Vous êtes sur la page 1sur 19

Chapter 7

THE COST OF QUALITY AND


ACCOUNTING FOR PRODUCTION LOSSES

MULTIPLE CHOICE

Question Nos. 16, 17, 22, and 23 are AICPA adapted.


Question No. 24 is CIA adapted.

A 1. The quality costs that are associated with materials and products that fail to meet quality
standards and result in manufacturing losses are known as:
A. internal failure costs
B. external failure costs
C. prevention costs
D. appraisal costs
E. none of the above

D 2. The quality costs that are associated with designing, implementing, and maintaining the quality
system are known as:
A. appraisal costs
B. internal failure costs
C. external failure costs
D. prevention costs
E. none of the above

C 3. The quality costs that are incurred to ensure that materials and products meet quality standards
are known as:
A. external failure costs
B. prevention costs
C. appraisal costs
D. internal failure costs
E. none of the above

B 4. The quality costs that are incurred because inferior quality products are shipped to customers
are known as:
A. internal failure costs
B. external failure costs
C. prevention costs
D. appraisal costs
E. none of the above

82
The Cost of Quality and Accounting for Production Losses 83

D 5. All of the following are characteristics of total quality management except:


A. the company's objective for all business activity is to serve its customers
B. top management provides an active leadership role in quality improvement
C. all employees are actively involved in quality improvement
D. the company maintains a loosely defined system of identifying quality problems so as not
to stifle employee creativity
E. the company provides continuous training as well as recognition for achievement

A 6. The best approach to quality improvement is to concentrate on:


A. prevention
B. detection
C. appraisal
D. increased production
E. none of the above

C 7. A mathematical technique used to monitor production quality and reduce product variability is:
A. the method of least squares
B. the statistical scattergraph method
C. statistical process control
D. linear programming
E. none of the above

D 8. Appraisal costs include all of the following except:


A. inspecting and testing materials
B. inspecting products during and after production
C. obtaining information from customers about product satisfaction
D. designing quality into the product and the production process
E. all of the above

B 9. Internal failure costs include all of the following except:


A. the cost of the scrap
B. the cost of warranty repairs and replacements
C. rework
D. downtime due to machine failures
E. all of the above

E 10. All of the following accounts would be acceptable ones to credit at the time scrap is sold except:
A. Scrap Sales
B. Cost of Goods Sold
C. Factory Overhead Control
D. Work in Process
E. all of the above would be acceptable

C 11. Scrap includes all of the following except:


A. the trimmings remaining after processing materials
B. defective materials that cannot be used or returned to the vendor
C. partially or fully completed units that are in some way defective
D. broken parts resulting from employee or machine failures
E. all of the above
84 Chapter 7

A 12. When spoilage occurs because of some action taken by the customer, the unrecoverable cost of
the spoilage should be charged to:
A. Work in Process
B. Spoiled Goods Inventory
C. Factory Overhead Control
D. Applied Factory Overhead
E. none of the above

C 13. When spoilage occurs because of some internal failure, the unrecoverable cost should be
charged to:
A. Work in Process
B. Spoiled Goods Inventory
C. Factory Overhead Control
D. Applied Factory Overhead
E. none of the above

A 14. When rework occurs because of some action taken by the customer, the cost of the rework
should be charged to:
A. Work in Process
B. Spoiled Goods Inventory
C. Factory Overhead Control
D. Applied Factory Overhead
E. none of the above

C 15. When rework occurs because of some internal failure, the cost of the rework should be charged
to:
A. Work in Process
B. Spoiled Goods Inventory
C. Factory Overhead Control
D. Applied Factory Overhead
E. none of the above

C 16. Newman Company's Job 1865 for the manufacture of 2,200 coats was completed during August
at the unit costs presented below. Due to an internal failure in the production process, 200 coats
were found to be spoiled during final inspection that were sold to a jobber for $6,000.

