Chapter7

SpecialProductionIssues:LostUnitsandAccretion
Questions
1.

Anacceptedqualitylevel(AQL)istheproportionoftotalunits
tobeproducedinaprocesswithoutdefectsaspreestablishedby
anappropriateminimumthatisdeterminedbymanagement.
Alternatively,anAQLcanbestatedastheproportionoftotal
unitstobeproducedinaprocessthatcanbedefectiveas
preestablishedbyanappropriatemaximumdeterminedby
management.
WhentheAQLissetat100percentforgoodproduction,then
theacceptabledefectlevelissetatzero.Inthiscase,theAQL
issetatalevelof100percentandthisisthesameasazero
defectstolerancelevel.

2.

Shrinkagereferstolossofinputsbecauseofnaturalprocesses
suchasevaporationoroxidation.Spoiledunitscannotbe
economicallyreworkedtobringthemuptostandard.Defective
unitscaneeconomicallyreworkedbecausetheincrementalrevenue
exceedstheincrementalcostoftherework.Bothspoiledand
defectiveunitsdonotmeetqualityspecificationsupon
inspection.

3.

Atoleratedlosslevelmaybesetbecauselossesareinherentin
theproductionprocess(e.g.,shrinkage)orthereareknown
defectsinmaterialsusedorinproductionprocesses.For
example,managementmayknowthataparticularproductionprocess
performswithintolerancesonly99.5percentofthetime.
Accordingly,managementmayallowfor5defectsoutofevery
1,000unitsproduced.Althoughmanagementcouldinvestin
technologythatwouldreducethelevelofdefects,thenew
technologymaybetoocostlyrelativetotheexistinglevelof
defects.Withthiscost/benefitanalysis,managementhas
concludedthatacertainlevelofdefectsispreferredtono
defects.

4.

5.

Examplesofdefectiveunitsincludethefollowing:acarthat
hasbeenpaintedthewrongcolor;thedeliveryofpersonal
possessionstothewrongaddressbyamovingcompany;an
incorrectlymountedtransmissioninanewautomobile;apiece
oflumberthathasbeencuttoolongforitsintended
application;andafishingreelthathasbeenassembled
withoutarequiredbearing.
Examplesofspoiledproducts/servicesincludethe
following:atirethatthathastreadswhichareirregularly
positionedonthetire(e.g.,treadsthatwouldnotbe
paralleltotheroad);ataxreturnpreparedbyanaccounting
firmthatwasauditedbytheIRSanddeterminedtohavelarge
errors;acakethathasbeencutintopiecesthataretoo
small;atreethatdiedbecauseitwastrimmedsoseverelyby
alandscapingservice;lossofapatientssightcausedbya
surgeonserrorduringanoperation.

Normallossreferstoanexpectedreductioninproduction
quantitybasedontheproductiontechnologyandproduction
practicesofthecompany.Abnormallossreferstoaquantity
oflossabovethenormallossquantity.Normallosscreates
anexpectedcostofproductionsothecostofsuchalossis
inventoriable;abnormalspoilagecostisnotexpected,and,
thus,itisnotinventoriable.

6.

Abnormallosseswouldbemorelikelytobepreventablethan
normallossesbecauseabnormallossesarelesslikelytobe
causedbyfactorsthatareinherentinthematerialsor
productionmethods.Forexample,aknownamountofmaterial
loss(waste)istobeexpectediflowerqualitymaterialsare
utilized.However,anylossbeyondtheexpectedamountwould
likelybecausedbyotherfactorsthataresubjectto
managementcontrol,e.g.,productionerrors.

7.

Acontinuouslossisonethatoccurs(moreorless)
uniformlythroughouttheproductionprocess.Adiscrete
lossisonethatoccursataspecificstageorinaspecific
productionprocess.

8.

Adiscretelossoccursataspecificpointintheproduction
process.Foraccountingpurposes,discretelossisassumed
tooccurimmediatelypriortoinspection.Inreality,the
losscouldhaveoccurredanywherebeforetheinspection
pointand,thus,thelostunitsshouldhavehadno
additionalconversion(and/or,possibly,materials)addedto

them.Itisimpossibletohavecontinuousmonitoringfor
lossesinmostproductionprocesses,soconversioncostsare
incurreduntilinspectionandassignedtoallunitsthat
havepassedtheinspectionpoint(eventhoughsomeunits
thathavenotreachedtheinspectionpointcouldalsobe
lost).

9.

Anytimeadeclineinthevalueofanassetoccursthatis
unexpected,itisconsideredalossoftheperiod.Abnormal
lossesareunplannedforandareinexcessofnormallosses.
Therefore,thecostassociatedwiththemshouldnotbe
consideredaproductcostandshouldnotbeallocatedto
goodproduction.Theunitsthemselveshavenovalueand
cannotbeconsideredassets,sotheircostsareexpiredand
belongontheincomestatement.Thecostisremovedby
debitingalossaccount(suchas"LossfromAbnormal
Spoilage")andcreditingWorkinProcessInventory.

10.

Themethodofneglectrequiresnospecificcomputations
regardingspoiledunits;allcostsareassignedtogood
units.Thecostofspoiledunitsthathavebeenfoundatan
inspectionpointwillbeassignedtoallunitsthathave
passedtheinspectionpoint.Thus,themethodofneglect
assignsspoilagecostsbysimplyignoring(neglecting)the
spoiledunits.
Themethodofneglectisappropriateiflossis
consideredtobeincurredcontinuouslyandisconsidered
normal.

11.

Themethodofneglectraisesthecostperequivalentunit
becausenocostsareassignedtothespoiledunits.
Therefore,goodunitsbearallcosts,includingthecostsof
producingthespoiledunits.

12.

Ifspoilageisincurredforall(ormost)jobsinajob
ordercostingsystem,theestimateofoverheadusedin
settingthepredeterminedoverheadrateshouldincludean
amountforthenetcostofspoilage.Thiswillallowthe
costofnormal,generalspoilagetobespreadoveralljobs
produced.Ifspoilageisrelatedtoasinglejob,thecost
ofthatspoilageshouldbeassignedtothejobthatgave
risetoit.Ifanyabnormalspoilageisincurredinajob
ordersystem,itscostshouldbeassignedtotheperiodasa
loss.

