Question

Ram furnitures produces chairs and tables in accordance with job orders from customers. Given below are the details of a recent order.                                                                                                                                        

Number of chairs in the job order               70                                                                                    

Unit cost per chair (Breakup given below)               $95.00                                                                            

DM cost               $40.00                                                                            

DL cost $35.00                                                                            

Manufacturing overhead cost      $20.00                                                                            

                                                                                                                                                     

The manufacturing overhead cost per chair (given above) includes a provision for normal spoilage.

6 chairs were found to be below acceptable quality and sold to a scrap dealer for $12          per chair

Prepare the appropriate journal entries for spoilage for the three independent cases given below. Also calculate the average cost of one good unit of chair in the job order for each of the three cases.                                                                                                                                           

a) The rejection due to unacceptable quality is considered as abnormal spoilage                                  

b) The rejection is considered normal and the rejection is attributable to the exacting specifications of this job

c) The rejection is considered normal and the rejection is not attributable to this job and is a characteristic of the production process

Answer 1

1) Journal Entries

				Amount ($)
Date	Particulars	Working	Debit	Credit
a)	Rejection due to abnormal spoilage
	Loss from Abnormal rework A/c .. Dr		570.00
	To Materials Control A/c	40*6		240.00
	To Wages payable Control A/c	35*6		210.00
	To Manufacturing overhead allocated A/c	20*6		120.00
	Being material rejected due to unacceptable quality
	Scrap Sale
	Cash / Debtors A/c .. Dr	12*6	72.00
	To Scrap revenue A/c			72.00
	Being material rejected sold as scrap
b)	Rejection considered normal and allocated to specific job
	Work in progress Control (specific job) A/c .. Dr		570.00
	To Materials Control A/c	40*6		240.00
	To Wages payable Control A/c	35*6		210.00
	To Manufacturing overhead allocated A/c	20*6		120.00
	Being material rejected considered normal loss and allocated to a job
	Scrap Sale
	Cash / Debtors A/c .. Dr	12*6	72.00
	To Work in progress Control (specific job) A/c			72.00
	Being material rejected sold as scrap
c)	Rejection considered normal and allocated to common all jobs
	Manufacturing Overhead Control (rework costs) A/c .. Dr		570.00
	To Materials Control A/c	40*6		240.00
	To Wages payable Control A/c	35*6		210.00
	To Manufacturing overhead allocated A/c	20*6		120.00
	Being material rejected considered normal loss and allocated to all jobs
	Scrap Sale
	Cash / Debtors A/c .. Dr	12*6	72.00
	Manufacturing Overhead Control (rework costs) A/c			72.00
	Being material rejected sold as scrap

2) Average cost of one good unit of chair in the job order for each of the three cases.

			Amount$
	Case A	Case B	Case C
	Note 1	Note 2	Note 3
Direct Material Cost	40.00	40.00	40.00
Direct Labour Cost	35.00	35.00	35.00
Manufacturing overhead Cost	20.00	20.00	20.00
Normal Spoilage loss		7.78	-
Cost Per Unit	95.00	102.78	95.00

Note 1: If the spoilage is abnormal, the net loss is charged to the Loss from Abnormal Spoilage account. Unlike normal spoilage costs, abnormal spoilage costs are not included as a part of the cost of good units produced

Note 2 :When normal spoilage occurs because of the specifications of a particular job, that job bears the cost of the spoilage minus the disposal value of the spoilage.

Normal Sopilage Cost = ($570-$72)/ (70Units-6Units) = $7.78

Note 3 :When normal spoilage is common to all jobs, the budgeted manufacturing overhead rate includes a provision for normal spoilage cost. Normal spoilage cost is spread, through overhead allocation, over all jobs rather than allocated to a specific job. Hence no need to consider again seperately