Chapter 19: Spoilage, Rework, and Scrap

CHAPTER 19 SPOILAGE, REWORK, AND SCRAP 19-1 Managers have found that improved quality and intolerance for high spoilage have lowered overall costs and increased sales. 19-2 Spoilage—units of production that do not meet the standards required by customers for good units and that are discarded or sold at reduced prices. Rework—units of production that do not meet the specifications required by customers but which are subsequently repaired and sold as good finished units. Scrap—residual material that results from manufacturing a product. It has low total sales value compared to the total sales value of the product. 19-3 Yes. Normal spoilage is spoilage inherent in a particular production process that arises even under efficient operating conditions. Management decides the spoilage rate it considers normal depending on the production process. 19-4 Abnormal spoilage is spoilage that is not inherent in a particular production process and would not arise under efficient operating conditions. Costs of abnormal spoilage are “lost costs,” measures of inefficiency that should be written off directly as losses of the accounting period. 19-5 Management effort can affect the spoilage rate. Many companies are relentlessly reducing their rates of normal spoilage, spurred on by competitors who, likewise, are continuously reducing costs. 19-6 Normal spoilage typically is expressed as a percentage of good units passing the inspection point. Given actual spoiled units, we infer abnormal spoilage as follows: Abnormal spoilage = Actual spoilage – Normal spoilage. 19-7 Accounting for spoiled goods deals with cost assignment, rather than with cost incurrence, because the existence of spoiled goods does not involve any additional cost beyond the amount already incurred. 19-8 Yes. Normal spoilage rates should be computed from the good output or from the normal input, not the total input. Normal spoilage is a given percentage of a certain output base. This base should never include abnormal spoilage, which is included in total input. Abnormal spoilage does not vary in direct proportion to units produced, and to include it would cause the normal spoilage count to fluctuate irregularly and not vary in direct proportion to the output base. 19-9 Yes, the point of inspection is the key to the assignment of spoilage costs. Normal spoilage costs do not attach solely to units transferred out. Thus, if units in ending work in process have passed inspection, they should have normal spoilage costs added to them. 19-10 No. If abnormal spoilage is detected at a different point in the production cycle than normal spoilage, then unit costs would differ. If, however normal and abnormal spoilage are detected at the same point in the production cycle, their unit costs would be the same. 19-1 19-11 No. Spoilage may be considered a normal characteristic of a given production cycle. The costs of normal spoilage caused by a random malfunction of a machine would be charged as a part of the manufacturing overhead allocated to all jobs. Normal spoilage attributable to a specific job is charged to that job. 19-12 No. Unless there are special reasons for charging normal rework to jobs that contained the bad units, the costs of extra materials, labor, and so on are usually charged to manufacturing overhead and allocated to all jobs. 19-13 Yes. Abnormal rework is a loss just like abnormal spoilage. By charging it to manufacturing overhead, the abnormal rework costs are spread over other jobs and also included in inventory to the extent a job is not complete. Abnormal rework is rework over and above what is expected during a period, and is recognized as a loss for that period. 19-14 A company is justified in inventorying scrap when its estimated net realizable value is significant and the time between storing it and selling or reusing it is quite long. 19-15 Companies measure scrap to measure efficiency and to also control a tempting source of theft. Managers of companies that report high levels of scrap focus attention on ways to reduce scrap and to use the scrap the company generates more profitably. Some companies, for example, might redesign products and processes to reduce scrap. Others may also examine if the scrap can be reused to save substantial input costs. 19-16 Choice "c" is correct. This represents an inaccurate statement. Abnormal spoilage represents a period expense that is reflected on the firm’s income statement. Choice "a" is incorrect. Abnormal spoilage is not considered a product cost but is recognized as a period expense on the firm’s income statement. Choice "b" is incorrect. Normal spoilage is a product cost that impacts the total inventory cost reflected on a firm’s balance sheet. Choice "d" is incorrect. Equivalent units of production include normal and abnormal spoilage units, which are generally less than actual units added during a period. 19-17 Choice "c is correct. This is a TRUE statement. When there is scrap from a given job, and the scrap is sold, the scrap revenues serve to reduce the total costs of the job. Choice "a" is incorrect. This is a FALSE statement. Scrap may be common to all jobs or may be associated with a specific job. The allocation of scrap revenue if sold is based on whether it is common or job specific. Choice "b" is incorrect. This is a FALSE statement. Unlike spoilage, scrap is not separated between normal and abnormal classifications. Choice "d" is incorrect. This is a FALSE statement. There are no costs assigned to scrap as it is simply a residual from the manufacturing process. 19-2 19-18 Choice "b" is correct. Healthy Dinners Co. would recognize the following period expenses on the income statement: Sales and marketing costs $125,000 Abnormal food spoilage 40,000 General and administrative expenses 75,000 Total period expenses $240,000 Choice "a" is incorrect. This answer choice treated both normal spoilage and abnormal spoilage as product costs. Only normal spoilage is classified as a product cost. Choice "c" is incorrect. This answer choice erroneously included plant production overhead as a period expense instead of a product cost. Choice "d" is incorrect. This answer choice included normal spoilage as a period expense instead of a product cost. 19-19 Choice "b" is correct. The total inventory cost is determined as follows: Food product labor Ice cream cone ingredients Factory overhead Normal food spoilage Total $175,000 325,000 16,000 4,000 $520,000 Cost per food unit: $520,000 ÷ 162,500 cones = $3.20/per cone Choice "a" is incorrect. This answer choice treats normal spoilage as a period cost instead of a product cost. Choice "c" is incorrect. This answer choice treats both normal spoilage and abnormal spoilage as products costs. Choice d" is incorrect. This answer choice correctly treats abnormal spoilage as a period cost, but includes sales and marketing costs as product costs. 19-3 19-20 (5–10 min.) Normal and abnormal spoilage in units. 1. Total spoiled units Normal spoilage in units, 4%  170,000 Abnormal spoilage in units 2. Abnormal spoilage, 5,800  $11 Normal spoilage, 6,800  $11 Potential savings, 12,600  $11 12,600 6,800 5,800 $ 63,800 74,800 $138,600 Regardless of the targeted normal spoilage, abnormal spoilage is nonrecurring and avoidable. The targeted normal spoilage rate is subject to change. Many companies have reduced their spoilage to almost zero, which would realize all potential savings. Of course, zero spoilage usually means higher-quality products, more customer satisfaction, more employee satisfaction, and various beneficial effects on nonmanufacturing (for example, purchasing) costs of direct materials. 