13.

Accretionisanincreaseinthenumberofunitsorthe
volumeofaproductthatoccursthroughtheadditionof
materials(e.g.,waterorotherfluids)orthrough
processing(e.g.,heatcausingexpansion).Althoughthe
totalcostofthepredecessordepartmentisunaffected,the
costperunitcalculatedbythepredecessordepartmentwould
declineinthesuccessordepartmentbecauseoftheincrease

inunits.
14.

Thecostperunitmighthavedeclinedinthesecond
departmentbecauseofanincreaseinthenumberofunits
causedbytheadditionofmaterialsortheexpansionofthe
unitstransferredin.Ifthecompanymanufacturesbread,
therisingofthedoughwouldcauseanincreaseinthe
volumeofdoughtransferredinfromtheMixingDepartment.

15.

Ifthedefectsareconsiderednormal,thetreatmentof
reworkcostsdependsonwhetheranactualoranormalcost
systemisineffect.Ifanactualcostsystemisused,the
reworkcostswillbeaddedtothecomponentcostsofthe
periodandbeallocatedtoallunitscompleted.Inanormal
costsystem,thereworkcostswillhavebeenestimatedand
includedinthedevelopmentoftheoverheadapplication
rate;actualreworkcostswouldbeassignedtoManufacturing
Overhead.
Ifthedefectsareabnormal,thecostsofproduction
andreworkcostsforthedefectiveunitsshouldbe
accumulatedandassignedtoalossaccount.

16.

Theimportantmanagerialconcernistocontrolspoilageand
defectiveworkratherthantoaccountforit.Measuringits
costisthefirststepincontrollingspoilage/defects.
Usingthemethodofneglectorotherwisespreadingthecost
ofthelostunitstogoodproductionminimizesthedegreeof
controlthatcanbeexertedbymanagement.

17.

Certainfluctuationsoccurinanyproductionprocess.
Statisticalprocesscontrolscanbeusedtodetermineif
fluctuationsinaprocessarewithinnormalandtolerable
limits,orexceedtolerablelimits.Inshort,theSPC
methodscanbeusedtodeterminewhetheraprocessisin
control.SPCchartscanalsobeusedasindicatorsofthe
pointsatwhichtheprocessisoutofcontrolandthushelps
managersunderstandwhyfluctuationsoccurinaprocessso
thatactionscanbetakentoreducesuchfluctuations.

18.

Eachstudentwillhaveadifferentanswer.Nosolution
provided.

Exercises
19.

a.
b.
c.
d.
e.
f.
g.
h.

3
8
2
5
7
1
6
4

20.

a.
Annualcostofspoilage=20050$8.50=
$85,000.
Alfredwouldbeabletosaveupto$85,000peryearby
purchasingtheregulator.Theamounthewouldpaywouldbe
basedontheexpectedlifeoftheregulatorand(ina
discountedcashflowframework)onthecostofcapitalof
thefirm.Inadditiontothesefactors,Alfredwouldwant
toconsiderhowlongthecompanyintendstokeepthe
machinerythatcurrentlyprintsthepackingboxes,thecosts
ofoperatingandinstallingtheregulator,thecostsof
trainingpersonneltooperateitandtheutilityand
maintenancecostsforthemachine(ifdifferentfromthose
currentlyexperienced).
b.

Goodboxes=60050=550
Spoilagecostpersetup=50$8.50=$425
Increaseincost=$425550=$0.77(rounded)
c.Toobtainthecorrect20boxesineachbatch,
WEBOXALLmustfirstproducethe50misprintedboxes.
TotalPerBox
Costsofspoilage=1250$8.50=$5,100
$21.25
Costofregulator4,300
17.92
Netsavingsincost$800$
3.33
Yes,SpringtimeCorporationwouldbewillingto
purchasetheregulatorbecauseitwouldresultin
substantialcostsavings.Thecostoftheregulator
wouldberecoupedinlessthanoneyearsvolumeof
purchases.However,analternativeforSpringtime
wouldbetopurchaseallofitsboxesinasingle
transactionratherthanin12differentbatches.In
suchacase,thetotalspoilagecostincurredwould
onlybe$425(50boxes$8.50).
d.
Thespoilagecostperboxfiguresdiffer
substantiallybecauseofthenumberofunitsproduced
inthebatches.Inpart(b),thebatchcostsof
spoilagewerespreadover550goodunits;inpart(c),
thecostsofspoilageforeachbatchwerespreadover

only20units.

21.

a.

10,000+60,000=70,000units

b.

60,0000.05=3,000units

c.
units

Abnormalloss=Totalunits(CompletedUnits+EI
+Normalloss)=70,000(58,200+8,000+3,000)
=70,00069,200=800units

d.
UnitsMaterial
Conversion
Beginninginventory(10%)10,000
Unitsstarted
60,000
Unitstoaccountfor
70,000
Transferredout
58,200
Endinginventory(60%)
4,800
Normalshrinkage
Abnormalshrinkage
800
Unitsaccountedfor
63,800

58,200 58,200
8,000 8,000

3,000
800 800

70,00067,000

22. ad.UnitsMaterial
Conversion
Beginninginventory(20%;30%)8,000
Gallonsstarted
180,000
Gallonstoaccountfor
188,000
Beginninginventorycompleted 8,000 6,400
5,600
Gallonsstartedandcompleted 174,600 174,600
174,600
Totalgallonstransferred
182,600
Endinginventory(70%;80%)
4,000 2,800
3,200
Normalspoilage(180,0000.4%)
720 0
0
Abnormalspoilage680 680
680
Gallonsaccountedfor(FIFOEUP)188,000 184,480
184,480
e.
Costofnormalspoilageisautomaticallyspread
amongalloftheremainingunitsproduced.Thisis
donebyusingthemethodofneglectandomittingthese
spoiledunitsfromtheEUPcalculations.
f.
23.

a.

