Solution manual cost accounting 12e by horngren ch 18

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 18 SPOILAGE, REWORK, AND SCRAP 18-1 Managers have found that improved quality and intolerance for high spoilage have lowered overall costs and increased sales 18-2 Spoilage—units of production that not meet the standards required by customers for good units and that are discarded or sold at reduced prices Rework—units of production that 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 18-3 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 18-4 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 for the accounting period 18-5 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 18-6 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 18-7 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 18-8 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 18-9 Yes, the point of inspection is the key to the assignment of spoilage costs Normal spoilage costs 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 18-10 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 18-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-11 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 18-12 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 18-13 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 18-14 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 18-15 Company managements measure scrap to measure efficiency and to also control a tempting source of theft Managements 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 18-16 (5–10 min.) Normal and abnormal spoilage in units Total spoiled units Normal spoilage in units, 5% Abnormal spoilage in units 132,000 Abnormal spoilage, 5,400 $10 Normal spoilage, 6,600 $10 Potential savings, 12,000 $10 12,000 6,600 5,400 $ 54,000 66,000 $120,000 Regardless of the targeted normal spoilage, abnormal spoilage is non-recurring 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 18-2 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-17 (20 min.) Weighted-average method, spoilage, equivalent units Solution Exhibit 18-17 calculates equivalent units of work done to date for direct materials and conversion costs SOLUTION EXHIBIT 18-17 Summarize Output in Physical Units and Compute Output in Equivalent Units; Weighted-Average Method of Process Costing with Spoilage, Gray Manufacturing Company for November 2006 (Step 1) Physical 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: 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 Work done to date (Step 2) Equivalent Units Direct Conversion Materials Costs 1,000 10,150a 11,150 9,000 100 9,000 9,000 100 100 50 50 50 2,000 2,000 600 11,150 11,150 a 9,750 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 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% 18-3 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-18 (20 25 min.) Weighted-average method, assigning costs (continuation of 18-17) Solution Exhibit 18-18 calculates the costs per equivalent unit for direct materials and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process SOLUTION EXHIBIT 18-18 Compute Cost per Equivalent Unit, Summarize Total Costs to Account For, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process; Weighted-Average Method of Process Costing, Gray Manufacturing Company, November 2006 (Step 3) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit (Step 4) Total costs to account for (Step 5) 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 $ 2,533 39,930 Direct Materials $ 1,423 12,180 13,603 11,150 $ 1.22 Conversion Costs $ 1,110 27,750 28,860 9,750 $ 2.96 $42,463 $37,620 (9,000# 418 (100# 38,038 (50# 209 4,216 (2,000# $42,463 $1.22) + (9,000# $2.96) $1.22) + (100# $2.96) $1.22) + (50# $2.96) $1.22) + (600# $2.96) Equivalent units of direct materials and conversion costs calculated in Step in Solution Exhibit 18-17 18-4 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-19 (15 min.) FIFO method, spoilage, equivalent units Solution Exhibit 18-19 calculates equivalent units of work done in the current period for direct materials and conversion costs SOLUTION EXHIBIT 18-19 Summarize Output in Physical Units and Compute Output in Equivalent Units; First-in, First-out (FIFO) Method of Process Costing with Spoilage, Gray Manufacturing Company for November 2006 (Step 1) Physical Units 1,000 10,150a 11,150 (Step 2) Equivalent Units Direct Conversion Materials Costs 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|| 1,000 500 1,000 (100% 100%); 1,000 (100% 50%) 8,000# Started and completed 8,000 8,000 8,000 100%; 8,000 100% 100 Normal spoilage* 100 100 100 100%; 100 100% 50 Abnormal spoilage† 50 50 50 100%; 50 100% 2,000 Work in process, ending‡ 2,000 600 2,000 100%; 2,000 30% 11,150 