19-4 19-21 (20 min.) Weighted-average method, spoilage, equivalent units. Solution Exhibit 19-21 calculates equivalent units of work done to date for direct materials and conversion costs. SOLUTION EXHIBIT 19-21 Summarize the Flow of Physical Units and Compute Output in Equivalent Units; Weighted-Average Method of Process Costing with Spoilage, Gray Manufacturing Company for November 2020. (Step 1) Physical Units 1,000 10,150a 11,150 Flow of Production Work in process, beginning (given) Started during current period To account for Good units completed and transferred out during current period: Normal spoilage* 100  100%; 100  100% Abnormal spoilage† 50  100%; 50 100% Work in process, ending‡ (given) 2,000  100%; 2,000  30% Accounted for Equivalent units of work done to date (Step 2) Equivalent Units Direct Conversion Materials Costs 9,000 9,000 9,000 100 100 100 50 2,000 50 50 2,000 600 11,150 9,750 11,150 below, 11,150 total units are accounted for. Therefore, units started during current period must be = 11,150 – 1,000 = 10,150. *Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. †Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡Degree of completion in this department: direct materials, 100%; conversion costs, 30%. a From 19-5 19-22 (2025 min.) Weighted-average method, assigning costs (continuation of 19-21). Solution Exhibit 19-22 summarizes total costs to account for, calculates the costs per equivalent unit for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to ending work in process. SOLUTION EXHIBIT 19-22 Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory; Weighted-Average Method of Process Costing, Gray Manufacturing Company, November 2020. Total Production Costs $ 2,533 39,930 $42,463 (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit Assignment of costs Good units completed and transferred out (9,000 units) Costs before adding normal spoilage Normal spoilage (100 units) (A) Total cost of good units completed & transf. out (B) Abnormal spoilage (50 units) (C) Work in process, ending (2,000 units) (A)+(B)+(C) Total costs accounted for Direct Materials $ 1,423 12,180 $13,603 $13,603 11,150 $ 1.22 Conversion Costs $ 1,110 27,750 $28,860 $28,860  9,750 $ 2.96 (Step 5) # $37,620 418 38,038 209 4,216 $42,463 (9,000#  $1.22) + (9,000#  $2.96) (100#  $1.22) + (100#  $2.96) (50#  $1.22) + (50#  $2.96) (2,000#  $1.22) + (600#  $2.96) $13,603 + $28,860 Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 19-21. 19-6 19-23 (15 min.) FIFO method, spoilage, equivalent units. Solution Exhibit 19-23 calculates equivalent units of work done in the current period for direct materials and conversion costs. SOLUTION EXHIBIT 19-23 Summarize the Flow of Physical Units and Compute Output in Equivalent Units; First-in, First-out (FIFO) Method of Process Costing with Spoilage, Gray Manufacturing Company for November 2020. Flow of Production Work in process, beginning (given) Started during current period To account for Good units completed and transferred out during current period: From beginning work in process|| 1,000  (100% 100%); 1,000  (100%  50%) Started and completed 8,000  100%; 8,000  100% Normal spoilage* 100  100%; 100  100% Abnormal spoilage† 50  100%; 50  100% Work in process, ending‡ 2,000  100%; 2,000  30% Accounted for Equivalent units of work done in current period (Step 1) Physical Units 1,000 10,150a 11,150 (Step 2) Equivalent Units Direct Conversion Materials Costs 1,000 0 500 8,000 8,000 100 100 50 50 2,000 600 10,150 9,250 8,000# 100 50 2,000 11,150 From below, 11,150 total units are accounted for. Therefore, units started during current period must be 11,150 – 1,000 = 10,150. || Degree of completion in this department: direct materials, 100%; conversion costs, 50%. # 9,000 physical units completed and transferred out minus 1,000 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%. a 19-7 19-24 (2025 min.) FIFO method, assigning costs (continuation of 19-23). Solution Exhibit 19-24 summarizes total costs to account for, calculates the costs per equivalent unit for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to ending work in process. SOLUTION EXHIBIT 19-24 Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory; FIFO Method of Process Costing, Gray Manufacturing Company, November 2020. Total Production Costs $ 2,533 39,930 $42,463 (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit (Step 5) Assignment of costs: Good units completed and transferred out (9,000 units) Work in process, beginning (1,000 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (8,000 units) Normal spoilage (100 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (50 units) (C) Work in process, ending (2,000 units) (A)+(B)+(C) Total costs accounted for a Direct Materials $ 1,423 12,180 $13,603 $12,180 10,150 $ 1.20 $ 2,533 1,500 $1,423 + (0a  $1.20) + $27,750  9,250 $ 3 $1,110 (500a  $3) 4,033 33,600 420 38,053 210 4,200 $42,463 (8,000a  $1.20) + (8,000a  $3) (100a  $1.20) + (100a  $3) (50a  $1.20) + (2,000a  $1.20) + $13,603 + Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 19-23. 19-8 Conversion Costs $ 1,110 27,750 $28,860 (50a  $3) (600a  $3) $28,860 19-25 (35 min.) Weighted-average method, spoilage. 1. Solution Exhibit 19-25, Panel A calculates equivalent units of work done to date for direct materials and conversion costs. 2. Solution Exhibit 19-25, Panel B summarizes total costs to account for, calculates the costs per equivalent unit for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process, using the weighted-average method. SOLUTION EXHIBIT 19-25 Weighted-Average Method of Process Costing with Spoilage, La Croix Company for April 2020 PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units (Step 1) (Step 2) Equivalent Units Physical Direct Conversion Units Materials Costs 2,400 12,000 14,400 Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and tsfd. out during current period: Normal spoilagea (1,080 100%; 1,080 100%) Abnormal spoilageb (360 100%; 360 100%) Work in process, endingc (given) (2,160  100%; 2,160  75%) Accounted for Equivalent units of work done to date aNormal 10,800 1,080 10,800 10,800 1,080 1,080 360 360 2,160 ______ 14,400 1,620 ______ 13,860 360 2,160 ______ 14,400 spoilage is 10% of good units transferred out: 10% × 10,800 = 1,080 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. bTotal spoilage = Beg. units + Units started - Good units transferred out – Ending units = 2,400 + 12,000 − 10,800 − 2,160 = 1,440; Abnormal spoilage = Total spoilage – Normal spoilage = 1,440 – 1,080 = 360 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. cDegree of completion in this department: direct materials, 100%; conversion costs, 75%. 19-9 PANEL B: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divide by equivalent units of work done to date Cost per equivalent unit (Step 5) (A) (B) (C) (A) + (B) + (C) Assignment of costs Good units completed and transferred out (10,800 units) Costs before adding normal spoilage Normal spoilage (1,080 units) Total costs of good units completed and transferred out Abnormal spoilage (360 units) Work in process, ending (2,160 units): Total costs accounted for d Total Production Costs $ 34,572 208,968 $243,540 Conversion Costs $ 13,332 111,408 $124,740 $118,800 $124,740 ÷13,860 $ 9.00  14,400 $ $186,300 18,630 204,930 6,210 32,400 $243,540 8.25 (10,800d  $8.25) + (10,800 d  $9.00) (1,080d  $8.25) + (1,080d  $9.00) (360d  $8.25) + (2,160d  $8.25) + $118,800 + Equivalent units of direct materials and conversion costs calculated in step 2 of Solution Exhibit 19-25 Panel A. 19-10 Direct Materials $ 21,240 97,560 $118,800 (360d  $9.00) 1,620d  $9.00) $124,680 19-26 (35 min.) FIFO method, spoilage. 1. Solution Exhibit 19-26, Panel A calculates equivalent units of work done in the current period for direct materials and conversion costs. Solution Exhibit 19-26, Panel B summarizes total costs to account for, calculates the costs per equivalent unit for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process, using the FIFO method. SOLUTION EXHIBIT 19-26 First-in, first-out (FIFO) Method of Process Costing with Spoilage, La Croix Company for April 2020 PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: From beginning work in process|| 2,400  (100% 100%); 2,400  (100%  50%) Started and completed 8,400  100%; 8,400  100% Normal spoilage* 1,080  100%; 1,080  100% Abnormal spoilage† 360  100%; 360  100% Work in process, ending‡ 2,160  100%; 2,160  75% Accounted for Equivalent units of work done in current period || (Step 1) Physical Units 2,400 12,000 14,400 (Step 2) Equivalent Units Direct Conversion Materials Costs 2,400 0 1,200 8,400 8,400 1,080 1,080 360 360 2,160 1,620 ___ 12,660 8,400# 1,080 360 2,160 ____ 14,400 12,000 Degree of completion in this department: direct materials, 100%; conversion costs, 50%. 