Question

Mountain Meadow Grains produces trail mix. Materials are added at the beginning of the process, and the company uses the FIFO process costing method. Inspection takes place when the product is 100% complete. Normal spoilage is 4% of good units completed. Here is the production information for the latest period.

Beginning WIP (75% complete)                        20,000 units

Good units completed and transferred out        80,000 units

Ending WIP inventory (90% complete)            24,000 units

Total spoilage                                                     4,800 units

FIFO cost per equivalent unit:

Materials                                                       $1.00

Conversion costs                                          1.50

Total unit cost                                               $2.50

Cost of Beginning WIP                                   $50,000

a.   Calculate the cost of abnormal spoilage.

b.   Calculate the cost of good units completed and transferred, including an allocation of normal spoilage costs.

c.   The costs recorded in the accounting system for spoilage include direct materials and conversion costs up to the point of completion. However, these recorded costs are only part of the costs incurred when spoilage occurs. Write a brief paragraph that discusses other costs of spoilage that are not recorded in the accounting system and explain why they might be more important to an organization than the costs in the accounting system.

d.   Discuss why uncertainties exist about how much spoilage is normal versus abnormal.

Answer 1

a) Normal spoilage = 3,200 units (=0.04 * 80,000)

Abnormal spoilage = 4,800 - 3,200 = 1,600 units * $2.50 each = $4,000

b) Good units produced cost = $200,000 (= 80,000 * $2.50)

Normal spoilage cost = $8,000 (=3,200 * $2.50)

Total cost of good units transferred out = $208,000 (=200,000 + 8,000)

c) Other costs incurred due to loss of reputation and market share in the poor quality goods. Spoilage causes opportunity costs normal profits are foregone on the spoiled units. When warranty and replacement costs are incurred, such costs could cause loss of profits.

d) Normal spoilage includes defective units occurs due to regular operations, while all other spoilage is considered abnormal. Some uncertainties are as follows:

-- Random fluctuations in the worker performance, quality of materials, or other operational aspects

-- Failure to determine whether operations are in control

-- Lack of experience with a specific process or product

-- Unable to fully anticipate results when adopting new production processes, changing the quality of materials, etc