Sussex Syrup Company Ltd (SSC) makes a unique syrup using cane sugar and local herbs. The syrup is sold in small bottles and is prized as a flavouring for drinks and for use in desserts. The bottles are sold for 10 each. The first stage in the production process is carried out in the Mixing department, which removes foreign matter from the raw materials and mixes them in the proper proportions in large vats. The company uses the weighted-average method in its process costing system. Information on work in the Mixing Department for the month of April is shown below:

While collecting information to prepare the mixing department process cost report for April, Ethan learns that 10,000 of the completed units were later considered spoilt and discarded. The previous month there was no spoilage. He is puzzled by the high quantity of spoilage during April. Ethan discusses the spoilage with the mixing department manager. She tells him 3000 units were spoiled because of a problem that occurs three or four times a year with the quality of the raw materials. The problem causes a slight crystallization in the number of units. In addition, a new employee accidentally programmed the mixing machine incorrectly, spoiling 7000 units during April. All spoilage is discovered when units are turned out at the end of the mixing process (when they are 100% complete).

After further discussion with the mixing department manager, Ethan learns that approximately 3% of units throughout the year are spoilt due to crystallization. Thus, he decides that for the raw material problem, up to 3% of units produced should be accounted for as normal spoilage. He decides that the spoilage caused by incorrect equipment setting should be account for as abnormal spoilage because the manager tells him that little employee turnover exists, and this probably rarely occurs.

SSC has just been acquired by another company, and the management of the acquiring company would like some additional information about the operations of SSC, particularly with reference to the information on the work done in April. In addition, the management is shocked by the amount of spoilage that occurs in the production process of SSC. As such, the management of the acquiring company is seeking answers in relation to the following questions.

The beginning inventory consisted of the following costs: materials, 67,800; and conversion cost, 30,200. The costs added during the month consisted of: materials, 579,000; and conversion cost, 248,000.

Required:

(i) What is the total cost of the 10,000 units that were spoilt and discarded?

(iI) With reference to additional concern of the management of the acquiring company, discuss five costs that may result from spoilage due to manufacturing? Where possible, illustrate your discussion with the data from the case.

Quantity Schedule Units to be accounted for: Work in progress inventory, 1 April (90% materials. 80% conversion cost added last month) Started into production Total units 50,000 400,000 450,000 Units accounted for as follows: Transferred to the next department 380,000 Work in progress inventory, 30 April (70% materials, 55% conversion cost added this month) 70.000 Total units 450,000 Total Cost Cost to be accounted for: Work in progress inventory, 1 April Cost added during the month Total cost 98,000 827 000 925.000 Cost reconciliation Cost accounted for as follows: Transferred to the next department Work in progress inventory, 30 April Total cost 805,600 119,400 925.000 Quantity Schedule Units to be accounted for: Work in progress inventory, 1 April (90% materials. 80% conversion cost added last month) Started into production Total units 50,000 400,000 450,000 Units accounted for as follows: Transferred to the next department 380,000 Work in progress inventory, 30 April (70% materials, 55% conversion cost added this month) 70.000 Total units 450,000 Total Cost Cost to be accounted for: Work in progress inventory, 1 April Cost added during the month Total cost 98,000 827 000 925.000 Cost reconciliation Cost accounted for as follows: Transferred to the next department Work in progress inventory, 30 April Total cost 805,600 119,400 925.000