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Chapter 7
Special Production Issues: Lost Units and Accretion
Questions
1. An accepted quality level (AQL) is the proportion of total units
to be produced in a process without defects as preestablished by
an appropriate minimum that is determined by management.
Alternatively, an AQL can be stated as the proportion of totalunits to be produced in a process that can be defective as
preestablished by an appropriate maximum determined by
management.
When the AQL is set at 100 percent for good production, then
the acceptable defect level is set at zero. In this case, the AQL
is set at a level of 100 percent and this is the same as a zero-
defects tolerance level.
2. Shrinkage refers to loss of inputs because of natural processes
such as evaporation or oxidation. Spoiled units cannot be
economically reworked to bring them up to standard. Defectiveunits can e economically reworked because the incremental revenue
exceeds the incremental cost of the rework. Both spoiled and
defective units do not meet quality specifications upon
inspection.
3. A tolerated loss level may be set because losses are inherent in
the production process (e.g., shrinkage) or there are known
defects in materials used or in production processes. For
example, management may know that a particular production process
performs within tolerances only 99.5 percent of the time.
Accordingly, management may allow for 5 defects out of every
1,000 units produced. Although management could invest in
technology that would reduce the level of defects, the new
technology may be too costly relative to the existing level of
defects. With this cost/benefit analysis, management has
concluded that a certain level of defects is preferred to no
defects.
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4. Examples of defective units include the following: a car that
has been painted the wrong color; the delivery of personal
possessions to the wrong address by a moving company; an
incorrectly mounted transmission in a new automobile; a piece
of lumber that has been cut too long for its intended
application; and a fishing reel that has been assembledwithout a required bearing.
Examples of spoiled products/services include the
following: a tire that that has treads which are irregularly
positioned on the tire (e.g., treads that would not be
parallel to the road); a tax return prepared by an accounting
firm that was audited by the IRS and determined to have large
errors; a cake that has been cut into pieces that are too
small; a tree that died because it was trimmed so severely by
a landscaping service; loss of a patients sight caused by a
surgeons error during an operation.
5. Normal loss refers to an expected reduction in production
quantity based on the production technology and production
practices of the company. Abnormal loss refers to a quantity
of loss above the normal loss quantity. Normal loss creates
an expected cost of production so the cost of such a loss is
inventoriable; abnormal spoilage cost is not expected, and,
thus, it is not inventoriable.
6. Abnormal losses would be more likely to be preventable than
normal losses because abnormal losses are less likely to becaused by factors that are inherent in the materials or
production methods. For example, a known amount of material
loss (waste) is to be expected if lower quality materials are
utilized. However, any loss beyond the expected amount would
likely be caused by other factors that are subject to
management control, e.g., production errors.
7. A continuous loss is one that occurs (more or less)
uniformly throughout the production process. A discrete
loss is one that occurs at a specific stage or in a specific
production process.
8. A discrete loss occurs at a specific point in the production
process. For accounting purposes, discrete loss is assumed
to occur immediately prior to inspection. In reality, the
loss could have occurred anywhere before the inspection
point and, thus, the lost units should have had no
additional conversion (and/or, possibly, materials) added to
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them. It is impossible to have continuous monitoring for
losses in most production processes, so conversion costs are
incurred until inspection and assigned to all units that
have passed the inspection point (even though some units
that have not reached the inspection point could also be
lost).
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9. Any time a decline in the value of an asset occurs that is
unexpected, it is considered a loss of the period. Abnormal
losses are unplanned for and are in excess of normal losses.
Therefore, the cost associated with them should not be
considered a product cost and should not be allocated to
good production. The units themselves have no value andcannot be considered assets, so their costs are expired and
belong on the income statement. The cost is removed by
debiting a loss account (such as "Loss from Abnormal
Spoilage") and crediting Work in Process Inventory.
10. The method of neglect requires no specific computations
regarding spoiled units; all costs are assigned to good
units. The cost of spoiled units that have been found at an
inspection point will be assigned to all units that have
passed the inspection point. Thus, the method of neglect
assigns spoilage costs by simply ignoring (neglecting) the
spoiled units.
The method of neglect is appropriate if loss is
considered to be incurred continuously and is considered
normal.
11. The method of neglect raises the cost per equivalent unit
because no costs are assigned to the spoiled units.
Therefore, good units bear all costs, including the costs of
producing the spoiled units.
12. If spoilage is incurred for all (or most) jobs in a job
order costing system, the estimate of overhead used in
setting the predetermined overhead rate should include an
amount for the net cost of spoilage. This will allow the
cost of normal, general spoilage to be spread over all jobs
produced. If spoilage is related to a single job, the cost
of that spoilage should be assigned to the job that gave
rise to it. If any abnormal spoilage is incurred in a job
order system, its cost should be assigned to the period as a
loss.
13. Accretion is an increase in the number of units or the
volume of a product that occurs through the addition of
materials (e.g., water or other fluids) or through
processing (e.g., heat causing expansion). Although the
total cost of the predecessor department is unaffected, the
cost per unit calculated by the predecessor department would
decline in the successor department because of the increase
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in units.
14. The cost per unit might have declined in the second
department because of an increase in the number of units
caused by the addition of materials or the expansion of the
units transferred in. If the company manufactures bread,the rising of the dough would cause an increase in the
volume of dough transferred in from the Mixing Department.
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15. If the defects are considered normal, the treatment of
rework costs depends on whether an actual or a normal cost
system is in effect. If an actual cost system is used, the
rework costs will be added to the component costs of the
period and be allocated to all units completed. In a normal
cost system, the rework costs will have been estimated andincluded in the development of the overhead application
rate; actual rework costs would be assigned to Manufacturing
Overhead.
