spoilage, rework, and scrap

CHAPTER 18 SPOILAGE, REWORK, AND SCRAP

18-1 Managers have found that improved quality and intolerance for high spoilage have lowered overall costs and increased sales.

18-2 Spoilage—units of production that do not meet the standards required by customers for good units and that are discarded or sold for reduced prices.

Rework—units of production that do not meet the standards required by customers for finished units that are subsequently repaired and sold as acceptable finished units.

Scrap—material left over when making a product. It has low sales value compared with the sales value of the product.

18-3 Yes. Normal spoilage is spoilage that arises under efficient operating conditions. Management plans for a specified amount of spoilage that it believes is inherent to the production process.

18-4 Abnormal spoilage is spoilage that is not expected to arise under efficient operating conditions. Costs of abnormal spoilage are "lost costs," measures of inefficiency that should be written off directly as losses for the accounting period.

18-5 Management effort can affect the spoilage rate. Many companies are relentlessly reducing their rates of normal spoilage, spurred on by competitors who, likewise, are continuously reducing costs.

18-6 Normal spoilage typically is expressed as a percentage of good units passing the inspection point. Given actual spoiled units, we infer abnormal spoilage as follows:

Abnormal spoilage = Actual spoilage – Normal spoilage

18-7 Accounting for spoiled goods deals with cost assignment, rather than with cost incurrence, because the existence of spoiled goods does not involve any additional cost beyond the amount already incurred.

18-8 Yes. Normal spoilage rates should be computed from the good output or from the normal input, not the total input. Normal spoilage is a given percentage of a certain output base. This base should never include abnormal spoilage, which is included in total input. Abnormal spoilage does not vary in direct proportion to units produced, and to include it would cause the normal spoilage count to fluctuate irregularly and not vary in direct proportion to the output base.

18-9 Yes, the point of inspection is the key to the assignment of spoilage costs. Normal spoilage costs do not attach solely to units transferred out. Thus, if units in ending work in process have passed inspection, they should have normal spoilage costs added to them.

18-10 No. If abnormal spoilage is detected at a different point in the production cycle than normal spoilage, then unit costs would differ. If, however normal and abnormal spoilage are detected at the same point in the production cycle, their unit costs would be the same.

18-1

18-11 No. Spoilage may be considered a normal characteristic of a given production cycle. The costs of normal spoilage caused by a random malfunction of a machine would be charged as a part of the manufacturing overhead allocated to all jobs. Normal spoilage attributable to a specific job is charged to that job.

18-12 No. Unless there are special reasons for charging normal rework to jobs that contained the bad units, the costs of extra materials, labor, and so on are usually charged to manufacturing overhead and allocated to all jobs.

18-13 Yes. Abnormal rework is a loss just like abnormal spoilage. By charging it to manufacturing overhead, the abnormal rework costs are spread over other jobs and also included in inventory to the extent a job is not complete. Abnormal rework is rework over and above what is expected during a period, and is recognized as a loss for that period.

18-14 A company is justified in inventorying scrap when its estimated net realizable value is significant and the time between storing it and selling or reusing it is quite long.

18-15 Company managements measure scrap to measure efficiency and to also control a tempting source of theft. Managements of companies that report high levels of scrap focus attention on ways to reduce scrap and to use the scrap the company generates more profitably. Some companies, for example, might redesign products and processes to reduce scrap. Others may also examine if the scrap can be reused to save substantial input costs.

18-16 (5-10 min.) Normal and abnormal spoilage in units.

1. Total spoiled units 12,000Normal spoilage in units, 5% × 132,000 6,600Abnormal spoilage in units 5,400

2. Abnormal spoilage, 5,400 × $10 $ 54,000Normal spoilage, 6,600 × $10 66,000Potential savings, 12,000 × $10 $120,000

Regardless of the targeted normal spoilage, abnormal spoilage is non-recurring and avoidable. The targeted normal spoilage rate is subject to change. Many companies have reduced their spoilage to almost zero, which would realize all potential savings. Of course, zero spoilage usually means higher-quality products, more customer satisfaction, more employee satisfaction, and various effects on nonmanufacturing (for example, purchasing) costs of direct materials.

18-2

18-17 (20 min.) Weighted-average method, spoilage, equivalent units (CMA, adapted).

Solution Exhibit 18-17 calculates equivalent units of work done to date for direct materials and conversion costs.

SOLUTION EXHIBIT 18-17Summarize Output in Physical Units and Compute Equivalent Units Weighted-Average Method of Process Costing with SpoilageGray Manufacturing Company for November 2003

(Step 1)Physical

(Step 2)Equivalent Units

Flow of ProductionUnits

(given)Direct

MaterialsConversion

Costs

Work in process, beginningStarted during current periodTo account forGood units completed and transferred out during current period:Normal spoilage* 100 × 100%; 100 × 100%Abnormal spoilage†

50 × 100%; 50 ×100%Work in process, ending‡

2,000 × 100%; 2,000 × 30%Accounted forWork done to date

1,00010,150 11,150

9,000100

50

2,000 11,150

9,000

100

50

2,000 11,150

9,000

100

50

600 9,750

*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.†Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.‡Degree of completion in this department: direct materials, 100%; conversion costs, 30%.

18-3

18-18 (20−25 min.) Weighted-average method, assigning costs (continuation of 18-17).

Solution Exhibit 18-18 calculates the costs per equivalent unit for direct materials and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.

SOLUTION EXHIBIT 18-18Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed, to Spoilage Units, and to Units in Ending Work in ProcessWeighted-Average Method of Process CostingGray Manufacturing Company, November 2003

TotalProduction

CostsDirect

MaterialsConversion

Costs

(Step 3) Work in process, beginning (given)Costs added in current period (given)Costs incurred to dateDivided by equivalent units of work done to dateEquivalent unit costs of work done to date

(Step 4) Total costs to account for(Step 5) Assignment of costs

Good units completed and transferred out (9,000 units)

$ 2,53339,930

$42,463

$ 1,423 12,180 13,603

÷ 11,150 $ 1 .22

$ 1,110 27,750 28,860

÷ 9,750 $ 2 .96

Costs before adding normal spoilageNormal spoilage (100 units)

(A) Total cost of good units completed & transf. out(B) Abnormal spoilage (50 units)

Work in process, ending (2,000 units)Direct materialsConversion costs

(C) Total work in process, ending(A)+(B)+(C) Total costs accounted for

$37,620 418 38,038 209

2,440 1,776 4,216 $42,463

(9,000# × $1.22) + (9,000# × $2.96) (100# × $1.22) + (100# × $2.96) (50# × $1.22) + (50# × $2.96)

2,000# × $1.22 600# × $2.96

#Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-17.

18-4

18-19 (15 min.) FIFO method, spoilage, equivalent units.

Solution Exhibit 18-19 calculates equivalent units of work done in the current period for direct materials and conversion costs.

