work in process300 120 Accounted for Work to date Nothing new here, calculate ending work in process as we did in the previous chapter.

84. Steps 1 and 2 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process400 Started current period1700 To account for2100 Goods completed and transferred out1400 Normal spoilage210 Abnormal spoilage190 Ending work in process300 120 Accounted for2100 Work to date21001920

85. Total Productio n Costs Direct Materials Conversio n Costs Beginning work in process$74,200$64,000$10,200 Cost in current month 531,600378,000153,600 Costs to date$442,000$163,800 Divided by equivalent units2,1001,920 Cost per equivalent unit$210.476$85.3125 Total cost to account for$605,800 Assignment of cost: Down to here there is nothing new, the same calculations as in the previous chapter.

86. Total Productio n Costs Direct Materials Conversio n Costs Beginning work in process$74,200$64,000$10,200 cost in current month 531,600378,000153,600 Costs to date$442,000$163,800 Divided by equivalent units2,1001,920 Cost per equivalent unit$257.7558$210.476$85.3125 Total cost to account for$605,800 Assignment of cost: Good units completed and transferred out Cost before any normal spoilage$414,104 Normal spoilage (210 units)62,116 Total cost of good units completed and transferred out 476,220 Remember, we’re going to attach the cost of normal spoilage to good units transferred out. Normal spoilage was ($210 x $210.476) + (210 x $85.3125) = $62,116.

87. Total Productio n Costs Direct Materials Conversio n Costs Beginning work in process$74,200$64,000$10,200 cost in current month 531,600378,000153,600 Costs to date$442,000$163,800 Divided by equivalent units2,1001,920 Cost per equivalent unit$210.476$85.3125 Total cost to account for$605,800 Assignment of cost: Good units completed and transferred out Cost before any normal spoilage$414,104 Normal spoilage (210 units)62,116 Total cost of good units completed and transferred out 476,220 Abnormal spoilage (190 units)56,199 We calculate abnormal spoilage the same way we did for normal spoilage, but this figure will be written off to a loss account on the income statement.

88. Total Productio n Costs Direct Materials Conversio n Costs Beginning work in process$74,200$64,000$10,200 cost in current month 531,600378,000153,600 Costs to date$442,000$163,800 Divided by equivalent units2,1001,920 Cost per equivalent unit$210.476$85.3125 Total cost to account for$605,800 Assignment of cost: Good units completed and transferred out Cost before any normal spoilage$414,104 Normal spoilage (210 units)62,116 Total cost of good units completed and transferred out 476,220 Abnormal spoilage (190 units)56,199 Ending work in process73,381 Total cost accounted for$605,800 Ending work in process and total cost account for our calculated the same way as in the previous chapter.

89. Example 3 Refer to Example 3. Using the same information perform the same calculations using FIFO.

90. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,200 Good units completed and transferred out From beginning work in process Started and completed Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done in current period Same methodology as previous chapter.

91. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done in current period (100% - 100%) x 400

92. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done in current period (100% - 30%) x 400 = 280

93. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed 1,000 Normal spoilage Abnormal spoilage Ending work in process Accounted for Work done in current period As in the chapter before, since these units were started and completed in the current period, equivalent units are 100% of physical units.

94. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed 1,000 Normal spoilage210 Abnormal spoilage Ending work in process Accounted for Work done in current period In this problem, the inspection takes place when the units are completely finished, thus equivalent units are 100% of finished units

95. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed 1,000 Normal spoilage210 Abnormal spoilage190 Ending work in process Accounted for Work done in current period The same for abnormal spoilage.

96. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed 1,000 Normal spoilage210 Abnormal spoilage190 Ending work in process Accounted for Work done in current period Can you tell the difference between normal and abnormal spoiled units by looking at them? No they are a normal or abnormal by definition only.

97. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed 1,000 Normal spoilage210 Abnormal spoilage190 Ending work in process300 120 Accounted for Work done in current period Ending work in process is 100% complete. It was started in this period.

98. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed 1,000 Normal spoilage210 Abnormal spoilage190 Ending work in process300 120 Accounted for Work done in current period Ending work in process is 40% complete, 40% x 300 = 120.

99. Steps 1 and 3 Physical Units Equivalent Units Flow of ProductionDirect Materials Conversion Costs Beginning work in process 400 Started during the current period 1,700 To account for2,100 Good units completed and transferred out From beginning work in process4000280 Started and completed 1,000 Normal spoilage210 Abnormal spoilage190 Ending work in process300 120 Accounted for2,100 Work done in current period1,7001,800

100. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units) Costs added to beginning work in process Total from beginning inventory before normal spoilage Started and completed before normal spoilage (1000 units) Normal spoilage Total cost of goods completed and transferred out Abnormal spoilage (190 units) Ending work in process (300 units) Total cost account for The above numbers are calculated the same as in the previous chapter. Just remember we are including all spoiled units in equivalent units.

101. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process Total from beginning inventory before normal spoilage Started and completed before normal spoilage (1000 units) Normal spoilage Total cost of goods completed and transferred out Abnormal spoilage (190 units) Ending work in process (300 units) Total cost account for Beginning inventory in dollars is given.

102. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process23,893 Total from beginning inventory before normal spoilage Started and completed before normal spoilage (1000 units) Normal spoilage Total cost of goods completed and transferred out Abnormal spoilage (190 units) Ending work in process (300 units) Total cost account for (0 x $222.353) + (280 x $85.333)

103. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process23,893 Total from beginning inventory before normal spoilage 98,093 Started and completed before normal spoilage (1000 units) Normal spoilage Total cost of goods completed and transferred out Abnormal spoilage (190 units) Ending work in process (300 units) Total cost account for

104. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process23,893 Total from beginning inventory before normal spoilage 98,093 Started and completed before normal spoilage (1000 units) 307,686 Normal spoilage64,614 Total cost of goods completed and transferred out Abnormal spoilage (190 units) Ending work in process (300 units) Total cost account for

105. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process23,893 Total from beginning inventory before normal spoilage 98,093 Started and completed before normal spoilage (1000 units) 307,686 Normal spoilage64,614 Total cost of goods completed and transferred out470,393 Abnormal spoilage (190 units) Ending work in process (300 units) Total cost account for

106. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process23,893 Total from beginning inventory before normal spoilage 98,093 Started and completed before normal spoilage (1000 units) 307,686 Normal spoilage64,614 Total cost of goods completed and transferred out470,393 Abnormal spoilage (190 units)58,461 Ending work in process (300 units) Total cost account for $307.686 x 190 units

107. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600378,000153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process23,893 Total from beginning inventory before normal spoilage 98,093 Started and completed before normal spoilage (1000 units) 307,686 Normal spoilage64,614 Total cost of goods completed and transferred out470,393 Abnormal spoilage (190 units)58,461 Ending work in process (300 units)76,946 Total cost account for Same calculation as for normal units

108. Total Production Costs Direct Materials Conversion Costs Beginning work in process ($64,000 plus $10,200)$74,200 Costs added incurred period531,600 378,000 153,600 Divide by equivalent units1,7001,800 Cost per equivalent unit$222.353$85.333 Total cost to account for$605,800 Assignment of costs Good units completed and transferred out (1400 units) Beginning work in process (400 units)$74,200 Costs added to beginning work in process23,893 Total from beginning inventory before normal spoilage 98,093 Started and completed before normal spoilage (1000 units) 307,686 Normal spoilage64,614 Total cost of goods completed and transferred out470,393 Abnormal spoilage (190 units)58,461 Ending work in process (300 units)76,946 Total cost account for$605,800

109. End of Lecture 24