Accounted for 10,150 9,250 Work done in current period only a 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% 18-5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-20 (20 25 min.) FIFO method, assigning costs (continuation of 18-19) Solution Exhibit 18-20 calculates the costs per equivalent unit for direct materials and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process SOLUTION EXHIBIT 18-20 Compute Cost per Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process; FIFO Method of Process Costing, Gray Manufacturing Company, November 2006 (Step 3) Work in process, beginning (given: $1,423 + $1,110) Costs added in current period (given) Divided by equivalent units of work done in current period Cost per equivalent unit (Step 4) Total costs to account for (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 Total Production Costs $ 2,533 39,930 $42,463 $ 2,533 1,500 Direct Materials $12,180 10,150 $ 1.20 (0a 4,033 a 33,600 (8,000 (100a 420 38,053 210 (50a 4,200 (2,000a $42,463 $1.20) $27,750 9,250 $ + (500a $3) $1.20) + (8,000a $3) $1.20) + (100a $3) $1.20) + (50a $1.20) + (60a Equivalent units of direct materials and conversion costs calculated in Step in Solution Exhibit 18-19 18-6 Conversion Costs $3) $3) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-21 (30 min.) Weighted-average method, spoilage Solution Exhibit 18-21A calculates equivalent units of work done in the current period for direct materials and conversion costs SOLUTION EXHIBIT 18-21A Summarize Output in Physical Units and Compute Output in Equivalent Units; Weighted-Average Method of Process Costing with Spoilage, Appleton Company for August 2006 (Step 1) (Step 2) Equivalent Units Physical Direct Conversion Flow of Production Units Materials Costs Work in process, beginning (given) 2,000 Started during current period (given) 10,000 To account for 12,000 Good units completed and tsfd out during current period: 9,000 9,000 9,000 a Normal spoilage 900 (900 100%; 900 100%) 900 900 b Abnormal spoilage 300 (300 100%; 300 100%) 300 300 Work in process, endingc (given) 1,800 (1,800 100%; 1,800 75%) 1,800 1,350 Accounted for 12,000 Work done to date 12,000 11,550 a Normal spoilage is 10% of good units transferred out: 10% × 9,000 = 900 units Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100% b Total spoilage = Beg units + Units started - Good units tsfd out – Ending units = 2,000 + 10,000 - 9,000 - 1,800 = 1,200; Abnormal spoilage = Total spoilage – Normal spoilage = 1,200 – 900 = 300 units Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100% c Degree of completion in this department: direct materials, 100%; conversion costs, 75% 18-7 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com & Solution Exhibit 18-21B calculates the costs per equivalent unit for direct materials and conversion costs, summarizes total costs to account for, and assigns these 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 18-21B Compute Cost per Equivalent Unit, Summarize Total Costs to Account For, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process; Weighted-Average Method of Process Costing, Appleton Company, August 2006 (Step 3) (Step 4) (Step 5) (A) (B) (C) (A) + (B) + (C) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date Cost per equivalent unit Total costs to account for Assignment of costs: Good units completed and transferred out (9,000 units) Costs before adding normal spoilage Normal spoilage (900 units) Total costs of good units completed and transferred out Abnormal spoilage (300 units) Work in process, ending (1,800 units): Total costs accounted for d Total Production Costs $ 28,600 174,300 _ $202,900 Conversion Costs $ 10,900 93,000 $103,900 11,550 $ 8.250 $ 8.9957 $155,211 (9,000d 15,521 (900d 170,732 5,174 (300d 26,994 (1,800d $202,900 Equivalent units of direct materials and conversion costs calculated in step of Solution Exhibit 18-21A 18-8 Direct Materials $17,700 81,300 $99,000 12,000 $8.25) + (9,000 d $8.9957) $8.25) + (900d $8.9957) $8.25) + (300d $8.9957) $8.25) + (1,350d $8.9957) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-22 (30 min.) FIFO method, spoilage Solution Exhibit 18-22A calculates equivalent units of work done in the current period for direct materials and conversion costs SOLUTION EXHIBIT 18-22A Summarize Output in Physical Units and Compute Output in Equivalent Units; FIFO Method of Process Costing with Spoilage, Appleton Company for August 2006 (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: From beginning work in process a [2,000 × (100% – 100%); 2,000 × (100% – 50%)] Started and completed (7,000 × 100%; 7,000 × 100%) Normal spoilagec (900 × 100%; 900 × 100%) Abnormal spoilaged (300 × 100%; 300 × 100%) Work in process, endinge (given) (1,800 × 