Weighted-average method, inspection at 80% completion. (A. Atkinson) The Horshei

Question

Weighted-average method, inspection at 80% completion. (A. Atkinson) The Horsheim Company is a furniture manufacturer with two departments: molding and finisihing. The company uses the weighted-average method of process costing. In August, the following data were recorded for the finishing department:

Units of beginning work in process inventory     25,000

% of completion of beginning work in process units     25%

Cost of direct materials in beginning work in process     $0

Units started     175,000

Units completed     125,000

Units in ending inventory     50,000

% completion of ending WIP units     95%

Spoiled units     25,000

Total costs added during current period:

     Direct materials     $1,638,000

     Direct MFG labor     $1,589,000

     MFG OH     $1,540,000

WIP, beginning:

     Transferred-in costs     $207,250

     Conversion costs         $105,000

Cost of units transferred in during current period     $1,618,750

Conversion costs are added evenly during the process. Direct material costs are added when production is 90% complete. The inspection point is at the 80% stage of production. Normal spoilage is 10% of all good units that pass inspection. Spoiled units are disposed of at zero net disposal value.

1. For August, summarize total costs to account for and assign these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.

2. What are the managerial issues involved in determining the percentage of spoilage considered normal? How would your answer to requirement 1 differ if all spoilage were treated as normal?

Explanation / Answer

1. For August, summarize total costs to account for, and assign these costs (1) to units completed and transferred out (including normal spoilage), (2) to abnormal spoilage, and (3) to units in ending work in process. Equivalent Units Horsheim Company: Finishing Department Cost of Production Report Physical Flow Transferred-in D/M Conversion Degree of Completion Added at the: Beginning 90% Evenly Units to Account for: Trans-in D/M Conversion BWIP 100% 0% 25% 25,000 Transferred-in to Finishing Department 1,75,000 Total 2,00,000 Units Accounted for: 1,00,000 Completed: 1,25,000 Units 1,00,000      From BWIP 0% 100% 75% 25,000 0 25,000 18,750 B      Started And Completed 100% 100% 100% 1,00,000 1,00,000 1,00,000 1,00,000 C N. Spoilage (10% of good units that pass inspect. pt.) 100% 0% 80% 17,500 17,500 0 14,000 Abnormal Spoilage (Inspection at 80%) 100% 0% 80% 7,500 7,500 0 6,000 EWIP 100% 100% 95% 50,000 50,000 50,000 47,500 D Total 2,00,000 Calculation of Equivalent Units FIFO Equivalent Units 1,75,000 (A) 1,75,000 1,75,000 1,86,250 Plus BWIP EU from previous period 25,000 0 6,250 A Weighted Average Equivalent Units (B) 2,00,000 1,75,000 1,92,500 Costs to Account for: Trans-in D/M Conversion Total BWIP $2,07,250 $0 $1,05,000 $3,12,250 Current Costs Added This Period (1) 16,18,750 16,38,000 31,29,000 63,85,750 Total (2) $18,26,000 $16,38,000 $32,34,000 $66,98,000 Cost per Equivalent Unit: Weighted Average (2) / (B) $9.130 $9.360 $16.800 $35.290 Costs Accounted for: Weighted Average Method Costs Associated with Completed Units 1,25,000 $11,41,250.00 $11,70,000 $21,00,000 $44,11,250.00 $35.290 Normal Spoilage $1,59,775.00 $0 $2,35,200 $3,94,975.00 $22.570 Abnormal Spoilage $68,475.00 $0 $1,00,800 $1,69,275.00 $22.570 Cost Assigned to EWIP Units $4,56,500.00 $4,68,000 $7,98,000 $17,22,500.00 Total Costs Accounted for $18,26,000.00 $16,38,000 $32,34,000 $66,98,000.00 Allocation of Normal Spoilage to EWIP and Transferred-out units: EWIP Trans-out Total Physical good units which passed through the inspection point this period 50,000 1,25,000 1,75,000 Cost Assigned to EWIP Units Costs Associated with Completed Units which are T/O: Trans-in D/M Conversion Total Trans-in D/M Conversion Total Grand Total Pre -allocation balance $4,56,500 $4,68,000 $7,98,000 $17,22,500 $11,41,250.00 $11,70,000 $21,00,000 $44,11,250.00 $61,33,750.00 Allocation of normal spoilage $45,650 $0 $67,200 $1,12,850 $1,14,125.00 $0 $1,68,000 $2,82,125.00 $3,94,975.00 Post-allocation balance $5,02,150 $4,68,000 $8,65,200 $18,35,350 $12,55,375.00 $11,70,000 $22,68,000 $46,93,375.00 $65,28,725.00 $65,28,725.00 Abnormal Spoilage $37.55 $1,69,275.00 Total costs accounted for $66,98,000.00 Journal Entries for Weighted Average Methods Weighted Average Method Dr Cr Work-in-Process -- Finishing Department 16,18,750     Work-in-Process -- Molding Department 16,18,750         To record the transfer of partially completed units to the         finishing department for additional production activities. Work-in-Process -- Finishing Department 16,38,000     Direct Materials Inventory 16,38,000         To record direct materal usage for the month of April Work-in-Process -- Finishing Department 31,29,000     various accounts 31,29,000         To record conversion costs for the month of April Finished Goods Inventory 46,93,375.00     Work-in-Process -- Finishing Department 46,93,375.00         To record the transfer of finished units to the         finishing goods inventory. Abnormal Production Loss -- Finishing Department 1,69,275.00     Work-in-Process -- Finishing Department 1,69,275.00          To record abnormal loss Weighted Average WIP - Finishing Department 3,12,250 Note: Cost to account for $66,98,000 16,18,750           Cost accounted for $66,98,000 16,38,000 46,93,375.00 $37.5470 31,29,000 1,69,275.00 $22.5700 18,35,350 2. What are the managerial issues involved in determining the percentage of spoilage considered normal? A supervisor who wants to show better operating income performance might categorize more of the spoilage as normal, thereby reducing the amount that must be written off against income as an abnormal spoilage loss. Managers must stress the value of consistent and unbiased estimates of normal spoilage percentages and drive home the importance of pursuing ethical actions and reporting the correct income figures, regardless of the short-term consequences of doing so. 3. How would your answer to requirement 1 differ if all spoilage were treated as normal? If all 25,000 units spoiled were considered normal spoilage, the $169,275 in abnormal spoilage would no longer exist and would not be a period expense for August. Instead, it would be reassigned as normal spoilage to the cost of goods completed and transferred out, as well as the ending work in process (because the latter has also passed the point of inspection). The simplest way to calculate the effect is to divide the current abnormal spoilage cost of $169,275 in the ratio of the number of good units currently in each category (125,000 for units completed and transferred out and 50,000 for units in ending work in process). The new amounts would therefore be given as follows: Cost of goods completed and transferred out:            $4,693,375 + ($169,275)(125,000/175,000) = $4,814,285.71 Cost of goods in ending work-in-process inventory: $1,835,350 + ($169,275)(50,000/175,000)    = $1,883,714.29. Proof: Change cell J50 to "25,000".

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