Solution manual cost and managerial accounting 3rd by barspecial production issues lost units and accretion

Chapter Special Production Issues: Lost Units and Accretion Questions 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 total units 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 zerodefects tolerance level 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 Defective units can e economically reworked because the incremental revenue exceeds the incremental cost of the rework Both spoiled and defective units not meet quality specifications upon inspection 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 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 165 166 CHAPTER Special Production Issues: Lost Units and Accretion 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 assembled without 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 patient’s sight caused by a surgeon’s error during an operation 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 Abnormal losses would be more likely to be preventable than normal losses because abnormal losses are less likely to be caused 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 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 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 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) CHAPTER 167 Special Production Issues: Lost Units and Accretion 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 and cannot 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 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 168 15 CHAPTER Special Production Issues: Lost Units and Accretion 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 and included 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 helps managers 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 b c d e f g h CHAPTER 169 Special Production Issues: Lost Units and Accretion 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 of the 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) 20 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 year’s 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 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 170 CHAPTER Special Production Issues: Lost Units and Accretion d Units Material Conversion Beginning inventory (10%) 10,000 Units started 60,000 Units to account for 70,000 Transferred out Ending inventory (60%) Normal shrinkage Abnormal shrinkage Units accounted for 22 a - d Beginning inventory (20%; 30%) Gallons started Gallons to account for 58,200 8,000 3,000 800 70,000 Units 8,000 180,000 188,000 58,200 8,000 58,200 4,800 800 67,000 800 63,800 Material Conversion Beginning inventory completed 8,000 6,400 5,600 Gallons started and completed 174,600 174,600 174,600 Total gallons transferred 182,600 Ending inventory (70%; 80%) 4,000 2,800 3,200 Normal spoilage (180,000 × 0.4%) 720 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 is done by using the method of neglect and omitting these spoiled units from the EUP calculations f 23 Cost of abnormal spoilage is treated as a period cost a Beginning inventory Pounds started Pounds to account for b c Units 40,000 425,000 465,000 BI completed 40,000 Started & completed 405,000 Ending inventory 10,000 Normal spoilage 2,000 Abnormal spoilage 8,000 Units accounted for 465,000 Ending inventory: Material (10,000 × $2.40) Conversion (2,500 × $4.70) Total cost Abnormal spoilage: Material (8,000 × $2.40) Conversion (5,600 × $4.70) Total cost (treated as a loss) Material Conversion 405,000 10,000 6,000 405,000 2,500 8,000 423,000 5,600 419,100 $24,000 11,750 $35,750 $19,200 26,320 $45,520 24 CHAPTER 171 Special Production Issues: Lost Units and Accretion 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 Pounds started and completed 22,500 Total pounds completed 31,500 Ending inventory (20%) 5,400 Normal spoilage 2,100 Pounds accounted for (FIFO) 39,000 b Beginning inventory cost Current costs Total costs Divided by EUP Cost per EUP Total $ 6,200 18,729 $24,929 $0.65 22,500 6,300 22,500 5,400 27,900 1,080 29,880 Material Conversion $9,765 $8,964 27,900 $0.35 29,880 $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 Ending inventory: Material (5,400 × $0.35) $ 1,890 Conversion (1,080 × $0.30) 324 Total costs accounted for 25 a $22,715 2,214 $24,929 Normal spoilage = 20,000 ÷ 20 = 1,000 units Material Beginning inventory Started Units to account for Units 4,000 20,000 24,000 Beginning inv completed Started & completed Ending inventory Normal spoilage Units accounted for (WA) 4,000 16,000 3,000 1,000 24,000 4,000 16,000 3,000 1,000 24,000 Total $ 24,592 175,448 $200,040 Material $ 12,252 112,548 $124,800 24,000 $5.20 b Beginning inventory Current period Total costs Divided by EUP Cost per EUP $8.50 Conversion 4,000 16,000 1,800 1,000 22,800 Conversion $12,340 62,900 $75,240 22,800 $3.30 172 CHAPTER Special Production Issues: Lost Units and Accretion 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) $ 15,600 Conversion (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 Beginning inventory (30%) Pounds started Pounds to account for Units 500,000 13,500,000 14,000,000 Material Conversion Beginning inventory Pounds started and completed Ending inventory (40%) Abnormal spoilage* Normal spoilage Pounds accounted for (WA) 500,000 500,000 500,000 10,900,000 10,900,000 10,900,000 750,000 750,000 300,000 230,000 230,000 115,000 1,620,000 1,620,000 810,000 14,000,000 14,000,000 12,625,000 * To balance schedule c The memo should address the fact that additives such as water and preservatives would cause accretion in the canning process 27 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 a Beginning inventory Started Units to account for Units 750 17,250 18,000 Material Beginning inventory completed Units started and completed Ending inventory Defective units Units accounted for 750 14,250 1,200 1,800 18,000 750 14,250 1,200 1,800 18,000 b Conversion 750 14,250 840 1,800 17,640 Regular ProRework 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 CHAPTER 173 Special Production Issues: Lost Units and Accretion d Abnormal rework costs are accumulated and assigned to a loss account Regular Production Cost DM $126,000 Conv $41,013 28 EUP 18,000 17,640 Cost per Unit $7.00 $2.325 a Appraisal; the food can be compared to the customer’s 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 b 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 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 Beginning inventory Started To account for 1,000 125,000 126,000 Beginning inventory Started and completed Ending inventory Normal spoilage Abnormal spoilage Accounted for (WA) 1,000 1,000 109,000 109,000 3,000 3,000 12,500 500 500 126,000 113,500 1,000 109,000 900 500 CHAPTER Special Production Issues: Lost Units and Accretion 111,400 174 Material Total Beginning WIP costs Current costs Total costs Divide by EUP Cost per EUP $ 1,020 118,155 $119,175 113,500 $1.05 $ 195 33,225 $ 33,420 111,400 $0.30 Cost Assignment Transferred out (110,000 × $1.35) Ending inventory: Material (3,000 × $1.05) Conversion (900 × $0.30) Abnormal spoilage (500 × $1.35) Total cost accounted for 30 Conversion $ 1,215 151,380 $152,595 $1.35 $148,500 $3,150 270 3,420 675 $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 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 Beginning inventory Started To account for Total 5,000 70,000 75,000 Beginning inventory Started and completed Ending inventory Normal spoilage Abnormal spoilage Accounted for (WA) 73,180 5,000 5,000 5,000 5,000 63,600 63,600 63,600 63,600 6,000 6,000 4,200 400 400 380 0 0 75,000 75,000 68,600 Beginning WIP costs Current costs Total costs Divide by EUP Cost per EUP Material $ 21,900 315,600 $337,500 75,000 $4.50 Material Boxes 75,460 $75,460 68,600 $1.10 $ Boxes Conversion $ 7,680 270,404 $278,084 73,180 $3.80 Conversion Total $ 29,580 661,464 $691,044 $9.40 35 CHAPTER Special Production Issues: Lost Units and Accretion Maximum normal spoilage = 70,000 × 3% = 2,100 units Ronald Company Cost of Production Report for May 2003 Units Material Conversion Beginning inventory 5,600 Units started 74,400 Units to account for 80,000 BI completed Units S & C Total units completed Ending inventory Normal spoilage Abnormal spoilage* Units accounted for *To balance schedule Beg inventory cost Current costs Total costs Divided by EUP Cost per EUP 5,600 64,400 