100%; 1,800 × 75%) Accounted for Work done in current period only a (Step 2) Equivalent Units Physical Direct Conversion Units Materials Costs 2,000 10,000 12,000 2,000 7,000 1,000 7,000 7,000 900 900 300 300 1,800 _ 10,000 1,350 b 900 300 1,800 12,000 Degree of completion in this department: direct materials, 100%; conversion costs, 50% 9,000 physical units completed and transferred out minus 2,000 physical units completed and transferred out from beginning work-in-process inventory c Normal spoilage is 10% of good units transferred out: 10% × 9,000 = 900 units Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100% d Total spoilage = Beg units + Units started – Good units tsfd Out - ending units = 2,000 + 10,000 – 9,000 – 1,800 = 1,200 Abnormal spoilage = Actual spoilage – Normal spoilage = 1,200 – 900 = 300 units Degree of completion of abnormal spoilage in in this department: direct materials, 100%; conversion costs, 100% e Degree of completion in this department: direct materials, 100%; conversion costs, 75% b 18-9 10,550 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com & Solution Exhibit 18-22B calculates the costs per equivalent unit for direct materials and conversion costs, summarizes total costs to account for, and assigns these 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 18-22B Compute Cost per Equivalent Unit, Summarize Total Costs to Account For, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process; FIFO Method of Process Costing, Appleton Company, August 2006 (Step 3) (Step 4) (Step 5) (A) (B) (C) (A) + (B) + (C) Work in process, beginning (given) ($17,700 + $10,900) Costs added in current period (given) Divide by equivalent units of work done in current period Cost per equivalent unit Total costs to account for Assignment of costs: Good units completed and transferred out (9,000 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 (7,000 units) Normal spoilage (900 units) Total costs of good units completed and transferred out Abnormal spoilage (300 units) Work in process, ending (1,800 units): Total costs accounted for f Total Production Costs $ 28,600 174,300 Conversion Costs $ 81,300 10,000 $93,000 10,550 $ 8.8152 $ 8.130 $202,900 $ 28,600 8,815 (0f × $8.13) + (1,000f × $8.8152) 37,415 118,616 (7,000f × $8.13) + (7,000f × $8.8152) 15,521 (900f × $8.13) + (900f × $8.8152) 171,282 5,084 (300f × $8.13) + (300f × $8.8152) 26,534 (1,800f × $8.13) + (1,350f × $8.8152) $202,900 Equivalent units of direct materials and conversion costs calculated in step in Solution Exhibit 18-22A 18-10 Direct Materials To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-34 (20 25 min.) Job-costing spoilage and scrap a Materials Control Manufacturing Department Overhead Control Work-in-Process Control (650 + 500 + 250 = 1,400) b Accounts Receivable Work-in-Process Control 600 800 1,400 1,250 1,250 a The clause does not specify whether the 1% calculation is to be based on the input cost ($26,951 + $15,076 + $7,538) or the cost of the good output before the "1% normal spoilage" is added b If the inputs are used to determine the 1%: $26,951 + $15,076 + $7,538 = $49,565 1% of $49,565 = $495.65 or $496, rounded Then, the entry to leave the $496 "normal spoilage" cost on the job, remove the salvageable material, and charge manufacturing overhead would be: Materials Control Manufacturing Department Overhead Control Work-in-Process Control ($800 spoilage minus $496 = $304 spoilage cost that is taken out of the job; $600 salvage value plus $304 = $904; or $1,400 minus $496 = $904) 600 304 904 If the outputs are used to determine the 1%: $26,951 – $650 = 15,076 – 500 = 7,538 – 250 = $49,565 Then, $48,165 $26,301 14,576 7,288 $48,165 1% = $481.65 or $482, rounded The journal entry would be: Materials Control Manufacturing Department Overhead Control Work-in-Process Control 18-29 600 318 918 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-35 (30 min.) Job costing, rework Work-in-Process Control (SM-5 motors) ($550 80) Materials Control ($300 80) Wages Payable ($60 80) Manufacturing Overhead Allocated ($190 80) Total costs assigned to 80 spoiled units of SM-5 Motors before considering rework costs 44,000 24,000 4,800 15,200 Manufacturing Department Overhead Control (rework) Materials Control ($60 50) Wages Payable ($45 50) Manufacturing Overhead Allocated ($75 50) Normal rework on 50 units, but not attributable specifically to the SM-5 motor batches or jobs 9,000 Loss from Abnormal Rework ($180 30) Materials Control ($60 30) Wages Payable ($45 30) Manufacturing Overhead Allocated ($75 30) Total costs of abnormal rework on 30 units (Abnormal rework = Actual rework – Normal rework = 80 – 50 = 30 units) of SM-5 Motors 5,400 Work-in-Process Control (SM-5 motors) Work-in-Process Control (RW-8 motors) Manufacturing Department Overhead Allocated (rework) (Allocating manufacturing department rework costs to SM-5 and RW-8 in the proportion 1,000:500 since each motor requires the same number of machine-hours.) 