Appendix: Normal and Abnormal Spoilage

Cuero Company produces leather strips for western belts using three processes: cutting, design and coloring, and punching. The weighted average method is used for all three departments. The following information pertains to the Design and Coloring Department for the month of June:

There was no beginning work in process.

There were 560,000 units transferred in from the Cutting Department.

Ending work in process, June 30: 70,000 strips, 80 percent complete with respect to conversion costs.

Units completed and transferred out: 462,000 strips. The following costs were added during the month:

Transferred in	$2,800,000
Direct materials	840,000
Conversion costs	1,092,000

Direct materials are added at the beginning of the process.

Inspection takes place at the end of the process. All spoilage is considered normal.

Required:

Question Content Area

1. Calculate equivalent units of production for transferred-in materials, direct materials added, and conversion costs.

	Equivalent Units
Transferred In
Direct Materials
Conversion Costs

2. Calculate unit costs for the three categories of Requirement 1. Round your answers to the nearest cent.

	Unit Cost
Transferred In
Direct Materials
Conversion Costs
Total unit cost

3. What is the total cost of units transferred out?

What is the cost of ending work-in-process inventory?

Question Content Area

4. Assume that all spoilage is considered abnormal. How should abnormal spoilage be treated? Give the journal entry to account for the cost of the spoiled units.

blank	CashLoss from Abnormal SpoilageWork in Process-Design and Coloring	- Select -
	CashLoss from Abnormal SpoilageWork in Process-Design and Coloring		- Select -

Question Content Area

Some companies view all spoilage as abnormal. Explain why.

The abnormal spoilage, the cost of 23,380 units would be assigned to the

abnormal loss accountcash accountcost of goods transferred out

, and the cost of the other 4,620 units would be assigned to the

abnormal loss accountcash accountcost of goods transferred out

.

Question Content Area

5. For Requirement 4, provide an example of each data analytic type (descriptive, diagnostic, predictive, and prescriptive) with a brief justification (see Exhibits 2.5 and 2.6, pp. 37, 40, for a review of data analytic types).

The journal entry for abnormal spoilage describes what the loss is _______.

Explaining why companies view all spoilage as abnormal is __________.

Using the 1 percent rule allows the firm to predict normal spoilage is ____________.

Total quality management would say that all spoilage should be treated as abnormal and assigned to a loss account.