70,000 7,500 2,100 400 80,000 Total 7,632 106,168 $113,800 $ $1.45 5,600 64,400 5,600 64,400 7,500 2,100 400 80,000 2,500 2,100 400 75,000 Material $ 6,400 74,400 $80,800 80,000 $1.01 Cost Assignment Transferred out: Units completed (70,000 × $1.45) Normal spoilage DM: (2,100 × $1.01) $2,121 CC: (2,100 × $0.44) 924 Ending inventory: Material (7,500 × $1.01) Conversion (2,500 × $0.44) Abnormal spoilage Material (400 × $1.01) Conversion (400 × $0.44) Total costs accounted for Conversion $ 1,232 31,768 $33,000 75,000 $0.44 $101,500 3,045 $104,545 $7,575 1,100 8,675 $ 404 176 580 $113,800 179 180 36 CHAPTER Special Production Issues: Lost Units and Accretion a Total Material Conversion Beginning inventory 6,000 Started 180,000 To account for 186,000 Beginning inventory Started and completed Transferred out Ending inventory Normal spoilage Abnormal spoilage* Accounted for *To balance schedule b Conversion BI Current $342,810 Total costs Divide by EUP Cost per EUP 6,000 146,000 152,000 20,000 4,800 9,200 186,000 Total $ 33,600 1,224,330 6,000 146,000 152,000 20,000 4,800 9,200 186,000 6,000 146,000 152,000 14,000 3,360 6,440 175,800 Material $915,120 $1,257,930 $6.87 186,000 $4.92 175,800 $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) Conversion (3,360 × $1.95) Total cost $23,616 6,552 $30,168 Cost of transferred goods after proration of normal spoilage: Cost before normal spoilage $1,044,240 Normal spoilage DM: $23,616 × 88 20,782 CC: $6,552 × 92 6,028 Total $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 CHAPTER 181 Special Production Issues: Lost Units and Accretion Total $57,822 182 CHAPTER Special Production Issues: Lost Units and Accretion 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 Beginning inventory Started Units to account for Beginning inventory Started & completed Transferred out Ending inventory* Abnormal spoilage Normal spoilage Units accounted for *To balance schedule Units 4,200 42,000 46,200 Tran in 4,200 29,400 33,600 10,500 420 1,680 46,200 4,200 29,400 33,600 10,500 420 1,680 46,200 b Cost Assignment Transferred out: Good units (33,600 × $9) Normal spoilage (1,680 × $9) Total c Ending inventory: Trans in (10,500 × $5) Material (10,500 × $1) Conversion (4,200 × $3) Total d Material Conversion 4,200 29,400 33,600 10,500 420 1,680 46,200 4,200 29,400 33,600 4,200 420 1,680 39,900 $302,400 15,120 $317,520 $52,500 10,500 12,600 $75,600 Total cost transferred in (46,200 × $5) Cost of beginning inventory Cost transferred in this period $231,000 (18,900) $212,100 e Abnormal spoilage: 420 × $9 = $3,780; this cost would be deducted as a period cost (loss) in May (CMA adapted) 38 CHAPTER Special Production Issues: Lost Units and Accretion Maximum normal loss = 150,000 × 4% = 6,000 units Abnormal loss = 9,000 – 6,000 = 3,000 units Dept Beginning inventory Started Units to account for Units 6,000 150,000 156,000 Material BI completed Started & completed Transferred out Ending inventory Normal spoilage (4%) Abnormal spoilage Units accounted for 6,000 123,000 129,000 18,000 6,000 3,000 156,000 6,000 123,000 129,000 18,000 6,000 3,000 156,000 Beginning inventory Current period Total costs Divided by EUP Cost per EUP Material $ 3,060 37,500 $40,560 156,000 $0.26 Cost Assignment Transferred out: Good units (129,000 × $1.67) Normal spoilage (6,000 × $1.67) Ending inventory: Material (18,000 × $0.26) Conversion (10,800 × $1.41) Abnormal spoilage (3,000 × $1.67) Total costs accounted for Conversion 6,000 123,000 129,000 10,800 6,000 3,000 148,800 Conversion $ 2,328 207,480 $209,808 148,800 $1.41 $215,430 10,020 $ 4,680 15,228 183 Total $ 5,388 244,980 $250,368 $1.67 $225,450 19,908 5,010 $250,368 Dept Maximum normal loss = 129,000 × 8% = 10,320 units Beginning inventory Transferred in Units to account for BI completed Units S & C Transferred out Ending inventory Normal spoilage Units accounted for BI cost Current costs Total costs Divided by EUP Cost per EUP Units 3,000 129,000 132,000 3,000 108,000 111,000 15,000 6,000 132,000 Total 8,436 281,810 $290,246 $ $2.22 Trans In 3,000 108,000 111,000 15,000 6,000 132,000 Trans In $ 6,690 230,910 $237,600 132,000 $1.80 Material Conversion 3,000 108,000 111,000 0 111,000 Material $ 740 $740 