10,800 physical units completed and transferred out minus 2,400 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 75%. # 19-11 PANEL B: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory Total Production Costs (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for $ 34,572 208,968 $243,540 (Step 4) Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit Assignment of costs: Good units completed and transferred out (10,800 units) Work in process, beginning (2,400 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (8,400 units) Normal spoilage (1,080 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (360 units) (C) Work in process, ending (2,160 units) (A)+(B)+(C) Total costs accounted for Direct Materials Conversion Costs $21,240 97,560 $118,800 $ 13,332 111,408 $124,740 $97,560 12,000 $ 8.13 $111,408  12,660 $ 8.80 (Step 5) a $ 34,572 10,560 45,132 142,212 18,284 205,628 6,095 31,817 $243,540 $21,240 (0a  $8.13) (8,400a  $8.13) (1,080a  $8.13) + $13,332 + (1,200a  $8.80) + (8,400a  $8.80) + (1,080a  $8.80) (360a  $8.13) + (360a  $8.80) (2,160a  $8.13) + (1,620a  $8.80) $118,800 + $124,740 Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 19-26 Panel A. 2. The issues related to the determination of the percentage of spoilage considered normal are similar to the factors discussed in Chapter 18 regarding the importance of verifying the estimated completion percentages of ending work-in-process, especially with regard to conversion costs. A supervisor who wants to show better operating income performance might categorize more of the spoilage as normal, thereby reducing the amount that must be written off against income as the loss from abnormal spoilage. Managers must stress the value of consistent and unbiased estimates of normal spoilage percentages and drive home the importance of pursuing ethical actions and reporting the correct income figures, regardless of the short-term consequences of doing so. In the above example, if all 1,440 units spoiled were considered normal spoilage, then the cost of goods completed and transferred out would increase to $211,723 ($205,628 + $6,095) while ending work-in-process would stay unchanged at $31,817. Of course, the $6,095 would no longer be written off as a period expense by the LaCroix facility in northeast Ohio. 19-12 19-27 (10 min.) Spoilage, journal entries. 1. First, calculate normal and abnormal spoilage: Total Spoilage = 100,000 – 97,000 = 3,000 Normal Spoilage = 97,000 × 0.02 = 1,940 Abnormal Spoilage = 3,000 – 1,940 = 1,060 a) Journal entries if the spoilage was job specific Normal Spoilage: Material Control (1,940 × $0.20) WIP Control (Job #) 388 388 Abnormal Spoilage: Material Control (1,060 × $0.20) Loss from Abnormal Spoilage ($1,060 – $212) WIP Control (Job #) (1,060 × $1) 212 848 1,060 b) Journal entries if spoilage was common to all jobs Normal Spoilage: Material Control (1,940 × $0.20) Mfg OH Control ($1,940 – $388) WIP Control (Job #) (1,940 × $1) 388 1,552 1,940 Abnormal Spoilage: Material Control (1,060 × $0.20) Loss from Abnormal Spoilage ($1,060 – $212) WIP Control (Job #) (1,060 × $1) 212 848 1,060 2. When the spoilage is specific to a certain job, the job absorbs the cost of those spoiled parts less the disposal value. Therefore, the cost per good part of that job will be higher. 19-13 19-28 (15 min.) Recognition of loss from spoilage. 1. The unit cost of making the 10,000 power adapters is: $400,000 ÷ 10,000 units = $40 per unit 2. The total cost of the 375 spoiled units is: $40 × 375 units = $15,000 3. The increase in the per-unit cost of goods sold as a result of the normal spoilage is: $15,000 ÷ 9,625 good units = $1.56 Unit cost of goods sold for units remaining after the spoilage = $40 + $1.56 = $41.56. (Or $400,000 ÷ 9,625 = $41.56) 4. The $15,000 cost for the 375 spoiled units is taken out of manufacturing costs and expensed in the period of the spoilage. The journal entry to record the abnormal spoilage incurred is: Loss from abnormal spoilage 15,000 Work-in-process control 15,000 19-14 19-29 (25 min.) Weighted-average method, spoilage. 1. Solution Exhibit 19-29, Panel A, calculates the equivalent units of work done to date for each cost category in September 2020. 2. Solution Exhibit 19-29, Panel B, summarizes total costs to account for, calculates the costs per equivalent unit for each cost category, and assigns total costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. SOLUTION EXHIBIT 19-29 Weighted-Average Method of Process Costing with Spoilage, WaferCo for September 2020 PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units (Step 1) Physical Units 1,200 2,257 3,457 Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage* 345  100%; 345  100% Abnormal spoilage† 292  100%; 292  100% Work in process, ending‡ (given) 520  100%; 520  20% Accounted for Equivalent units of work done to date 2,300 345 (Step 2) Equivalent Units Direct Conversion Materials Costs 2,300 2,300 345 345 292 292 520 104 3,457 3,041 292 520 3,457 * Normal spoilage is 15% of good units transferred out: 15% × 2,300 = 345 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. Total spoilage = 1,200 + 2,257 – 2,300 – 520 = 637 units; Abnormal spoilage = Total spoilage Normal spoilage = 637  345 = 292 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100% ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 20%. † 19-15 PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit Total Production Costs $158,635 830,654 $989,289 Assignment of costs Good units completed and transferred out (2,300 units) Costs before adding normal spoilage $683,100 Normal spoilage (345 units) 102,465 (A) Total cost of good units completed and transferred out 785,565 (B) Abnormal spoilage (292 units) 86,724 (C) Work-in-process, ending (520 units) 117,000 (A)+(B)+(C) Total costs accounted for $989,289 Direct Materials $142,321 573,278 $715,599 Conversion Costs $ 16,314 257,376 $273,690 $715,599  3,457 $ 207.00 $273,690  3,041 $ 90.00 (Step 5) # (2,300#  $207) (345#  $207) + + (2,300#  $90) (345#  $90) (292#  $207) (520#  $207) $715,599 + + (292#  $90) (104#  $90) $273,690 Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 19-29 Panel A. 19-16 19-30 (25 min.) FIFO method, spoilage. 1. Solution Exhibit 19-30, Panel A, calculates the equivalent units of work done in the current period for each cost category in September 2020. Solution Exhibit 19-30, Panel B, summarizes WaferCo’s production costs for September 2020, calculates the costs per equivalent unit for each cost category, and assigns total costs to units completed and transferred out (including normal spoilage) to abnormal spoilage and to units in ending work in process under the FIFO method. SOLUTION EXHIBIT 19-30 First-in, First-out (FIFO) Method of Process Costing with Spoilage, WaferCo for September 2020 PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: From beginning work in process|| 1,200  (100% 100%); 1,200  (100%  30%) Started and completed 1,100  100%; 1,100  100% Normal spoilage* 345  100%; 345  100% Abnormal spoilage† 292  100%; 292  100% Work in process, ending‡ 520  100%; 520  20% Accounted for Equivalent units of work done in current period || (Step 1) Physical Units 1,200 2,257 3,457 (Step 2) Equivalent Units Direct Conversion Materials Costs 1,200 0 840 1,100 1,100 345 345 292 292 520 104 2,257 2,681 # 1,100 345 292 520 3,457 Degree of completion in this department: direct materials, 100%; conversion costs, 30%. 2,300 physical units completed and transferred out minus 1,200 physical units completed and transferred out from beginning work in process inventory. * Normal spoilage is 15% of good units transferred out: 15%  2,300 = 345 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Abnormal spoilage = Actual spoilage  Normal spoilage = 637  345 = 292 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 20%. # 19-17 PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory (Step 3) (Step 4) Total Production Costs $158,635 830,654 $989,289 Work in process, beginning (given) Costs added in current period (given) Total costs to account for Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit Assignment of costs: Good units completed and transferred out (2,300 units) Work in process, beginning (1,200 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (1,100 units) Normal spoilage (345 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (292 units) (C) Work in process, ending (520 units) (A)+(B)+(C) Total costs accounted for Direct Materials $ 142,321 573,278 $715,599 Conversion Costs $ 16,314 257,376 $273,690 $573,278  2,257 $ 254.00 $257,376  2,681 $ 96.00 (Step 5) § $158,635 80,640 $142,321 (0§  $254) + $16,314 + (840§  $96) 385,000 120,750 (1,100§  $254) (345§  $254) + (1,100§  $96) + (345§  $96) 