If the defects are abnormal, the costs of production
and rework costs for the defective units should be
accumulated and assigned to a loss account.
16. The important managerial concern is to control spoilage and
defective work rather than to account for it. Measuring its
cost is the first step in controlling spoilage/defects.
Using the method of neglect or otherwise spreading the cost
of the lost units to good production minimizes the degree of
control that can be exerted by management.
17. Certain fluctuations occur in any production process.
Statistical process controls can be used to determine if
fluctuations in a process are within normal and tolerable
limits, or exceed tolerable limits. In short, the SPC
methods can be used to determine whether a process is in
control. SPC charts can also be used as indicators of the
points at which the process is out of control and thus helpsmanagers understand why fluctuations occur in a process so
that actions can be taken to reduce such fluctuations.
18. Each student will have a different answer. No solution
provided.
Exercises
19. a. 3
b. 8
c. 2d. 5
e. 7
f. 1
g. 6
h. 4
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20. a. Annual cost of spoilage = 200 50 $8.50 =
$85,000.
Alfred would be able to save up to $85,000 per year by
purchasing the regulator. The amount he would pay would be
based on the expected life of the regulator and (in a
discounted cash flow framework) on the cost of capital ofthe firm. In addition to these factors, Alfred would want
to consider how long the company intends to keep the
machinery that currently prints the packing boxes, the costs
of operating and installing the regulator, the costs of
training personnel to operate it and the utility and
maintenance costs for the machine (if different from those
currently experienced).
b. Good boxes = 600 50 = 550
Spoilage cost per setup = 50 $8.50 = $425
Increase in cost = $425 550 = $0.77 (rounded)
c. To obtain the correct 20 boxes in each batch,
WEBOXALL must first produce the 50 misprinted boxes.
Total Per Box
Costs of spoilage = 12 50 $8.50 = $5,100
$21.25
Cost of regulator 4,300
17.92
Net savings in cost $ 800 $3.33
Yes, Springtime Corporation would be willing to
purchase the regulator because it would result in
substantial cost savings. The cost of the regulator
would be recouped in less than one years volume of
purchases. However, an alternative for Springtime
would be to purchase all of its boxes in a single
transaction rather than in 12 different batches. In
such a case, the total spoilage cost incurred would
only be $425 (50 boxes $8.50).
d. The spoilage cost-per-box figures differ
substantially because of the number of units produced
in the batches. In part (b), the batch costs of
spoilage were spread over 550 good units; in part (c),
the costs of spoilage for each batch were spread over
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only 20 units.
21. a. 10,000 + 60,000 = 70,000 units
b. 60,000 0.05 = 3,000 units
c. Abnormal loss = Total units (Completed Units + EI
units
+ Normal loss) = 70,000 - (58,200 + 8,000 + 3,000)
= 70,000 69,200 = 800 units
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d. Units Material
Conversion
Beginning inventory (10%) 10,000
Units started 60,000
Units to account for 70,000
Transferred out 58,200 58,200
58,200
Ending inventory (60%) 8,000 8,000
4,800
Normal shrinkage 3,000
Abnormal shrinkage 800 800
800
Units accounted for 70,000 67,000
63,800
22. a - d. Units Material
Conversion
Beginning inventory (20%; 30%) 8,000
Gallons started 180,000
Gallons to account for 188,000
Beginning inventory completed 8,000 6,400
5,600
Gallons started and completed 174,600 174,600
174,600
Total gallons transferred 182,600Ending inventory (70%; 80%) 4,000 2,800
3,200
Normal spoilage(180,000 0.4%) 720 0
0
Abnormal spoilage 680 680
680
Gallons accounted for (FIFO EUP)188,000 184,480
184,480
e. Cost of normal spoilage is automatically spread
among all of the remaining units produced. This isdone by using the method of neglect and omitting these
spoiled units from the EUP calculations.
f. Cost of abnormal spoilage is treated as a period cost.
