Job costing, spoilage ethics. (CMA, adapted) The Richport Company manufactures products that often require specification changes or modifications to meet its customers’ needs. Still, Richport has been able to establish a normal spoilage rate of 2.5% of normal input. Normal spoilage is recognized during the budgeting process and classified as a component of manufac¬

turing overhead when determining the overhead rate.

Rose Duncan, one of Richport’s inspection managers, obtains the following informa¬

tion for Job No. N1192-122 that was recently completed. A total of 122,000 units were started, and 5,000 units were rejected at final inspection yielding 117,000 good units. Duncan noted that 900 of the first units produced were rejected because of a design defect that was considered very unusual; this defect was corrected immediately, and no further units were rejected for this reason. These units were disposed of after incurring an additional cost of

$1,440. Duncan was unable to identify a rejection pattern for the remaining 4,100 rejected units. These units can be sold at $8.40 per unit.

The total costs for all 122,000 units ofJob No. N1192-122 are presented here. The job has been completed, but the costs have yet to be transferred to finished goods.

Direct materials $2,635,200 Direct manufacturing labour 2,196,000 Manufacturing overhead 3,513,600 Total manufacturing costs $8,344,800 Required 1. Calculate the unit quantities ofnormal and abnormal spoilage.

2. Prepare the appropriate journal entry (or entries) to properly account for Job No.

N1192-122 including spoilage, disposal, and transfer of costs to finished goods control.

3. Richport Company has small profit margins and is anticipating very low operating income for the year. The controller, Thomas Rutherford, tells Martha Gonzales, the management accountant responsible forJob No. N1192-122, the following: “This was an unusual job. I think all 5,000 spoiled units should be considered normal.” Martha knows that similar jobs had been done in the past and that the spoilage levels for Job N1192-122 were much greater than in the past. She feels Thomas made these comments because he wants to show higher operating income for the year.

a. Prepare the journal entry (or entries), similar to the journal entry (or entries) prepared in requirement 2, to account for Job No. N1192-122 if all spoilage were considered normal. By how much will Richport’s operating income be affected if all spoilage is considered normal?

b. What should Martha Gonzales do?