Costofabnormalspoilageistreatedasaperiodcost.
UnitsMaterial

Conversion
Beginninginventory 40,000
Poundsstarted
425,000
Poundstoaccountfor 465,000
BIcompleted

40,000

6,000
Started&completed 405,000
405,000
405,000
Endinginventory
10,000
10,000
2,500
Normalspoilage
2,000
Abnormalspoilage
8,000
8,000

5,600
Unitsaccountedfor
465,000
423,000
419,100
b.
Endinginventory:
Material(10,000$2.40)
$24,000
Conversion(2,500$4.70)
11,750
Totalcost
$35,750
c.

Abnormalspoilage:
Material(8,000$2.40)
Conversion(5,600$4.70)
Totalcost(treatedasaloss)

$19,200
26,320
$45,520

24. a.Normalspoilageallowed=30,000pounds8%=2,400
pounds
UnitsMaterial
Conversion
Beginninginventory(30%)9,000
Poundsstarted
30,000
Poundstoaccountfor
39,000
Beginninginventorycompleted 9,000
6,300
Poundsstartedandcompleted22,500
22,500
Totalpoundscompleted
31,500
Endinginventory(20%) 5,400
1,080
Normalspoilage 2,100
0
Poundsaccountedfor(FIFO)39,000
29,880

22,500

5,400

27,900

b.TotalMaterialConversion
Beginninginventorycost
$6,200
Currentcosts
18,729
$9,765$8,964
Totalcosts
$24,929
DividedbyEUP
27,90029,880
CostperEUP$0.65$0.35$0.30
c.CostAssignment
Transferredout:
Beginninginventorycost
Costtocomplete(conversion:6,300$0.30)
Totalcostofbeginninginventory
Started&completed(22,500$0.65)

$22,715
Endinginventory:
Material(5,400$0.35)
Conversion(1,080$0.30)
2,214
Totalcostsaccountedfor
$24,929
25.

$6,200
1,890
$8,090
14,625

$1,890
324

a.Normalspoilage=20,00020=1,000units
UnitsMaterialConversion
Beginninginventory
4,000
Started
20,000
Unitstoaccountfor
24,000
Beginninginv.completed
Started&completed
Endinginventory
Normalspoilage
Unitsaccountedfor(WA)

4,0004,000
16,00016,000
3,0003,000
1,0001,000
24,00024,000

4,000
16,000
1,800
1,000
22,800

b.Total
MaterialConversion
Beginninginventory $24,592
$12,252
$12,340

Currentperiod
175,448112,548
62,900
Totalcosts
$200,040
$124,800
$75,240
DividedbyEUP

24,000
22,800
CostperEUP $8.50$5.20
$3.30

CostAssignment
Transferredout:
Goodunits(20,000$8.50)
$170,000
Normalspoilage(1,000$8.50)
8,500 $178,500
Endinginventory:
Material(3,000$5.20)$15,600
Conversion(1,800$3.30)5,94021,540
Totalcostaccountedfor$200,040

26. Maximumnormalspoilage=13,500,00012%=1,620,000
a.&b.UnitsMaterial
Conversion
Beginninginventory(30%) 500,000
Poundsstarted
13,500,000
Poundstoaccountfor
14,000,000
Beginninginventory500,000500,000500,000
Poundsstartedandcompleted10,900,00010,900,00010,900,000
Endinginventory(40%)
750,000750,000
300,000
Abnormalspoilage*
230,000230,000
115,000

Normalspoilage
1,620,0001,620,000
810,000
Poundsaccountedfor (WA)
14,000,00014,000,000
12,625,000
*

Tobalanceschedule

c.
1.
Thememoshouldaddressthefactthat
additivessuchaswaterandpreservativeswould
causeaccretioninthecanningprocess.
2.

Thememoshoulddiscusshowevaporationwouldlead
toalossofwatercontentinthepotato.Such
lossesareverycommoninvegetableprocessing.

27. a.
Conversion
Beginninginventory
Started
Unitstoaccountfor

UnitsMaterial
750
17,250
18,000

Beginninginventorycompleted 750
750

750

Unitsstartedandcompleted
14,250
Endinginventory
840
Defectiveunits
1,800
Unitsaccountedfor

17,640
b.

14,250

14,250

1,200

1,200

1,800

1,800

18,000

18,000

RegularProReworkTotal Cost
ductionCost+Cost=CostEUP=per

Unit
DM
$126,000
Conv.$41,013

$3,240$129,24018,000$7.18
$1,323$42,33617,640$2.40

c.
Theactualcostsofreworkingwouldbechargedto
manufacturingoverheadandtheoverheadapplication
rate(s)wouldincludeachargeforrework.

d.

Abnormalreworkcostsareaccumulatedandassignedtoa
lossaccount.

RegularProCost
ductionCostEUPperUnit
DM
$126,000
18,000$7.00
Conv.$41,013
17,640$2.325
28.

a.
Appraisal;thefoodcanbecomparedtothe
customersorderbeforedeliverytothetable.
b.

Prevention;thiserrorcouldbepreventedbymarkingan
invoicepaidatthetimeacheckisissued.

c.

Prevention;onlyactionstakenpriortothebreakage
wouldbeeffectiveinminimizingtheloss.

d.

Althoughneithermethodwouldbeentirelyeffective,
preventionmeasurescouldbetakensuchasusing
technologythatminimizesevaporationlosses.

e.

Prevention;allpartscouldbemadesuchthatonlythe
correctmatescouldbefastenedtogether.

f.

Appraisal;theerrorwouldbediscoveredbyvisual
inspection.

Problems
29.

a.

b.

