Marvel, Inc. had 500 units in beginning inventory (5/1). During May, they starte
ID: 2449485 • Letter: M
Question
Marvel, Inc. had 500 units in beginning inventory (5/1). During May, they started 9,000 units. They completed and transferred out 8,500 units. They had 500 uncompleted units at 5/31. Their normal spoilage rate is 3%
How many units were defective (spoiled) during May?
How many defective units would be considered normal?
If the cost per equivalent unit of production is $14 in May,what is the total cost of abnormal spoilage?
How did the cost of the abnormal spoilage effect net income?
Increase
Decrease
No effect
Explanation / Answer
Part A)
The total number of defective (spoiled) units can be calculated as follows:
Defective (Spoiled Units) = Beginning Inventory + Units Started During the Period - Units Completed and Transferred - Closing Inventory
________
Using the information provided in the question, we get,
Defective (Spoiled Units) = 500 + 9,000 - 8,500 - 500 = 500 units
________
Part B)
SInce, 3% of the production is considered to be as normal spoilage, out of 500 units, 255 units (8,500*3%) would be treated as normal spoilage during the month. The basis for calculating normal spoilage is units completed and transferred out. Units introduced during the period is not take into consideration for arriving at normal spoilage.
Answer for Part B is 255 units.
________
Part C)
The total cost of abnormal spoilage can be calculated as follows:
Cost of Abnormal Spoilage = Abnormal Spoilage*Equivalent Cost Per Unit
________
Abnormal Spoilage = Defective Units - Normal Spoilage = 500 - 255 = 245 units
Cost of Abnormal Spoilage = 245*14 = $3,430
________
Part D)
Cost of abnormal loss is treated as a loss and reported seperately in the income statement. It, therefore, has an effect of reducing net income.
Decrease is the answer for Part D)
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