23. a. Units Material
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Conversion
Beginning inventory 40,000
Pounds started 425,000
Pounds to account for 465,000
BI completed 40,000 06,000
Started & completed 405,000 405,000
405,000
Ending inventory 10,000 10,000
2,500 Normal spoilage 2,000
Abnormal spoilage 8,000 8,000
5,600
Units accounted for 465,000 423,000
419,100
b. Ending inventory:
Material (10,000 $2.40) $24,000
Conversion (2,500 $4.70) 11,750
Total cost $35,750
c. Abnormal spoilage:
Material (8,000 $2.40) $19,200
Conversion (5,600 $4.70) 26,320
Total cost (treated as a loss) $45,520
24. a. Normal spoilage allowed = 30,000 pounds 8% = 2,400
pounds Units Material
Conversion
Beginning inventory (30%) 9,000
Pounds started 30,000
Pounds to account for 39,000
Beginning inventory completed 9,000 0
6,300
Pounds started and completed 22,500 22,500
22,500
Total pounds completed 31,500Ending inventory (20%) 5,400 5,400
1,080
Normal spoilage 2,100 0
0
Pounds accounted for (FIFO) 39,000 27,900
29,880
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b. Total Material Conversion
Beginning inventory cost $ 6,200
Current costs 18,729 $9,765 $8,964
Total costs $24,929
Divided by EUP 27,900 29,880
Cost per EUP $0.65 $0.35 $0.30
c. Cost Assignment
Transferred out:
Beginning inventory cost $ 6,200
Cost to complete (conversion: 6,300 $0.30) 1,890
Total cost of beginning inventory $ 8,090
Started & completed (22,500 $0.65) 14,625
$22,715
Ending inventory:
Material (5,400 $0.35) $ 1,890
Conversion (1,080 $0.30) 324
2,214
Total costs accounted for
$24,929
25. a. Normal spoilage = 20,000 20 = 1,000 units
Units Material Conversion
Beginning inventory 4,000
Started 20,000
Units to account for 24,000
Beginning inv. completed 4,000 4,000 4,000
Started & completed 16,000 16,000 16,000
Ending inventory 3,000 3,000 1,800
Normal spoilage 1,000 1,000 1,000
Units accounted for (WA) 24,000 24,000 22,800
b. Total Material Conversion
Beginning inventory $ 24,592 $ 12,252 $12,340
Current period 175,448 112,548 62,900Total costs $200,040 $124,800 $75,240
Divided by EUP 24,000 22,800
Cost per EUP $8.50 $5.20 $3.30
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Cost Assignment
Transferred out:
Good units (20,000 $8.50) $170,000
Normal spoilage (1,000 $8.50) 8,500 $178,500
Ending inventory:
Material (3,000 $5.20) $ 15,600Conversion (1,800 $3.30) 5,940 21,540
Total cost accounted for $200,040
26. Maximum normal spoilage = 13,500,000 12% = 1,620,000
a. & b. Units Material
Conversion
Beginning inventory (30%) 500,000
Pounds started 13,500,000
Pounds to account for 14,000,000
Beginning inventory 500,000 500,000 500,000
Pounds started and completed 10,900,000 10,900,000 10,900,000
Ending inventory (40%) 750,000 750,000
300,000
Abnormal spoilage* 230,000 230,000
115,000
Normal spoilage 1,620,000 1,620,000
810,000
Pounds accounted for (WA) 14,000,000 14,000,000
12,625,000
*To balance schedule
c. 1. The memo should address the fact that
additives such as water and preservatives would
cause accretion in the canning process.
2. The memo should discuss how evaporation would lead
to a loss of water content in the potato. Such
losses are very common in vegetable processing.
27. a. Units Material
Conversion
Beginning inventory 750
Started 17,250
Units to account for 18,000
Beginning inventory completed 750 750
750
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Units started and completed 14,250 14,250
14,250
Ending inventory 1,200 1,200
840
Defective units 1,800 1,800
1,800Units accounted for 18,000 18,000
17,640
b. Regular Pro- Rework Total Cost
duction Cost + Cost = Cost EUP = per
Unit
DM $126,000 $3,240 $129,240 18,000 $7.18
Conv. $41,013 $1,323 $42,336 17,640 $2.40
c. The actual costs of reworking would be charged to
manufacturing overhead and the overhead application
rate(s)would include a charge for rework.
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d. Abnormal rework costs are accumulated and assigned to a
loss account.
Regular Pro- Cost
duction Cost EUP per Unit
DM $126,000 18,000 $7.00Conv. $41,013 17,640 $2.325
28. a. Appraisal; the food can be compared to the
customers order before delivery to the table.
b. Prevention; this error could be prevented by marking an
invoice paid at the time a check is issued.
c. Prevention; only actions taken prior to the breakage
would be effective in minimizing the loss.
d. Although neither method would be entirely effective,
prevention measures could be taken such as using
technology that minimizes evaporation losses.
e. Prevention; all parts could be made such that only the
correct mates could be fastened together.
f. Appraisal; the error would be discovered by visual
inspection.
Problems
29. a. Total shrinkage = Total units to account for Units
transferred Ending inventory = (1,000 + 125,000)
110,000 3,000 = 126,000 113,000 = 13,000
b. Maximum normal shrinkage = 125,000 10% = 12,500
pounds. For accounting purposes, it is simply ignored,
which means its costs will be spread over all good
units produced.
c. Abnormal spoilage = 13,000 12,500 = 500 pounds.
Its costs will be treated as a loss of the period.
d.
Total Material
Conversion
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Beginning inventory 1,000
Started 125,000
To account for 126,000
Beginning inventory 1,000 1,000 1,000
Started and completed 109,000 109,000 109,000Ending inventory 3,000 3,000 900
Normal spoilage 12,500
Abnormal spoilage 500 500 500
Accounted for (WA) 126,000 113,500
111,400
Material Conversion
Total
Beginning WIP costs $ 1,020 $ 195 $ 1,215
Current costs 118,155 33,225 151,380
Total costs $119,175 $ 33,420 $152,595
Divide by EUP 113,500 111,400
Cost per EUP $1.05 $0.30 $1.35
Cost Assignment
Transferred out (110,000 $1.35) $148,500
Ending inventory:
Material (3,000 $1.05) $3,150
Conversion (900 $0.30) 270 3,420
Abnormal spoilage (500 $1.35) 675
Total cost accounted for $152,595
e. The easiest way to decrease shrinkage loss is to buy
higher quality material. Higher quality ground beef
would have a lower fat content and consequently would
shrink less. Although raw material prices would
increase, the cost of conversion per pound of finished
product would likely decline because of the reduced
loss.
