Question

Regarding Scrap Values from abnormal spoilage

Given in my assignment question, "Spoilages are assumed to occur at the stage of completion where inspection takes place and these spoilages can be sold to a bio-fuel company at an estimated disposal value $0.25 per kg".
I have seen other group's answer where they calculated the scrap value according to this info.

My question is whether this scrap value should be included in cost per equivalent as what other groups had in their answer. from what i see, scrap value is from selling of the spoilage. so i'm not sure if it should be in costs. cos it can be like in sales? like selling of goods but of spoiled ones instead.

if not, where is this scrap value used for answering this question? is it only to be included in part (b) the journal entries only?

one of my classmate had this answer below:

Cost Per Equivalent Unit	DM	CC	Total ($)
Prior Period Cost	$   60,920.00	$          35,597.00	$   96,517.00
Current Period Cost	$ 276,500.00	$        373,248.00	$ 649,748.00
Scrap Value	-$     2,212.00	-$           1,990.80	-$     4,202.80
Total Cost to Account for	$ 274,288	$        406,854.20	$ 742,062.20
Total Equivalent Units	110,600	102,070	212,670
Cost per Equivalent	$            2.48	$                   3.99	$            6.47

This is the question in my assignment:

Lokal Food Manufacturer produces the "Fresh" brand of pasteurised coconut milk from one of its manufacturing processes. The following information of process inputs, outputs and work in process relates to the month of September 2018:

kg

Opening work in process ...........26,700

Raw materials input.................. 110,600

Output completed....................... 98,400

Closing work in process............. 29,200

The opening and closing work in process are respectively 30 per cent and 60 per cent complete as to conversion costs. Raw materials are added at the beginning of the manufacturing process. However, conversion costs are incurred evenly throughout the manufacturing process. Spoilages are assumed to occur at the stage of completion where inspection takes place and these spoilages can be sold to a bio-fuel company at an estimated disposal value $0.25 per kg. Inspection takes place when the products are 90% complete. The opening work in process included raw material costs of $60,920 and conversion costs of $35,597.

Costs incurred during the period were:

Raw material input .......$276,500

Conversion costs.......... $373,248

The company uses FIFO method of process costing and assumes that the normal spoilage are 8 per cent of the good units produced.

Answer 1

You are right that sale of scrap is also kind of a sale but You also have to agree it is not a normal sale.

We are selling the stock which is spoiled at loss.If we add it to normal sales , it will not give the correct picture in the financial statements.For example say we sold inventory costing 4000 in the market @ 5000 but there was also scrap which sold for 500. So now if we add it to normal sales, it will look like we sold inventory costing 4000 for 5500 and now a different profit margin will be calculated which will be misleading.

Also inventory which is spoiled will be our cost . example We input inventory costing 4000 but inventory costing 500 was spoiled so it is a loss for the business. But we also sold it as scrap so some amount of the loss is recoverable. say we sold this for 200. so now our loss reduced from 500 to 300 so now only 300 is a loss and a additional cost to us.

To give this efffect we have to deduct scrap value of spoiled inventory from cost of goods sold as done in your friend's answer.

I hope it solved your query.