Solution manual cost and managerial accounting 3rd by barspecial production issues lost units and accretion

Alternatively, an AQL can be stated as the proportion of total units to be produced in a process that can be defective as preestablished by an appropriate maximum determined by zero-2..

Special Production Issues: Lost Units and AccretionQuestions

1 An accepted quality level (AQL) is the proportion of total units

to be produced in a process without defects as preestablished by

an appropriate minimum that is determined by management

Alternatively, an AQL can be stated as the proportion of total units to be produced in a process that can be defective as

preestablished by an appropriate maximum determined by

zero-2 Shrinkage refers to loss of inputs because of natural processes

such as evaporation or oxidation Spoiled units cannot be

economically reworked to bring them up to standard Defective units can e economically reworked because the incremental revenueexceeds the incremental cost of the rework Both spoiled and defective units do not meet quality specifications upon

inspection

3 A tolerated loss level may be set because losses are inherent in

the production process (e.g., shrinkage) or there are known

defects in materials used or in production processes For

example, management may know that a particular production processperforms within tolerances only 99.5 percent of the time

Accordingly, management may allow for 5 defects out of every 1,000 units produced Although management could invest in

technology that would reduce the level of defects, the new

technology may be too costly relative to the existing level of defects With this cost/benefit analysis, management has

concluded that a certain level of defects is preferred to no defects

165

4 Examples of defective units include the following: a car that

has been painted the wrong color; the delivery of personal

possessions to the wrong address by a moving company; an

incorrectly mounted transmission in a new automobile; a piece of lumber that has been cut too long for its intended application; and a fishing reel that has been assembled without a required bearing

Examples of spoiled products/services include the following:

a tire that that has treads which are irregularly positioned on the tire (e.g., treads that would not be parallel to the road); atax return prepared by an accounting firm that was audited by theIRS and determined to have large errors; a cake that has been cutinto pieces that are too small; a tree that died because it was trimmed so severely by a landscaping service; loss of a patient’ssight caused by a surgeon’s error during an operation

5 Normal loss refers to an expected reduction in production

quantity based on the production technology and production

practices of the company Abnormal loss refers to a quantity of loss above the normal loss quantity Normal loss creates an expected cost of production so the cost of such a loss is

inventoriable; abnormal spoilage cost is not expected, and, thus,

it is not inventoriable

6 Abnormal losses would be more likely to be preventable than

normal losses because abnormal losses are less likely to be

caused by factors that are inherent in the materials or

production methods For example, a known amount of material loss(waste) is to be expected if lower quality materials are

utilized However, any loss beyond the expected amount would likely be caused by other factors that are subject to management control, e.g., production errors

7 A continuous loss is one that occurs (more or less) uniformly

throughout the production process A discrete loss is one

that occurs at a specific stage or in a specific production

process

8 A discrete loss occurs at a specific point in the production

process For accounting purposes, discrete loss is assumed tooccur immediately prior to inspection In reality, the loss could have occurred anywhere before the inspection point and, thus, the lost units should have had no additional conversion (and/or, possibly, materials) added to them It is impossible

to have continuous monitoring for losses in most production

processes, so conversion costs are incurred until inspection and assigned to all units that have passed the inspection

point (even though some units that have not reached the

inspection point could also be lost)

9 Any time a decline in the value of an asset occurs that is

unexpected, it is considered a loss of the period Abnormal losses are unplanned for and are in excess of normal losses Therefore, the cost associated with them should not be

considered a product cost and should not be allocated to good production The units themselves have no value and cannot be considered assets, so their costs are expired and belong on the income statement The cost is removed by debiting a loss account (such as "Loss from Abnormal Spoilage") and crediting Work in Process Inventory

10 The method of neglect requires no specific computations

regarding spoiled units; all costs are assigned to good units.The cost of spoiled units that have been found at an

inspection point will be assigned to all units that have

passed the inspection point Thus, the method of neglect

assigns spoilage costs by simply ignoring (neglecting) the spoiled units

The method of neglect is appropriate if loss is considered to be incurred continuously and is considered

normal

11 The method of neglect raises the cost per equivalent unit

because no costs are assigned to the spoiled units

Therefore, good units bear all costs, including the costs of producing the spoiled units

12 If spoilage is incurred for all (or most) jobs in a job order

costing system, the estimate of overhead used in setting the predetermined overhead rate should include an amount for the net cost of spoilage This will allow the cost of normal, general spoilage to be spread over all jobs produced If spoilage is related to a single job, the cost of that spoilageshould be assigned to the job that gave rise to it If any abnormal spoilage is incurred in a job order system, its cost should be assigned to the period as a loss