30. a. Units completed = (BI + Started) EI Defects =
(5,000+ 70,000) 6,000 400 = 75,000 6,400 = 68,600
b. Maximum normal spoilage = 70,000 1% = 700 units
c. Total Material Boxes
Conversion
Beginning inventory 5,000
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Started 70,000
To account for 75,000
Beginning inventory 5,000 5,000 5,000 5,000
Started and completed 63,600 63,600 63,600 63,600
Ending inventory 6,000 6,000 0 4,200Normal spoilage 400 400 0 380
Abnormal spoilage 0 0 0 0
Accounted for (WA) 75,000 75,000 68,600
73,180
Material Boxes Conversion
Total
Beginning WIP costs $ 21,900 $ 0 $ 7,680 $
29,580 Current costs 315,600 75,460 270,404
661,464
Total costs $337,500 $75,460 $278,084
$691,044
Divide by EUP 75,000 68,600 73,180
Cost per EUP $4.50 $1.10 $3.80
$9.40
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Good units completed (68,600 $9.40) $644,840
Normal spoilage
Material (400 $4.50) $1,800
Conversion (380 $3.80) 1,444 3,244
Total cost of good units $648,084
Cost per unit = $648,084 68,600 = $9.45 rounded
If there would have been no defective units, the cost would
have been $9.40 because the method of neglect would not have
been used.
d. Material (6,000 $4.50) $27,000
Conversion (4,200 $3.80) 15,960
Total cost of ending WIP $42,960
31. a.
Matthew Tools
Cost of Production Report
for August
Beginning inventory 1,000
Transferred in 50,800
Units to account for 51,800
Normal spoilage (650)
Abnormal spoilage (350)
Ending inventory (1,800)
Transferred out 49,000
Units Trans. In Material Labor OH
BI 1,000 1,000 1,000 1,000
1,000
Units S & C 48,000 48,000 48,000 48,000
48,000
Ending inventory 1,800 1,800 0 720
1,170
Normal spoilage 650 650 0 650
650
Abnormal spoilage 350 350 0 350
350Units accounted for 51,800 51,800 49,000 50,720
51,170
Total Trans. In Material Labor OH
BI cost $ 7,355 $ 6,050 $ 0 $ 325 $
980 Current costs 235,557 149,350 12,250 23,767
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50,190
Total costs $242,912 $155,400 $12,250 $24,092
$51,170
Divided by EUP 51,800 49,000 50,720
51,170
Cost per EUP $4.725 $3 $0.25 $0.475$1.00
Cost Assignment
Transferred out
Good units (49,000 $4.725) $231,525
Normal spoilage (650 $4.475) 2,909 $234,434
Ending inventory:
Transferred in (1,800 $3.00) $ 5,400
Labor (720 $0.475) 342
Overhead (1,170 $1.00) 1,170 6,912
Abnormal spoilage (350 $4.475) 1,566
Total costs accounted for $242,912
b. Loss on Abnormal Spoilage 1,566
Work in Process - Grinding 1,566
32.
Big Piney Furniture
Cost of Production Report
for April 2003
Beginning inventory 2,000Transferred in 14,900
Units to account for 16,900
Ending inventory (3,000)
Normal spoilage (200)
Abnormal spoilage (400)
Transferred out 13,300
Units Trans. In Material Labor OH
BI completed 2,000 2,000 2,000 2,000
2,000
Units S & C 11,300 11,300 11,300 11,30011,300
Ending inventory 3,000 3,000 0 1,200
600
Normal spoilage 200 200 200 200
200
Abnormal spoilage 400 400 0 120
60
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Units accounted for 16,900 16,900 13,500 14,820
14,160
Total Trans. In Material Labor OH
Beginning inv. $ 32,312 $ 15,020 $ 2,130 $ 4,118 $
11,044Current costs 310,714 137,080 13,800 46,270
113,564
Total $343,026 $152,100 $15,930 $50,388
$124,608
Divide by EUP 16,900 13,500 14,820
14,160
Cost per EUP $22.38 $9 $1.18 $3.40
$8.80
Cost Assignment
Transferred out
Good units (13,300 $22.38) $297,654
Normal spoilage (200 $22.38) 4,476 $302,130
Ending inventory:
Transferred in (3,000 $9) $ 27,000
Labor (1,200 $3.40) 4,080
Overhead (600 $8.80) 5,280 36,360
Abnormal spoilage
Transferred in (400 $9) $ 3,600
Labor (120 $3.40) 408
Overhead (60
$8.80) 528 4,536Total costs accounted for $343,026
Finished Goods Inventory 302,130
WIP Inventory-Lamination 302,130
Loss on Abnormal Spoilage 4,536
WIP Inventory-Lamination 4,536
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33.