745,025 102,200 142,064 $989,289 (292§  $254) (520§  $254) $715,599 + (292§  $96) + (104§  $96) + $273,690 239,275 Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A. 2. The cost per equivalent unit of beginning inventory and of work done in the current period differ substantially: Beginning Work Done in Inventory Current Period Direct materials $254.00 $118.60 ($142,321  1,200 equiv. units) Conversion costs 96.00 45.32 ($ 16,314  360 equiv. units) Total cost per unit $350.00 $163.92 Cost per equivalent unit (weighted-average) Cost per equivalent unit (FIFO) * Direct Materials $207* $254** Conversion Costs $90* $96** from Solution Exhibit 19-25, Panel B from Solution Exhibit 19-26, Panel B ** The cost per equivalent unit differs between the two methods because each method uses different costs as the numerator of the calculation. FIFO uses only the costs added during the current 19-18 period whereas weighted-average uses the costs from the beginning work-in-process as well as costs added during the current period. Both methods also use different equivalent units in the denominator. The following table summarizes the costs assigned to units completed and those still in process under the weighted-average and FIFO process-costing methods for our example. FIFO (Solution Exhibit 19-26B) Cost of units completed and transferred out $745,025 Abnormal spoilage 102,200 Work in process, ending 142,064 Total costs accounted for $989,289 Wtd.-Avg. (Solution Exhibit 19-25B) Difference $785,565  $40,540 86,724 + $15,476 117,000 + $25,064 $989,289 The FIFO ending inventory is higher than the weighted-average ending inventory by $25,064. This is because FIFO assumes that all the lower-cost prior-period units in work in process are the first to be completed and transferred out while ending work in process consists of only the higher-cost current-period units. The weighted-average method, in contrast, smoothens the cost per equivalent unit by assuming that more of the higher-cost units are completed and transferred out, while some lower-cost units in beginning work in process are placed in ending work in process. It similarly costs the abnormal spoilage incurred during the period using a blended cost rate rather than the higher current-period cost (as in the FIFO method, which assigns $15,476 more in costs to that spoilage). As a result, the FIFO method results in a relatively lower cost of units completed and transferred out and a higher ending work-in-process inventory. WaferCo’s managers should consider the weighted-average method because it leads to a higher cost of goods completed and transferred (and sold), thereby lowering taxes. The managers may have an incentive, however, to use the FIFO method and show a higher level of current income if their compensation increases with higher operating income or if there are debt covenants that would be violated by showing lower income. WaferCo’s managers may also consider advantage of the FIFO method, which is that it provides better information for managing the business because it keeps separate the costs of the current period from costs incurred in previous periods. 19-19 19-31 (30 min.) Standard-costing method, spoilage. 1. Solution Exhibit 19-30, Panel A, shows the computation of the equivalent units of work done in September 2020 for direct materials (2,257 units) and conversion costs (2,681 units). (This computation is the same for FIFO and standard-costing.) The direct materials cost per equivalent unit of beginning work in process and of work done in September 2020 is the standard cost of $240 given in the problem. The conversion cost per equivalent unit of beginning work in process and of work done in September 2020 is the standard cost of $100 given in the problem. Solution Exhibit 19-31 summarizes the total costs to account for and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the standard costing method. SOLUTION EXHIBIT 19-31 Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory; Standard Costing Method of Process Costing with Spoilage, WaferCo for September 2020 (Step 3) Work in process, beginning* Costs added in current period at standard prices Costs to account for (Step 4) Standard costs per equivalent unit (given) (Step 5) Assignment of costs at standard costs: Good units completed and transferred out (2,100 units) Work in process, beginning (1,200 units)* Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (1,100 units) Normal spoilage (345 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (292 units) (C) Work in process, ending (520 units) (A)+(B)+(C) Total costs accounted for Total Production Costs $324,000 809,780 $1,133,780 $ $324,000 84,000 340 Direct Materials (1,200 $240) (2,257  $240) $829,680 $ 240 Conversion Costs (360  $100) (2,681  $100) $304,100 $ (1,200  $240) + (360  $100) (0§  $240) + (840§  $100) 408,000 374,000 117,300 899,300 99,280 135,200 $1,133,780 (1,100§  $240) (345§  $240) + (1,100§  $100) + (345§  $100) (292§  $240) + (520§  $240) + $829,680 + (292§  $100) (104§  $100) $304,100 Work in process, beginning has 1,200 equivalent units (1,200 physical units 100%) of direct materials and 360 equivalent units (1,200 physical units  30%) of conversion costs. § Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 19-29, Panel A. * 19-20 100 2. To show better performance, a department supervisor might report a higher degree of completion resulting in understated cost per equivalent unit and overstated operating income. If performance for the period is very good, the department supervisor may be tempted to report a lower degree of completion reducing income in the current period. This has the effect of reducing the costs carried in ending inventory and the costs carried to the following year in beginning inventory. In other words, estimates of degree of completion can help to smooth earnings from one period to the next. To guard against the possibility of bias, managers should ask supervisors specific questions about the process they followed to prepare estimates. Top management should always emphasize obtaining the correct answer, regardless of how it affects reported performance. This emphasis drives ethical actions throughout the organization. 19-21 19-32 (20–30 min.) Spoilage and job costing. 1. Cash Loss from Abnormal Spoilage Work-in-Process Control Loss = (€9.00  420) – €420 = €3,360 420 3,360 3,780 Remaining cases cost = €9.00 per case. The cost of these cases is unaffected by the loss from abnormal spoilage. 2. a. Cash 840 Work-in-Process Control 840 The cost of the remaining good cases = [(€9.00  2,100) – €840] = €18,060 The unit cost of a good case now becomes €18,060  1,680 = €10.75 b. Cash Manufacturing Department Overhead Control Work-in-Process Control 840 2,940 3,780 The unit cost of a good case remains at €9.00. 3. c. The unit costs in 2a and 2b are different because in 2a the normal spoilage cost is charged as a cost of the job which has exacting job specifications. In 2b however, normal spoilage is due to the production process, not the particular attributes of this specific job. These costs are, therefore, charged as part of manufacturing overhead and the manufacturing overhead cost of €2 per case already includes a provision for normal spoilage. a. Work-in-Process Control Materials Control, Wages Payable Control, Manufacturing Overhead Allocated 420 420 The cost of the good cases = [(€9.00  2,100) + €420] = €19,320 The unit cost of a good case is €19,320  2,100 = €9.20 b. Manufacturing Department Overhead Control Materials Control, Wages Payable Control, Manufacturing Overhead Allocated The unit cost of a good case = €9.00 per case c. 420 420 The unit costs in 3a and 3b are different because in 3a the normal rework cost is charged as a cost of the job which has exacting job specifications. In 3b however, normal rework is due to the production process, not the particular attributes of this specific job. These costs are, therefore, charged as part of manufacturing overhead and the manufacturing overhead cost of €2 per case already includes a provision for this normal rework. 19-22 19-33 (15 min.) Reworked units, costs of rework. 1. The two alternative approaches to account for the materials costs of reworked units are: a. To charge the costs of rework to the current period as a separate expense item as abnormal rework. This approach would highlight to Heyer Appliances the costs of the supplier problem. b. To charge the costs of the rework to manufacturing overhead as normal rework. 