Totalshrinkage=TotalunitstoaccountforUnits
transferredEndinginventory=(1,000+125,000)
110,0003,000=126,000113,000=13,000

Maximumnormalshrinkage=125,00010%=12,500
pounds.Foraccountingpurposes,itissimplyignored,
whichmeansitscostswillbespreadoverallgood
unitsproduced.
c.
Abnormalspoilage=13,00012,500=500pounds.
Itscostswillbetreatedasalossoftheperiod.
d.
TotalMaterial
Conversion

Beginninginventory1,000
Started125,000
Toaccountfor126,000
Beginninginventory1,0001,0001,000
Startedandcompleted109,000109,000109,000
Endinginventory3,0003,000900
Normalspoilage12,500
Abnormalspoilage500500500
Accountedfor(WA)126,000113,500
111,400

MaterialConversion

Total
BeginningWIPcosts$1,020$195$1,215
Currentcosts118,15533,225151,380
Totalcosts$119,175$33,420$152,595
DividebyEUP113,500111,400
CostperEUP$1.05$0.30$1.35

CostAssignment
Transferredout(110,000$1.35)
$148,500
Endinginventory:
Material(3,000$1.05)$3,150
Conversion(900$0.30)2703,420
Abnormalspoilage(500$1.35)675
Totalcostaccountedfor$152,595
e.

30. a.
(5,000

Theeasiestwaytodecreaseshrinkagelossistobuy
higherqualitymaterial.Higherqualitygroundbeef
wouldhavealowerfatcontentandconsequentlywould
shrinkless.Althoughrawmaterialpriceswould
increase,thecostofconversionperpoundoffinished
productwouldlikelydeclinebecauseofthereduced
loss.
Unitscompleted=(BI+Started)EIDefects=
+70,000)6,000400=75,0006,400=68,600

b.

Maximumnormalspoilage=70,0001%=700units

c.
TotalMaterialBoxes
Conversion
Beginninginventory5,000

Started70,000
Toaccountfor75,000
Beginninginventory5,0005,0005,0005,000
Startedandcompleted63,60063,60063,60063,600
Endinginventory6,0006,00004,200
Normalspoilage4004000380
Abnormalspoilage0000
Accountedfor(WA)75,00075,00068,600
73,180
MaterialBoxesConversion
Total
BeginningWIPcosts$21,900$0$7,680$
29,580
Currentcosts315,60075,460270,404
661,464
Totalcosts$337,500$75,460$278,084
$691,044
DividebyEUP75,00068,60073,180
CostperEUP$4.50$1.10$3.80
$9.40

Goodunitscompleted(68,600$9.40)$644,840
Normalspoilage
Material(400$4.50)$1,800
Conversion(380$3.80)1,4443,244
Totalcostofgoodunits$648,084
Costperunit=$648,08468,600=$9.45rounded
Iftherewouldhavebeennodefectiveunits,thecostwould
havebeen$9.40becausethemethodofneglectwouldnothave
beenused.
d.

31.

Material(6,000$4.50)$27,000
Conversion(4,200$3.80)15,960
TotalcostofendingWIP$42,960

a.
MatthewTools
CostofProductionReport
forAugust
Beginninginventory
1,000
Transferredin
50,800
Unitstoaccountfor
51,800
Normalspoilage
(650)
Abnormalspoilage
(350)
Endinginventory
(1,800)
Transferredout
49,000

UnitsTrans.InMaterialLaborOH
BI
1,0001,0001,0001,000
1,000
UnitsS&C
48,00048,00048,00048,000
48,000
Endinginventory
1,8001,8000720
1,170
Normalspoilage
6506500650
650
Abnormalspoilage
3503500350
350
Unitsaccountedfor51,80051,80049,00050,720
51,170

980

TotalTrans.InMaterialLaborOH
BIcost$7,355$6,050$0$325$
Currentcosts235,557149,35012,25023,767

50,190
Totalcosts$242,912$155,400$12,250$24,092
$51,170
DividedbyEUP51,80049,00050,720
51,170
CostperEUP$4.725$3$0.25$0.475
$1.00
CostAssignment
Transferredout
Goodunits(49,000$4.725)
$231,525
Normalspoilage(650$4.475)
2,909 $234,434
Endinginventory:
Transferredin(1,800$3.00)
$5,400
Labor(720$0.475)342
Overhead(1,170$1.00)1,170
6,912
Abnormalspoilage(350$4.475)
1,566
Totalcostsaccountedfor
$242,912
b.

LossonAbnormalSpoilage1,566
WorkinProcessGrinding1,566

32.
BigPineyFurniture
CostofProductionReport
forApril2003
Beginninginventory
2,000
Transferredin
14,900
Unitstoaccountfor16,900
Endinginventory
(3,000)
Normalspoilage
(200)
Abnormalspoilage
(400)
Transferredout
13,300
UnitsTrans.InMaterialLaborOH

BIcompleted 2,0002,0002,0002,000
2,000
UnitsS&C 11,30011,30011,30011,300
11,300
Endinginventory3,0003,00001,200
600
Normalspoilage200200200200
200
Abnormalspoilage 4004000120
60

Unitsaccountedfor 16,90016,90013,50014,820
14,160

TotalTrans.InMaterialLaborOH
Beginninginv.$32,312$15,020$2,130$4,118$
11,044
Currentcosts310,714137,08013,80046,270
113,564
Total$343,026$152,100$15,930$50,388
$124,608
DividebyEUP16,90013,50014,820
14,160
CostperEUP$22.38$9$1.18$3.40
$8.80

CostAssignment
Transferredout
Goodunits(13,300$22.38) $297,654
Normalspoilage(200$22.38)
4,476
Endinginventory:
Transferredin(3,000$9)$27,000
Labor(1,200$3.40)4,080
Overhead(600$8.80)
5,280
Abnormalspoilage
Transferredin(400$9)
$3,600
Labor(120$3.40)408
Overhead(60$8.80)
528
Totalcostsaccountedfor
FinishedGoodsInventory302,130
WIPInventoryLamination302,130
LossonAbnormalSpoilage4,536
WIPInventoryLamination4,536