Big Piney Furniture
Cost of Production Report
for April 2003
Beginning inventory 2,000
Transferred in 14,900Units to account for 16,900
Ending inventory (3,000)
Normal spoilage (200)
Abnormal spoilage (400)
Transferred out 13,300
Units Trans. In Material Labor OH
BI completed 2,000 0 0 400
600
Units S & C 11,300 11,300 11,300 11,300
11,300
Ending inventory 3,000 3,000 0 1,200
600
Normal spoilage 200 200 200 200
200
Abnormal spoilage 400 400 0 120
60
Units accounted for 16,900 14,900 11,500 13,220
12,760
Total Trans. In Material Labor OHBeginning inv. $ 32,312
Current costs 310,714 $137,080 $13,800 $46,270
$113,564
Total $343,026
Divide by EUP 14,900 11,500 13,220
12,760
Cost per EUP $22.80 $9.20 $1.20 $3.50
$8.90
Cost Assignment
Transferred out Beginning inventory $ 32,312
Complete BI:
Labor (400 $3.50) 1,400
Overhead (600 $8.90) 5,340
S&C (11,300 $22.80) 257,640
Normal spoilage (200 $22.80) 4,560 $301,252
Ending inventory:
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Transferred in (3,000 $9.20) $ 27,600
Labor (1,200 $3.50) 4,200
Overhead (600 $8.90) 5,340 37,140
Abnormal spoilage
Transferred in (400 $9.20) $ 3,680
Labor (120 $3.50) 420 Overhead (60 $8.90) 534 4,634
Total costs accounted for $343,026
Finished Goods Inventory 301,252
WIP Inventory-Lamination 301,252
Loss on Abnormal Spoilage 4,634
WIP Inventory-Lamination 4,634
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34. Maximum normal spoilage = 70,000 3% = 2,100 units
Ronald Company
Cost of Production Report
for May 2003
Units Material Conversion
Beginning inventory 5,600Units started 74,400
Units to account for 80,000
BI completed 5,600 0 2,800
Units S & C 64,400 64,400 64,400
Total units completed 70,000
Ending inventory 7,500 7,500 2,500
Normal spoilage 2,100 2,100 2,100
Abnormal spoilage* 400 400 400
Units accounted for 80,000 74,400 72,200*To balance schedule
Total Material Conversion
Beg. inventory cost $ 7,632
Current costs 106,168 $74,400 $31,768
Total costs $113,800
Divided by EUP 74,400 72,200
Cost per EUP $1.44 $1 $0.44
Cost Assignment
Transferred out: Beginning inventory cost $ 7,632
Cost to complete
Conversion (2,800 $0.44) 1,232
Total cost of BI $ 8,864
Started & comp. (64,400 $1.44) 92,736
Normal spoilage
DM: (2,100 $1) $2,100
CC: (2,100 $0.44) 924 3,024 $104,624
Ending inventory:
Material (7,500 $1) $7,500
Conversion (2,500 $0.44) 1,100 8,600Abnormal spoilage
Material (400 $1) $ 400
Conversion (400 $0.44) 176 576
Total costs accounted for $113,800
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35. Maximum normal spoilage = 70,000 3% = 2,100 units
Ronald Company
Cost of Production Report
for May 2003
Units Material Conversion
Beginning inventory 5,600Units started 74,400
Units to account for 80,000
BI completed 5,600 5,600 5,600
Units S & C 64,400 64,400 64,400
Total units completed 70,000
Ending inventory 7,500 7,500 2,500
Normal spoilage 2,100 2,100 2,100
Abnormal spoilage* 400 400 400
Units accounted for 80,000 80,000 75,000*To balance schedule
Total Material Conversion
Beg. inventory cost $ 7,632 $ 6,400 $ 1,232
Current costs 106,168 74,400 31,768
Total costs $113,800 $80,800 $33,000
Divided by EUP 80,000 75,000
Cost per EUP $1.45 $1.01 $0.44
Cost Assignment
Transferred out:Units completed (70,000 $1.45) $101,500
Normal spoilage
DM: (2,100 $1.01) $2,121
CC: (2,100 $0.44) 924 3,045 $104,545
Ending inventory:
Material (7,500 $1.01) $7,575
Conversion (2,500 $0.44) 1,100 8,675
Abnormal spoilage
Material (400 $1.01) $ 404
Conversion (400 $0.44) 176 580
Total costs accounted for $113,800
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36. a. Total Material Conversion
Beginning inventory 6,000
Started 180,000
To account for 186,000
Beginning inventory 6,000 6,000 6,000Started and completed 146,000 146,000 146,000
Transferred out 152,000 152,000 152,000
Ending inventory 20,000 20,000 14,000
Normal spoilage 4,800 4,800 3,360
Abnormal spoilage* 9,200 9,200 6,440
Accounted for 186,000 186,000 175,800*To balance schedule
b. Total Material
Conversion
BI $ 33,600
Current 1,224,330 $915,120
$342,810
Total costs $1,257,930
Divide by EUP 186,000 175,800
Cost per EUP $6.87 $4.92 $1.95
Cost of goods transferred before proration of normal
spoilage:
152,000 $6.87 = $1,044,240
Cost of ending inventory before proration of normal
spoilage:
Direct material (20,000 $4.92) $ 98,400
Conversion (14,000 $1.95) 27,300
Total $125,700
Proration:
Cost of normal spoilage:
Direct material (4,800 $4.92)
$23,616
Conversion (3,360 $1.95)6,552
Total cost
$30,168
Cost of transferred goods after proration of normal
spoilage:
Cost before normal spoilage
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$1,044,240
Normal spoilage
DM: $23,616 .88
20,782
CC: $6,552 .92
6,028Total
$1,071,050
Cost of ending inventory after proration of normal spoilage:
Cost before normal spoilage
$125,700
Normal spoilage
DM: $23,616 .12
2,834
CC: $6,552 .08
524
Total
$129,058
Abnormal spoilage cost:
Direct material (9,200 $4.92)
$45,264
Direct labor (6,440 $1.95)
12,558
Total
$57,822
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Total costs accounted for:
Transferred out $1,071,050
Ending inventory 129,058
Abnormal spoilage 57,822
Total $1,257,930
37. a. Abnormal spoilage = 2,100 1,680 = 420
Units Tran. in Material
Conversion
Beginning inventory 4,200
Started 42,000
Units to account for 46,200
Beginning inventory 4,200 4,200 4,200
4,200
Started & completed 29,400 29,400 29,400
29,400
Transferred out 33,600 33,600 33,600
33,600
Ending inventory* 10,500 10,500 10,500
4,200
Abnormal spoilage 420 420 420
420
Normal spoilage 1,680 1,680 1,680
1,680
Units accounted for 46,200 46,200 46,20039,900*To balance schedule
b.