2. The $125 circulation motor cost is the cost of the actual motors included in the dishwashers and so should be used to calculate the cost of materials of the reworked units. The $110 motors from the first supplier were eventually never used in any dishwasher, and that supplier is now bankrupt. The units have now been disposed of at zero disposal value. 3. The total costs of rework due to the defective circulation motors include the following: a. the labor and other conversion costs spent on substituting the new circulation motors; b. the costs of any extra negotiations to obtain the replacement circulation motors; c. any higher price the existing supplier may have charged to do a rush order for the replacement circulation motors; and d. ordering costs for the replacement circulation motors. 19-23 19-34 (25 min.) Scrap, job costing. 1. Journal entry to record scrap generated by a specific job and accounted for at the time scrap is sold is: Cash or Accounts Receivable Work-in-Process Control To recognize asset from sale of scrap. A memo posting is also made to the specific job record. 480 480 2. Scrap common to various jobs and accounted for at the time of its sale can be accounted for in two ways: a. Regard scrap sales as a separate line item of revenues (the method generally used when the dollar amount of scrap is immaterial): Cash or Accounts Receivable Scrap Revenues To recognize revenue from sale of scrap. 4,500 4,500 b. Regard scrap sales as offsets against manufacturing overhead (the method generally used when the dollar amount of scrap is material): Cash or Accounts Receivable Manufacturing Department Overhead Control To record cash raised from sale of scrap. 4,500 4,500 3. Journal entry to record scrap common to various jobs at the time scrap is returned to storeroom: Materials Control 4,500 Manufacturing Department Overhead Control 4,500 To record value of scrap returned to storeroom. When the scrap is reused as direct material on a subsequent job, the journal entry is: Work-in-Process Control 4,500 Materials Control 4,500 To record reuse of scrap on a job. Explanations of journal entries are provided here but are not required. 19-24 19-35 (30 min.) Weighted-average method, spoilage. Solution Exhibit 19-35 summarizes total costs to account for, calculates the equivalent units of work done to date for each cost category, and assigns total costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. SOLUTION EXHIBIT 19-35 Weighted-Average Method of Process Costing with Spoilage, Cleaning Department of the Seafood Company for May PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units; (Step 1) Physical Units 3,600 30,000 33,600 Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage* 2,460  100%; 2,460  100% Abnormal spoilage† 1,500  100%; 1,500 100% Work in process, ending‡ (given) 5,040  100%; 5,040  30% Accounted for Equivalent units of work done to date (Step 2) Equivalent Units Direct Conversion Materials Costs 24,600 24,600 24,600 2,460 2,460 2,460 1,500 1,500 1,500 5,040 5,040 1,512 33,600 33,600 30,072 *Normal spoilage is 10% of good units transferred out: 10% × 24,600 = 2,460 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Total spoilage = 3,600 + 30,000 – 24,600 – 5,040 = 3,960 units; Abnormal spoilage = 3,960 – 2,460 = 1,500 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%. 19-25 PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory Total Production Costs $ 7,269 100,159 $107,428 (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit Assignment of costs Good units completed and transferred out (24,600 units) Costs before adding normal spoilage Normal spoilage (2,460 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (1,500 units) (C) Work in process, ending (5,040 units) (A)+(B)+(C) Total costs accounted for Direct Materials $ 5,316 55,500 $60,816 Conversion Costs $ 1,953 44,659 $46,612 $60,816 33,600 $1.81 $46,612 30,072 $1.55 (Step 5) # $82,656 (24,600#  1.81) 8,266 (2,460#  1.81) + + (24,600#  1.55) (2,460#  1.55) 90,922 5,040 (1,500#  1.81) 11,466 (5,040#  1.81) $107,428 $60,816 + + + (1,500# 1.55) (1,512#  1.55) $46,612 Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A above . 19-26 19-36 (25 min.) FIFO method, spoilage. For the Cleaning Department, Solution Exhibit 19-36 summarizes the total costs for May, calculates the equivalent units of work done in the current period for direct materials and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process under the FIFO method. SOLUTION EXHIBIT 19-36 First-in, First-out (FIFO) Method of Process Costing with Spoilage, Cleaning Department of the Seafood Company for May PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: From beginning work in process|| 3,600  (100% 100%); 3,600  (100%  60%) Started and completed 21,000  100%; 21,000  100% Normal spoilage* 2,460  100%; 2,460  100% Abnormal spoilage† 1,500  100%; 1,500  100% Work in process, ending‡ 5,040  100%; 5,040  30% Accounted for Equivalent units of work done in current period || (Step 1) Physical Units 3,600 30,000 33,600 3,600 (Step 2) Equivalent Units Direct Conversion Materials Costs 0 1,440 21,000 21,000 21,000 2,460 2,460 2,460 1,500 1,500 1,500 5,040 5,040 _____ 30,000 1,512 _____ 27,912 # 33,600 Degree of completion in this department: direct materials, 100%; conversion costs, 60%. 24,600 physical units completed and transferred out minus 3,600 physical units completed and transferred out from beginning work-in-process inventory. * Normal spoilage is 10% of good units transferred out: 10%  24,600 = 2,460 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Total spoilage = 3,600 + 30,000 – 24,600 – 5,040 = 3,960 units; Abnormal spoilage = 3,960 – 2,460 = 1,500 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%. ## 19-27 PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory Total Production Costs $ 7,269 100,159 $107,428 (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit Assignment of costs: Good units completed and transferred out (24,600 units) Work in process, beginning (3,600 units) $ 7,269 Costs added to beg. work in process in current period 2,304 Total from beginning inventory before normal spoilage 9,573 Started and completed before normal spoilage (21,000 units) 72,450 Normal spoilage (2,460 units) 8,487 (A) Total costs of good units completed and transferred out 90,510 (B) Abnormal spoilage (1,500 units) 5,175 (C) Work in process, ending (5,040 units) 11,743 (A)+(B)+(C) Total costs accounted for $107,428 Direct Materials $ 5,316 55,500 $60,816 Conversion Costs $ 1,953 44,659 $46,612 $55,500 30,000 $ 1.85 $44,659 27,912 $ 1.60 (Step 5) § $5,316 + $1,953 (0§  $1.85) + (1,440§  1.6) (21,000§1.85) + (21,000§ 1.6) (2,460§  1.85) + (2,460§  1.6) (1,500§  1.85) + (1,500§ 1.6) (5,040§ 1.85) + (1,512§  1.6) $60,816 + $46,612 Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A. 19-28 19-37 (35 min.) Weighted-average method, Shipping Department (continuation of 19-36). For the Packaging Department, Solution Exhibit 19-37 summarizes total costs to account for, calculates the equivalent units of work done to date for each cost category, and assigns costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. SOLUTION EXHIBIT 19-37 Weighted-Average Method of Process Costing with Spoilage, Packaging Department of the Seafood Company for May PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage* 2,112  100%; 2,112  100%; 2,112  100% Abnormal spoilage† 288  100%; 288 100%, 288  100% Work in process, ending‡ (given) 8,400  100%; 8,400  0%; 8,400  40% Accounted for Equivalent units of work done to date (Step 1) Physical Units 12,600 24,600 37,200 26,400 2,112 (Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs 26,400 26,400 26,400 2,112 2,112 2,112 288 288 288 288 8,400 8,400 37,200 37,200 0 ______ 28,800 3,360 _____ 32,160 *Normal spoilage is 8% of good units transferred out: 8% × 26,400 = 2,112 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. †Total spoilage =12,600 + 24,600 – 26,400 – 8,400 = 2,400 units. Abnormal spoilage = 2,400 – 2,112 = 288 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. ‡Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%. 