Case 1: Normal Loss Charged to Manufacturing Overhead

Transcription

1 APPENDIX B SHRINKAGE AND LOST UNITS The illustrations presented in Chapter 6 of the textbook assume that units that are in process are either completed or still awaiting completion at the end of each period. In reality, units can disappear because of evaporation, losses, or rejection. Such missing units can be considered to be a normal part of the processing or may be deemed to be abnormal. Abnormal losses can be thought of as costs akin to unusual losses studied in financial accounting. Normal losses are normal costs of operating the process department. Two accounting treatments are prevalent for normal losses. One, the amount of the loss can be charged to a specific loss account, which could be charged to manufacturing overhead. Two, the amount of the loss could be spread over all of the good units of work done during the period. If significant in amount and truly abnormal, losses should always be assigned to the unusual section of the income statement, where they can be offset by any recoveries from insurance or other means. The following cases illustrate the two alternative treatments of normal losses. The weighted-average method of costing is used for illustration. LEARNING OBJECTIVE 9 Compute the cost of lost units or shrinkage. Case 1: Normal Loss Charged to Manufacturing Overhead Assume that Stabler Chemical had a machine breakdown, causing a loss of 10,000 units that were 100% complete as to materials and 60% complete for labour and overhead. Exhibit 6B 1 presents the cost of production report for Stabler Chemical, assuming that normal losses are to be charged to manufacturing overhead. Note that the lost units are included in the units accounted for, and the equivalent units lost become a separate line in the equivalent units calculation. When costs are accounted for, the lost units are costed according to their equivalent units completed. The journal entry for normal losses is as follows: Manufacturing Overhead ,272 Work in Process ,272 An assumption is needed here to avoid a significant complexity. The preceding entry assumes predetermined overhead is used so that $11,272 is an actual overhead cost that was previously estimated when the overhead rate was calculated. Because the $11,272 includes $4,632 for overhead, overhead on lost units is being charged to manufacturing overhead, resulting in some cost duplication, but the amount of error introduced is assumed to be minor. Case 2: Normal Loss Charged to Good Output Exhibit 6B 2 presents the cost of production report for Stabler Chemical, assuming that normal losses are to be charged to good output. In this case, the 10,000 lost units are accounted for but not assigned a value in equivalent units. Instead, the total cost of $300,000 is distributed over fewer equivalent units, increasing the cost per equivalent unit as compared to the costs calculated in Exhibit 6B 1 (i.e., $1.706 versus $1.642). No special journal entry is needed to account for costs related to spoiled units, since these costs are attached to the equivalent units of production.

2 6B-2 Appendix 6B Shrinkage and Lost Units EXHIBIT 6B 1 Production Report: Weighted-Average Method Loss Charged to Overhead Quantity Schedule and Quantity Schedule Units to be accounted for: Work in process, beginning (all materials, 30% labour and overhead added last month) ,000 Started into production ,000 Total units to be accounted for ,000 Materials Labour Overhead Units accounted for as follows: Transferred out , , , ,000 Units lost, normal (100% of materials, 60% labour and overhead)... 10,000 10,000 6,000 6,000 Work in process, ending (all materials, 40% labour and overhead added this month) ,000 30,000 12,000* 12,000* Total units accounted for , , , ,000 Unit Costs Total Materials Labour Overhead Work in process, beginning $ 17,000 $ 8,000 $ 3,600 $ 5,400 Cost added by the department ,000 63,000 88, ,000 Total cost (a) $300,000 $ 71,000 $ 91,600 $137,400 Equivalent units (b) , , ,000 Unit cost, (a) (b) $1.642 = $ $ $0.772 Cost Reconciliation Costs Cost to be accounted for: Work in process, beginning $ 17,000 Cost added by the department ,000 Total cost to be accounted for $300,000 Cost accounted for as follows: Transferred to cooking: 160,000 $ $ 262, , , ,000 Normal losses Materials (at $ ,000) ,550 10,000 Labour (at $ ,000) ,090 6,000 Overhead (at $ ,000) ,632 6,000 Total normal losses ,272 Work in process, ending: Materials (at $ ,000) ,650 30,000 Labour (at $ ,000) ,180 12,000 Overhead (at $ ,000) ,264 12,000 Total work in process, ending ,094 Total cost accounted for ,086 Less: Rounding Total cost accounted for $300,000 *40% 30,000 units = 12,000 equivalent units.

3 Appendix 6B Shrinkage and Lost Units 6B-3 EXHIBIT 6B 2 Production Report: Weighted-Average Method Losses Charged to Good Output Quantity Schedule Quantity Schedule Units to be accounted for: Work in process, beginning (all materials, 30% labour and overhead added last month) ,000 Started into production ,000 Total units to be accounted for ,000 Materials Labour Overhead Units accounted for as follows: Transferred out , , , ,000 Units lost normal ,000* Work in process, ending (all materials, 40% labour and overhead added this month) ,000 30,000 12,000 12,000 Total units accounted for , , , ,000 Unit Costs Total Materials Labour Overhead Work in process, beginning $ 17,000 $ 8,000 $ 3,600 $ 5,400 Cost added by the department ,000 63,000 88, ,000 Total cost (a) $300,000 $ 71,000 $ 91,600 $ 137,400 Equivalent units (b) , , ,000 Unit cost, (a) (b) $1.706 = $ $ $0.799 Cost Reconciliation Cost to be accounted for: Work in process, beginning $ 17,000 Cost added by the department ,000 Total cost to be accounted for $300,000 Costs Cost accounted for as follows: Transferred to cooking: (160,000 $1.706) $ 272, , , ,000 Work in process, ending: Materials (at $ ,000) ,220 30,000 Labour (at $ ,000) ,396 12,000 Overhead (at $ ,000) ,588 12,000 Total work in process, ending ,204 Total cost accounted for ,164 Less: Rounding Total cost accounted for $300,000 *Total units to be accounted for, 200,000 - Units transferred, 160,000 - Units in process, ending, 30,000 = 10,000 units lost. 40% 30,000 units = 12,000 EU. EU = Equivalent unit.

