Question
The Hartland Corporation manufactures glassware for several big-box retailers. Hartland ordinarily experiences normal spoilage at a rate of 3% of normal input. The company recognizes
The Hartland Corporation manufactures glassware for several big-box retailers. Hartland ordinarily experiences normal spoilage at a rate of 3% of normal input. The company recognizes normal spoilage during the budgeting process and classifies its cost as manufacturing overhead when determining the overhead rate. Recently, Hartland completed an order from one of its customers. A total of 153,500 units were started and 8,000 units were spoiled, yielding 145,500 quality units. The spoiled units were sold at $3 per unit.
Given the higher-than-expected spoilage, the production manager argues that all of the spoiled units should be considered normal for this order. Costs were as follows for the 153,500 units started:
Direct Materials | $1,134,000 |
Direct Labor | $850,000 |
Manufacturing Overhead | $1,700,000 |
In the initial post:
- Calculate the units attributable to normal and to abnormal spoilage.
- Compute the effect on gross profit for this order if all spoiled units are to be considered normal as opposed to accounting for normal and abnormal units separately. Which method results in a higher gross profit?
- Brainstorm at least two potential reasons that resulted in higher spoilage for this order.
- Assume you are Hartland's controller and describe the ethical considerations of reporting spoilage correctly to the production manager. Refer to the Standards of Ethical Conduct for Management Accountants from the Institute of Management Accountants to justify your response.
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