6,000 3,000 3,000 2,250 3,750 1,800 1,350 2,250 9,000 Total rework costs for SM-5 motors in February 2004 are as follows: Normal rework costs allocated to SM-5 Abnormal rework costs for SM-5 Total rework costs $ 6,000 5,400 $11,400 We emphasize two points: a Only $6,000 of the normal rework costs are allocated to SM-5 even though the normal rework costs of the 50 SM-5 motors reworked equal $9,000 The reason is that the normal rework costs are not specifically attributable to SM-5 For example, the machines happened to malfunction when SM-5 was being made, but the rework was not caused by the specific requirements of SM-5 If it were, then all $9,000 would be charged to SM-5 b Abnormal rework costs of $5,400 are linked to SM-5 in the management control system even though for financial reporting purposes the abnormal rework costs are written off to the income statement 18-30 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-36 (30 min.) Job costing, scrap Materials Control Manufacturing Overhead Control (To record scrap common to all jobs at the time it is returned to the storeroom) 10,000 Cash or Accounts Receivable Materials Control (To record sale of scrap from the storeroom) 10,000 10,000 10,000 A summary of the manufacturing costs for HM3 and JB4 before considering the value of scrap are as follows: Direct materials Direct manufacturing labor Manufacturing overhead (200% of direct manufacturing labor) Total manufacturing costs Manufacturing cost per unit ($380,000 20,000; $270,000 10,000) HM3 $200,000 60,000 JB4 $150,000 40,000 Total Costs $350,000 100,000 120,000 $380,000 80,000 $270,000 200,000 $650,000 $19 $27 The value of scrap of $10,000 generated during March will reduce manufacturing overhead costs by $10,000 from $200,000 to $190,000 Manufacturing overhead will then be allocated at 190% of direct manufacturing labor costs ($190,000 ÷ $100,000 = 190%) The revised manufacturing cost per unit would then be: Direct materials Direct manufacturing labor Manufacturing overhead (190% of direct manufacturing labor) Total manufacturing costs Manufacturing cost per unit ($374,000 20,000; $266,000 HM3 $200,000 60,000 JB4 $150,000 40,000 Total Costs $350,000 100,000 114,000 $374,000 76,000 $266,000 190,000 $640,000 $18.70 10,000) 18-31 $26.60 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-37 (15 20 min.) Physical units, inspection at various stages of completion (chapter appendix) Work in process, beginning (20%)* Started during March To account for Good units completed and transferred out Normal spoilage Abnormal spoilage (10,000 – normal spoilage) Work in process, ending (70%)* Accounted for Inspection at 15% 14,000 120,000 134,000 113,000a 6,600b 3,400 11,000 134,000 Inspection at 40% 14,000 120,000 134,000 113,000a 7,440c 2,560 11,000 134,000 Inspection at 100% 14,000 120,000 134,000 113,000a 6,780d 3,220 11,000 134,000 *Degree of completion for conversion costs of the forging process at the dates of the work-in-process inventories a 14,000 beginning inventory +120,000 –10,000 spoiled – 11,000 ending inventory = 113,000 b 6% (113,000 – 14,000 + 11,000) = 6% 110,000 = 6,600 c 6% (113,000 + 11,000 ) = 6% 124,000 = 7,440 d 6% 113,000 = 6,780 18-32 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-38 (25 35 min.) Weighted-average method, inspection at 80% completion (chapter appendix) 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 80,000 units to account for (10,000 beginning + 70,000 started), 10,000 must have been spoiled in June [80,000 – (50,000 completed + 20,000 ending inventory)] Normal spoilage is 7,000 [0.10 (50,000 + 20,000)] The 3,000 remainder is abnormal spoilage (10,000 – 7,000) Solution Exhibit 18-38, 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 18-38, Panel B, computes the costs per equivalent unit for each cost category, summarizes 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 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 18-33 $1,877,350 67,710 734,140 $2,679,200 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 18-38 Weighted-Average Method of Process Costing with Spoilage; Finishing Department of the Ottawa Manufacturing Company for June PANEL A: Steps and 2—Summarize Output in 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* 5,000 100%; 5,000 0%; 5,000 80% Work in process, ending‡ (given) 20,000 100%; 20,000 100%; 20,000 95% Normal spoilage on ending WIP** 2,000 100%; 2,000 0%; 2,000 80% Abnormal spoilage† 3,000 100%; 3,000 0%; 3,000 80% Accounted for Work done to date Physical Units 10,000 70,000 80,000 