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You are on the audit team that audits Redwood Furniture Company, a new family owned business which manufactures wooden furniture such as tables and chairs.

You are on the audit team that audits Redwood Furniture Company, a new family owned business which manufactures wooden furniture such as tables and chairs. The owner, who takes care of the company's accounting, has a fair amount of knowledge concerning cost accounting for direct labor, direct material and overhead. However, he does not know the proper way of accounting for spoilage that occurs in this type of manufacturing. You are asked to prepare a brief memo explaining the nature of spoilage and how it is properly accounted for.

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