Cost Assignment
Transferred out:
Good units (33,600 $9) $302,400
Normal spoilage (1,680 $9) 15,120
Total $317,520
c.Ending inventory:
Trans. in (10,500 $5) $52,500
Material (10,500 $1) 10,500
Conversion (4,200 $3) 12,600
Total $75,600
d. Total cost transferred in (46,200 $5) $231,000
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Cost of beginning inventory (18,900)
Cost transferred in this period $212,100
e. Abnormal spoilage: 420 $9 = $3,780; this cost
would be deducted as a period cost (loss) in May.
(CMA adapted)
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38. Maximum normal loss = 150,000 4% = 6,000 units
Abnormal loss = 9,000 6,000 = 3,000 units
Dept. 1 Units Material Conversion
Beginning inventory 6,000
Started 150,000Units to account for 156,000
BI completed 6,000 6,000 6,000
Started & completed 123,000 123,000 123,000
Transferred out 129,000 129,000 129,000
Ending inventory 18,000 18,000 10,800
Normal spoilage (4%) 6,000 6,000 6,000
Abnormal spoilage 3,000 3,000 3,000
Units accounted for 156,000 156,000 148,800
Material Conversion Total
Beginning inventory $ 3,060 $ 2,328 $ 5,388
Current period 37,500 207,480 244,980
Total costs $40,560 $209,808 $250,368
Divided by EUP 156,000 148,800
Cost per EUP $0.26 $1.41 $1.67
Cost Assignment
Transferred out:
Good units (129,000 $1.67) $215,430
Normal spoilage (6,000
$1.67) 10,020 $225,450Ending inventory:
Material (18,000 $0.26) $ 4,680
Conversion (10,800 $1.41) 15,228 19,908
Abnormal spoilage (3,000 $1.67) 5,010
Total costs accounted for $250,368
Dept. 2
Maximum normal loss = 129,000 8% = 10,320 units
Units Trans. In Material
ConversionBeginning inventory 3,000
Transferred in 129,000
Units to account for 132,000
BI completed 3,000 3,000 3,000 3,000
Units S & C 108,000 108,000 108,000 108,000
Transferred out 111,000 111,000 111,000 111,000
Ending inventory 15,000 15,000 0 12,000
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Normal spoilage 6,000 6,000 0 3,600
Units accounted for 132,000 132,000 111,000 126,600
Total Trans. In Material
Conversion
BI cost $ 8,436 $ 6,690 $ 0 $1,746
Current costs 281,810 230,910 740
50,160
Total costs $290,246 $237,600 $740
$51,906 Divided by EUP 132,000 111,000
126,600
Cost per EUP $2.22 $1.80 $0.01
$0.41
Cost Assignment
Transferred out
Good units (111,000 $2.22) $246,420
*Proration of normal spoilage 10,832 $257,252
Ending inventory:
Transferred in (15,000 $1.80) $27,000
Conversion (12,000 $0.41) 4,920
Total cost before proration $31,920
*Proration of normal spoilage 1,444 33,364
Total costs accounted for (with rounding error) $290,616
*Proration:Cost of normal spoilage:
Transferred in (6,000 $1.80) $10,800
Conversion (3,600 $0.41) 1,476
Total cost $12,276
Trans In Conversion
EUP % EUP %
Units transferred out* 111,000 88 111,000 90
Ending work in process 15,000 12 12,000 10
126,000 100 123,000 100
Note: Beginning inventory was not past inspection point and
must be included in the proration.
TO: TI $10,800 88% = $ 9,504
CC $ 1,476 90% = 1,328 $10,832
EI: TI $10,800 12% = $ 1,296
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CC $ 1,476 10% = 148 1,444
39. Maximum normal loss = 150,000 4% = 6,000 units
Abnormal loss = 9,000 6,000 = 3,000 units
Dept. 1 Units Material ConversionBeginning inventory 6,000
Started 150,000
Units to account for 156,000
BI completed 6,000 0 5,400
Started & completed 123,000 123,000 123,000
Transferred out 129,000 123,000 128,400
Ending inventory 18,000 18,000 10,800
Normal spoilage (4%) 6,000 6,000 6,000
Abnormal spoilage 3,000 3,000 3,000
Units accounted for 156,000 150,000 148,200
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Material Conversion Total
Beginning inventory $ 5,388
Current period $37,500 $207,480 244,980
Total costs $250,368
Divided by EUP 150,000 148,200
Cost per EUP $0.25 $1.40 $1.65
Cost Assignment
Transferred out:
Beginning WIP $ 5,388
Complete Beginning WIP
CC (5,400 $1.40) 7,560 $ 12,948
S & C (123,000 $1.65) 202,950
Normal spoilage (6,000 $1.65) 9,900 $225,798
Ending inventory:
Material (18,000 $0.25) $ 4,500
Conversion (10,800 $1.40) 15,120 19,620
Abnormal spoilage (3,000 $1.65) 4,950
Total costs accounted for $250,368
Dept. 2
Maximum normal loss = 129,000 8% = 10,320 units
Units Trans. In Material
Conversion
Beginning inventory 3,000
Transferred in 129,000Units to account for 132,000
BI completed 3,000 0 3,000 1,800
Units S & C 108,000 108,000 108,000 108,000
Transferred out 111,000 108,000 111,000 109,800
Ending inventory 15,000 15,000 0 12,000
Normal spoilage 6,000 6,000 0 3,600
Units accounted for 132,000 129,000 111,000 125,400
Total Trans. In Material
ConversionBI cost $ 8,436
Current costs 281,810 $230,910 $740
$50,160
Total costs $290,246
Divided by EUP 129,000 111,000
125,400
Cost per EUP $2.20 $1.79 $0.01
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$0.40
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Cost Assignment
Transferred out:
Beginning WIP $ 8,436
Complete Beginning WIP:
DM (3,000 $0.01) 30
CC (1,800 $0.40) 720 $ 9,186 S & C (108,000 $2.20) 237,600
*Proration of normal spoilage 10,747 $257,533
Ending inventory:
Transferred in (15,000 $1.79) $26,850
Conversion (12,000 $0.40) 4,800
Total cost before proration $31,650
*Proration of normal spoilage 1,433 33,083
Total costs accounted for (with rounding error) $290,616
*Proration:
Cost of normal spoilage:
Transferred in (6,000 $1.79) $10,740
Conversion (3,600 $0.40) 1,440
Total cost $12,180
Trans In Conversion
EUP % EUP %
Units transferred out* 111,000 88 111,000 90
Ending work in process 15,000 12 12,000 10
126,000 100 123,000 100
Note: Beginning inventory was not past inspection point andmust be included in the proration.