SOLUTION EXHIBIT 18-19Summarize Output in Physical Units and Compute Equivalent Units. First-in, First-out (FIFO) Method of Process Costing with SpoilageGray Manufacturing Company for November 2003

(Step 1) (Step 2)

Equivalent Units

Flow of ProductionPhysical

UnitsDirect

MaterialsConversion

CostsWork in process, beginning (given)Started during current period (given)To account forGood units completed and transferred out

during current period:From beginning work in process||

1,000 × (100% −100%); 1,000 × (100% − 50%)Started and completed

8,000 × 100%; 8,000 × 100%Normal spoilage*

100 × 100%; 100 × 100%Abnormal spoilage†

50 × 100%; 50 × 100%Work in process, ending‡

2,000 × 100%; 2,000 × 30%Accounted forWork done in current period only

1,00010,150 11,150

1,000

8,000#

100

50

2,000 11,150

0

8,000

100

50

2,000 10,150

500

8,000

100

50

600 9,250

||Degree of completion in this department: direct materials, 100%; conversion costs, 50%.#9,000 physical units completed and transferred out minus 1,000 physical units completed and transferred out from

beginning work-in-process inventory.*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.†Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.‡Degree of completion in this department: direct materials, 100%; conversion costs, 30%.

18-5

18-20 (20−25 min.) FIFO method, assigning costs (continuation of 18-19).

Solution Exhibit 18-20 calculates the costs per equivalent unit for direct materials and conversion costs, summarizes total costs to account for, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.

SOLUTION EXHIBIT 18-20Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed, to Spoilage Units, and to Units in Ending Work in ProcessFIFO Method of Process CostingGray Manufacturing Company, November 2003

TotalProduction

CostsDirect

MaterialsConversion

Costs

(Step 3) Work in process, beginning (given: $1,423 + $1,110)Costs added in current period (given)Divided by equivalent units of work done in current periodEquivalent unit costs of work done in current period

(Step 4) Total costs to account for(Step 5) Assignment of costs:


$ 2,53339,930

$42,463

$12,180÷ 10,150

$ 1.20

$27,750 ÷ 9,250

$ 3

Work in process, beginning (1,000 units)Direct materials added in current periodConversion costs added in current period

Total from beginning inventory before normal spoilage

Started and completed before normal spoilage (8,000 units)

Normal spoilage (100 units)(A) Total cost of good units transferred out(B) Abnormal spoilage (50 units)



$ 2,5330

1,500

4,033

33,600 420 38,053 210

2,400 1,800 4,200 $42,463

0§ × $1.20500§ × $3

(8,000§ × $1.20) + (8,000§ × $3) (100§ × $1.20) + (100§ × $3)

(50§ × $1.20) + (50§ × $3)

2,000§ × $1.20 600§ × $3

§Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-19.

18-6

18-21 (30 min.) Weighted-average method, spoilage.

1. Solution Exhibit 18-21, Panel A, calculates the equivalent units of work done to date for each cost category in March 2004.

2. & 3. Solution Exhibit 18-21, Panel B, calculates the cost per equivalent unit for each cost category, summarizes total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method.

SOLUTION EXHIBIT 18-21Weighted-Average Method of Process Costing with SpoilageWang Manufacturing Company, March 2004

PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Eqvlt. Units

(Step 1) Step (2)Physical Equivalent Units Units Direct Conversion

Flow of Production (given) Materials Costs

Work in process, beginning 30,000Started during current period 50,000To account for 80,000Good units completed and transferred out during current period: 40,000 40,000 40,000Normal spoilage* 6,000 × 100%; 6,000 × 100% 6,000 6,000 6,000Abnormal spoilage†

2,000 × 100%; 2,000 × 100% 2,000 2,000 2,000Work in process ending ‡

32,000 × 100%; 32,000 × 75% 32,000 32,000 24,000 Accounted for 80,000 Work done to date 80,000 72,000

*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.† Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.‡ Degree of completion in this department: direct materials, 100%; conversion costs, 75%.

18-7

18-21 (Cont’d.)

PANEL B: Steps 3, 4, and 5—Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed, to Spoilage Units, and to Units in Ending Work in Process

TotalProduction Direct Conversion

Costs Materials Costs (Step 3) Work in process, beginning (given) $ 420,000 $240,000 $180,000 Costs added in current period (given) Costs incurred to date

1,003,200 420,000 660,000

583,200 763,200

Divide by equiv. units of work to date Equivalent unit costs of work done

÷ 80,000 ÷ 72,000

to date $8.25 $10.60(Step 4) Total costs to account for $1,423,200(Step 5) Assignment of costs Goods units completed and transferred out (40,000 units) Costs before adding normal spoilage $ 754,000 (40,000# × $8.25) + (40,000# × $10.60)

Normal spoilage (6,000 units) 113,100 (6,000# × $8.25) + (6,000# × $10.60)

Total cost of good units (A) completed and transferred out 867,100 (B) Abnormal spoilage (2,000 units) 37,700 (2,000# × $8.25) + (2,000# × $10.60)

Work in process, ending (32,000 units) Direct materials 264,000 32,000# × $8.25

Conversion costs 254,400 24,000# × $10.60

(C) Total work in process, ending 518,400(A)+(B)+(C) Total costs accounted for $1,423,200

# Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

18-22 (30 min.) FIFO method, spoilage (Refer to the information in 18-21).

1. Solution Exhibit 18-22, Panel A, calculates the equivalent units of work done in the current period for each cost category in March 2004.

2. & 3. Solution Exhibit 18-22, Panel B, calculates the cost per equivalent unit for each cost category, summarizes total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the FIFO method.

18-8

18-22 (Cont’d.)

SOLUTION EXHIBIT 18-22First-in, First-out (FIFO) Method of Process Costing with SpoilageWang Manufacturing Company, March 2004

PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Equiv. Units

Step (2)

(Step 1) Equivalent Units Physical Direct Conversion

Flow of Production Units Materials Costs Work in process, beginning (given) 30,000Started during current period (given) 50,000To account for 80,000Good units completed and transferred out during current period: From beginning work in process||

30,000 × (100% – 100%); 30,000 × (100% – 60%)

30,000

0 12,000 Started and completed 10,000 × 100%; 10,000 × 100%

10,000#

10,000 10,000Normal spoilage* 6,000 × 100%; 6,000 × 100%

6,000 6,000 6,000

Abnormal spoilage†

2,000 × 100%; 2,000 × 100% 2,000

2,000 2,000Work in process ending ‡

32,000 × 100%; 32,000 × 75% 32,000

32,000 24,000 Accounted for 80,000 Work done in current period only 50,000 54,000

|| Degree of completion in this department: direct materials, 100%; conversion costs, 60%.# 40,000 physical units completed and transferred out minus 30,000 physical units completed and transferred out

from beginning work in process inventory.*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.† Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.‡ Degree of completion in this department: direct materials, 100%; conversion costs, 75%.

18-9

18-22 (Cont’d.)



Costs Materials Costs (Step 3) Work in process, beginning (given) ($240,000 + $180,000)

$ 420,000

Costs added in current period (given) 1,003,200 $420,000 $583,200 Divide by equivalent units of work done in current period ÷ 50,000 ÷ 54,000 Equivalent unit costs of work done in current period $8.40 $10.80(Step 4) Total costs to account for $1,423,200(Step 5) Assignment of costs Goods units completed and transferred out (40,000 units) Work in process, beginning (30,000 units) $ 420,000 Direct materials added in current period 0 0§

× $8.40 Conversion costs added in current period 129,600 12,000§ × $10.80

Total from beginning inventory before normal spoilage 549,600 Started and completed before normal spoilage (10,000 units) 192,000 (10,000§ × $8.40) + (10,000§ × $10.80)

Normal spoilage (6,000 units) 115,200 (6,000§ × $8.40) + (6,000§ × $10.80)

(A) Total cost of good units

transferred out 856,800

(B) Abnormal spoilage (2,000 units) 38,400 (2,000§× $8.40) + (2,000§× $10.80)

Work in process, ending (32,000 units) Direct materials 268,800 32,000§ × $8.40

Conversion costs 259,200 24,000§ × $10.80

(C) Total work in process, ending 528,000(A)+(B)+(C) Total costs accounted for $1,423,200§ Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

18-10

18-23 (30 min.) Standard-costing method, spoilage (Refer to the information in 18-21).