$302,130

36,360

4,536
$343,026

33.
BigPineyFurniture
CostofProductionReport
forApril2003
Beginninginventory
2,000
Transferredin
14,900
Unitstoaccountfor16,900
Endinginventory
(3,000)
Normalspoilage
(200)
Abnormalspoilage
(400)
Transferredout
13,300
UnitsTrans.InMaterialLaborOH
BIcompleted
2,00000400
600
UnitsS&C 11,30011,30011,30011,300
11,300
Endinginventory 3,0003,00001,200
600
Normalspoilage 200200200200
200
Abnormalspoilage4004000120
60
Unitsaccountedfor 16,90014,90011,50013,220
12,760
TotalTrans.InMaterialLaborOH
Beginninginv.$32,312
Currentcosts310,714$137,080$13,800$46,270
$113,564
Total$343,026
DividebyEUP14,90011,50013,220
12,760
CostperEUP$22.80$9.20$1.20$3.50
$8.90
CostAssignment
Transferredout
Beginninginventory$32,312
CompleteBI:
Labor(400$3.50)1,400
Overhead(600$8.90)5,340
S&C(11,300$22.80)257,640
Normalspoilage(200$22.80)4,560
Endinginventory:

$301,252

Transferredin(3,000$9.20)$27,600
Labor(1,200$3.50)4,200
Overhead(600$8.90)
5,340
Abnormalspoilage
Transferredin(400$9.20)$3,680
Labor(120$3.50)420
Overhead(60$8.90)
534
Totalcostsaccountedfor

37,140

4,634
$343,026

FinishedGoodsInventory
301,252
WIPInventoryLamination301,252
LossonAbnormalSpoilage4,634
WIPInventoryLamination4,634

34.

Maximumnormalspoilage=70,0003%=2,100units
RonaldCompany
CostofProductionReport
forMay2003
UnitsMaterialConversion
Beginninginventory5,600

Unitsstarted74,400
Unitstoaccountfor80,000
BIcompleted5,60002,800
UnitsS&C64,40064,40064,400
Totalunitscompleted70,000
Endinginventory7,5007,5002,500
Normalspoilage2,100
2,1002,100
*
Abnormalspoilage 400400400
Unitsaccountedfor80,00074,40072,200
*
Tobalanceschedule
TotalMaterialConversion
Beg.inventorycost$7,632
Currentcosts106,168$74,400$31,768
Totalcosts$113,800
DividedbyEUP74,40072,200
CostperEUP$1.44$1$0.44

CostAssignment
Transferredout:
Beginninginventorycost
$7,632
Costtocomplete
Conversion(2,800$0.44)1,232
TotalcostofBI
$8,864
Started&comp.(64,400$1.44)92,736
Normalspoilage
DM:(2,100$1)$2,100
CC:(2,100$0.44)9243,024$104,624
Endinginventory:
Material(7,500$1)$7,500
Conversion(2,500$0.44)
1,1008,600
Abnormalspoilage
Material(400$1)
$400
Conversion(400$0.44)
176576
Totalcostsaccountedfor
$113,800

35.

Maximumnormalspoilage=70,0003%=2,100units
RonaldCompany
CostofProductionReport
forMay2003

UnitsMaterialConversion
Beginninginventory5,600
Unitsstarted74,400
Unitstoaccountfor80,000
BIcompleted5,6005,6005,600
UnitsS&C64,40064,40064,400
Totalunitscompleted70,000
Endinginventory7,5007,5002,500
Normalspoilage2,1002,1002,100
Abnormalspoilage*400400400
Unitsaccountedfor80,00080,00075,000
*
Tobalanceschedule
TotalMaterialConversion
Beg.inventorycost $7,632$6,400$1,232
Currentcosts
106,16874,40031,768
Totalcosts
$113,800$80,800$33,000
DividedbyEUP 80,00075,000
CostperEUP
$1.45$1.01$0.44

CostAssignment
Transferredout:
Unitscompleted(70,000$1.45)$101,500
Normalspoilage
DM:(2,100$1.01)$2,121
CC:(2,100$0.44)9243,045$104,545
Endinginventory:
Material(7,500$1.01)$7,575
Conversion(2,500$0.44)
1,1008,675
Abnormalspoilage
Material(400$1.01)$404
Conversion(400$0.44)
176580
Totalcostsaccountedfor
$113,800

36.

a.TotalMaterialConversion
Beginninginventory6,000
Started180,000
Toaccountfor186,000
Beginninginventory6,0006,0006,000
Startedandcompleted146,000146,000146,000
Transferredout152,000152,000152,000
Endinginventory20,00020,00014,000
Normalspoilage4,8004,8003,360
Abnormalspoilage*9,2009,2006,440
Accountedfor186,000186,000175,800
*
Tobalanceschedule
b.
TotalMaterial
Conversion
BI$33,600
Current1,224,330$915,120
$342,810
Totalcosts$1,257,930
DividebyEUP186,000175,800
CostperEUP$6.87$4.92$1.95
Costofgoodstransferredbeforeprorationofnormal
spoilage:
152,000$6.87=$1,044,240
Costofendinginventorybeforeprorationofnormal
spoilage:
Directmaterial(20,000$4.92)$98,400
Conversion(14,000$1.95)27,300
Total$125,700

Proration:
Costofnormalspoilage:
Directmaterial(4,800$4.92)
$23,616
Conversion(3,360$1.95)
6,552
Totalcost
$30,168
Costoftransferredgoodsafterprorationofnormal
spoilage:
Costbeforenormalspoilage

$1,044,240

CC:$6,552.92

20,782

6,028

Normalspoilage
DM:$23,616.88

Total
$1,071,050
Costofendinginventoryafterprorationofnormalspoilage:
Costbeforenormalspoilage
$125,700
Normalspoilage
DM:$23,616.12

2,834
CC:$6,552.08

524
Total
$129,058
Abnormalspoilagecost:
Directmaterial(9,200$4.92)
$45,264
Directlabor(6,440$1.95)
12,558
Total
$57,822

Totalcostsaccountedfor:
Transferredout$1,071,050
Endinginventory129,058
Abnormalspoilage57,822

Total$1,257,930
37.

a.Abnormalspoilage=2,1001,680=420
UnitsTran.inMaterial
Conversion
Beginninginventory
4,200
Started
42,000
Unitstoaccountfor46,200

Beginninginventory4,200
4,2004,200

4,200
Started&completed29,400
29,40029,400

29,400
Transferredout
33,60033,60033,600
33,600
Endinginventory*10,500
10,50010,500

4,200
Abnormalspoilage420420420

420
Normalspoilage1,680
1,6801,680

1,680
Unitsaccountedfor46,200
46,20046,200

39,900
*
Tobalanceschedule
b.
CostAssignment
Transferredout:
Goodunits(33,600$9) $302,400
Normalspoilage(1,680$9) 15,120
Total$317,520

c.
Endinginventory:
Trans.in(10,500$5)
$52,500
Material(10,500$1)
10,500
Conversion(4,200$3) 12,600
Total

$75,600
d.