111,000 $0.01 3,000 108,000 111,000 12,000 3,600 126,600 Conversion $ 1,746 50,160 $51,906 126,600 $0.41 184 CHAPTER Special Production Issues: Lost Units and Accretion 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) Conversion (3,600 × $0.41) Total cost Units transferred out* Ending work in process $10,800 1,476 $12,276 Trans In EUP % 111,000 88 15,000 12 126,000 100 Conversion EUP % 111,000 90 12,000 10 123,000 100 Note: Beginning inventory was not past inspection point and must be included in the proration TO: EI: 39 TI CC $10,800 × 88% = $ 9,504 $ 1,476 × 90% = 1,328 $10,832 TI CC $10,800 × 12% = $ 1,296 $ 1,476 × 10% = 148 1,444 Maximum normal loss = 150,000 × 4% = 6,000 units Abnormal loss = 9,000 – 6,000 = 3,000 units Dept Beginning inventory Started Units to account for Units 6,000 150,000 156,000 Material BI completed Started & completed Transferred out Ending inventory Normal spoilage (4%) Abnormal spoilage Units accounted for 6,000 123,000 129,000 18,000 6,000 3,000 156,000 123,000 123,000 18,000 6,000 3,000 150,000 Conversion 5,400 123,000 128,400 10,800 6,000 3,000 148,200 CHAPTER 185 Special Production Issues: Lost Units and Accretion 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 S & C (123,000 × $1.65) Normal spoilage (6,000 × $1.65) Ending inventory: Material (18,000 × $0.25) Conversion (10,800 × $1.40) Abnormal spoilage (3,000 × $1.65) Total costs accounted for $ 12,948 202,950 9,900 $ 4,500 15,120 $225,798 19,620 4,950 $250,368 Dept Maximum normal loss = 129,000 × 8% = 10,320 units Units 3,000 129,000 132,000 Trans In Beginning inventory Transferred in Units to account for BI completed Units S & C Transferred out Ending inventory Normal spoilage Units accounted for 3,000 108,000 111,000 15,000 6,000 132,000 108,000 108,000 15,000 6,000 129,000 BI cost Current costs Total costs Divided by EUP Cost per EUP Total 8,436 281,810 $290,246 Trans In Material Conversion 3,000 108,000 111,000 0 111,000 1,800 108,000 109,800 12,000 3,600 125,400 Material Conversion $740 $50,160 $ $2.20 $230,910 129,000 $1.79 111,000 $0.01 125,400 $0.40 186 CHAPTER Special Production Issues: Lost Units and Accretion 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 and must be included in the proration TO: EI: 40 TI CC $10,740 × 88% = $ 9,451 $ 1,440 × 90% = 1,296 $10,747 TI CC $10,740 × 12% = $ 1,289 $ 1,440 × 10% = 144 1,433 Maximum normal loss = 125,000 × 10% = 12,500 units Dept Beginning inventory Started Units to account for Units 5,000 125,000 130,000 Material Beginning inv completed Started & completed Transferred out Ending inventory Normal spoilage Units accounted for 5,000 105,000 110,000 14,000 6,000 130,000 105,000 105,000 14,000 119,000 Conversion 1,750 105,000 106,750 5,600 112,350 CHAPTER Special Production Issues: Lost Units and Accretion Material Beginning WIP Current period Total costs Divided by EUP Cost per EUP Conversion $190,400 $393,225 119,000 $1.60 112,350 $3.50 187 Total $ 19,250 583,625 $602,875 $5.10 Cost Assignment Transferred out: Beginning inventory cost Cost to complete (conv 1,750 × $3.50) Total cost of beginning inventory Started & completed (105,000 × $5.10) Ending inventory: Material (14,000 × $1.60) Conversion (5,600 × $3.50) Total costs accounted for $ 19,250 6,125 $ 25,375 535,500 $560,875 $ 22,400 19,600 42,000 $602,875 Dept Maximum normal loss = 110,000 × 5% = 5,500 Beginning inventory Transferred in Units to account for BI completed Units S & C Transferred out Ending inventory Normal spoilage Abnormal spoilage* Units accounted for *To balance schedule BI cost Current costs Total costs Divided by EUP Cost per EUP Units Trans In 40,000 110,000 150,000 40,000 80,000 120,000 22,500 5,500 2,000 150,000 Total 345,600 892,770 $1,238,370 $ $8.79 40,000 80,000 120,000 22,500 5,500 2,000 150,000 Trans In $204,000 568,500 $772,500 150,000 $5.15 Material Conversion 40,000 80,000 120,000 5,500 2,000 127,500 Material $120,000 268,875 $388,875 127,500 $3.05 40,000 80,000 120,000 4,500 4,400 1,600 130,500 Conversion $21,600 55,395 $76,995 130,500 $0.59 188 CHAPTER Special Production Issues: Lost Units and Accretion 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 Transferred out Ending inventory Defective units