TO: TI $10,740 88% = $ 9,451
CC $ 1,440 90% = 1,296 $10,747
EI: TI $10,740 12% = $ 1,289
CC $ 1,440 10% = 144 1,433
40. Maximum normal loss = 125,000 10% = 12,500 units
Dept. 1 Units Material ConversionBeginning inventory 5,000
Started 125,000
Units to account for 130,000
Beginning inv. completed 5,000 0 1,750
Started & completed 105,000 105,000 105,000
Transferred out 110,000 105,000 106,750
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Ending inventory 14,000 14,000 5,600
Normal spoilage 6,000 0 0
Units accounted for 130,000 119,000 112,350
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Material Conversion Total
Beginning WIP $ 19,250
Current period $190,400 $393,225 583,625
Total costs $602,875
Divided by EUP 119,000 112,350
Cost per EUP $1.60 $3.50 $5.10
Cost Assignment
Transferred out:
Beginning inventory cost $ 19,250
Cost to complete (conv. 1,750 $3.50) 6,125
Total cost of beginning inventory $ 25,375
Started & completed (105,000 $5.10) 535,500
$560,875
Ending inventory:
Material (14,000 $1.60) $ 22,400
Conversion (5,600 $3.50) 19,600
42,000
Total costs accounted for
$602,875
Dept. 2
Maximum normal loss = 110,000 5% = 5,500
Units Trans. In Material
Conversion
Beginning inventory 40,000Transferred in 110,000
Units to account for 150,000
BI completed 40,000 40,000 40,000
40,000
Units S & C 80,000 80,000 80,000
80,000
Transferred out 120,000 120,000 120,000
120,000
Ending inventory 22,500 22,500 0
4,500Normal spoilage 5,500 5,500 5,500
4,400
Abnormal spoilage* 2,000 2,000 2,000
1,600 Units accounted for 150,000 150,000 127,500
130,500*To balance schedule
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Total Trans. In Material
Conversion
BI cost $ 345,600 $204,000 $120,000 $21,600
Current costs 892,770 568,500 268,875 55,395
Total costs $1,238,370 $772,500 $388,875 $76,995
Divided by EUP 150,000 127,500 130,500Cost per EUP $8.79 $5.15 $3.05 $0.59
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Cost Assignment
Transferred out:
(120,000 $8.79) $1,054,800
Normal spoilage
Trans. In (5,500 $5.15) $28,325
Materials (5,500 $3.05) 16,775 Conversion (4,400 $0.59) 2,596 47,696
Total costs transferred out
$1,102,496 Ending inventory:
Trans. In (22,500 $5.15) $ 115,875
Conversion (4,500 $0.59) 2,655
118,530
Abnormal spoilage
Trans. In (2,000 $5.15) $ 10,300
Material (2,000 $3.05) 6,100
Conversion (1,600 $.59) 944
17,344
Total costs accounted for
$1,238,370
41. a. Predetermined rate = $462,500 50,000 = $9.25 per MH
b. Units Material
Conversion
Transferred out 2,000,000 2,000,000
2,000,000
Ending inventory 75,000 75,00026,250
Defective units 40,000 40,000
40,000
Total 2,115,000 2,115,000
2,066,250
Total Material
Conversion
Costs $9,322,425 $3,743,550
$5,578,875
Divided by EUP 2,115,0002,066,250
Cost per EUP $4.47 $1.77
$2.70
c. The rework cost is debited to the manufacturing
overhead account since the company uses a predetermined
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rate to apply overhead.