4 6B-4 Appendix 6B Shrinkage and Lost Units APPENDIX B QUESTIONS AND PROBLEMS 6B 1 Describe two methods of dealing with normal losses in a process. 6B 2 Which of the two methods of dealing with normal losses would you prefer from a management control perspective? Why? PROBLEM 6B 1 Process Costing; Spoilage [LO9] Milliners Flour Ltd. operates under a process costing system for one of its products. During the month of June, 5,676 units were put into production and 5,000 units were completed and transferred to finished goods. There were 160 good units in ending work in process inventory (100% complete for materials and 75% complete for conversion costs). Remaining units were considered normal spoilage. There were no beginning inventories; during June, $56,760 of direct materials were applied at the beginning of the process, and conversion costs of $52,820 were applied evenly during the process. There was no abnormal spoilage during June. Compute the cost of goods completed and the cost of the ending inventory of work in process. Charge the costs of all normal spoilage to good output. PROBLEM 6B 2 Process Costing; Spoilage [LO9] Baker Company uses a process costing system to account for the costs of three production departments (Departments 1, 2, and 3). Department 2 receives units from Department 1 and applies conversion costs evenly throughout the process. During the month, 32,000 units were completed and transferred to Department 3. When the units are 90% complete, they are inspected and all materials are then added to the good units. The following is additional information related to Department 2 for the month of May: a. The department had 2,000 units in process at the beginning of May. They were estimated to be 40% complete. Costs associated with these units were as follows: Department 1 costs $10,000 Department 2 costs $ 1,800 b. During May, 35,000 units were received from Department 1 at a cost of $205,000. c. Actual costs incurred by Department 2 during the month were as follows: Materials $ 12,500 Conversion costs ,000 d. There were 4,000 units in process at the end of the month that were estimated to be 70% complete. 1. Prepare a cost report for Department 2 for May using the weighted-average method, showing the determination of equivalent units, the cost per equivalent unit, the disposition and cost of spoiled units, the cost of goods transferred out, and the cost of the ending work in process inventory. Charge the costs of normal spoilage to manufacturing overhead. 2. How much could Baker save if it were able to reduce its spoilage to zero? Would society benefit from such an action? PROBLEM 6B 3 Process Costing; Second Department; Spoilage [LO9] Mosley Co. Ltd. has two departments and uses a weighted-average process costing system. The following information pertains to Department 2 for the month of April: a. At March 31, the work in process inventory in Department 2 consisted of 6,000 units that were 50% complete and had been charged $56,000 for Department 1 costs, and $24,000 for conversion costs in Department 2. b. During April, 22,000 units were received from Department 1 at a cost of $224,000. c. Department 2 costs during April were $24,000 for materials and $156,000 for conversion costs. d. 16,000 good units were completed and transferred to finished goods. e. At the end of April, 10,000 units were still in process in Department 2. They were estimated to be 60% complete.

5 Appendix 6B Shrinkage and Lost Units 6B-5 In Department 2, it is expected that 5% of good output will be spoiled. Inspection takes place at the end of the process. Materials are added after inspection in Department Prepare a cost report for Department 2 for April using the weighted-average method, showing the determination of equivalent units, the cost per equivalent unit, the disposition and cost of spoiled units, the cost of goods transferred out, and the cost of the ending work in process inventory. Charge the costs of normal spoilage to manufacturing overhead. 2. Was the spoilage in Department 2 greater or less than normal? What was its cost to Mosley? How should any abnormal spoilage be accounted for? 3. How much could Mosley save if it could cut its normal spoilage to 2%? PROBLEM 6B 4 Process Costing; Second Department; Spoilage [LO9] The SMU Company operates under a weighted-average process costing system. It has two departments, 1 and 2. In Department 2, materials are added at the end of the process, following inspection. Normal spoilage is considered to be 10% of good output. Labour and overhead costs are assumed to apply evenly throughout the process. Inventory at the beginning of the period was one-half complete; ending inventory is twothirds complete. Following are the costs and unit production statistics for November: Beginning inventory Received from Department Completed good output transferred to finished goods storeroom Ending inventory ,200 units 8,000 units 7,000 units 1,500 units Costs Transferred from Dept. 1 Materials Labour Overhead Beginning inventory $ 6,100 $ 1,400 $ 550 Current costs $23,900 $7,000 $12,000 $5,050 Prepare a cost report for Department 2 for November using the weighted-average method, showing the determination of equivalent units, the cost per equivalent unit, the disposition of the cost of spoiled units, the cost of goods transferred out, and the cost of the ending work in process inventory. Charge normal spoilage to good output.