Chapt e r 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
83 Chapter 7

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 program ming
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
The Cost of Quality and Accounting for Production Losses 84

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

85 Chapter 7

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
The Cost of Quality and Accounting for Production Losses 86

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
87 Chapter 7

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
The Cost of Quality and Accounting for Production Losses 88

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
89 Chapter 7

PROBLEMS

PROBLEM

1.
Journal Entrie s 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 Syste m . 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.

The Cost of Quality and Accounting for Production Losses 90

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
91 Chapter 7

PROBLEM

3.
Entries for Chargi ng Rewo r k Costs Caus e d by Intern al Failure and by Chan g e in
Custo m e r Specificatio n. 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
The Cost of Quality and Accounting for Production Losses 92

PROBLEM

4.
Comp u t a ti o n of Equiv ale nt Units With Produc ti o n Losse s. 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
93 Chapter 7

(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 Salvag e Value in a Proce ss Cost Syste m Using an Avera g e Cost
Flow Assu m p ti o n . 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.
The Cost of Quality and Accounting for Production Losses 94

SOLUTION

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

Quantity Sche d ule 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 Charg e d to Depart m e n t 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. ....................................................... 14,742 18,200 .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
95 Chapter 7

% Unit Total
Cost Acco un t e d 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
The Cost of Quality and Accounting for Production Losses 96

PROBLEM

6.
Produc ti o n Shrink a g e in a Proce s s Cost Syste m Using an Averag e Cost Flow
Assu m p ti o n . 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.
97 Chapter 7

SOLUTION

Carrera Chemical Inc.

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

Conversion
Quantity Sche d ule .................................................... 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 Charg e d to Depart m e n t ............................... 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 Acco un t e d 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
The Cost of Quality and Accounting for Production Losses 98

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

PROBLEM

7.
Spoilage With a Salvag e Value in a Proce ss Cost Syste m With a Fifo Cost Flow
Assu m p ti o n . 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.
99 Chapter 7

SOLUTION

School Craft Petroleum Company

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

Quantity Sche d ule 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 Charg e d to Depart m e n t 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
The Cost of Quality and Accounting for Production Losses 100

% Unit Total
Cost Acco un t e d 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