13 Accretion is an increase in the number of units or the volume

of a product that occurs through the addition of materials (e.g., water or other fluids) or through processing (e.g., heat causing expansion) Although the total cost of the

predecessor department is unaffected, the cost per unit

calculated by the predecessor department would decline in the successor department because of the increase in units

14 The cost per unit might have declined in the second department

because of an increase in the number of units caused by the addition of materials or the expansion of the units

transferred in If the company manufactures bread, the rising

of the dough would cause an increase in the volume of dough transferred in from the Mixing Department

15 If the defects are considered normal, the treatment of rework

costs depends on whether an actual or a normal cost system is

in effect If an actual cost system is used, the rework costswill be added to the component costs of the period and be allocated to all units completed In a normal cost system, the rework costs will have been estimated and included in the development of the overhead application rate; actual rework costs would be assigned to Manufacturing Overhead

If the defects are abnormal, the costs of production and rework costs for the defective units should be accumulated andassigned to a loss account

16 The important managerial concern is to control spoilage and

defective work rather than to account for it Measuring its cost is the first step in controlling spoilage/defects Usingthe method of neglect or otherwise spreading the cost of the lost units to good production minimizes the degree of control that can be exerted by management

17 Certain fluctuations occur in any production process

Statistical process controls can be used to determine if

fluctuations in a process are within normal and tolerable limits, or exceed tolerable limits In short, the SPC methodscan be used to determine whether a process is in control SPCcharts can also be used as indicators of the points at which the process is out of control and thus helps managers

understand why fluctuations occur in a process so that actionscan be taken to reduce such fluctuations

18 Each student will have a different answer No solution

20 a Annual cost of spoilage = 200 × 50 × $8.50 =

$85,000

Alfred would be able to save up to $85,000 per year

by purchasing the regulator The amount he would pay would be based on the expected life of the regulator and (in a discounted cash flow framework) on the cost of capital of the firm In addition to these factors, Alfred would want to consider how long the company intends to keep the machinery that currently prints the packing boxes, the costs of operating and installing the regulator, the costs of training personnel to operate it and the utility and maintenance costs for the machine (ifdifferent from those currently experienced)

be to purchase all of its boxes in a single transaction rather than in 12 different batches In such a case, thetotal spoilage cost incurred would only be $425 (50 boxes

× $8.50)

d The spoilage cost-per-box figures differ substantially because of the number of units produced in the batches In part (b), the batch costs of spoilage were spread over 550 good units; in part (c), the costs

of spoilage for each batch were spread over only 20 units

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

b 60,000 × 0.05 = 3,000 units

c Abnormal loss = Total units – (Completed Units + EI units

+ Normal loss) = 70,000 - (58,200 + 8,000 + 3,000) = 70,000 – 69,200 = 800 units

d Units Material Conversion

Beginning inventory (10%) 10,000Units started 60,000Units to account for 70,000Transferred out 58,200 58,200 58,200Ending inventory (60%) 8,000 8,000 4,800Normal shrinkage 3,000

Abnormal shrinkage 800 800 800Units accounted for 70,000 67,000 63,800

22 a - d Units Material Conversion

Beginning inventory (20%; 30%) 8,000

Gallons to account for 188,000

Beginning inventory completed 8,000 6,400 5,600Gallons started and completed 174,600 174,600 174,600

Total gallons transferred 182,600

f Cost of abnormal spoilage is treated as a period cost

23 a Units Material Conversion

Beginning inventory 40,000

Pounds to account for 465,000

BI completed 40,000 0 6,000Started & completed 405,000 405,000 405,000Ending inventory 10,000 10,000 2,500Normal spoilage 2,000

Abnormal spoilage 8,000 8,000 5,600Units accounted for 465,000 423,000 419,100

b Ending inventory:

Material (10,000 × $2.40) $24,000 Conversion (2,500 × $4.70) 11,750

c Abnormal spoilage:

Material (8,000 × $2.40) $19,200 Conversion (5,600 × $4.70) 26,320 Total cost (treated as a loss) $45,520

24 a Normal spoilage allowed = 30,000 pounds × 8% = 2,400 pounds

Units Material ConversionBeginning inventory (30%) 9,000

Pounds to account for 39,000

Beginning inventory completed 9,000 0 6,300Pounds started and completed 22,500 22,500 22,500Total pounds completed 31,500