1. The equivalent units of work done in the current period for direct materials and conversion costs are calculated in Solution Exhibit 18-22, Panel A.

2. The cost per equivalent unit for direct materials and conversion costs equals the standard cost per unit given in the problem: $8.00 per equivalent unit for direct materials in both beginning inventory and work done in the current period, and $10.00 per equivalent unit for conversion costs in both beginning inventory and work done in the current period.

3. Solution Exhibit 18-23 summarizes the total costs to account for and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage and to ending work in process using the standard costing method.

18-11

18-23 (Cont’d.)

SOLUTION EXHIBIT 18-23Standard Costing Method of Proven Costing with SpoilageWang Manufacturing Company, March 2004

Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed, to Spoilage Units, and to Units in ending Work in Process.


Costs Materials Costs(Step 3) Standard cost per equivalent unit (given) $ 18 $ 8 $ 10 Work in process, beginning* $ 420,000 Costs added in current period at at standard prices

Direct materials 50,000 × $8; Conversion costs 54,000 × $10 940,000 $400,000 $540,000(Step 4) Costs to account for $1,360,000(Step 5) Assignment of costs at standard costs: Goods units completed and transferred out (40,000 units) Work in process, beginning (30,000 units) $ 420,000 Direct materials added in Current period 0 0§

× $8 Conversion costs added in Current period 120,000 12,000§ × $10

Total from beginning inventory before normal spoilage 540,000 Started and completed before normal spoilage (10,000 units) 180,000 (10,000§ × $8) + (10,000§ × $10)

Normal spoilage (6,000 units) 108,000 (6,000§ × $8) + (6,000§ × $10)

(A) Total cost of good units transferred out 828,000 (B) Abnormal spoilage (2,000 units) 36,000 (2,000§ × $8) + (2,000§× $10)

Work in process, ending (32,000 units) Direct materials 256,000 32,000§ × $8

Conversion costs 240,000 24,000§ × $10

(C) Total work in process, ending 496,000(A)+(B)+(C) Total costs accounted for $1,360,000*Work in process, beginning has 30,000 equivalent units (30,000 physical units × 100%) of direct materials and 18,000 equivalent units (30,000 physical units × 60%) of conversion costs. Hence work in process, beginning inventory at standard cost equals ($8 × 30,000) + ($10 × 18,000) = $240,000 + $180,000 = $420,000.§ Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-22 Panel A.

18-12


1. Solution Exhibit 18-24, Panel A, calculates the equivalent units of work done to date for each cost category in September 2003.

2. & 3. Solution Exhibit 18-24, Panel B, calculates the costs per equivalent unit for each cost category, summarizes total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method.

SOLUTION EXHIBIT 18-24Weighted-Average Method of Process Costing with SpoilageSuperchip, September 2003

PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Equivalent Units

(Step 1)Physical



(given)Direct

MaterialsConversion

Costs

Work in process, beginningStarted during current periodTo account forGood units completed and transferred out during current period:Normal spoilage* 210 × 100%; 210 × 100%Abnormal spoilage†


300 × 100%; 300 × 40%Accounted forWork done to date

400 1,7002,100

1,400210

190

300 2,100

1,400

210

190

300 2,100

1,400

210

190

120

1,920

*Normal spoilage is 15% of good units transferred out: 15% × 1,400 = 210 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.

†Abnormal spoilage = Actual spoilage − Normal spoilage = 400 − 210 = 190 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.

‡Degree of completion in this department: direct materials, 100%; conversion costs, 40%.

18-13

18-24 (Cont’d.)


TotalProduction

CostsDirect

MaterialsConversion

Costs

(Step 3) Work in process, beginning (given)Costs added in current period (given)Costs incurred to dateDivided by equivalent units of work done to dateEquivalent unit costs of work done to date



$ 74,200531,600

$605,800

$ 64,000 378,000 442,000

÷ 2,100 $210 .476

$ 10,200 153,600 163,800

÷ 1,920 $85 .3125


(A) Total cost of good units completed & transf. out

(B) Abnormal spoilage (190 units)Work in process, ending (300 units)

Direct materialsConversion costs


$414,104 62,116

476,220 56,199

63,143 10,238 73,381 $605,800

(1,400#× $210.476) + (1,400#× $85.3125) (210# × $210.476) + (210# × $85.3125)

(190# × $210.476) + (190# × $85.3125)

300# × $210.476 120# × $85.3125

# Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

18-25 (25 min.) FIFO method, spoilage (Refer to the information in Exercise 18-24).

1. Solution Exhibit 18-25, Panel A, calculates the equivalent units of work done in the current period for each cost category in September 2003.

2. & 3. Solution Exhibit 18-25, Panel B, calculates the costs per equivalent unit for each cost category, summarizes the total Microchip Department costs for September 2003, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process under the FIFO method.

18-14

18-25 (Cont’d.)

SOLUTION EXHIBIT 18-25First-in, First-out (FIFO) Method of Process Costing with SpoilageSuperchip, September 2003


(Step 1) (Step 2)

Equivalent Units


UnitsDirect

MaterialsConversion

Costs

Work in process, beginning (given)Started during current period (given)To account forGood units completed and transferred out


400 × (100% −100%); 400 × (100% − 30%)Started and completed

1,000 × 100%; 1,000 × 100%Normal spoilage*

210 × 100%; 210 × 100%Abnormal spoilage†

190 × 100%; 190 × 100%Work in process, ending‡

300 × 100%; 300 × 40%Accounted forWork done in current period only

4001,700 2,100

400

1,000#

210

190

300 2,100

0

1,000

210

190

300 1,700

280

1,000

210

190

120

1,800

||Degree of completion in this department: direct materials, 100%; conversion costs, 30%.#1,400 physical units completed and transferred out minus 400 physical units completed and transferred out from

beginning work in process inventory.*Normal spoilage is 15% of good units transferred out: 15% × 1,400 = 210 units. Degree of completion of normal

spoilage in this department: direct materials, 100%; conversion costs, 100%.†Abnormal spoilage = Actual spoilage − Normal spoilage = 400 − 210 = 190 units. Degree of completion of

abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.‡Degree of completion in this department: direct materials, 100%; conversion costs, 40%.

18-15

18-25 (Cont’d.)

PANEL B: Steps 3, 4 and 5—Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed, to Spoilage Units, and to Units in Ending Work in Process

TotalProduction

CostsDirect

MaterialsConversion

Costs




$ 74,200531,600

$605,800

$378,000

÷ 1,700 $222.353

$153,600

÷ 1,800 $ 85.333

Work in process, beginning (400 units)Direct materials added in current periodConversion costs added in current period


Started and completed before normal spoilage (1,000 units)Normal spoilage (210 units)

(A) Total cost of good units transferred out(B) Abnormal spoilage (190 units)

Work in process, ending (300 units)Direct materialsConversion costs


$ 74,2000

23,893

98,093

307,686 64,614 470,393 58,461

66,706 10,240 76,946 $605,800

0§ × $222.353280§ × $85.333

(1,000§×$222.353) + (1,000§×$85.333) (210§×$222.353) + (210§×$85.333)

(190§×$222.353) + (190§×$85.333)

300§×$222.353 120§× $85.333

§Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.