Direct materials ........................................................................................................................................ $20


Direct labor ................................................................................................................................................. 18
Factory overhead ..................................................................................................................................... 18
............................................................................................................................................................. $56

What would be the unit cost of good coats produced on Job 1865?
A. $57.00
B. $55.00
C. $56.00
D. $58.00
E. none of the above

SUPPORTING CALCULATION: $20 + $18 + $18 = $56


The Cost of Quality and Accounting for Production Losses 85

A 17. During March, Vaughan Company incurred the following costs on Job 009 for the manufacture of
200 motors:

Original cost accumulation:


Direct materials ................................................................................................................................ $ 660
Direct labor ......................................................................................................................................... 800
Factory overhead (150% of direct labor) ............................................................................. 1,200
$ 2,660

Direct costs of reworking 10 units:


Direct materials ................................................................................................................................ $100
Direct labor ......................................................................................................................................... 160
.................................................................................................................................................................. $260

The rework costs were attributable to the exacting specifications of the customer. What is the
cost per finished unit of Job 009?
A. $15.80
B. $14.60
C. $14.00
D. $13.30
E. none of the above

SUPPORTING CALCULATION:

$2,660 + $260 + (150% x $160) = $3,160  200 = $15.80

C 18. Spoilage occurs as a result of an internal failure in a process cost system. Using average costing,
the number of equivalent units that production costs should be charged to would be based upon:
A. spoiled units
B. units transferred out and spoiled units
C. units transferred out, spoiled units, and units in ending inventory
D. units transferred out and units in ending inventory
E. none of the above

D 19. Spoilage occurs as a result of normal production shrinkage in a process cost system. Using
average costing, the number of equivalent units that production costs should be charged to
would be based upon:
A. spoiled units
B. units transferred out and spoiled units
C. units transferred out, spoiled units, and units in ending inventory
D. units transferred out and units in ending inventory
E. none of the above

C 20. In a process cost system, the cost of spoilage due to an internal production failure should be
recorded as:
A. dr. Work in Process; cr. Finished Goods
B. dr. Work in Process; cr. Factory Overhead Control
C. dr. Factory Overhead Control; cr. Work in Process
D. dr. Materials; cr. Factory Overhead
E. dr. Finished Goods; cr. Work in Process
86 Chapter 7

B 21. Gyro Products transferred 10,000 units to one department. An additional 3,000 units of
materials were added in the department. At the end of the month, 7,000 units were transferred
to finished goods; while 4,000 units remained in work in process inventory. There was no
beginning inventory, and lost units were a result of normal production shrinkage. The
production costs for the period in this department would be effectively allocated over:
A. 12,000 units
B. 11,000 units
C. 10,000 units
D. 7,000 units
E. 13,000 units

SUPPORTING CALCULATION: 7,000 + 4,000 = 11,000

B 22. In manufacturing its products for the month of March, Leo Co. incurred normal production
shrinkage of $10,000 and spoilage due to internal failure of $12,000. How much spoilage cost
should Leo charge to Factory Overhead Control for the month of March?
A. $22,000
B. $12,000
C. $10,000
D. $0
E. none of the above

C 23. Willis, Inc. instituted a new process in October. During October, 10,000 units were started in
Department A. Of the units started, 1,000 were lost in the process due to normal production
shrinkage, 7,000 were transferred to Department B, and 2,000 remained in work in process at
October 31. The work in process at October 31 was 100% complete as to materials costs and
50% complete as to conversion costs. Materials costs of $27,000 and conversion costs of
$40,000 were charged to Department A in October. What were the total costs transferred to
Department B?
A. $46,900
B. $53,600
C. $56,000
D. $57,120
E. none of the above

SUPPORTING CALCULATION:

Materials: $27,000  (7,000 + 2,000) = $3


Conversion: $40,000  (7,000 + 1,000) = $5
Transferred costs: 7,000 x $8 = $56,000
The Cost of Quality and Accounting for Production Losses 87