50,000 5,000 (Step 2) Equivalent Units TransferredDirect Conversion in Costs Materials Costs 50,000 5,000 50,000 50,000 4,000 20,000 20,000 20,000 19,000 2,000 2,000 1,600 3,000 2,400 3,000 80,000 80,000 70,000 77,000 *Normal spoilage is 10% of good units that pass inspection: 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% ‡ 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% 20,000 = 2,000 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 = 10,000 7,000 = 3,000 units Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80% 18-34 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 18-38 PANEL B: Steps 3, 4, and 5—Compute Cost per Equivalent Unit, Summarize Total Costs to Account For, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Total Production TransferredCosts in Costs (Step 3) Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divided by equivalent units of work done to date Cost per equivalent unit (Step 4) Total costs to account for (Step 5) Assignment of costs Good units completed and transferred out (50,000 units) Costs before adding normal spoilage Normal spoilage (5,000 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (3,000 units) Work in process, ending (20,000 units) WIP ending, before normal spoilage Normal spoilage on ending WIP (C) Total costs of ending WIP (A)+(B)+(C) Total costs accounted for # $ 124,900 2,554,300 $ 82,900 647,500 730,400 $ 80,000 9.13 $ Direct Materials Conversion Costs 655,200 655,200 $ 42,000 1,251,600 1,293,600 70,000 $ 9.36 77,000 16.80 $ $2,679,200 50,000# ($9.13 + $9.36 + $16.80) $1,764,500 # 112,850 (5,000 $9.13) + (0# $9.36) + (4,000# $16.80) 1,877,350 67,710 (3,000# $9.13) + (0# $9.36) + (2,400# $16.80) 689,000 (20,000# $9.13) + (20,000# $9.36)+(19,000# $16.80) 45,140 (2,000# $9.13) + (0# $9.36) + (1,600# $16.80) 734,140 $2,679,200 Equivalent units of transferred-in costs, direct materials, and conversion costs calculated in Step in Panel A 18-35 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18-39 (40 min.) Job costing, spoilage, ethics Analysis of the 5,000 units rejected by Richport Company for Job No N1192-122 yields the following breakdown between normal and abnormal spoilage Units 3,000 2,000 5,000 Normal spoilage* Abnormal spoilage (5,000 – 3,000) Total units rejected *Normal spoilage = 0.025 of normal input When output equals 117,000 units, Normal input = 117,000 ÷ (1– 0.025) = 120,000 units Normal spoilage = 120,000 0.025 = 3,000 units The journal entries required to properly account for Job No N1192-122 are presented below and use an average cost per unit of $57 ($6,954,000 ÷ 122,000) Accounts Receivable or Cash Abnormal loss WIP Control To account for 5,000 units rejected 35,000 100,000 135,000 Finished Good Control 6,819,000 WIP Control 6,819,000 To transfer 117,000 units to finished goods inventory (costs incurred on job and debited to WIP Control, $6,954,000, minus $135,000 credited to WIP control) Units sold: 5,000 units at $7 each Loss from abnormal spoilage: 2,000 units at $57 Cost recovery (2,000 $7) $114,000 (14,000) $100,000 WIP control: 2,000 abnormal spoilage units at $57 3,000 normal spoilage units at $7 $114,000 21,000 $135,000 18-36 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 3a If all spoilage were considered normal, the journal entries to account for Job No N1192122 would be as follows: Accounts Receivable or Cash 35,000 WIP Control 35,000 To account for 5,000 units of normal spoilage, credited to WIP Control at $35,000 (5,000 units $7) Finished Goods Control 6,919,000 WIP Control 6,919,000 To transfer 117,000 units to finished-goods inventory (costs incurred on job and debited to WIP Control, $6,954,000, minus $35,000 credited to WIP Control) By considering all spoilage as normal, Richport will show no abnormal loss of $100,000 (see requirement 2) but instead will add $100,000 to the finished-goods inventory [$6,919,000 (in requirement 3a) minus $6,819,000 (in requirement 2)] As a result, showing all spoilage as normal will increase Richport’s operating income by $100,000 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 Rutherford to suggest that Gonzales 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 Rutherford’s motivation for wanting Gonzales to revise the quality figures could well have been motivated by Rutherford’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 Rutherford’s and Gonzales’s behavior (if Gonzales 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 Rutherford’s and Gonzales's behavior (if Gonzales goes along with Rutherford’s wishes) is unethical 18-37 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Gonzales should indicate to Rutherford that the classification of normal and abnormal spoilage established by Richport Company is, indeed, appropriate