18-16

18-25 (Cont’d.)18-25 Excel Application

Spoilage, Rework, and Scrap Superchip

Original DataPhysical Units Direct Conversion

(Microchips) Materials CostsWork in process, September 1 400 $64,000 $10,200

Started during September 1,700 Completed during September 1,400

Work in process, September 30 300Costs added during September $378,000 $153,600

Problem 1Direct Conversion

Flow of Production Physical Units Materials CostsWork in process, beginning 400Started during current period 1,700To account for 2,100Good units completed and transferred out during current period: From beginning work in process 400 400x(100%-100%); 400x(100%-30%) 0 280 Started and completed 1,000 1000 x 100%; 1000 x 100% 1,000 1,000 Normal Spoilage 210 210x100%; 210x100% 210 210Abnormal Spoilage 190 190 x 100%; 190 x 100% 190 190 Work in process, ending 300 300 x 100%; 300 x 40% 300 120Accounted for 2,100Work done in current period only 1,700 1,800

Problem 2Equivalent unit costs of beginning work in

process Total Direct Conversion

Production Materials CostsCosts

Work in process, beginning $74,200Costs added in current period 531,600 378,000 153,600Equivalent units of work done in current period 1,700 1,800Cost per equivalent unit of work done in current period only $222.35 $85.33

18-17

18-25 (Cont’d.)

Problem 3


Costs Materials Costs

Total costs to account for $605,800Assignment of costs:Good units completed and transferred out: Work in process, beginning $74,200 Direct materials added in current period 0 0 Conversion costs added in current period 23,893 23,893 Total from beginning inventory before normal spoilage 98,093 Started and completed before normal spoilage 307,686 222,353 85,333 Normal spoilage 64,614 46,694 17,919Total cost of good units transferred out 470,393Abnormal spoilage 58,461 42,247 16,213Work in process, ending Direct materials 66,706 Conversion costs 10,240Total work in process ending 76,946Total costs accounted for $605,800

18-18

18-26 (30 min.) Standard costing method, spoilage (Refer to the information in Exercise 18-24).

1. Solution Exhibit 18-25, Panel A, shows the computation of the equivalent units of work done in September 2003 for direct materials (1,700 units) and conversion costs (1,800 units).

2. The direct materials cost per equivalent unit of beginning work in process and of work done in September 2003 is the standard cost of $205 given in the problem.

The conversion cost per equivalent unit of beginning work in process and of work done in September 2003 is the standard cost of $80 given in the problem.

3. Solution Exhibit 18-26 summarizes the total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the standard costing method.

18-19

18-26 (Cont’d.)

SOLUTION EXHIBIT 18-26Standard Costing Method of Process Costing with SpoilageSuperchip, September 2003

Steps 3, 4, and 5—Compute Equivalent Unit Costs, Summarize Total Costs to Account For, and Assign Costs to Units Completed, to Spoilage Units, and to Units in Ending Work in Process

TotalProduction

CostsDirect

MaterialsConversion

Costs

(Step 3) Standard costs per equivalent unit (given)

Work in process, beginning*Costs added in current period at standard pricesDirect materials, 1,700 × $205; conversion costs, 1,800 × $80

(Step 4) Costs to account for(Step 5) Assignment of costs at standard costs:


$ 285

91,600

492,500 $584,100

$ 205

348,500

$ 80

$144,000

Work in process, beginning (400 units) Direct materials added in current period Conversion costs added in current period Total from beginning inventory before normal spoilageStarted and completed before normal spoilage (1,000 units)Normal spoilage (210 units)


Work in process, ending (300 units)Direct materialsConversion costs


$ 91,6000

22,400

114,000

285,000 59,850 458,850 54,150

61,500 9,600 71,100 $584,100

0§ × $205 280§ × $80

(1,000§ × $205) + (1,000§ × $80) (210§ × $205) + (210§ × $80)

(190§ × $205) + (190§ × $80)

300§ × $205 120§ × $80

*Work in process, beginning has 400 equivalent units (400 physical units × 100%) of direct materials and 120 equivalent units (400 physical units × 30%) of conversion costs. Hence work in process, beginning inventory at standard costs equals ($205 × 400) + ($80 × 120) = $82,000 + $9,600 = $91,600.

§Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-25, Panel A.

18-20

18-27 (20-30 min.) Spoilage and job costing (L. Bamber).

1. Cash 200Loss from Abnormal Spoilage 1,000

Work-in-Process Control 1,200Loss = ($6.00 × 200) – $200 = $1,000

Remaining cases cost = $6.00 per case. The cost of these cases is unaffected by the loss from abnormal spoilage.

2. a. Cash 400Work-in-Process Control 400

The cost of the remaining good cases = [($6.00 × 2,500) – $400] = $14,600The unit cost of a good case now becomes $14,600 ÷ 2,300 = $6.3478

b. Cash 400Manufacturing Department Overhead Control 800

Work-in-Process Control 1,200

The unit cost of a good case remains at $6.00.

c. The unit cost in the cases 2a and 2b is different because in case 2a, the normal spoilage cost, due to the exacting specifications of this particular job, is charged as a cost of this job. In case 2b, the normal spoilage is due to the production process (not the particular attributes of this specific job). These costs are, therefore, charged as part of manufacturing overhead. The manufacturing overhead cost of $1 per case already includes a provision for normal spoilage.

3. a. Work-in-Process Control 200Materials Control, Wages Payable Control, Manufacturing Overhead Allocated 200

The cost of the good cases = [($6.00 × 2,500) + $200] = $15,200The unit cost of a good case is $15,200 ÷ 2,500 = $6.08

b. Manufacturing Department Overhead Control 200Materials Control, Wages Payable Control, Manufacturing Overhead Allocated 200

The unit cost of a good case = $6.00 per case

c. The unit cost in the cases 3a and 3b is different because in case 3a, the normal rework cost, due to the exacting specifications of this particular job, is charged as a cost of this job. In case 3b, the normal rework is due to the production process (not the particular attributes of this specific job). These costs are, therefore, charged as part of manufacturing overhead. The manufacturing overhead cost of $1 per case already includes a provision for this normal rework.

18-21

18-28 (15 min.) Reworked units, costs of rework.

1. The two alternative approaches to account for the materials costs of reworked units are:a. To charge the costs of rework to the current period as a separate expense item as

abnormal rework. This approach would highlight to White Goods the costs of the supplier problem.

b. To charge the costs of the rework to manufacturing overhead as normal rework.

2. The $50 tumbler cost is the cost of the actual tumblers included in the washing machines. The $44 tumbler units from the new supplier were eventually never used in any washing machine and that supplier is now bankrupt. The units must now be disposed of at zero disposal value.

3. The total costs of rework due to the defective tumbler units include:a. The labor and other conversion costs spent on substituting the new tumbler units.b. The costs of any extra negotiations to obtain the replacement tumbler units. c. Any higher price the existing supplier may have charged to do a rush order for the

replacement tumbler units.d. Ordering costs for the replacement tumbler units.

18-29 (25 min.) Scrap, job costing.

1. Journal entry to record scrap generated by a specific job and accounted for at the time scrap is sold is:

Cash or Accounts Receivable 490Work-in-Process Control 490

To recognize asset from sale of scrap.A posting is made to the specific job record.

2. Scrap common to various jobs and accounted for at the time of its sale can be accounted for in two ways:

a. Regard scrap sales as a separate line item of revenues: (This method generally is used when the dollar amount of scrap is immaterial.)