D 24. A company that manufactures baseballs begins operations on January 1. Each baseball requires
three elements: a hard plastic core, several yards of twine that are wrapped around the plastic
core, and a piece of leather to cover the baseball. The plastic core is started down a conveyor
belt and is automatically wrapped with the twine to the approximate size of the baseball, at
which time the leather cover is sewn to the wrapped twine. Finished baseballs are inspected,
and the ones that are defective due to internal production failure are pulled out. Defective
baseballs cannot be economically salvaged and are destroyed. Cost and production reports for
the first week of operations are:

Raw material cost........................................................................................................................................ $ 840


Conversion cost ............................................................................................................................................ 315
................................................................................................................................................................ $ 1,155

During the week, 2,100 baseballs were completed; 2,000 passed inspection. There was no
ending work in process. The cost of the spoilage charged to Factory Overhead is:
A. $33
B. $22
C. $1,100
D. $55
E. none of the above

SUPPORTING CALCULATION:

Materials: $840  (2,000 + 100) = $.40


Conversion: $315  (2,000 + 100) = $.15
Spoilage: 100 x $.55 = $55

A 25. In a process cost system, the cost of rework usually is debited to:
A. Factory Overhead Control
B. Applied Factory Overhead
C. Spoiled Goods Inventory
D. Work in Process
E. none of the above

The following questions are based on the Appendix to the chapter:

D 26. If spoilage occurs as a result of an internal failure in a process cost system, using fifo costing, the
number of equivalent units that production costs should be charged to would be based upon:
A. spoiled units
B. units transferred out and spoiled units
C. units transferred out, beginning inventory, and units in ending inventory
D. units transferred out, spoiled units, units in ending inventory, and units in beginning
inventory
E. none of the above
88 Chapter 7

C 27. If spoilage occurs as a result of normal production shrinkage in a process cost system, using fifo
costing, the number of equivalent units that production costs should be charged to would be
based on:
A. spoiled units
B. units transferred out and spoiled units
C. units transferred out, beginning inventory, and units in ending inventory
D. units transferred out, spoiled units, units in ending inventory, and units in beginning
inventory
E. none of the above

B 28. Primo Products transferred 15,000 units to one department. An additional 5,000 units were in
beginning inventory in the department. At the end of the month, 12,000 units were transferred
to the next department, 6,000 units remained in work in process, 40% complete as to conversion
costs and the remaining units were lost at the 75% stage of conversion. Beginning inventory
was 60% complete as to conversion costs and lost units were the result of internal failure. The
equivalent units of conversion cost using fifo costing is:
A. 14,400
B. 12,900
C. 13,900
D. 13,400
E. none of the above

SUPPORTING CALCULATION:

Equivalent units in beginning inventory (40% x 5,000) ........................................................ 2,000


Equivalent units started and completed during period
(12,000 - 5,000) ............................................................................................................................. 7,000
Equivalent units in ending inventory (40% x 6,000) .............................................................. 2,400
Equivalent units of spoilage (75% x 2,000) ................................................................................. 1,500
Total equivalent units ............................................................................................................................ 12,900

A 29. Primo Products transferred 15,000 units to one department. An additional 5,000 units were
added in the department. At the end of the month, 12,000 units were transferred to the next
department, 6,000 units remained in work in process, 40% complete as to conversion costs and
the remaining units were lost at the 75% stage of conversion. Beginning inventory was 60%
complete as to conversion costs, and lost units were the result of normal production shrinkage.
The equivalent units of conversion cost using fifo is:
A. 11,400
B. 14,400
C. 12,900
D. 13,400
E. none of the above

SUPPORTING CALCULATION:

Equivalent units in beginning inventory (40% x 5,000) ........................................................ 2,000


Equivalent units started and completed during period
(12,000 - 5,000) ............................................................................................................................. 7,000
Equivalent units in ending inventory (40% x 6,000) .............................................................. 2,400
Total equivalent units ............................................................................................................................ 11,400
The Cost of Quality and Accounting for Production Losses 89

PROBLEMS

PROBLEM

1.
Journal Entries for Scrap. Munoz Metal Products accumulates metal shavings from the shop floor and sells
them periodically to a nearby scrap dealer. Scrap sales, on account, for the period just ended total $2,300.