Total Costs Divided by EUP Cost per EUP Units 2,000,000 75,000 40,000 2,115,000 Material 2,000,000 75,000 40,000 2,115,000 Total $9,322,425 Material $3,743,550 2,115,000 $1.77 $4.47 Conversion 2,000,000 26,250 40,000 2,066,250 Conversion $5,578,875 2,066,250 $2.70 c The rework cost is debited to the manufacturing overhead account since the company uses a predetermined rate to apply overhead Manufacturing Overhead Various accounts d 37,750 37,750 Normal production cost (40,000 × $4.47) Cost of rework Total cost of defective units Total sales value of defective units (40,000 × $3.50) Deficiency Inventory - Irregulars 140,000 Work in Process Inventory Cost of good pipe (2,000,000 × $4.47) Deficiency Total cost Divided by total good pipe Revised cost per good pipe (rounded) $178,800 37,750 $216,550 (140,000) $ 76,550 140,000 $8,940,000 76,550 $9,016,550 2,000,000 $4.51 CHAPTER Special Production Issues: Lost Units and Accretion e Inventory - Irregular 140,000 Loss from Defects 15,310* Work in Process 155,310 *20% of deficiency; $76,550 × 20% 189 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 Wages Payable 150 700 b Manufacturing Overhead Raw Materials Inventory Wages Payable 850 150 700 c Loss on Abnormal Rework Raw Materials Inventory Wages Payable 850 150 700 Case 43 a Beginning inventory Transferred in Units to account for 3,000 45,000 48,000 Transferred out Ending inventory Bikes lost Units accounted for 40,000 4,000 4,000 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 inspection 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 1,950 190 CHAPTER Special Production Issues: Lost Units and Accretion 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 BI $ 82,200 Current 1,237,800 Total cost $1,320,000 Divided by EUP 48,000 Cost per EUP $27.50 d Conversion Total $ 11,930 $100,790 236,590 1,571,230 $248,520 $1,672,020 43,600 $5.70 $35.45 (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 (2) e Material 6,660 96,840 $103,500 46,000 $2.25 $ 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 (3) Good bikes completed (40,000 × $35.45) (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 Total costs accounted for (1) $ 69,167 65,793 1,418,000 119,060 $1,672,020 The cost of the normal defective units of $69,167 would be transferred to the Packing Department as a portion of 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 (2) The abnormal loss of $65,793 would appear as period expense (loss) on the company’s 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 Department’s 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 CHAPTER 191 Special Production Issues: Lost Units and Accretion (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 cost but 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 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's request 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, by informing 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 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 192 CHAPTER Special Production Issues: Lost Units and Accretion (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 need information 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 provided No solution 46 Each student will have a different answer provided No solution 47 Each student will have a different answer provided No solution 48 Each student will have a different answer provided No solution 49 Each student will have a different answer provided No solution 50 Each student will have a different answer provided No solution CHAPTER Special Production Issues: Lost Units and Accretion 193 ... $1.95) 12,558 CHAPTER 181 Special Production Issues: Lost Units and Accretion Total $57,822 182 CHAPTER Special Production Issues: Lost Units and Accretion Total costs accounted for: Transferred... 109,000 900 500 CHAPTER Special Production Issues: Lost Units and Accretion 111,400 174 Material Total Beginning WIP costs Current costs Total costs Divide by EUP Cost per EUP $ 1,020 118,155 $119,175... company to find solutions 192 CHAPTER Special Production Issues: Lost Units and Accretion (3) The plant manager and her staff have responsibilities for product quality and cost and should protect