A company which manufactures industrial pumps has decided to computerise its stock control system. In doing so it is proposed to change the accounting procedures.

The current system is to:

(i) value all stock on a FIFO basis

(ii) identify separately the cost of rejected material

(iii) charge the cost of rejects to a scrap account, and credit this account with the value of scrap sold

(iv) debit the balance on the scrap account to the finished goods account The proposed new system is to:

(i) value all stock on an average cost basis

(ii) average out the cost of defective material over the good production in each department

(iii) credit the value of the scrap material to the department in which the rejection occurs The following data are given for component X.

Component X is machined from a bought-out casting. There are three operations in the machining department with direct wages in the proportion of 3:2:5. Direct expense is incurred equally by each operation.
Inventory at 1 October 19X9:
Costs:
Units:
During October 19X9:
Costs incurred:
Units:
Inventory at 31 October 19X9:
Units:
Direct material Direct wages Direct expense 600 not started Operation 1 00 completed 1 200 completed 2 Direct material Direct wages Direct expenses 5400 purchases 4800 transferred to finished goods 700 rejected from October castings at the end of:
Operation No.
1 200 2 200 3 300 Operation 500 completed 1 300 completed 2 $
16000 1300 500 $
108000 59730 16500 All scrapped material is sold, and has a net value equivalent to 20 of the original direct material cost.
REQUIRED A. For component X, from the data given for the month of October 19X9, calculate:

(a) machining cost per unit of production during October showing the individual operations separately

(b) for the current system:
(i) cost of material transferred from the machining department to the finished goods stores (ii) value of machining department inventory at 31 October

(c) for the proposed new system:
(i) cost of material transferred from the machining department to the finished goods stores (ii) value of machining department inventory at 31 October Unit costs should be calculated in $to two decimal places, and any rounding differences should be included in the cost of materials transferred out.
B. Write brief notes on the effect of introducing the new system.
ICMA. PS, Part Ill. Management Accounting, November 1979.