Question

Problem 6.42 Appendix: Normal and Abnormal Spoilage

Larkin Company produces leather strips for western belts using three processes: cutting, design and coloring, and punching. The weighted average method is used for all three departments. The following information pertains to the Design and Coloring Department for the month of June:

a. There was no beginning work in process.

b. There were 400,000 units transferred in from the Cutting Department.

c. Ending work in process, June 30: 50,000 strips, 80 percent complete with respect to conver- sion costs.

d. Units completed and transferred out: 330,000 strips. The following costs were added during the month:

Transferred in	$2,000,000
Direct materials	600,000
Conversion costs	780,000

e. Direct materials are added at the beginning of the process.

f. Inspection takes place at the end of the process. All spoilage is considered normal.

Required:

1. Calculate equivalent units of production for transferred-in materials, direct materials added, and conversion costs.

2. Calculate unit costs for the three categories of Requirement 1.

3. What is the total cost of units transferred out? What is the cost of ending work-in-process inventory? How is the cost of spoilage treated?

4. Assume that all spoilage is considered abnormal. Now, how is spoilage treated? Give the journal entry to account for the cost of the spoiled units. Some companies view all spoilage as abnormal. Explain why.

5. Assume that 80 percent of the units spoiled are abnormal and 20 percent are normal spoil- age. Show the spoilage treatment for this scenario.

Answer 1

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Part 1			Transferred	Direct	Conversion
			In	Materials	Costs
Transferred out			330,000	330,000	330,000
Normal spoilage			20,000	20,000	20,000
Ending work in process			50,000	50,000	40,000
Equivalent units			400,000	400,000	390,000
Part 2	Cost	Eq Unit	Cost per unit
Transferred in	$   2,000,000	400,000	$                    5.00
Unit direct materials	$       600,000	400,000	$                    1.50
Unit conversion costs	$       780,000	390,000	$                    2.00
Total unit cost	$   3,380,000		$                    8.50
Part 3
Cost of units transferred out		$   2,975,000
(330,000*+20,000)*$8.50
Cost of ending work in process:		$       405,000
($5.00 × 50,000) + ($1.50 × 50,000) + ($2.00 × 40,000)
Part 4
If all spoilage is abnormal, it would not be added to the cost of goods transferred out.
It would be assigned to a loss account and treated as a loss of the period. The following journal entry is required:
Loss from Abnormal Spoilage	$       170,000
Work in Process—Design and Coloring		$       170,000
20,000*$8.50
Viewing all spoilage as abnormal is consistent with a total quality management view.
All waste is bad and should be eliminated. There is no normal waste
Part 5
If there is 80% abnormal spoilage, then the cost of 16,000 units
Abnormal loss ($8.50 × 16,000)	$       136,000
Cost of goods transferred out ($8.50*4,000)	$         34,000