19-29 PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit Assignment of costs Good units completed and transferred out (26,400 units) Costs before adding normal spoilage Normal spoilage (2,112 units) (A) Total cost of good units completed and transferred out (B) Abnormal spoilage (288 units) (C) Work in process, ending (8,400 units) (A)+(B)+(C) Total costs accounted for Total Production Transferred-in Costs Costs $ 57,173 $ 33,698 137,527 90,922* $194,700 $124,620 124,620 37,200 $ 3.35 Direct Materials $ 0 5,760 $5,760 5,760  28,800 $ 0.20 Conversion Costs $23,475 40,845 $64,320 64,320 32,160 $ 2.00 (Step 5) $146,520 11,722 26,400#  ($3.35 + $0.20 + $2) 2,112#  ($3.35 + $0.20 + $2) 158,242 1,598 34,860 $194,700 288#  ($3.35 + $0.20 + $2) (8,400  $3.35) + (0#  $0.20) + (3,360#  $2) $124,620 + $5,760 + $64,320 # *Total costs of good units completed and transferred out in Panel B (Step 5) of Solution Exhibit 19-35. # Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A above. 19-30 19-38 (25 min.) FIFO method, Shipping Department (continuation of 19-37). Solution Exhibit 19-38 summarizes the total Packaging Department costs for May, shows the equivalent units of work done in the Packaging Department in the current period for transferredin costs, direct materials, and conversion costs, and assigns total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending workin-process under the FIFO method. SOLUTION EXHIBIT 19-38 First-in, First-out (FIFO) Method of Process Costing with Spoilage, Packaging Department of the Seafood Company for May PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: From beginning work in process|| 12,600  (100%  100%); 12,600  (100%  0%); 12,600  (100%  70%) Started and completed 13,800  100%; 13,800  100%; 13,800  100% Normal spoilage* 2,112  100%; 2,112  100%; 2,112  100% (Step 1) Physical Units 12,600 24,600 37,200 (Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs 12,600 0 12,600 3,780 13,800 13,800 13,800 2,112 2,112 2,112 288 288 288 8,400 0 3,360 24,600 28,800 23,340 13,800# 2,112 288 Abnormal spoilage† 288 100%; 288  100%; 288  100% Work in process, ending‡ 8,400  100%; 8,400  0%; 8,400  40% Accounted for Equivalent units of work done in current period 8,400 37,200 || Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 70%. 26,400 physical units completed and transferred out minus 12,600 physical units completed and transferred out from beginning work-in-process inventory. *Normal spoilage is 8% of good units transferred out: 8%  26,400 = 2,112 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. † Total spoilage = 12,600 + 24,600 – 26,400 – 8,400 = 2,400 units. Abnormal spoilage = 2,400 – 2,112 = 288 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 40%. # 19-31 PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit Assignment of costs: Good units completed and transferred out (26,400 units) Work in process, beginning (12,600 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (13,800 units) Normal spoilage (2,112 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (288 units) (C) Work in process, ending (8,400 units) (A)+(B)+(C) Total costs accounted for Total Production Costs Transferredin Costs Direct Materials Conversion Costs $ 56,565 137,115 $193,680 $ 33,090 90,510* $123,600 $ 0 5,760 $5,760 $23,475 40,845 $64,320 $90,510 $5,760 $40,845 24,600 $ 3.679 ÷28,800 $ 0.20 23,340 $ 1.75 (Step 5) $56,565 9,135 65,700 77,680 $33,090 + $0 $23,475 (0  $3.679) + (12,600§  0.20) + (3,780§  $1.75) 13,800§  ($3.679 + $0.20 + $1.75) 11,888 2,112§  ($3.679 + $0.20 + $1.75) 155,268 1,621 288§  ($3.679 + $0.20 + $1.75) § 36,784 (8,400 $3.679) + (0§$0.20) + (3,360§$1.75) $193,673+ $123,593 + $5,760 + $64,320 *Total costs of good units completed and transferred out in Step 5, Panel B of Solution Exhibit 19-36. § Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A. + Difference of $7 ($193,673 relative to $193,680) due to rounding. 19-32 + 19-39 (30 min.) Physical units, inspection at various levels of completion. 1. Work in process, beginning (50%)* Started during November To account for Good units completed and transferred out Normal spoilage Abnormal spoilage (2,000 – normal spoilage) Work in process, ending (80%)* Accounted for Inspection at 40% 2,500 14,000 16,500 Inspection at 70% 2,500 14,000 16,500 11,000a 1,200b 800 3,500 16,500 11,000a 1,450c 550 3,500 16,500 Inspection at 100% 2,500 14,000 16,500 11,000a 1,100d 900 3,500 16,500 *Degree of completion for conversion costs at the dates of the work-in-process inventories a 2,500 beginning inventory + 14,000 started – 2,000 spoiled – 3,500 ending inventory = 11,000. b 10%  (14,000 units started – 2,000 units spoiled) = 10%  12,000 = 1,200; beginning work-in-process inventory is excluded because it was already 50% complete at April 1 and past the inspection point. c 10%  (16,500 units – 2,000 ) = 10%  14,500 = 1,450, because all units passed the 70% completion inspection point in April. d 10%  11,000 = 1,100, because 11,000 units are fully completed and inspected during April. 2. There are different amounts of normal and abnormal spoilage because the spoilage is detected at different points in the process. At the 40% inspection point, the beginning work in process inventory has already passed inspection and consists entirely of good units. At the 70% inspection point, the beginning work in process as well as units started this period must pass through the inspection point in the month of April. At the 100% inspection point, only the finished units have been inspected. Those units in ending work in process have not yet been inspected. The finished units that are transferred out are good, but the others have not been inspected yet. Of course in all three cases the total spoilage is 2,000 units (given in the problem.) 19-33 19-40 (15 min.) Spoilage in job costing 1. Normal spoilage rate = Units of normal spoilage ÷ Total good units completed = 6 ÷ 40 = 15%. 2. a. Journal entry for spoilage related to a specific job: Materials Control (spoiled goods at current disposal value) 6 × $235 1,410 Work-in-Process Control (Job #10) 1,410 Note: The costs incurred on the bad units (6 × $1,100) are already part of the balance in WIP. The cost of the 40 good units is (40 × 1,100) + (6 × $865) = $49,190 b. Journal entry for spoilage common to all jobs: Materials Control (spoiled goods at current disposal value) 6 × $235 Manufacturing Overhead Control (normal spoilage) Work-in-Process Control (Job #10) 1,410 5,190 6,600 Note: In developing the predetermined O/H rate, the budgeted manufacturing overhead would include expected normal spoilage costs. c. Journal entry for abnormal spoilage: Materials Control (spoiled goods at current disposal value) 6 × $235 Loss from Abnormal Spoilage 6 × $865 Work-in-Process Control (Job #10) 1,410 5,190 6,600 Note: If the spoilage is abnormal, the net loss is highlighted and always charged to an abnormal loss account. 19-34 19-41 (10 min.) Rework in job costing, journal entry (continuation of 19-40) a. Journal entry for rework related to a specific job: Work-in-Process Control (Job #10) Various Accounts (To charge rework costs to the job) b. Journal entry for rework common to all jobs: Manufacturing Overhead Control (rework costs) Various Accounts c. Journal entry for abnormal rework: Loss from Abnormal Rework Various Accounts 19-35 1,800 1,800 1,800 1,800 1,800 1,800 19-42 (10 min.) Scrap at time of sale or at time of production, journal entries (continuation of 19-41). a. Journal entry for recognizing immaterial scrap at time of sale: Cash or Accounts Receivable 700 Scrap Revenues 700 (To record other revenue sale of scrap) b. Journal entry for recognizing material scrap related to a specific job at time of sale: Cash or Accounts Receivable 700 Work-in-Process Control (Job #10) 700 c. Journal entry for recognizing material scrap common to all jobs at time of sale: Cash or Accounts Receivable 700 Manufacturing Overhead Control 700 d. Journal entry for recognizing material scrap as inventory at time of production and recording at net realizable value: Materials Control 700 Work-in-Process Control (Job #10) 700 Cash or Accounts Receivable Materials Control (When later sold) 700 700 19-36 19-43 (2025 min.) Physical units, inspection at various stages of completion Work in process, beginning (20%)* Started during March To account for Good units completed and transferred out Normal spoilage Abnormal spoilage (1,800 – Normal spoilage) Work in process, ending (70%)* Accounted for Inspection at 15% 2,200 21,000 23,200 Inspection at 40% 2,200 21,000 23,200 19,500a 1,152b 648 1,900 23,200 19,500a 1,284c 516 1,900 23,200 Inspection at 100% 2,200 21,000 23,200 19,500a 1,170d 630 1,900 23,200 *Degree of completion for conversion costs at the dates of the work-in-process inventories a 2,200 beginning inventory + 21,000 – 1,800 spoiled – 1,900 ending inventory = 19,500. b 6%  (21,000 units started – 1,800 units spoiled) = 6%  19,200 = 1,152; beginning work-in-process inventory is excluded because it was already 20% complete at March 1 and past the inspection point. c 6%  (23,200 units – 1,800) = 6%  21,400 = 1,284 because all units passed the 40% completion inspection point in March. d 6%  19,500 = 1,170 because 19,500 units are fully completed and inspected during March. 