Ending inventory (20%) 5,400 5,400 1,080Normal spoilage 2,100 0 0Pounds accounted for (FIFO) 39,000 27,900 29,880

b Total Material ConversionBeginning inventory cost $ 6,200

Cost to complete (conversion: 6,300 × $0.30) 1,890

Total cost of beginning inventory $ 8,090

Started & completed (22,500 × $0.65) 14,625 $22,715Ending inventory:

25 a Normal spoilage = 20,000 ÷ 20 = 1,000 units

Units Material ConversionBeginning inventory 4,000

Units to account for 24,000

Beginning inv completed 4,000 4,000 4,000Started & completed 16,000 16,000 16,000Ending inventory 3,000 3,000 1,800Normal spoilage 1,000 1,000 1,000Units accounted for (WA) 24,000 24,000 22,800

b Total Material Conversion Beginning inventory $ 24,592 $ 12,252 $12,340 Current period 175,448 112,548 62,900 Total costs $200,040 $124,800 $75,240

Cost per EUP $8.50 $5.20 $3.30

a & b Units Material Conversion

Beginning inventory 500,000 500,000 500,000 Pounds started and completed 10,900,000 10,900,000 10,900,000

2 The memo should discuss how evaporation would lead

to a loss of water content in the potato Such losses are very common in vegetable processing

Beginning inventory 750

Units to account for 18,000

Beginning inventory completed 750 750 750Units started and completed 14,250 14,250 14,250

Defective units 1,800 1,800 1,800Units accounted for 18,000 18,000 17,640

b Regular Pro- Rework Total Cost duction Cost + Cost = Cost ÷ EUP = per Unit

DM $126,000 $3,240 $129,240 18,000 $7.18Conv $41,013 $1,323 $42,336 17,640 $2.40

c The actual costs of reworking would be charged to manufacturing overhead and the overhead application rate(s)would include a charge for rework

d Abnormal rework costs are accumulated and assigned to a

loss account

Regular Pro- Cost duction Cost EUP per Unit

DM $126,000 18,000 $7.00Conv $41,013 17,640 $2.325

28 a Appraisal; the food can be compared to the

customer’s order before delivery to the table

b Prevention; this error could be prevented by marking an

invoice “paid” at the time a check is issued

c Prevention; only actions taken prior to the breakage

would be effective in minimizing the loss

d Although neither method would be entirely effective,

prevention measures could be taken such as using technology that minimizes evaporation losses

e Prevention; all parts could be made such that only the

correct mates could be fastened together

f Appraisal; the error would be discovered by visual

inspection

Problems

29 a Total shrinkage = Total units to account for – Units

transferred – Ending inventory = (1,000 + 125,000) – 110,000 – 3,000 = 126,000 – 113,000 = 13,000

b Maximum normal shrinkage = 125,000 × 10% = 12,500 pounds

For accounting purposes, it is simply ignored, which means its costs will be spread over all good units produced

c Abnormal spoilage = 13,000 – 12,500 = 500 pounds Its costs will be treated as a loss of the period

d

Total Material Conversion

Beginning inventory 1,000

Started 125,000

To account for 126,000

Beginning inventory 1,000 1,000 1,000Started and completed 109,000 109,000 109,000Ending inventory 3,000 3,000 900Normal spoilage 12,500

Abnormal spoilage 500 500 500

Accounted for (WA) 126,000 113,500

Material Conversion Total

Beginning WIP costs $ 1,020 $ 195 $ 1,215Current costs 118,155 33,225 151,380Total costs $119,175 $ 33,420 $152,595Divide by EUP 113,500 111,400

Cost per EUP $1.05 $0.30 $1.35

Cost Assignment

Transferred out (110,000 × $1.35) $148,500Ending inventory:

Material (3,000 × $1.05) $3,150 Conversion (900 × $0.30) 270 3,420Abnormal spoilage (500 × $1.35) 675 Total cost accounted for $152,595

e The easiest way to decrease shrinkage loss is to buy

higher quality material Higher quality ground beef would have a lower fat content and consequently would shrink less Although raw material prices would

increase, the cost of conversion per pound of finished product would likely decline because of the reduced loss

30 a Units completed = (BI + Started) – EI – Defects = (5,000

+ 70,000) – 6,000 – 400 = 75,000 – 6,400 = 68,600

b Maximum normal spoilage = 70,000 × 1% = 700 units

Beginning inventory 5,000

Started 70,000

To account for 75,000

Beginning inventory 5,000 5,000 5,000 5,000Started and completed 63,600 63,600 63,600 63,600Ending inventory 6,000 6,000 0 4,200Normal spoilage 400 400 0 380Abnormal spoilage 0 0 0 0