Cash or Accounts Receivable 4,000Sale of Scrap 4,000

To recognize revenue from sale of scrap.

b. Regard scrap sales as offsets against manufacturing overhead: (This method generally is used when the dollar amount of scrap is material.)

Cash or Accounts Receivable 4,000Manufacturing Department Overhead Control 4,000

To recognize revenue from sale of scrap.

18-22

18-29 (Cont’d.)

3. Journal entry to record scrap common to various jobs at the time scrap is returned to storeroom is:

Materials Control 4,000Manufacturing Department Overhead Control 4,000

To record value of scrap returned to storeroom.

When the scrap is reused as direct material on a subsequent job, the journal entry is:Work-in-Process Control 4,000

Materials Control 4,000To record reuse of scrap on a job.

Explanations of journal entries are provided here but are not required.


Solution Exhibit 18-30 calculates the equivalent units of work done to date for each cost category, presents computations of the costs per equivalent unit for each cost category, summarizes total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method.

SOLUTION EXHIBIT 18-30Weighted-Average Method of Process Costing with SpoilageCleaning Department of the Alston Company for May


(Step 1)Physical



(given)Direct

MaterialsConversion

CostsWork in process, beginningStarted during current periodTo account forGood units completed and transferred out during current period:Normal spoilage* 740 × 100%; 740 × 100%Abnormal spoilage†


1,600 × 100%; 1,600 × 25%Accounted forWork done to date

1,000 9,000 10,000

7,400740

260

1,600 10,000

7,400

740

260

1,600 10,000

7,400

740

260

400 8,800

*Normal spoilage is 10% of good units transferred out: 10% × 7,400 = 740 units. Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.

†Abnormal spoilage = 260 units. Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.

‡Degree of completion in this department: direct materials, 100%; conversion costs, 25%.

18-23

18-30 (Cont’d.)


Total Production

CostsDirect

MaterialsConversion

Costs(Step 3) Work in process, beginning (given)

Costs added in current period (given)Costs incurred to dateDivided by equivalent units of work done to dateEquivalent unit costs of work done to date



$ 1,80017,000

$18,800

$ 1,000 9,000 10,000

÷ 10,000 $ 1

$ 800 8,000

8,800÷ 8,800 $ 1


(A) Total cost of good units completed & transferred out

(B) Abnormal spoilage (260 units)Work in process, ending (1,600 units)

Direct materialsConversion costs


$14,800 1,480

16,280 520

1,600 400 2,000 $18,800

7,400# × $1 + 740# × $1 +

260# × $1 +

1,600# × $1

7,400# × $1 740# × $1

260# × $1

400# × $1

#Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A above.

18-31 (25 min.) FIFO method, spoilage.

For the Cleaning Department, Solution Exhibit 18-31 calculates the equivalent units of work done in the current period for direct materials and conversion costs, presents the costs per equivalent unit for direct materials and conversion costs, summarizes the total costs for May, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process under the FIFO method.

18-24

18-31 (Cont’d.)

SOLUTION EXHIBIT 18-31First-in, First-out (FIFO) Method of Process Costing with SpoilageCleaning Department of the Alston Company for May


(Step 1) (Step 2)

Equivalent Units


UnitsDirect

MaterialsConversion

CostsWork in process, beginning (given) 1,000Started during current period (given) 9,000 To account for 10,000 Good units completed and transferred out during current period:From beginning work in process|| 1,0001,000 × (100% −100%); 1,000 × (100% − 80%) 0 200Started and completed 6,400#

6,400 × 100%; 6,400 × 100% 6,400 6,400Normal spoilage* 740740 × 100%; 740% × 100% 740 740Abnormal spoilage† 260260 × 100%; 260 × 100% 260 260Work in process, ending‡ 1,6001,600 × 100%; 1,600 × 25% 1,600 400Accounted for 10,000

Work done in current period only 9,000 8,000

|| Degree of completion in this department: direct materials, 100%; conversion costs, 80%.#7,400 physical units completed and transferred out minus 1,000 physical units completed and transferred out from

beginning work-in-process inventory.*Normal spoilage is 10% of good units transferred out: 10% × 7,400 = 740 units. Degree of completion of normal

spoilage in this department: direct materials, 100%; conversion costs, 100%.†Abnormal spoilage = 260 units. Degree of completion of abnormal spoilage in this department: direct materials,

100%; conversion costs, 100%.‡Degree of completion in this department: direct materials, 100%; conversion costs, 25%.

18-25

18-31 (Cont’d.)


TotalProduction

CostsDirect

MaterialsConversion

Costs

(Step 3) Work in process, beginning (given: $1,000 + $800)Costs added in current period (given)Divided by equivalent units of work done in current periodEquivalent unit costs of work done in current period



$ 1,80017,000

$18,800

$ 9,000

÷ 9,000 $ 1

$ 8,000

÷ 8,000 $ 1


Total from beginning inventory before normal spoilageStarted and completed before normal spoilage (6,400 units)Normal spoilage (740 units)




$ 1,8000

200 2,00012,800

1,480 16,280 520

1,600 400 2,000 $18,800

0§ × $1 200§ × $1

6,400§ × $1 + 6,400§ × $1 740§ × $1 + 740§ × $1

260§ × $1 + 260 × $1

1,600§ × $1 400§ × $1


18-26

18-32 (35 min.) Weighted-average method, Milling Department (continuation of 18-30).

For the Milling Department, Solution Exhibit 18-32 calculates the equivalent units of work done to date for each cost category, presents computations of the costs per equivalent unit for each cost category, summarizes total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method.

SOLUTION EXHIBIT 18-32Weighted-Average Method of Process Costing with SpoilageMilling Department of the Alston Company for May

PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Equivalent Units(Step 1)Physical



(given)Transferred-

in CostsDirect

MaterialsConversion

Costs

Work in process, beginningStarted during current periodTo account forGood units completed and transferred out during current period:Normal spoilage* 300 × 100%; 300 × 100%; 300 × 100%Abnormal spoilage†

100 × 100%; 100 ×100%, 100 × 100%Work in process, ending‡

4,000 × 100%; 4,000 × 0%; 4,000 × 25%Accounted forWork done to date

3,000 7,400 10,400

6,000300

100

4,000 10,400

6,000

300

100

4,000 10,400

6,000

300

100

0 6,400

6,000

300

100

1,000 7,400

*Normal spoilage is 5% of good units transferred out: 5% × 6,000 = 300 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%.

†Abnormal spoilage = 100 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%.

‡Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 25%.

18-27

18-32 (Cont’d.)


TotalProduction

CostsTransferred-

in costsDirect

MaterialsConversion

Costs

(Step 3) Work in process, beginning (given)Costs added in current period (given)Costs incurred to dateDivided by equivalent units of work done to

dateEquivalent unit costs of work done to date



$ 8,90021,870

$30,770

$ 6,450 16,280 *22,730

÷ 10,400 $2 .1856

$ 0 640

640

÷ 6,400 $ 0 .10

$2,450 4,950 7,400

÷ 7,400 $ 1



(B) Abnormal spoilage (100 units)Work in process, ending (4,000 units)

Transferred-in costsDirect materialsConversion costs


$19,713 986

20,699 329

8,7420

1,000 9,742 $30,770

6,000# × ($2.1856 + $0.10 + $1) 300# × ($2.1856 + $0.10 + $1)

100# × ($2.1856 + $0.10 + $1)

4,000# × $2.1856 0# × $0.10

1,000# × $1

#Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A above.*Total costs of good units completed and transferred out in Step 5 Panel B of Solution Exhibit 18-30.