Required: Indicate the journal entries when:

(1)The scrap sales are viewed as additional revenue.


(2)The scrap sales are viewed as a reduction of the cost of goods sold during the period.
(3)The scrap sales are viewed as a reduction of factory overhead.
(4)The scrap sales are traceable to individual jobs and are viewed as a reduction in the cost of materials used
on the jobs.

SOLUTION

(1) Accounts Receivable ...................................................................................................... 2,300


Scrap Sales (or Other Income) ......................................................................... 2,300

(2) Accounts Receivable ...................................................................................................... 2,300


Cost of Goods Sold ................................................................................................. 2,300

(3) Accounts Receivable ...................................................................................................... 2,300


Factory Overhead Control .................................................................................. 2,300

(4) Accounts Receivable ...................................................................................................... 2,300


Work in Process...................................................................................................... 2,300

PROBLEM

2.
Spoilage in a Job Order Cost System. Walker Inc. manufactures custom wood products. During the current
period, an order for 2,000 workbenches was begun on Job 1994. After the job was completed, the benches
were inspected and 100 units were determined to be defective. The customer has agreed to accept the order
with only 1,900 units instead of the quantity originally ordered. The spoiled units can be sold as seconds for
$25 each. Spoiled goods are kept in a separate inventory account from finished goods. Total costs charged to
Job 1994 follow:

Materials ..................................................................................................................................................................... $ 5,100


Labor (200 hours x $15 per hour)......................................................................................................................... 3,000
Factory overhead ($9.50 per labor hour) .......................................................................................................... 1,900
Total cost charged to Job 1994 ................................................................................................................................ $ 10,000

Custom jobs are marked up 150 percent on cost.


90 Chapter 7

Required:

(1) Assuming that the defective units were the result of an internal failure (i.e., an employee error or a
machine failure), prepare the appropriate general journal entries to record the transfer of the
defective units to a separate inventory account and the completion and shipment of Job 1994 to the
customer.
(2) Assuming that the defective units were the result of a change in design specified by the customer
after the units were completed, prepare the appropriate general journal entries to record the transfer
of the defective units to the separate inventory account and the completion and shipment of Job 1994
to the customer.

SOLUTION

(1) Spoiled Goods Inventory (10 units x $25 salvage)........................................... 250


Factory Overhead Control ........................................................................................... 250
Work in Process (10 units x $50* cost) ....................................................... 500

Cost of Goods Sold ........................................................................................................... 9,500


Work in Process ($10,000 - 500) ................................................................... 9,500

Accounts Receivable ($9,500 x 150%) .................................................................. 14,250


Sales ............................................................................................................................. 14,250

(2) Spoiled Goods Inventory (10 units x $25 salvage)........................................... 250


Work in Process...................................................................................................... 250

Cost of Goods Sold ........................................................................................................... 9,750


Work in Process ($10,000 - $250) ................................................................. 9,750

Accounts Receivable ($9,750 x 150%) .................................................................. 14,625


Sales ............................................................................................................................. 14,625

* $10,000 total job cost


= $50 per unit
200 units on job
The Cost of Quality and Accounting for Production Losses 91

PROBLEM

3.
Entries for Charging Rework Costs Caused by Internal Failure and by Change in Customer Specification. Albany
Appliances manufactured 100 microwave ovens in a recent production run and discovered that 10 ovens
were defective and required reworking as follows:

Rework cost per unit:


Materials ......................................................................................................................................................................... $ 10
Labor ................................................................................................................................................................................ 25
Factory overhead ........................................................................................................................................................ 25
Total ......................................................................................................................................................................... $ 60
Normal production cost per unit:
Materials ......................................................................................................................................................................... $ 50
Labor ................................................................................................................................................................................ 75
Factory overhead ........................................................................................................................................................ 75
Total ......................................................................................................................................................................... $ 200

Required:

(1) Prepare the journal entries to record (a) the normal production costs, (b) the rework costs, and (c)
the transfer of the job costs to Finished Goods assuming that rework costs were caused by an internal
failure.
(2) Prepare the same journal entries as in (1), assuming that rework costs were caused by a change in
customer specifications.

SOLUTION

Debit Credit
(1) (a) Work in Process ................................................................................................. 20,000
Materials ....................................................................................................... 5,000
Payroll............................................................................................................ 7,500
Applied Factory Overhead .................................................................... 7,500

(b) Factory Overhead Control ($60 x 10) ...................................................... 600


Materials ....................................................................................................... 100
Payroll............................................................................................................ 250
Applied Factory Overhead .................................................................... 250

(c) Finished Goods ($200 x 100) ....................................................................... 20,000


Work in Process ........................................................................................ 20,000

(2) (a) Same as first entry in (1) (a) above.

(b) Work in Process ................................................................................................. 600


Materials ....................................................................................................... 100
Payroll............................................................................................................ 250
Applied Factory Overhead .................................................................... 250

(c) Finished Goods ................................................................................................... 20,600


Work in Process ........................................................................................ 20,600
92 Chapter 7

PROBLEM

4.
Computation of Equivalent Units With Production Losses. Potter Paint Company manufactures paint in three
departments using a process cost system with an average cost flow assumption. Selected cost and production
data for the Blending Department, the second department in the production process, for the month just
ended, are as follows:

Units in beginning work in process............................................................................................................................. 5,000


Units received from Mixing Department .................................................................................................................. 25,000
Units transferred to Finishing Department ............................................................................................................. 20,000
Units in ending work in process ................................................................................................................................... 7,000
Units spoiled due to internal failure ........................................................................................................................... 3,000

Work in process, beginning inventory:


Cost from preceding department ........................................................................................................................ $ 4,200
Materials ......................................................................................................................................................................... 1,960
Labor ................................................................................................................................................................................ 895
Factory overhead ........................................................................................................................................................ 685
Costs added during the period:
From preceding department ................................................................................................................................. $ 15,900
Materials ......................................................................................................................................................................... 8,775
Labor ................................................................................................................................................................................ 4,550
Factory overhead ........................................................................................................................................................ 3,770

The paint is inspected at the end of the process in the Blending Department to detect any spoiled batches.
Ending inventory is 75% complete as to materials and 25% complete as to conversion costs.

Required:

(1) Compute the equivalent units of production for each cost element in the Blending Department for the
month just ended.
(2) Determine the average cost per equivalent unit for each cost element.

SOLUTION

(1) ..................................................................................... From


Preceding
Department Materials Labor Overhead
Equivalent units transferred out ............................. 20,000 20,000 20,000 20,000
Equivalent units in ending inventory .................... 7,000 5,250 1,750 1,750
Equivalent units of spoilage ...................................... 3,000 3,000 3,000 3,000
Total equivalent units .................................................. 30,000 28,250 24,750 24,750
The Cost of Quality and Accounting for Production Losses 93

(2) ..................................................................................... From


Preceding
Department Materials Labor Overhead

Cost in beginning inventory ...................................... $ 4,200 $ 1,960 $ 895 $ 685


Cost added during the period ................................... 15,900 8,775 4,550 3,770
Total cost to be accounted for .................................. $ 20,100 $ 10,735 $ 5,445 $ 4,455
Divide by equivalent units.......................................... 30,000 28,250 24,750 24,750
Cost per equivalent units ............................................ $ .67 $ .38 $ .22 $ .18