Totalcosttransferredin(46,200$5)$231,000

Costofbeginninginventory(18,900)
Costtransferredinthisperiod$212,100
e.
Abnormalspoilage:420$9=$3,780;thiscost
wouldbedeductedasaperiodcost(loss)inMay.
(CMA adapted)

38.

Maximumnormalloss=150,0004%=6,000units
Abnormalloss=9,0006,000=3,000units
Dept.1
Beginninginventory
Started
Unitstoaccountfor

UnitsMaterialConversion
6,000
150,000
156,000

BIcompleted6,000
6,000 6,000
Started&completed123,000
123,000 123,000
Transferredout
129,000129,000129,000
Endinginventory18,000
18,000 10,800
Normalspoilage(4%)6,000
6,000
6,000
Abnormalspoilage3,000
3,000 3,000
Unitsaccountedfor156,000
156,000 148,800

Beginninginventory
Currentperiod
Totalcosts
DividedbyEUP
CostperEUP

MaterialConversionTotal
$3,060
$2,328
$5,388
37,500
207,480
244,980
$40,560
$209,808
$250,368
156,000
148,800
$0.26 $1.41 $1.67

CostAssignment
Transferredout:
Goodunits(129,000$1.67)
Normalspoilage(6,000$1.67)
Endinginventory:
Material(18,000$0.26)
Conversion(10,800$1.41)
Abnormalspoilage(3,000$1.67)
Totalcostsaccountedfor

$215,430
10,020
$4,680
15,228

$225,450

19,908
5,010
$250,368

Dept.2
Maximumnormalloss=129,0008%=10,320units
UnitsTrans.InMaterial
Conversion
Beginninginventory3,000
Transferredin129,000
Unitstoaccountfor132,000
BIcompleted3,0003,0003,0003,000
UnitsS&C108,000108,000108,000108,000
Transferredout
111,000111,000111,000111,000
Endinginventory15,00015,000
012,000

Normalspoilage6,0006,000 03,600
Unitsaccountedfor132,000132,000 111,000126,600
TotalTrans.InMaterial
Conversion
BIcost$8,436 $6,690
$0$
1,746
Currentcosts281,810 230,910
740
50,160
Totalcosts$290,246 $237,600
$740
$51,906 DividedbyEUP132,000111,000
126,600

CostperEUP$2.22$1.80$0.01
$0.41
CostAssignment
Transferredout
Goodunits(111,000$2.22)$246,420
*Prorationofnormalspoilage10,832$257,252
Endinginventory:
Transferredin(15,000$1.80)$27,000
Conversion(12,000$0.41)4,920
Totalcostbeforeproration$31,920
*Prorationofnormalspoilage1,44433,364
Totalcostsaccountedfor(withroundingerror)$290,616
*Proration:
Costofnormalspoilage:
Transferredin(6,000$1.80)
Conversion(3,600$0.41)
Totalcost

$10,800
1,476
$12,276

TransInConversion

EUP% EUP%
Unitstransferredout*
111,00088111,00090
Endingworkinprocess
15,0001212,00010
126,000100123,000100
Note:Beginninginventorywasnotpastinspectionpointand
mustbeincludedintheproration.
TO:TI$10,80088%=$9,504
CC$1,47690%=1,328$10,832
EI:TI$10,80012%=$1,296

CC$1,47610%=1481,444
39.

Maximumnormalloss=150,0004%=6,000units
Abnormalloss=9,0006,000=3,000units
Dept.1UnitsMaterialConversion
Beginninginventory
6,000
Started
150,000
Unitstoaccountfor
156,000
BIcompleted6,000
0 5,400
Started&completed123,000
123,000 123,000
Transferredout
129,000123,000128,400
Endinginventory18,000
18,000 10,800
Normalspoilage(4%)6,000
6,000
6,000
Abnormalspoilage3,000
3,000 3,000
Unitsaccountedfor156,000
150,000 148,200


MaterialConversionTotal
Beginninginventory$5,388
Currentperiod$37,500 $207,480244,980
Totalcosts$250,368
DividedbyEUP150,000 148,200
CostperEUP$0.25$1.40$1.65
CostAssignment
Transferredout:
BeginningWIP$5,388
CompleteBeginningWIP
CC(5,400$1.40)7,560$12,948
S&C(123,000$1.65)
202,950
Normalspoilage(6,000$1.65)9,900
$225,798
Endinginventory:
Material(18,000$0.25)
$4,500
Conversion(10,800$1.40)
15,120
19,620
Abnormalspoilage(3,000$1.65)
4,950
Totalcostsaccountedfor
$250,368
Dept.2
Maximumnormalloss=129,0008%=10,320units
UnitsTrans.InMaterial
Conversion
Beginninginventory3,000
Transferredin129,000
Unitstoaccountfor132,000
BIcompleted3,000 0
3,0001,800
UnitsS&C108,000 108,000 108,000108,000
Transferredout
111,000108,000111,000109,800
Endinginventory15,000 15,000
012,000
Normalspoilage6,000 6,000 03,600
Unitsaccountedfor132,000129,000 111,000125,400
TotalTrans.InMaterial
Conversion
BIcost$8,436
Currentcosts281,810$230,910
$740
$50,160
Totalcosts$290,246
DividedbyEUP129,000
111,000
125,400

CostperEUP$2.20$1.79$0.01

$0.40

CostAssignment
Transferredout:
BeginningWIP$8,436
CompleteBeginningWIP:
DM(3,000$0.01)30
CC(1,800$0.40)720$9,186
S&C(108,000$2.20)
237,600
*Prorationofnormalspoilage
10,747$257,533
Endinginventory:
Transferredin(15,000$1.79) $26,850
Conversion(12,000$0.40)
4,800
Totalcostbeforeproration
$31,650
*Prorationofnormalspoilage
1,433
33,083
Totalcostsaccountedfor(withroundingerror)$290,616
*Proration:
Costofnormalspoilage:
Transferredin(6,000$1.79)
$10,740
Conversion(3,600$0.40)
1,440
Totalcost
$12,180
TransInConversion

EUP% EUP%
Unitstransferredout*
111,00088111,00090
Endingworkinprocess
15,0001212,00010
126,000100123,000100
Note:Beginninginventorywasnotpastinspectionpointand
mustbeincludedintheproration.
TO:TI$10,74088%=$9,451
CC$1,44090%=1,296$10,747
EI:TI$10,74012%=$1,289
CC$1,44010%=1441,433
40.

