Question 2:

Sama Company is a contract manufacturer for a variety of pharmaceutical and over-the-counter products. It has a reputation for operational excellence and boasts a normal spoilage rate of 2% of normal input. Normal spoilage is recognized during the budgeting process and is classified as a component of manufacturing overhead when determining the overhead rate. Lynn Sanger, one of Flextrons quality control managers, obtains the following information for Job No. M102, an order from a consumer products company. The order was completed recently, just before the close of Flextrons fiscal year. The units will be delivered early in the next accounting period. A total of 128,500 units were started, and 6,000 spoiled units were rejected at final inspection, yielding 122,500 good units. Spoiled units were sold at $4 per unit. Sanger indicates that all spoilage was related to this specific job.

The total costs for all 128,500 units of Job No. M102 follow. The job has been completed, but the costs are yet to be transferred to Finished Goods.

Direct materials $ 979,000

Direct manufacturing labor 840,000

Manufacturing overhead 1,650,500

Total manufacturing costs $3,469,500

Required:

1. Calculate the unit quantities of normal and abnormal spoilage.

2. Prepare the journal entries to account for Job No. M102, including spoilage, disposal of spoiled units, and transfer of costs to the Finished Goods account.

3. Flextrons controller, Vince Chadwick, tells Marta Suarez, the management accountant responsible for Job No. M102, the following: This was an unusual job. I think all 6,000 spoiled units should be considered normal. Suarez knows that the work involved in Job No. M102 was not uncommon and that Samas normal spoilage rate of 2% is the appropriate benchmark. She feels Chadwick made these comments because he wants to show a higher operating income for the year.

Prepare journal entries, similar to requirement 2, to account for Job No. M102 if all spoilage were considered normal. How will operating income be affected if all spoilage is considered normal?