Prudoe Compounds produces a variety of chemicals that are used by auto manufacturers in their painting processes.

Question:

Prudoe Compounds produces a variety of chemicals that are used by auto manufacturers in their painting processes. With each batch of chemicals produced, some spoilage naturally occurs. Prudoe Compounds includes normal spoilage cost in its predetermined OH rate. For 2010, Prudoe Compounds estimated the following:

Overhead costs, other than spoilage ......$600,000

Estimated spoilage cost ............ 50,000

Estimated sales value of spoiled materials .... 20,000

Estimated direct labor hours .......... 40,000

a. Prudoe Compounds applies overhead based on direct labor hours. Calculate the predetermined OH rate for 2010.

b. For a batch of chemicals mixed in May 2010, the firm experienced normal spoilage on Job #788. The cost of the spoiled material amounted to $1,730 and the company estimated the salvage value of those materials to be $496. Journalize the entry for the spoilage.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...