18-28

18-33 (25 min.) FIFO method, Milling Department (continuation of 18-31).

Solution Exhibit 18-33 shows the equivalent units of work done in the Milling Department in the current period for transferred-in costs, direct materials, and conversion costs, presents the costs per equivalent unit for transferred-in costs, direct materials, and conversion costs, summarizes the total Milling Department costs for May, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work-in-process under the FIFO method.

SOLUTION EXHIBIT 18-33First-in, First-out (FIFO) Method of Process Costing with SpoilageMilling Department of the Alston Company for May


(Step 1) (Step 2)

Equivalent Units


UnitsTransferred-

in CostsDirect

MaterialsConversion

Costs

Work in process, beginning (given)Started during current period (given)To account forGood units completed and transferred out


3,000 × (100% −100%); 3,000 × (100% − 0%); 3,000 × (100% − 80%)

Started and completed3,000 × 100%; 3,000 × 100%; 3,000 ×

100%Normal spoilage*

300 × 100%; 300% × 100%; 300 × 100%Abnormal spoilage†

100 × 100%; 100 × 100%; 100 × 100%Work in process, ending‡

4,000 × 100%; 4,000 × 0%; 4,000 × 25%Accounted forWork done in current period only

3,000 7,400 10,400

3,000

3,000#

300

100

4,000 10, 400

0

3,000

300

100

4,000 7,400

3,000

3,000

300

100

0

6,400

600

3,000

300

100

1,000

5,000

||Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.#6,000 physical units completed and transferred out minus 3,000 physical units completed and transferred out from

beginning work-in-process inventory.*Normal spoilage is 5% of good units transferred out: 5% × 6,000 = 300 units. Degree of completion of normal

spoilage in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 100%.†Abnormal spoilage = 100 units. Degree of completion of abnormal spoilage in this department: transferred-in costs,

100%; direct materials, 100%; conversion costs, 100%.‡Degree of completion in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 25%.

18-29

18-33 (Cont’d.)


TotalProduction

CostsTransferred-

in CostsDirect

MaterialsConversion

Costs

(Step 3) Work in process, begin. (given: $6,450+$0+$2,450)Costs added in current period (given)Divided by equivalent units of work done in current periodEquivalent unit costs of work done in current

period(Step 4) Total costs to account for(Step 5) Assignment of costs:


$ 8,90021,870

$30,770

$16,280*

÷ 7,400

$ 2.20

$ 640

÷ 6,400

$ 0.10

$ 4,950

÷ 5,000

$ 0 .99

Work in process, beginning (3,000 units)Transferred-in costs added in current periodDirect materials added in current periodConversion costs added in current period


Started and completed before normal spoilage (3,000 units)

Normal spoilage (300 units)(A) Total cost of good units transferred out(B) Abnormal spoilage (100 units)

Work in process, ending (4,000 units)Transferred-in costsDirect materialsConversion costs


$ 8,900

0300

594

9,794

9,870 987 20,651 329

8,8000

990 9,790 $30,770

0 × $2.20 3,000§ × 0.10

600§ × $0.99

3,000§ × ($2.20 + $0.10 + $0.99)300§ × ($2.20 + $0.10 + $0.99)

100§ × ($2.20 + $0.10 + $0.99)

4,000§ × $2.20 0§ × $0.10

1,000§ × $0.99

§Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.*Total costs of good units completed and transferred out in Step 5 Panel B of Solution Exhibit 18-31.

18-30

18-34 (20−25 min.) Job-costing spoilage and scrap (F. Mayne).

1. a. Materials Control 600Manufacturing Department Overhead Control 800

Work-in-Process Control 1,400(650 + 500 + 250 = 1,400)

b. Accounts Receivable 1,250Work-in-Process Control 1,250

2. a. The clause does not specify whether the 1% calculation is to be based on the input cost ($26,951 + $15,076 + $7,538) or the cost of the good output before the "1% normal spoilage" is added.

b. If the inputs are used to determine the 1%:

$26,951 + $15,076 + $7,538 = $49,565

1% of $49,565 = $495.65 or $496, rounded. Then, the entry to leave the $496 "normal spoilage" cost on the job, remove the salvageable material, and charge manufacturing overhead would be:

Materials Control 600Manufacturing Department Overhead Control 304

Work-in-Process Control 904($800 spoilage minus $496 = $304 spoilagecost that is taken out of the job;$600 salvage value plus $304 = $904; or$1,400 minus $496 = $904)

If the outputs are used to determine the 1%:

$26,951 – $650 = $26,301 15,076 – 500 = 14,576 7,538 – 250 = 7,288$49,565 $48,165

Then, $48,165 × 1% = $481.65 or $482, rounded. The journal entry would be:

Materials Control 600Manufacturing Department Overhead Control 318

Work-in-Process Control 918

18-31

18-35 (30 min.) Job costing, rework.

1. Work-in-Process Control (SM-5 motors) ($550 × 80) 44,000Materials Control ($300 × 80) 24,000Wages Payable ($60 × 80) 4,800Manufacturing Overhead Allocated ($190 × 80) 15,200

Total costs assigned to 80 spoiled units of SM-5 Motors before considering rework costs.

Manufacturing Department Overhead Control (rework) 9,000Materials Control ($60 × 50) 3,000Wages Payable ($45 × 50) 2,250Manufacturing Overhead Allocated ($75 × 50) 3,750

Normal rework on 50 units, but not attributable specifically to the SM-5 motor batches or jobs.

Loss from Abnormal Rework ($180 × 30) 5,400Materials Control ($60 × 30) 1,800Wages Payable ($45 × 30) 1,350Manufacturing Overhead Allocated ($75 × 30) 2,250

Total costs of abnormal rework on 30 units (Abnormal rework = Actual rework – Normal rework = 80 – 50 = 30 units) of SM-5 Motors.

Work-in-Process Control (SM-5 motors) 6,000Work-in-Process Control (RW-8 motors) 3,000

Manufacturing Department Overhead Allocated (rework) 9,000(Allocating manufacturing department rework costs to SM-5

and RW-8 in the proportion 1,000:500 since each motor requires the same number of machine-hours.)

2. Total rework costs for SM-5 motors in February 2004 are as follows:

Normal rework costs allocated to SM-5 $ 6,000Abnormal rework costs for SM-5 5,400Total rework costs $11,400

We emphasize two points:a. Only $6,000 of the normal rework costs are allocated to SM-5 even though the normal rework costs of the 50 SM-5 motors reworked equal $9,000. The reason is that the normal rework costs are not specifically attributable to SM-5. For example, the machines happened to malfunction when SM-5 was being made, but the rework was not caused by the specific requirements of SM-5. If it were, then all $9,000 would be charged to SM-5.b. Abnormal rework costs of $5,400 are linked to SM-5 in the management control system, even though for financial reporting purposes, the abnormal rework costs are written off to the income statement.

18-32

18-36 (30 min.) Job costing, scrap.