If Rutherford still insists on modifying the spoilage classification for this job to report higher operating income figures, Gonzales should raise the matter with one of Rutherford’s superiors If, after taking all these steps there is continued pressure to overstate operating income, Gonzales should consider resigning from the company rather than engaging in unethical behavior 18-40 (35 min.) Weighted-average method, spoilage, working backward Equivalent units of work done to date can be calculated using Step as follows: Direct Conversion Materials Costs Work in process, January $ 220,000 $ 30,000 Costs added in January 1,460,000 942,000 Total costs incurred to date $1,680,000 $972,000 Divided by cost per equivalent unit of work done to date $20 $12 Equivalent units of work done to date 84,000 81,000 Solution Exhibit 18-40A shows the equivalent units of work done (a) for good units completed and transferred out of inventory during January, (b) for normal spoilage, and (c) for abnormal spoilage The sum of these equivalent units is then subtracted from the total equivalent units of work done to date (direct materials, 84,000 units, and conversion costs, 81,000 units) to determine the equivalent units in ending work in process (direct materials, 15,000, and conversion costs, 12,000) This is also shown in Solution Exhibit 18-40A To summarize total costs to account for and to assign those costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to ending work in process, we first need to estimate the percentage of completion of ending work in process for each cost category We know that there are 15,000 physical units of ending work in process The percentage of completion of ending work in process for each cost category can then be calculated as follows: Direct Conversion Materials Costs Equivalent units of ending work in process (requirement 2) 15,000 12,000 Divided by physical units of ending work in process 15,000 15,000 Percentage of completion of ending work in process 100% 80% Solution Exhibit 18-40B summarizes total costs to account for, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process 18-38 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 18-40A Weighted Average Method of Process Costing with Spoilage at Ferguson, Inc., for January Steps and 2—Summarize Output in 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 spoilagea (6,100 100%; 6,100 100%) Abnormal spoilageb (1,900 100%; 1,900 100%) Work in process, ending (given) Accounted for Work done to date (from Requirement 1) a Normal spoilage = 10% of good units tsfd out = 0.1 Physical Units 10,000 74,000 84,000 61,000 6,100 (Step 2) Equivalent Units Direct Conversion Materials Costs 61,000 61,000 6,100 6,100 1,900 1,900 15,000c 12,000d 84,000 81,000 1,900 15,000 84,000 61,000 = 6,100 units Degree of completion of normal spoilage direct materials, 100%; conversion costs, 100% b Abnormal spoilage = Spoiled units - Normal spoilage = 8,000 - 6,100 = 1,900 units Degree of completion of abnormal spoilage: direct materials, 100%; conversion costs, 100% c Ending work in process eqvt units of dir matl = 84,000 - (61,000 + 6,100 + 1,900) = 15,000 eqvt units d Ending work in process eqvt units of conv costs = 81,000 - (61,000 + 6,100 + 1,900) = 12,000 eqvt units 18-39 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SOLUTION EXHIBIT 18-40B Weighted Average Method of Process Costing with Spoilage at Ferguson, Inc., for January Steps 3, 4, and 5—Compute Cost per Equivalent Unit, Summarize Total Costs to Account For, and Assign Total Costs to Units Completed, to Spoiled Units, and to Units in Ending Work in Process Work in process, beginning (given) Costs added in current period (given) Costs incurred to date Divide by equivalent units of work done to date Cost per equivalent unit Total costs to account for (Step 4) Assignment of costs: (Step 5) Good units completed and transferred out (61,000 units) Costs before adding normal spoilage Normal spoilage (6,100 units) (A) Total costs of good units completed and transferred out (B) Abnormal spoilage (1,900 units) (C) Work in process, ending (15,000 units): (A) + (B) + (C) Total costs accounted for (Step 3) e Total Production Costs $ 250,000 2,402,000 Direct Materials $ 220,000 1,460,000 $1,680,000 84,000 $ 20.00 $ 12.00 $2,652,000 $1,952,000 195,200 2,147,200 60,800 444,000 $2,652,000 (61,000e (6,100e $20) + (61,000e $12) $20) + (6,100e $12) (1,900 e (15,000e $20) + (1,900e $12) $20) + (12,000e $12) Equivalent units of direct materials and conversion costs calculated in step in Solution Exhibit 18-40A 18-40 Conversion Costs $ 30,000 942,000 $972,000 81,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 18 Case The United Libbey-Nippon Plant case can only be discussed using the textbook