PROBLEM

5.
Spoilage With a Salvage Value in a Process Cost System Using an Average Cost Flow Assumption. Carter
Company manufactures a single product in two departments, Cutting and Finishing. Units of a product are
started in the Cutting Department and then transferred to the Finishing Department where they are
completed. Units are inspected at the 80% stage of completion in the Finishing Department. Good units are
transferred to finished goods inventory when completed and spoiled units are transferred to a separate
inventory account. Spoiled units are inventoried at their salvage value of $3 each, and the unrecoverable cost
of spoilage, which was caused by an internal failure, should be charged to the appropriate account.
Materials are added at the beginning of the production process. At the end of June, 2,000 units were still
in process in the Finishing Department, 100% complete as to materials and 60% complete as to conversion
costs. During July, 20,000 units were transferred from the Cutting Department to the Finishing Department
and 15,000 were transferred from the Finishing Department to finished goods inventory. At the end of July,
the Finishing Department still had 4,000 units in process, 100% complete as to materials and 20% complete
as to conversion costs. Cost data related to July operations in the Finishing Department follow:

Beginning Added
Costs charged to the department: ............................................................................................... Inventory This Period
Cost from preceding department ....................................................................................... $6,050 $54,450
Materials ........................................................................................................................................ 3,410 30,690
Labor ............................................................................................................................................... 1,638 14,742
Factory overhead ....................................................................................................................... 2,184 19,656

Required: Complete the following cost of production report for the Finishing Department based on the data
presented for July, assuming the company uses a process cost system with average costing to account for its
production.
94 Chapter 7

SOLUTION

Carter Corporation
Finishing Department
Cost of Production Report
For July, 19--

Quantity Schedule Materials Labor Overhead Quantity


Beginning inventory .......................................................... 2,000
Received from Cutting Department ............................ 20,000
22,000

Transferred to finished goods ....................................... 15,000


Ending inventory ................................................................. 100% 20% 20% 4,000
Spoiled in process ............................................................... 100% 80% 80% 3,000
22,000

Total Equivalent Unit


Cost Charged to Department Cost Units* Cost
Beginning inventory:
Cost from preceding department ......................... $ 6,050
Materials ......................................................................... 3,410
Labor. ............................................................................. 1,638
Factory overhead ........................................................ 2,184
Total cost in beginning inventory ................ $ 13,282

Cost added during period:


Cost from preceding department ......................... $ 54,450 22,000 $2.75
Materials ......................................................................... 30,690 22,000 1.55
Labor. . ............................................................................. 14,74218,200 .90
Factory overhead ........................................................ 19,656 18,200 1.20
Total cost added during period .................... $ 119,538
Total cost charged to the department ........................ $ 132,820 $6.40
The Cost of Quality and Accounting for Production Losses 95

% Unit Total
Cost Accounted for as Follows Units Complete Cost Cost
Transferred to
finished goods ........................................ 15,000 100% $ 6.40 $96,000
Transferred to spoiled goods
inventory at salvage value................ 3,000 3.00 9,000
Charge to factory overhead
for spoilage:
Cost from preceding
department ..................................... 3,000 100% $ 2.75 $ 8,250
Materials .................................................. 3,000 100% 1.55 4,650
Labor. . .......................................... 3,000 80% .90 2,160
Factory overhead ................................. 3,000 80% 1.20 2,880
$ 17,940
Less salvage value of
spoiled units ................................... 3,000 3.00 9,000 8,940
Work in process,
ending inventory:
Cost from preceding
department ..................................... 4,000 100% $ 2.75 11,000
Materials .................................................. 4,000 100% 1.55 6,200
Labor. . .......................................... 4,000 20% .90 720
Factory overhead ................................. 4,000 20% 1.20 960 18,880
Total cost accounted for ............................ $132,820