1. Materials Control 7,000 Materials−Related Manufacturing Overhead Control 7,000

(To record scrap common to all jobs at the time it is returned to the storeroom)

2. Cash or Accounts Receivable 7,000Materials Control 7,000

(To record sale of scrap from the storeroom)

3. A summary of the manufacturing costs for HM3 and JB4 before considering the value of scrap are as follows:

HM3 JB4 Total CostsCost per

Unit(1)

Total Costs

(2) = (1) × 20,000

Cost perUnit(3)

TotalCosts

(4) = (3) × 10,000 (5) = (2)+(4)Direct materialsDirect manufacturing laborMaterials-related manufacturing

overhead (20% of direct materials)Other manufacturing overhead

(200% of direct manufacturing labor)

Total

$103

2

6 $21

$200,00060,000

40,000

120,000 $420,000

$154

3

8 $30

$150,00040,000

30,000

80,000 $300,000

$350,000100,000

70,000

200,000 $720,000

The value of scrap of $7,000 generated during March will reduce materials-related manufacturing overhead costs by $7,000 from $70,000 to $63,000. Materials-related manufacturing overhead will then be allocated at 18% of direct materials costs ($63,000 ÷ $350,000 = 0.18)

The revised manufacturing cost per unit would then be:

HM3 JB4 Total CostsCost per

Unit(1)

Total Costs

(2) = (1) × 20,000

Cost perUnit(3)

TotalCosts

(4) = (3) × 10,000 (5) = (2)+(4)Direct materialsDirect manufacturing laborMaterials-related manufacturing

overhead (18% of direct materials)Other manufacturing overhead

200% of direct manufacturing labor)Total

$10.003.00

1.80

6 .00 $20 .80

$200,00060,000

36,000

120,000 $416,000

$15.004.00

2.70

8 .00 $29 .70

$150,00040,000

27,000

80,000 $297,000

$350,000100,000

63,000

200,000 $713,000

18-33

18-37 (15−20 min.) Physical units, inspection at various stages of completion (Chapter Appendix).

Inspection Inspection Inspection at 15% at 40% at 100%

Work in process, beginning (20%)*Started during MarchTo account for

14,000120,000 134,000

14,000120,000 134,000

14,000120,000 134,000

Good units completed and transferred outNormal spoilage

113,000a

6,600b113,000a

7,440c113,000a

6,780d

Abnormal spoilage (10,000 – normal spoilage)Work in process, ending (70%)*Accounted for

3,400 11,000 134,000

2,560 11,000 134,000

3,220 11,000 134,000

*Degree of completion for conversion costs of the forging process at the dates of the work-in-process inventoriesa14,000 beginning inventory +120,000 –10,000 spoiled – 11,000 ending inventory = 113,000b6% × (113,000 – 14,000 + 11,000) = 6% × 110,000 = 6,600c6% × (113,000 + 11,000 ) = 6% × 124,000 = 7,440d6% × 113,000 = 6,780

18-38 (25−35 min.) Weighted-average method, inspection at 80% completion (A. Atkinson) (Chapter Appendix).

The computation and allocation of spoilage is the most difficult part of this problem. The units in the ending inventory have passed inspection. Therefore, of the 80,000 units to account for (10,000 beginning + 70,000 started), 10,000 must have been spoiled in June [80,000 – (50,000 completed + 20,000 ending inventory)]. Normal spoilage is 7,000 [0.10 × (50,000 + 20,000)]. The 3,000 remainder is abnormal spoilage (10,000 – 7,000).

Solution Exhibit 18-38, Panel A, calculates the equivalent units of work done for each cost category. We comment on several points in this calculation:

• Ending work in process includes an element of normal spoilage since all the ending WIP have passed the point of inspection––inspection occurs when production is 80% complete, while the units in ending WIP are 95% complete.

• Spoilage includes no direct materials units because spoiled units are detected and removed from the finishing activity when inspection occurs at the time production is 80% complete. Direct materials are added only later when production is 90% complete.

• Direct materials units are included for ending work in process, which is 95% complete, but not for beginning work in process, which is 25% complete. The reason is that direct materials are added when production is 90% complete. The ending work in process, therefore, contains direct materials units; the beginning work in process does not.

Solution Exhibit 18-38, Panel B, computes the costs per equivalent unit for each cost category, summarizes total costs to account for, and assigns these costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending work in process using the weighted-average method. The cost of ending work in process includes the assignment of normal spoilage costs since these units have passed the point of inspection. The costs assigned to each cost category are as follows:

18-34

18-38 (Cont’d.)

Cost of good units completed and transferred out (including normal spoilage costs on good units) $1,877,350Abnormal spoilage 67,710Cost of ending work in process (including normal spoilage costs on ending work in process) 734,140Total costs assigned and accounted for $2,679,200

SOLUTION EXHIBIT 18-38Weighted-Average Method of Process Costing with SpoilageFinishing Department of the Ottawa Manufacturing Company for June

PANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Equivalent Units(Step 1)Physical



(given)Transferred-

in CostsDirect

MaterialsConversion

Costs

Work in process, beginningStarted during current periodTo account forGood units completed and transferred out during current period:Normal spoilage on good units* 5,000 × 100%; 5,000 × 0%; 5,000 × 80%Work in process, ending‡

20,000 × 100%; 20,000 × 100%; 20,000 × 95%Normal spoilage on ending WIP**

2,000 × 100%; 2,000 × 0%; 2,000 × 80%Abnormal spoilage†

3,000 × 100%; 3,000 × 0%; 3,000 × 80%Accounted forWork done to date

10,00070,000 80,000

50,0005,000

20,000

2,000

3,000 80,000

50,000

5,000

20,000

2,000

3,000 80,000

50,000

0

20,000

0

0 70,000

50,000

4,000

19,000

1,600

2,400 77,000

*Normal spoilage is 10% of good units that pass inspection: 10% × 50,000 = 5,000 units. Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.

‡Degree of completion in this department: transferred-in costs, 100%; direct materials, 100%; conversion costs, 95%.**Normal spoilage is 10% of the good units in ending WIP that have passed the inspection point, 10% × 20,000 = 2,000 units.

Degree of completion of normal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.

†Abnormal spoilage = Actual spoilage − Normal spoilage = 10,000 − 7,000 = 3,000 units. Degree of completion of abnormal spoilage in this department: transferred-in costs, 100%; direct materials, 0%; conversion costs, 80%.

18-35

18-38 (Cont’d.)


TotalProduction

CostsTransferred-

in CostsDirect

MaterialsConversion

Costs

(Step 3) Work in process, beginning (given)Costs added in current period (given)Costs incurred to dateDivided by equivalent units of work done

to dateEquivalent unit costs of work done to date



$ 124,9002,554,300

$2,679,200

$ 82,900 647,500 730,400

÷ 80,000 $ 9.13

$ − 655,200

655,200

÷ 70,000 $ 9 .36

$ 42,000 1,251,600 1,293,600

÷ 77,000 $ 16 .80

Costs before adding normal spoilageNormal spoilage (5,000 units)


(B) Abnormal spoilage (3,000 units)Work in process, ending (20,000 units)

WIP ending, before normal spoilageNormal spoilage on ending WIP

(C) Total costs of ending WIP(A)+(B)+(C) Total costs accounted for

$1,764,500 112,850

1,877,350 67,710

689,000 45,140 734,140 $2,679,200

50,000# × ($9.13 + $9.36 + $16.80)

(5,000# × $9.13) + (0# × $9.36) + (4,000# × $16.80)

(3,000# × $9.13) + (0# × $9.36) + (2,400# × $16.80)

(20,000# × $9.13) + (20,000# × $9.36)+(19,000# × $16.80)

(2,000# × $9.13) + (0# × $9.36) + (1,600# × $16.80)

#Equivalent units of transferred-in costs, direct materials, and conversion costs calculated in Step 2 in Panel A.