Accounted for (WA) 75,000 75,000 68,600 73,180

Material Boxes Conversion TotalBeginning WIP costs $ 21,900 $ 0 $ 7,680 $ 29,580Current costs 315,600 75,460 270,404 661,464Total costs $337,500 $75,460 $278,084 $691,044Divide by EUP 75,000 68,600 73,180

Cost per EUP $4.50 $1.10 $3.80 $9.40

Good units completed (68,600 × $9.40) $644,840

Normal spoilage

Material (400 × $4.50) $1,800Conversion (380 × $3.80) 1,444 3,244Total cost of good units $648,084

Cost per unit = $648,084 ÷ 68,600 = $9.45 rounded

If there would have been no defective units, the cost would have been $9.40 because the method of neglect would not have been used

d Material (6,000 × $4.50) $27,000

Conversion (4,200 × $3.80) 15,960 Total cost of ending WIP $42,960

31 a

Matthew ToolsCost of Production Report

for AugustBeginning inventory 1,000Transferred in 50,800Units to account for 51,800Normal spoilage (650)Abnormal spoilage (350)Ending inventory (1,800)Transferred out 49,000 Units Trans In Material Labor OH

BI 1,000 1,000 1,000 1,000 1,000Units S & C 48,000 48,000 48,000 48,000 48,000Ending inventory 1,800 1,800 0 720 1,170Normal spoilage 650 650 0 650 650Abnormal spoilage 350 350 0 350 350Units accounted for 51,800 51,800 49,000 50,720 51,170 Total Trans In Material Labor OH

BI cost $ 7,355 $ 6,050 $ 0 $ 325 $ 980Current costs 235,557 149,350 12,250 23,767 50,190Total costs $242,912 $155,400 $12,250 $24,092 $51,170Divided by EUP 51,800 49,000 50,720 51,170Cost per EUP $4.725 $3 $0.25 $0.475 $1.00Cost Assignment

Transferred out

Good units (49,000 × $4.725) $231,525

Normal spoilage (650 × $4.475) 2,909 $234,434Ending inventory:

b Loss on Abnormal Spoilage 1,566

Work in Process - Grinding 1,56632

Big Piney FurnitureCost of Production Report

for April 2003Beginning inventory 2,000

Beginning inv $ 32,312 $ 15,020 $ 2,130 $ 4,118 $ 11,044Current costs 310,714 137,080 13,800 46,270 113,564 Total $343,026 $152,100 $15,930 $50,388 $124,608Divide by EUP 16,900 13,500 14,820 14,160Cost per EUP $22.38 $9 $1.18 $3.40 $8.80Cost Assignment

Transferred out

Good units (13,300 × $22.38) $297,654

Normal spoilage (200 × $22.38) 4,476 $302,130 Ending inventory:

Transferred in (3,000 × $9) $ 27,000

Labor (1,200 × $3.40) 4,080

Overhead (600 × $8.80) 5,280 36,360 Abnormal spoilage

Transferred in (400 × $9) $ 3,600

Labor (120 × $3.40) 408

Overhead (60 × $8.80) 528 4,536

Finished Goods Inventory 302,130

WIP Inventory-Lamination 302,130Loss on Abnormal Spoilage 4,536

WIP Inventory-Lamination 4,536

Big Piney FurnitureCost of Production Report

for April 2003Beginning inventory 2,000

Beginning inv $ 32,312

Current costs 310,714 $137,080 $13,800 $46,270 $113,564 Total $343,026

Divide by EUP 14,900 11,500 13,220 12,760Cost per EUP $22.80 $9.20 $1.20 $3.50 $8.90Cost Assignment

Transferred in (3,000 × $9.20) $ 27,600

Labor (1,200 × $3.50) 4,200

Overhead (600 × $8.90) 5,340 37,140 Abnormal spoilage

Transferred in (400 × $9.20) $ 3,680

Labor (120 × $3.50) 420

Overhead (60 × $8.90) 534 4,634

Finished Goods Inventory 301,252

WIP Inventory-Lamination 301,252Loss on Abnormal Spoilage 4,634

WIP Inventory-Lamination 4,634

34 Maximum normal spoilage = 70,000 × 3% = 2,100 units

Ronald CompanyCost of Production Report

for May 2003 Units Material ConversionBeginning inventory 5,600

Total Material Conversion

Beg inventory cost $ 7,632 Current costs 106,168 $74,400 $31,768

Material (7,500 × $1) $7,500

Conversion (2,500 × $0.44) 1,100 8,600Abnormal spoilage

Material (400 × $1) $ 400

Conversion (400 × $0.44) 176 576