case write-up The case questions challenge students to apply the concepts learned in the chapter to a specific business situation THE UNITED LIBBEY-NIPPON PLANT: Responsibility and Accounting for Scrap The United L/N case explores issues of scrap accounting involving two glass fabrication plants of the Libbey-Owens-Ford Co (L-O-F group) This case demonstrates that changes in a plant’s production operations may necessitate changes in its scrap accounting system In particular, it focuses on the costs and benefits of determining the causes of product defects in a fully automated production setting The primary problem at the United L/N Plant is that its yield is substantially lower than budgeted The higher than anticipated scrap rate makes it difficult for the plant to meet profit goals set by its joint L-O-F and Nippon Sheet Glass board of directors Responsibility for the high scrap rate is shared by both the Rossford plant (bad glass) and United L/N itself (improper machine setup or machine malfunction) At issue is the appropriate means of sharing the economic costs resulting from scrap The L-O-F management is very wary of decentralization The company has a tradition of centralized control Senior executives not want to change Rossford’s status either as a standard cost center or as a supplier of United L/N The two plants’ managements were therefore instructed to negotiate a mutually agreeable solution to their dispute, which centers on disposition of the United L/N scrap variance One way to proceed with requirement of the case is to have one group of students roleplay members of the Rossford Plant and have another group of students role-play members of United L/N Points made by the Rossford plant manager and team a At the Rossford plant, experienced personnel inspect glass after each operation and when units are finished These inspectors strongly believe that the problems with yields at United L/N are caused by problems with the plant’s automated machines and the inability of its personnel both to set the control dials properly and to otherwise operate the equipment This belief is reinforced by an unsubstantiated rumor that the yield rate of one of the three United L/N shifts is much higher than that of the other two The Rossford team may want to propose that the L-O-F board of directors obtain more direct evidence on this issue b Rossford’s management could argue that the plant should be charged only the Rossford manufacturing cost of units that are scrapped because of defects in the raw glass that it transfers This solution would require identification of the specific causes of scrap at United L/N, which would further require changes in the plant’s production lines 18-41 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com c As a compromise, the Rossford negotiators could offer to accept a prorated share of the scrap variance (and thereby a share of United L/N’s fabrication costs) if United L/N’s management would take the necessary steps to determine where scrapped units become defective d Rossford management could further propose a rigorous quality inspection at the United L/N receiving point, which would necessitate unpacking and repacking the specially designed racks of glass If such inspection were accepted by United L/N, then Rossford personnel could argue that no portion of future (and presumably lower) scrap variances should be assigned to their plant Points made by United L/N team a The United L/N position is that inspection at Rossford is insufficient to detect all defects Similarly, these defects would not be detectable even if raw glass manufactured at Rossford was inspected by United L/N These defects only show up at one of the subsequent processing steps but the root cause of these defects is the bad raw glass supplied by Rossford b United L/N could argue that the entire scrap cost (price paid for the raw glass plus all of United L/N’s manufacturing costs, not just the costs incurred until the glass is scrapped) should be charged to Rossford Their main argument is that the various stages in the production process are so closely linked together that the plant incurs costs at the subsequent stages even when glass is scrapped at an earlier stage c Since the demand for United L/N’s products is high, United L/N’s team could argue for full price of the lite (which includes the opportunity cost of not producing the lite) d United L/N could argue that introducing inspection at various points in the process would destroy the state-of-the-art, totally automated concept of the plant, create inventories and hence add to product costs, and complicate the simple process-costing system United L/N currently enjoys They would be unwilling to bear these costs only to resolve the current dispute