Question

(F. Mayne) Hamilton Metal Fabricators Inc. has a large job, No. 2734, that calls for producing various ore bins, chutes, and metal boxes for enlarging a copper concentrator. The following charges were made to the job in November 2015: Direct materials $40,400

Direct manufacturing labour 22,600

Manufacturing overhead 11,300

The contract with the customer called for the total price to be based on a cost-plus approach. The contract defined cost to include direct materials, direct manufacturing labour costs, and manufacturing overhead to be allocated at 50% of direct manufacturing labour costs. The contract also provided that the total costs of all work spoiled was to be removed from the billable cost of the job and that the benefits from scrap sales were to reduce the billable cost of the job.

1. In accordance with the stated terms oft he contract,prepare journal entries for the following two items: a. A cutting error was made in production. The up-to-date job cost record for this batch of work showed materials of $975, direct manufacturing labour of $600, and allocated overhead of $300. Because fairly large pieces of metal were recoverable, the company believed their value was $800 and that the materials recovered could be used on other jobs. The spoiled work was sent to the warehouse. b. Small pieces of metal cuttings and scrap in November 2015 amounted to $1,995, which was the price quoted by a scrap dealer. No journal entries were made with regard to the scrap until the price was quoted by the scrap dealer. The scrap dealer’s offer was immediately accepted.

2. Considernormalandabnormalspoilage.Supposethecontractdescribedabovehadcontainedtheclause “a normal spoilage allowance of 1% of the job costs will be included in the billable costs of the job.” a. Is this clause specific enough to define exactly how much spoilage is normal and how much is abnormal? Explain. b. Repeat requirement 1a with this “normal spoilage of 1%” clause in mind. You should be able to pro- vide two slightly different journal entries

Answer 1

Hamilton Metal Fabricators Inc.

1.a) Work in Process (Spoilage) Dr. $1,875

Work in Process (Job No 2734) $1,875

(Cost of spoilage for cutting error which includes materials costing $975, labor $600 and manufacturing overhead $300)

Raw Material Inventory-Scrap Material Dr $800

Work in Process (Job No 2734) $800

( To record recoverable from scrap material)

b) Cash Dr $1,995

Scrap Sales $1,995

( To record sale of small pieces of metal cuttings and scrap in November 2015 for which no entry was made until the price was quoted by scrap dealer)

2,a) Normal spoilage is the spoilage which is inherent in a particular production process that arises even under efficient operating conditions. Spoilage rates are determined by the management depending on the production process. The contract with the customer which contains the clause of a normal spoilage allowance of 1% of the job costs will be included in the billable costs of job is enough to define that spoilage of 1% of the value of job cost is normal and above that limit is abnormal.