Manufacturing Overhead 37,750
Various accounts 37,750
d. Normal production cost (40,000 $4.47) $178,800Cost of rework 37,750
Total cost of defective units $216,550
Total sales value of defective units
(40,000 $3.50)
(140,000)
Deficiency $ 76,550
Inventory - Irregulars 140,000
Work in Process Inventory 140,000
Cost of good pipe (2,000,000 $4.47) $8,940,000
Deficiency 76,550
Total cost $9,016,550
Divided by total good pipe 2,000,000
Revised cost per good pipe (rounded) $4.51
e. Inventory - Irregular 140,000
Loss from Defects 15,310*
Work in Process 155,310
*20% of deficiency; $76,550 20%
Cost of good pipe $8,940,000
Deficiency ($76,550 - $15,310) 61,240
Total cost $9,001,240
Divided by total good pipe 2,000,000
Revised cost per good foot of pipe (rounded) $4.50
42. a. WIP - Job BA468 850
Raw Materials Inventory 150
Wages Payable 700
b. Manufacturing Overhead 850Raw Materials Inventory 150
Wages Payable 700
c. Loss on Abnormal Rework 850
Raw Materials Inventory 150
Wages Payable 700
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Case
43. a. Beginning inventory 3,000
Transferred in 45,000
Units to account for 48,000
Transferred out 40,000
Ending inventory 4,000
Bikes lost 4,000
Units accounted for 48,000
(1) Bikes passing through Assembly
48,000
Less bikes not inspected during
current year:
Beginning WIP (inspected in prior
year - 80% complete) 3,000
Ending WIP(have not reached inspec-
tion point - 20% complete) 4,000
(7,000)
Bikes that reached inspection point
41,000
Normal defective rate
0.05
Normal number of defective bikes
2,050
(2) Total bikes lost 4,000
Normal number of defective bikes (2,050)
Abnormal number of defective bikes 1,950
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b. Units Trans. In Material Conversion
Transferred out 40,000 40,000 40,000 40,000
Ending inventory 4,000 4,000 2,000 800
Units lost 4,000 4,000 4,000 2,800
Units accounted for 48,000 48,000 46,000 43,600
c. Trans. In Material Conversion Total
BI $ 82,200 $ 6,660 $ 11,930 $100,790
Current 1,237,800 96,840 236,590 1,571,230
Total cost $1,320,000 $103,500 $248,520 $1,672,020
Divided by EUP 48,000 46,000 43,600
Cost per EUP $27.50 $2.25 $5.70 $35.45
d. (1) Normal defective bikes:
Transferred in (2,050 $27.50) $ 56,375.00
Material (2,050 $2.25) 4,612.50
Conversion (1,435 $5.70) 8,179.50 $
69,167
(2) Abnormal defective bikes:
Transferred in (1,950 $27.50) $ 53,625.00
Material (1,950 $2.25) 4,387.50
Conversion (1,365 $5.70) 7,780.50
65,793
(3) Good bikes completed (40,000 $35.45)
1,418,000
(4) Ending WIP
Transferred in (4,000 $27.50) $110,000.00
Material (2,000 $2.25) 4,500.00
Conversion (800 $5.70) 4,560.00
119,060
Total costs accounted for
$1,672,020
e. (1) The cost of the normal defective units of $69,167 would
be transferred to the Packing Department as a portionof the cost of the 40,000 good units transferred out.
Thus, this amount would be a portion of the Packing
Department's inventory account and/or cost of goods
sold amount depending on the proportion of the units in
the WIP inventory, FG inventory, and units sold during
the year.
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(2) The abnormal loss of $65,793 would appear as
period expense (loss) on the companys income
statement.
(3) The cost of the good units completed and
transferred to the Packing Department ($1,418,000)would be included in the Packing Departments
production costs. Thus, this amount would be a portion
of the Packing Department's inventory accounts and/or
cost of goods sold account depending on the proportion
of the units in WIP inventory, FG inventory, and units
sold during the year.
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(4) The Assembly Department's ending WIP inventory
($119,060) would be included in the inventory balance
on the Balance Sheet.
f. Normal spoilage cost is an expected cost of
producing good units. As such, it is not an extra costbut thought to be inherent in producing good units.
Normal spoilage may occur because of material or labor
quality, machine malfunctions, or human error.
Management should do cost=benefit studies to determine
if it is economically sensible to reduce spoilage.
Three questions should be addressed: (1) What does the
spoilage actually cost? (2) Why does it occur? (3) How
can it be controlled?
(CMA adapted)
Reality Check
44. a. Andrew Hill's considerations are determined
largely by his position as a cost accountant, with
responsibilities to Audio Spectrum, others in the
company, and himself. Hill's job involves collecting,
analyzing, and reporting operating information.
Although not responsible for product quality, Hill
should exercise initiative and good judgment in
providing management with information having potential
adverse economic impacts.
Hill should determine whether the controller'srequest violates his professional or personal
standards, or the company's code of ethics, if Audio
Spectrum has such a code. As Hill decides how to
proceed, he should protect any proprietary information
he has and should not violate the chain of command by
discussing this matter with the controller's superiors.
b. (1) The controller has reporting
responsibilities and should protect the overall
company interests by encouraging further study of
the problem by those in his department, byinforming his superiors in this matter, and by
working with others in the company to find
solutions.
(2) The quality control engineer has
responsibilities for product quality and should
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protect the overall company interests by
continuing to study the quality of reworked
rejects, informing the plant manager and her staff
in this matter, and working with others in the
company to find solutions.
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(3) The plant manager and her staff have
responsibilities for product quality and cost and
should protect the overall company interests by
exercising the stewardship expected of them.
Plant management should be sure that products meet
the quality standards. Absentee owners needinformation from management, and the plant manager
and her staff have a responsibility to inform the
board of directors elected by the owners of any
problems that could affect the well-being of Audio
Spectrum.
c. Andrew Hill needs to protect the interests of
Audio Spectrum, others in the company, and himself.
Hill is vulnerable if he conceals the problem and it
eventually surfaces. Hill must take some action to
reduce his vulnerability. One possible action that
Hill could take would be to obey the controller and
prepare the advance material for the board without
mentioning or highlighting the probable failure of
reworks. Because this differs from his long-standing
practice of highlighting information with potential
adverse economic impact, Hill should write a report to
the controller detailing the probable failure of
reworks, the analysis made by himself and the quality
control engineer, and the controller's instructions in
this matter. (CMA adapted)
45. Each student will have a different answer. No solution
provided.
46. Each student will have a different answer. No solution
provided.
47. Each student will have a different answer. No solution
provided.
48. Each student will have a different answer. No solution
provided.
49. Each student will have a different answer. No solution
provided.
50. Each student will have a different answer. No solution
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provided.
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