To improve its yield and its profit performance, United L/N’s management must determine and correct the problems that are causing excessive amounts of scrap in the plant’s production process The problems would include bad glass, flaws in the automated equipment, and improper operation of the equipment by plant technicians Determining where units become defective necessarily precedes determining why they become defective To answer the ―where‖ question, United L/N’s personnel could (1) rigorously inspect raw glass received from Rossford and other shipping plants to practically eliminate bad glass as a cause of defects, and (2) install and operate monitoring equipment after each stage of the production process If successful, these steps could considerably reduce the disputes between United L/N and its suppliers In fact, in the plant’s negotiations, Rossford personnel have pushed hard for installation of such equipment However, inspection of raw glass is not an ―exact science,‖ and United L/N managers could continue to argue that some defects detected in processing were caused by bad glass Operation of the monitoring equipment would create a situation similar to that of the Rossford plant, where units are visually inspected after each discrete processing step Work-in- 18-42 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com process inventory would accumulate at each monitoring station As the number of units in inventory increased, so would the need for overhead support Moreover, the plant’s accountants would almost certainly create a separate cost pool for each sub-process so that units scrapped at different points could be appropriately costed Creation of these cost pools could be accompanied by assignment of separate management responsibility for each one These changes would add substantial complexity to an otherwise simple process-costing system They would also destroy the state-of-the-art, totally automated concept of the plant Whether the benefits of the changes would outweigh the costs is debatable However, the United L/N plant was designed with the assumption that very high work quality would be the norm Management and operating personnel working together must solve their quality problems or some modification of the organization of production resources is inevitable One solution to the problem would be to store inventory in front of the furnaces so that they could be kept filled to optimal levels at all times The effects of this action would be similar to the effects of installing monitoring equipment as discussed above Work-in-process inventory would be introduced in production lines that were designed specifically to function without it, and inventory support costs would increase with the size of the inventory It could also lead to separate management responsibility for the two areas The number of cost pools would probably increase and the process of tracing costs to output would become substantially more complex than at present Another alternative would be to attack the operating problems directly instead of incurring the costs of storage, inventory, and additional plant support services Any reduction in the scrap rate of a pattern cutting or edging operation would result in fewer gaps in the line going into the furnace and translate into increased furnace efficiency If the more experienced Rossford personnel are correct, much room for improvement remains in the ability of United L/N technicians to set up and operate their machines With or without the aid of monitoring equipment, management should continue to work with them to refine their skills and thereby increase the yield of the plant If Rossford and United L/N were independent companies, they could negotiate a market price for raw glass, incorporating the risk of bad glass into the contract Similarly, if L-O-F were to make Rossford a profit center instead of a cost center, the two managements could negotiate a price that incorporates the risk of bad glass Additionally, if the managements of each plant were given decentralized decision-making authority, they could decide whether to sell to, and buy from, each other The cost allocation issues then would not be so critical 18-43 ... done to date for each cost category in September 2006 & Solution Exhibit 18- 24, Panel B, calculates the costs per equivalent unit for each cost category, summarizes total costs to account for,... costing method SOLUTION EXHIBIT 18- 26 Standard Costing Method of Process Costing with Spoilage; Superchip, September 2006 Steps 3, 4, and 5—Compute Cost per Equivalent Unit, Summarize Total Costs... conversion costs, 30% 18- 5 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 18- 20 (20 25 min.) FIFO method, assigning costs (continuation of 18- 19) Solution