Maximumnormalloss=125,00010%=12,500units
Dept.1UnitsMaterialConversion
Beginninginventory
5,000
Started
125,000
Unitstoaccountfor
130,000
Beginninginv.completed 5,000
0
1,750
Started&completed
105,000 105,000
105,000
Transferredout110,000105,000106,750

Endinginventory
Normalspoilage
Unitsaccountedfor

14,000
6,000
130,000

14,000
0
119,000

5,600
0
112,350

MaterialConversionTotal
BeginningWIP$19,250
Currentperiod $190,400$393,225 583,625
Totalcosts
$602,875
DividedbyEUP 119,000112,350
CostperEUP
$1.60$3.50$5.10
CostAssignment
Transferredout:
Beginninginventorycost
$19,250
Costtocomplete(conv.1,750$3.50)6,125
Totalcostofbeginninginventory $25,375
Started&completed(105,000$5.10) 535,500
$560,875
Endinginventory:
Material(14,000$1.60)
$22,400
Conversion(5,600$3.50)
19,600
42,000
Totalcostsaccountedfor

$602,875
Dept.2
Maximumnormalloss=110,0005%=5,500
UnitsTrans.InMaterial
Conversion
Beginninginventory40,000
Transferredin110,000
Unitstoaccountfor150,000
BIcompleted40,00040,00040,000
40,000
UnitsS&C80,00080,00080,000
80,000
Transferredout120,000120,000120,000
120,000
Endinginventory22,50022,5000
4,500
Normalspoilage5,5005,5005,500
4,400
Abnormalspoilage*2,0002,0002,000
1,600
Unitsaccountedfor150,000150,000127,500
130,500
*
Tobalanceschedule

TotalTrans.InMaterial
Conversion
BIcost$345,600$204,000 $120,000$21,600
Currentcosts892,770568,500 268,87555,395
Totalcosts$1,238,370$772,500 $388,875$76,995
DividedbyEUP150,000 127,500130,500
CostperEUP$8.79$5.15 $3.05$0.59

CostAssignment
Transferredout:
(120,000$8.79)
$1,054,800
Normalspoilage
Trans.In(5,500$5.15)$28,325
Materials(5,500$3.05)16,775
Conversion(4,400$0.59)2,59647,696

Totalcoststransferredout

$1,102,496 Endinginventory:
Trans.In(22,500$5.15)
$115,875
Conversion(4,500$0.59)
2,655
118,530

Abnormalspoilage
Trans.In(2,000$5.15)
$10,300
Material(2,000$3.05)
6,100
Conversion(1,600$.59)
944
17,344
Totalcostsaccountedfor

$1,238,370
41.

a.

Predeterminedrate=$462,50050,000=$9.25perMH

b.
UnitsMaterial
Conversion
Transferredout2,000,000
2,000,000
2,000,000
Endinginventory75,000
75,000
26,250
Defectiveunits40,000
40,000

40,000
Total
2,115,000 2,115,000
2,066,250
TotalMaterial
Conversion
Costs
$9,322,425$3,743,550
$5,578,875
DividedbyEUP2,115,000
2,066,250
CostperEUP$4.47$1.77
$2.70
c.
Thereworkcostisdebitedtothemanufacturing
overheadaccountsincethecompanyusesapredetermined

ratetoapplyoverhead.
ManufacturingOverhead
Variousaccounts

37,750
37,750

d.

Normalproductioncost(40,000$4.47)
$178,800
Costofrework
37,750
Totalcostofdefectiveunits
$216,550
Totalsalesvalueofdefectiveunits
(40,000$3.50)

(140,000)
Deficiency
$76,550
InventoryIrregulars
140,000
WorkinProcessInventory140,000
Costofgoodpipe(2,000,000$4.47)$8,940,000
Deficiency
76,550
Totalcost
$9,016,550
Dividedbytotalgoodpipe
2,000,000
Revisedcostpergoodpipe(rounded)$4.51
e.

InventoryIrregular
140,000
LossfromDefects
15,310*
WorkinProcess

155,310
*20%ofdeficiency;$76,55020%
Costofgoodpipe
$8,940,000
Deficiency($76,550$15,310)
61,240
Totalcost
$9,001,240
Dividedbytotalgoodpipe
2,000,000
Revisedcostpergoodfootofpipe(rounded)$4.50

42.

a.

WIPJobBA468
850
RawMaterialsInventory150
WagesPayable700
b.

ManufacturingOverhead850
RawMaterialsInventory150
WagesPayable700

c.

LossonAbnormalRework850
RawMaterialsInventory150
WagesPayable700

Case
43.

a.

Beginninginventory
Transferredin
Unitstoaccountfor
Transferredout
Endinginventory
Bikeslost
Unitsaccountedfor

3,000
45,000
48,000
40,000
4,000
4,000
48,000

(1)BikespassingthroughAssembly
48,000
Lessbikesnotinspectedduring
currentyear:
BeginningWIP(inspectedinprior
year80%complete)3,000
EndingWIP(havenotreachedinspec
tionpoint20%complete)4,000
(7,000)
Bikesthatreachedinspectionpoint
41,000
Normaldefectiverate
0.05
Normalnumberofdefectivebikes
2,050
(2)

Totalbikeslost
4,000
Normalnumberofdefectivebikes
(2,050)
Abnormalnumberofdefectivebikes 1,950

b.UnitsTrans.InMaterialConversion
Transferredout40,00040,000
40,000
40,000
Endinginventory4,0004,000
2,000
800
Unitslost4,0004,000
4,000
2,800
Unitsaccountedfor48,00048,000
46,000
43,600
c.Trans.InMaterialConversionTotal
BI
$82,200$6,660$11,930$100,790
Current
1,237,80096,840236,5901,571,230
Totalcost
$1,320,000$103,500$248,520$1,672,020
DividedbyEUP 48,00046,00043,600
CostperEUP
$27.50$2.25$5.70 $35.45
d.