* Total number of equivalent units required in the cost accounted for section determined as follows:

Prior
Dept. Cost Materials Labor Overhead
Equivalent units transferred out .................................. 15,000 15,000 15,000 15,000
Equivalent units in ending inventory ......................... 4,000 4,000 800 800
Equivalent units of spoilage ........................................... 3,000 3,000 2,400 2,400
Total equivalent units ....................................................... 22,000 22,000 18,200 18,200
96 Chapter 7

PROBLEM

6.
Production Shrinkage in a Process Cost System Using an Average Cost Flow Assumption. Carrera Chemical Inc.
uses a process cost system with an average cost flow assumption to account for the production of its only
product. The product is manufactured in two departments. Units of product are started in the Cooking
Department and then transferred to the Blending Department where they are completed. Because of the
intense heat applied in the Cooking Department, some of the production volume is lost to evaporation. Labor
and overhead are treated as one element of cost in the Cooking Department (i.e., conversion cost). Data
related to May operations in the Cooking Department follow:

Units in beginning inventory ............................................................................................................................................ 10,000


Units started in process this period ............................................................................................................................... 45,000
Units transferred to the Blending Department this period ................................................................................. 40,000
Units in ending inventory (100% materials, 40% conversion cost) ............................................................... 9,000

Beginning Added
Costs charged to the department: ............................................................................................... Inventory This Period
Materials ........................................................................................................................................ $4,375 $11,795
Conversion cost ........................................................................................................................... 2,975 6,181

Required: Prepare a cost of production report for the Cooking Department based on the data presented for
May.
The Cost of Quality and Accounting for Production Losses 97

SOLUTION

Carrera Chemical Inc.


Cooking Department
Cost of Production Report
For May, 19--

Conversion
Quantity Schedule ...................................................................................... Materials Cost Quantity
Beginning inventory ................................................................................ 10,000
Started in process this period .............................................................. 45,000
55,000

Transferred to Blending Department .............................................. 40,000


Ending inventory ....................................................................................... 100% 40% 9,000
Lost in process ............................................................................................ 6,000
55,000

Total Equivalent Unit


Cost Charged to Department ................................................................. Cost Units* Cost
Beginning inventory:
Materials ............................................................................................... $ 4,375
Conversion cost .................................................................................. 2,975
Total cost in beginning inventory ...................................... 7,350
Cost added during period:
Materials ............................................................................................... $ 11,795 49,000 $.33
Conversion cost .................................................................................. 6,181 43,600 .21
Total cost added during period .......................................... $ 17,976
Total cost charged to the department .............................................. $ 25,326 $.54

% Unit Total
Cost Accounted for as Follows Units Complete Cost Cost
Transferred to Blending
Department ............................................. 40,000 100% $.54 $21,600
Work in process,
ending inventory:
Materials .................................................. 9,000 100% $.33 $2,970
Conversion cost ..................................... 9,000 40% .21 756 3,726
Total cost accounted for ............................ $25,326

* Total number of equivalent units required in the cost accounted for section determined as follows:

Conversion
Materials Cost
Equivalent units transferred out ................................................................................................. 40,000 40,000
Equivalent units in ending inventory ........................................................................................ 9,000 3,600
Total equivalent units ...................................................................................................................... 49,000 43,600
98 Chapter 7

This problem is based on material presented in the Appendix to the chapter.