19-44 (35 min.) Weighted-average method, inspection at 80% completion 1. The computation and allocation of spoilage is the most difficult part of this problem. The units in the ending inventory have passed inspection. Therefore, of the 200,000 units to account for (25,000 beginning + 175,000 started), 25,000 must have been spoiled in May [200,000 – (125,000 completed + 50,000 ending inventory)]. Normal spoilage is 17,500 [0.10  (125,000 + 50,000)]. The 7,500 remainder is abnormal spoilage (25,000 – 17,500). Solution Exhibit 19-44, Panel A, calculates the equivalent units of work done for each cost category. We comment on several points in this calculation:    Ending work in process includes an element of normal spoilage since all the ending WIP have passed the point of inspection––inspection occurs when production is 80% complete, while the units in ending WIP are 95% complete. Spoilage includes no direct materials units because spoiled units are detected and removed from the finishing activity when inspection occurs at the time production is 80% complete. Direct materials are added only later when production is 90% complete. Direct materials units are included for ending work in process, which is 95% complete, but not for beginning work in process, which is 25% complete. The reason is that direct materials are added when production is 90% complete. The ending work in process, therefore, contains direct materials units; the beginning work in process does not. Solution Exhibit 19-44, Panel B, summarizes total costs to account for, computes the costs per equivalent unit for each cost category, and assigns costs to units completed (including 19-37 normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. The cost of ending work in process includes the assignment of normal spoilage costs since these units have passed the point of inspection. The costs assigned to each cost category are as follows: Cost of good units completed and transferred out (including normal spoilage costs on good units) Abnormal spoilage Cost of ending work in process (including normal spoilage costs on ending work in process) Total costs assigned and accounted for $4,693,374 169,276 1,835,530 $6,698,000 2. The issues related to the determination of the percentage of spoilage considered normal are similar to the factors discussed in Chapter 18 regarding the importance of verifying the estimated completion percentages of ending work-in-process, especially with regard to conversion costs. A supervisor who wants to show better operating income performance might categorize more of the spoilage as normal, thereby reducing the amount that must be written off against income as the loss from abnormal spoilage. Managers must stress the value of consistent and unbiased estimates of normal spoilage percentages and drive home the importance of pursuing ethical actions and reporting the correct income figures, regardless of the short-term consequences of doing so. SOLUTION EXHIBIT 19-44 Weighted-Average Method of Process Costing with Spoilage, Finishing Department of the Horsheim Company for August PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units (Step 1) Flow of Production Work in process, beginning (given) Started during current period (given) To account for Good units completed and transferred out during current period: Normal spoilage on good units* 12,500  100%; 12,500  0%; 12,500  80% Work in process, ending‡ (given) 50,000  100%; 50,000  100%; 50,000  95% Normal spoilage on ending WIP** 5,000  100%; 5,000  0%; 5,000  80% Abnormal spoilage† 7,500  100%; 7,500  0%; 7,500  80% Accounted for Equivalent units of work done to date Physical Units 25,000 175,000 200,000 125,000 12,500 (Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs 125,000 125,000 125,000 0 10,000 50,000 50,000 47,500 5,000 0 4,000 7,500 0 6,000 200,000 175,000 192,500 12,500 50,000 5,000 7,500 200,000 19-38 *Normal spoilage is 10% of good units that pass inspection: 10%  125,000 = 12,500 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%. ‡Degree of completion in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 95%. **Normal spoilage is 10% of the good units in ending WIP that have passed the inspection point, 10%  50,000 = 5,000 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%. †Abnormal spoilage = Actual spoilage  Normal spoilage = 25,000  17,500 = 7,500 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%. 19-39 PANEL B: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory Total Production TransferredCosts in Costs (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit $ 312,250 6,385,750 $6,698,000 Direct Materials Conversion Costs $ 207,250 1,618,750 $1,826,000 $  1,638,000 $1,638,000 $ $1,826,000 200,000 $1,638,000  175,000 $3,234,000  192,500 $ $ 9.13 9.36 105,000 3,129,000 $3,234,000 $ 16.80 (Step 5) Assignment of costs Good units completed and transferred out (125,000 units) 125,000#  ($9.13 + $9.36 + $16.80) Costs before adding normal spoilage $4,411,250 # (10,000#  $16.80) Normal spoilage (12,500 units) 282,126 (12,500  $9.13) + (0#  $9.36) + (A) Total costs of good units completed and transferred out 4,693,376 (6,000#  $16.80) (B) Abnormal spoilage (7,500 units) 169,276 (7,500#  $9.13) + (0#  $9.36) + Work in process, ending (25,000 units) WIP ending, before normal spoilage 1,722,500 (50,000#  $9.13) + (50,000#  $9.36) + (47,500#  $16.80) (4,000#  $16.80) Normal spoilage on ending WIP 112,850 (5,000#  $9.13) + (0#  $9.36) + (C) Total costs of ending WIP 1,835,350 $3,234,000 (A)+(B)+(C) Total costs accounted for $6,698,000 $1,826,000 + $1,638,000 + Equivalent units of transferred-in costs, direct materials, and conversion costs calculated in Step 2 in Solution Exhibit 19-44, Panel A. # 19-40 19-45 (40 min.) Job costing, classifying spoilage, ethics. 1. Analysis of the 6,000 units rejected by Flextron Company for Job No. M102 yields the following breakdown between normal and abnormal spoilage. Units 2,500 3,500 6,000 Normal spoilage Abnormal spoilage (6,000 – 2,500) Total units rejected 2. The journal entries required to properly account for Job No. M102 are presented below and use an average cost per unit of $27 ($3,469,500 ÷ 128,500). Accounts Receivable or Cash 2 Abnormal loss 3 WIP Control To account for 6,000 units rejected. 1 24,000 80,500 104,500 Finished Good Control 3,365,000 WIP Control 3,365,000 To transfer 128,500 units to finished goods inventory (costs incurred on job and debited to WIP Control, $3,469,500, minus $104,500 credited to WIP control). 1 2 3 Units sold: 6,000 units at $4 each. Loss from abnormal spoilage: 3,500 units at $27 Cost recovery (3,500  $4) WIP control: 3,500 abnormal spoilage units at $27 2,500 normal spoilage units at $4 $94,500 (14,000) $80,500 $94,500 10,000 $104,500 19-41 3a. If all spoilage were considered normal, the journal entries to account for Job No. M102 would be as follows: Accounts Receivable or Cash 24,000 WIP Control 24,000 To account for 6,000 units of normal spoilage, credited to WIP Control at $24,000 (6,000 units  $4). Finished Goods Control 3,445,500 WIP Control 3,445,500 To transfer 128,500 units to finished-goods inventory (costs incurred on job and debited to WIP Control, $3,469,500, minus $24,000 credited to WIP Control). By considering all spoilage as normal, Flextron will show no abnormal loss of $80,500 (see requirement 2) but instead will add $80,500 to the finished-goods inventory [$3,445,500 (in requirement 3a) minus $3,365,000 (in requirement 2)]. As a result, showing all spoilage as normal will increase Flextron’s operating income by $80,500. 