(1)Normaldefectivebikes:
Transferredin(2,050$27.50)$56,375.00
Material(2,050$2.25)4,612.50
Conversion(1,435$5.70)8,179.50$
69,167
(2)

Abnormaldefectivebikes:
Transferredin(1,950$27.50)$53,625.00
Material(1,950$2.25)
4,387.50
Conversion(1,365$5.70)7,780.50

65,793
(3) Goodbikescompleted(40,000$35.45)
1,418,000
(4)

EndingWIP
Transferredin(4,000$27.50)$110,000.00
Material(2,000$2.25)
4,500.00
Conversion(800$5.70)
4,560.00

119,060
Totalcostsaccountedfor

$1,672,020
e.

(1)

Thecostofthenormaldefectiveunitsof$69,167would
betransferredtothePackingDepartmentasaportion
ofthecostofthe40,000goodunitstransferredout.
Thus,thisamountwouldbeaportionofthePacking
Department'sinventoryaccountand/orcostofgoods
soldamountdependingontheproportionoftheunitsin
theWIPinventory,FGinventory,andunitssoldduring
theyear.

(2) Theabnormallossof$65,793wouldappearas
periodexpense(loss)onthecompanysincome
statement.
(3) Thecostofthegoodunitscompletedand
transferredtothePackingDepartment($1,418,000)
wouldbeincludedinthePackingDepartments
productioncosts.Thus,thisamountwouldbeaportion
ofthePackingDepartment'sinventoryaccountsand/or
costofgoodssoldaccountdependingontheproportion
oftheunitsinWIPinventory,FGinventory,andunits
soldduringtheyear.

(4) TheAssemblyDepartment'sendingWIPinventory
($119,060)wouldbeincludedintheinventorybalance
ontheBalanceSheet.
f.
Normalspoilagecostisanexpectedcostof
producinggoodunits.Assuch,itisnotanextracost
butthoughttobeinherentinproducinggoodunits.
Normalspoilagemayoccurbecauseofmaterialorlabor
quality,machinemalfunctions,orhumanerror.
Managementshoulddocost=benefitstudiestodetermine
ifitiseconomicallysensibletoreducespoilage.
Threequestionsshouldbeaddressed:(1)Whatdoesthe
spoilageactuallycost?(2)Whydoesitoccur?(3)How
canitbecontrolled?
(CMAadapted)
RealityCheck
44.

a.
AndrewHill'sconsiderationsaredetermined
largelybyhispositionasacostaccountant,with
responsibilitiestoAudioSpectrum,othersinthe
company,andhimself.Hill'sjobinvolvescollecting,
analyzing,andreportingoperatinginformation.
Althoughnotresponsibleforproductquality,Hill
shouldexerciseinitiativeandgoodjudgmentin
providingmanagementwithinformationhavingpotential
adverseeconomicimpacts.
Hillshoulddeterminewhetherthecontroller's
requestviolateshisprofessionalorpersonal
standards,orthecompany'scodeofethics,ifAudio
Spectrumhassuchacode.AsHilldecideshowto
proceed,heshouldprotectanyproprietaryinformation
hehasandshouldnotviolatethechainofcommandby
discussingthismatterwiththecontroller'ssuperiors.
b.
(1) Thecontrollerhasreporting
responsibilitiesandshouldprotecttheoverall
companyinterestsbyencouragingfurtherstudyof
theproblembythoseinhisdepartment,by
informinghissuperiorsinthismatter,andby
workingwithothersinthecompanytofind
solutions.
(2) Thequalitycontrolengineerhas
responsibilitiesforproductqualityandshould

protecttheoverallcompanyinterestsby
continuingtostudythequalityofreworked
rejects,informingtheplantmanagerandherstaff
inthismatter,andworkingwithothersinthe
companytofindsolutions.

(3) Theplantmanagerandherstaffhave
responsibilitiesforproductqualityandcostand
shouldprotecttheoverallcompanyinterestsby
exercisingthestewardshipexpectedofthem.
Plantmanagementshouldbesurethatproductsmeet
thequalitystandards.Absenteeownersneed
informationfrommanagement,andtheplantmanager
andherstaffhavearesponsibilitytoinformthe
boardofdirectorselectedbytheownersofany
problemsthatcouldaffectthewellbeingofAudio
Spectrum.
c.
AndrewHillneedstoprotecttheinterestsof
AudioSpectrum,othersinthecompany,andhimself.
Hillisvulnerableifheconcealstheproblemandit
eventuallysurfaces.Hillmusttakesomeactionto
reducehisvulnerability.Onepossibleactionthat
Hillcouldtakewouldbetoobeythecontrollerand
preparetheadvancematerialfortheboardwithout
mentioningorhighlightingtheprobablefailureof
reworks.Becausethisdiffersfromhislongstanding
practiceofhighlightinginformationwithpotential
adverseeconomicimpact,Hillshouldwriteareportto
thecontrollerdetailingtheprobablefailureof
reworks,theanalysismadebyhimselfandthequality
controlengineer,andthecontroller'sinstructionsin
thismatter.
(CMAadapted)
45.

Eachstudentwillhaveadifferentanswer.Nosolution
provided.

46.

Eachstudentwillhaveadifferentanswer.Nosolution
provided.

47.

Eachstudentwillhaveadifferentanswer.Nosolution
provided.

48.

Eachstudentwillhaveadifferentanswer.Nosolution
provided.

49.

Eachstudentwillhaveadifferentanswer.Nosolution
provided.

50.

Eachstudentwillhaveadifferentanswer.Nosolution

provided.