PROBLEM

7.
Spoilage With a Salvage Value in a Process Cost System With a Fifo Cost Flow Assumption. School Craft
Petroleum Company uses a process cost system with a fifo cost flow assumption to account for production,
which is manufactured in two departments. Units of product are started in the Cracking Department and then
transferred to the Refining Department where they are completed. Units are inspected at the end of the
production process in the Refining Department. Good units are transferred to finished goods inventory and
spoiled units are transferred to a separate inventory account. Spoiled units are inventoried at their salvage
value of $8 each, and the unrecoverable cost of spoilage resulting from an internal production failure is
charged to the appropriate account. Data related to September operations in the Refining Department follow:

Units in beginning inventory (60% materials, 30% labor, 30% overhead) ................................................ 2,800
Units received from Cracking Department this period ......................................................................................... 8,400
Units transferred to the finished goods inventory this period .......................................................................... 7,600
Units transferred to special inventory account this period ................................................................................ 1,100
Units in ending inventory (100% materials, 50% labor, 50% overhead) .................................................... 2,500

Beginning Added
Costs charged to the department: ............................................................................................... Inventory This Period
Cost from preceding department ........................................................................................ $17,889 $68,040
Materials ........................................................................................................................................ 2,733 11,900
Labor ................................................................................................................................................ 7,278 30,063
Factory overhead ....................................................................................................................... 12,350 51,016

Required: Prepare a cost of production report for the Refining Department based on the data presented for
September.
The Cost of Quality and Accounting for Production Losses 99

SOLUTION

School Craft Petroleum Company


Refining Department
Cost of Production Report
For September, 19--

Quantity Schedule Materials Labor Overhead Quantity


Beginning inventory .......................................................... 60% 30% 30% 2,800
Received from Cracking Department ......................... 8,400
11,200

Transferred to finished goods ....................................... 7,600


Ending inventory ................................................................. 100% 50% 50% 2,500
Spoiled in process ............................................................... 100% 100% 100% 1,100
11,200

Total Equivalent Unit


Cost Charged to Department Cost Units* Cost
Beginning inventory:
Cost from preceding department ......................... $ 17,889
Materials ......................................................................... 2,733
Labor ............................................................................. 7,278
Factory overhead ........................................................ 12,350
Total cost in beginning inventory ................ $ 40,250
Cost added during current period:
Cost from preceding department ......................... $ 68,040 8,400 $ 8.10
Materials ......................................................................... 11,900 9,520 1.25
Labor ............................................................................. 30,063 9,110 3.30
Factory overhead ........................................................ 51,016 9,110 5.60
Total cost added during period .................... $ 161,019
Total cost charged to the department ........................ $ 201,269 $ 18.25
100 Chapter 7

% Unit Total
Cost Accounted for as Follows Units Complete Cost Cost
Transferred to finished goods:
From beginning inventory .................. $ 40,250
Cost to complete this
period:
Materials ..................................... 2,800 40% $ 1.25 $ 1,400
Labor ............................................ 2,800 70% 3.30 6,468
Factory overhead .................... 2,800 70% 5.60 10,976 $ 59,094
Started and completed
this period .......................................... 4,800 100% $ 18.25 87,600
Total cost transferred to
Finishing Department ................... $ 146,694
Transferred to spoiled goods
inventory at salvage value................... 1,100 $ 8.00 8,800
Charged to factory overhead for
spoilage:
Cost of completed spoiled
units ...................................................... 1,100 100% $ 18.25 $ 20,075
Less salvage value of spoiled
units ...................................................... 1,100 8.00 8,800 11,275
Work in process,
ending inventory:
Cost from preceding
department ........................................ 2,500 100% $ 8.10 $ 20,250
Materials ..................................................... 2,500 100% 1.25 3,125
Labor. ......................................................... 2,500 50% 3.30 4,125
Factory overhead .................................... 2,500 50% 5.60 7,000 34,500
Total cost accounted for ............................... $ 201,269

* Number of equivalent units of cost added during the current period determined as follows:

Prior
Dept. Cost Materials Labor Overhead
To complete beginning inventory ......................... 0 1,120 1,960 1,960
Started and completed this period ....................... 4,800 4,800 4,800 4,800
Ending inventory .......................................................... 2,500 2,500 1,250 1,250
Spoiled units ................................................................... 1,100 1,100 1,100 1,100
Total equivalent units ................................................ 8,400 9,520 9,110 9,110