3b. Incorrect reporting of spoilage as normal instead of abnormal with the goal of increasing operating income is unethical. In assessing the situation, the management accountant should consider the following: Competence Spoilage should be accounted for using relevant and reliable information. Accounting for spoilage incorrectly to make the company’s operating performance look better than it is violates competence standards. It is unethical for Chadwick to suggest that Suarez change abnormal spoilage to normal spoilage in order to make operating performance look good. Integrity The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Chadwick’s motivation for wanting Suarez to revise the quality figures could well have been motivated by Chadwick’s desire to please senior management. This action could be viewed as violating the responsibility for integrity. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information. In this regard, both Chadwick’s and Suarez’s behavior (if Suarez agrees to modify the spoilage classification) could be viewed as unethical. Objectivity The management accountant's standards of ethical conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant's standpoint, showing abnormal spoilage as normal spoilage to make operating performance look good would violate the standard of objectivity. For the various reasons cited above, we should take the position that Chadwick’s and Suarez's behavior (if Suarez goes along with Chadwick’s wishes) is unethical. 19-42 Suarez should indicate to Chadwick that the classification of normal and abnormal spoilage established by Flextron Company is, indeed, appropriate. If Chadwick still insists on modifying the spoilage classification for this job to report higher operating income figures, Suarez should raise the matter with one of Chadwick’s superiors. If, after taking all these steps there is continued pressure to overstate operating income, Suarez should consider resigning from the company rather than engaging in unethical behavior. 19-43 Try It! 19-1 Weighted-Average Method of Process Costing: Units started during July = 10,750 + 200 + 50 + 1,000 – 2,000 = 10,000 Tensor Textiles: Summarize the Flow of Physical Units and Compute Output in Equivalent Units (Step 1) (Step 2) Equivalent Units Physical Direct Conversion Flow of Production Units Materials Costs Work in process, beginning (given) Started during current period To account for Good units completed and transferred out during current period: Normal spoilage* 100  100%; 100  100% Abnormal spoilage† 50  100%; 50 100% Work in process, ending‡ (given) 2,000  100%; 2,000  30% Accounted for Equivalent units of work done to date 2,000 10,000 12,000 10,750 200 10,750 10,750 200 200 50 50 1,000 300 12,000 11,300 50 1,000 12,000 *Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. †Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡Degree of completion in this department: direct materials, 100%; conversion costs, 30%. Tensor Textiles: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-inProcess Inventory: (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for (Step 4) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit Assignment of costs Good units completed and transferred out (9,000 units) Costs before adding normal spoilage Normal spoilage (100 units) (A) Total cost of good units completed & transf. out (B) Abnormal spoilage (50 units) (C) Work in process, ending (2,000 units) (A)+(B)+(C) Total costs accounted for Total Production Costs $ 2,840 47,930 $50,770 Direct Materials $ 2,000 16,000 $18,000 Conversion Costs $ 840 31,930 $32,770 $18,000 12,000 $ 1.50 $32,770 11,300 $ 2.90 (Step 5) a $47,300 880 48,180 220 2,370 $50,770 (10,750a  $1.50) + (10,750a  $2.90) (200a  $1.50) + (200a  $2.90) (50a  $1.50) + (50a  $2.90) a (1,000  $1.50) + (300a  $2.90) Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A 19-44 $18,000 + $32,770 Try It! 19-2 First-In, First-Out (FIFO) Method of Process Costing: Tensor Textiles: Summarize the Flow of Physical Units and Compute Output in Equivalent Units: Flow of Production Work in process, beginning (given) Started during current period To account for Good units completed and transferred out during current period: From beginning work in process|| 2,000  (100% 100%); 2,000  (100%  50%) Started and completed 10,000  100%; 10,000  100% Normal spoilage* 100  100%; 100  100% Abnormal spoilage† 50  100%; 50  100% Work in process, ending‡ 1,000  100%; 1,000  30% Accounted for Equivalent units of work done in current period || (Step 1) Physical Units 2,000 10,000a 12,000 (Step 2) Equivalent Units Direct Conversion Materials Costs 2,000 0 1,000 8,750 8,750 200 200 50 50 1,000 300 10,000 10,300 8,750# 200 50 1,000 ____ 12,000 Degree of completion in this department: direct materials, 100%; conversion costs, 50%. 10,750 physical units completed and transferred out minus 2,000 physical units completed and transferred out from beginning work-in-process inventory. *Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%. † Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%. ‡ Degree of completion in this department: direct materials, 100%; conversion costs, 30%. # 19-45 Tensor Textiles: Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-inProcess Inventory: (Step 3) Work in process, beginning (given) Costs added in current period (given) Total costs to account for Total Production Direct Costs Materials $ 2,840 $ 2,000 47,930 16,000 $50,770 $18,000 Conversion Costs $ 840 31,930 $32,770 $16,000 10,000 $ 1.60 $31,930 10,300 $ 3.10 (Step 4) Costs added in current period Divided by equivalent units of work done in current period Cost per equivalent unit (Step 5) Assignment of costs: Good units completed and transferred out (10,750 units) Work in process, beginning (2,000 units) Costs added to beg. work in process in current period Total from beginning inventory before normal spoilage Started and completed before normal spoilage (8,750 units) Normal spoilage (100 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (50 units) (C) Work in process, ending (2,000 units) (A)+(B)+(C) Total costs accounted for a $ 2,840 3,100 $2,000 + (0a  $1.60) + $ 840 (1,000a  3.10) 5,940 41,125 (8,750a  $1.60) + (8,750a  $3.10) 940 (200a  $1.60) + (200a  $3.10) 48,005 (50a  $1.60) + (50a  $3.10) 235 2,530 (1,000a  $1.60) + (300a  $3.10) $18,000 + $32,770 $50,770 Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A Try It! 19-3 Work in process, beginning (20%)* Started during March To account for Good units completed and transferred out Normal spoilage Abnormal spoilage (13,000 – normal spoilage) Work in process, ending (70%)* Accounted for Inspection at 15% 17,000 140,000 157,000 Inspection at 40% 17,000 140,000 157,000 Inspection at 100% 17,000 140,000 157,000 130,000a 8,890b 4,110 14,000 157,000 130,000a 10,080c 2,920 14,000 157,000 130,000a 9,100d 3,900 14,000 157,000 *Degree of completion for conversion costs of the forging process at the dates of the work-in-process inventories a 17,000 beginning inventory +140,000 –13,000 spoiled – 14,000 ending inventory = 130,000 b 7%  (130,000 – 17,000 + 14,000) = 7%  127,000 = 8,890 c 7%  (130,000 + 14,000 ) = 7%  144,000 = 10,080 d 7%  130,000 = 9,100 19-46 Try It! 19-4 a. b. Manufacturing Overhead Control (rework costs) Materials Control ($21  58) Wages Payable ($17  58) Manufacturing Overhead Allocated ($32  58) Normal rework on 58 units, but not attributable to any specific controller 4,060 Loss from Abnormal Rework ($70  28) Materials Control ($21  28) Wages Payable ($17  28) Manufacturing Overhead Allocated ($32  28) Total costs of abnormal rework on 28 controllers (Abnormal rework = Actual rework – Normal rework = 86 – 58 = 30 controllers) 1,960 1,218 986 1,856 588 476 896 Total rework costs for controllers in August 2020 are as follows: Normal rework costs allocated to controllers Abnormal rework costs for controllers Total rework costs $4,060 1,960 $6,020 c. Manufacturing costs of job #9 before rework: 200 units  ($190 + $22 + $88) Add: Normal rework costs Total cost of job #9 $60,000 4,060 $64,060 Unit cost of job #9 ($64,060 ÷ 200 units) = $320.30 Work-in-Process Control (Job #9) Materials Control ($190  200) Wages Payable ($22  200) Manufacturing Overhead Allocated ($88  200) Manufacturing costs for 200 controllers on Job #9 Work-in-Process Control (Job #9) Materials Control ($24  50) Wages Payable ($18  50) Manufacturing Overhead Allocated ($30  50) Normal rework for 50 controllers attributable to Job #9 19-47 60,000 38,000 4,400 17,600 4,060 1,218 986 1,856