18-39 (40 min.) Job costing, spoilage, ethics (CMA, adapted).

1. Analysis of the 5,000 units rejected by Richport Company for Job No. N1192-122 yields the following breakdown between normal and abnormal spoilage.

UnitsNormal spoilage* 3,000Abnormal spoilage (5,000 – 3,000) 2,000Total units rejected 5,000

*Normal spoilage = 0.025 of normal input When output equals 117,000 units, Normal input = 117,000 ÷ (1– 0.025)

= 120,000 units Normal spoilage= 120,000 × 0.025

= 3,000 units

18-36

18-39 (Cont’d.)

2. The journal entries required to properly account for Job No. N1192-122 are presented below and use an average cost per unit of $57 ($6,954,000 ÷ 122,000).

Accounts Receivable or Cash1 35,000Abnormal loss2 100,000

WIP Control3 135,000To account for 5,000 units rejected.

Finished Good Control 6,819,000

WIP Control 6,819,000

To transfer 117,000 units to finished goods inventory (costs incurred on job and debited to WIP

Control, $6,954,000, minus $135,000 credited to WIP control).

1Units sold 5,000 units sold at $7 each.2Loss from abnormal spoilage:

2,000 units at $57 $114,000Cost recovery (2,000 × $7) (14,000)

$100,0003WIP control:

2,000 abnormal spoilage units at $57 $114,0003,000 normal spoilage units at $7 21,000

$135,000

3a. If all spoilage were considered normal, the journal entries to account for Job No. N1192-122 would be as follows:

Accounts Receivable or Cash 35,000 WIP Control 35,000

To account for 5,000 units of normal spoilage, credited to WIP Control at $35,000 (5,000 units × $7).

Finished Goods Control 6,919,000 WIP Control 6,919,000

To transfer 117,000 units to finished-goods inventory (costs incurred on job and debited to WIP Control, $6,954,000, minus $35,000 credited to WIP Control).

By considering all spoilage as normal, Richport will show no abnormal loss of $100,000 (see requirement 2) but instead will add $100,000 to the finished-goods inventory [$6,919,000 (in requirement 3a) minus $6,819,000 (in requirement 2)]. Hence, showing all spoilage as normal will increase Richport’s operating income by $100,000.

3b. Incorrect reporting of spoilage as normal instead of abnormal with the goal of increasing operating income is unethical. In assessing the situation, the management accountant should consider the following:

18-37

18-39 (Cont’d.)

CompetenceSpoilage should be accounted for using relevant and reliable information. Accounting for spoilage incorrectly to make the company’s operating performance look better than it is violates competence standards. It is unethical for Rutherford to suggest that Gonzales change abnormal spoilage to normal spoilage in order to make operating performance look good.

IntegrityThe management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Rutherford’s motivation for wanting Gonzales to revise the quality figures could well have been motivated by Rutherford’s desire to please senior management. This action could be viewed as violating the responsibility for integrity. The Standards of Ethical Conduct require the management accountant to communicate favorable as well as unfavorable information. In this regard, both Rutherford’s and Gonzales’s behavior (if Gonzales agrees to modify the spoilage classification) could be viewed as unethical.

ObjectivityThe management accountant's standards of ethical conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant's standpoint, showing abnormal spoilage as normal spoilage to make operating performance look good would violate the standard of objectivity. For the various reasons cited above, we should take the position that Rutherford’s and Gonzales's behavior (if Gonzales goes along with Rutherford’s wishes) is unethical.

Gonzales should indicate to Rutherford that the classification of normal and abnormal spoilage established by Richport Company is, indeed, appropriate. If Rutherford still insists on modifying the spoilage classification for this job to report higher operating income figures, Gonzales should raise the matter with one of Rutherford’s superiors. If, after taking all these steps, there is continued pressure to overstate operating income, Gonzales should consider resigning from the company, and not engage in unethical behavior.

18-40 (35 min.) FIFO method, spoilage, working backward.

1. Equivalent units of work done in the current period can be calculated using Step 2 as follows:

Direct ConversionMaterials Costs

Costs added in January $1,480,000 $942,000Divided by cost per equivalent unit of work done in January ÷ $20 ÷ $12 Equivalent units of work done in January 74,000 78,500

2. Solution Exhibit 18-40, Panel A, shows the equivalent units of work done (a) to complete beginning work-in-process inventory, (b) to start and complete new units, (c) for normal spoilage, and (d) for abnormal spoilage. The sum of these equivalent units is then subtracted from the total equivalent units of work done in January (direct materials, 74,000, and conversion costs, 78,500) to determine the equivalent units in ending work in process (direct materials, 15,000, and conversion costs, 12,000).

18-38

18-40 (Cont’d.)

3. The physical units of ending work in process can be calculated by taking total physical units to account for, 84,000 (beginning work in process, 10,000 plus units started 74,000) and subtracting good units completed and transferred out, 61,000; normal spoilage, 6,710; and abnormal spoilage, 1,290, to obtain 15,000 physical units in ending work in process.

The percentage of completion of ending work in process for each cost category can then be calculated as follows:

Direct ConversionMaterials Costs

Equivalent units of ending work in process (requirement 2) 15,000 12,000Divided by physical units of ending work in process ÷ 15,000 ÷ 15,000 Percentage of completion of ending work in process 100% 80%

4. Solution Exhibit 18-40, Panel B summarizes total costs to account for, and assigns these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.

SOLUTION EXHIBIT 18-40First-in, First-out (FIFO) Method of Process Costing with SpoilageCooking Department of Spicer Inc. for JanuaryPANEL A: Steps 1 and 2—Summarize Output in Physical Units and Compute Equivalent Units

(Step 1) (Step 2)

Equivalent Units


UnitsDirect

MaterialsConversion

CostsWork in process, beginning (given)Started during current period (given)To account forGood units completed and transferred out


10,000 × (100% −100%); 10,000 × (100% − 25%)Started and completed

51,000 × 100%; 51,000 × 100%Normal spoilage*

6,710 × 100%; 6,710 × 100%Abnormal spoilage†

1,290 × 100%; 1,290 × 100%Work in process, ending‡

15,000 × 100%; 15,000 × 80%Accounted forWork done in current period only

10,00074,000 84,000

10,000

51,000#

6,710

1,290

15,000 84,000

0

51,000

6,710

1,290

15,000 74,000

7,500

51,000

6,710

1,290

12,000 78,500

||Degree of completion in this department: direct materials, 100%; conversion costs, 25%.#61,000 physical units completed and transferred out minus 10,000 physical units completed and transferred out

from beginning work-in-process inventory.*Normal spoilage is 11% of good units transferred out: 11% × 61,000 = 6,710 units. Degree of completion of

normal spoilage in this department: direct materials, 100%; conversion costs, 100%.†Abnormal spoilage = Actual spoilage − Normal spoilage = 8,000 − 6,710 = 1,290 units. Degree of completion of

abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.‡Degree of completion in this department: direct materials, 100%; conversion costs, 80%.

18-39

18-40 (Cont’d.)


TotalProduction

CostsDirect

MaterialsConversion

Costs




$ 250,0002,422,000

$2,672,000

$1,480,000

÷ 74,000 $ 20

$942,000

÷ 78,500 $ 12



Started and completed before normal spoilage (51,000 units)Normal spoilage (6,710 units)

(A) Total cost of good units transferred out(B) Abnormal spoilage (1,290 units)



$ 250,0000

90,000

340,000

1,632,000 214,720 2,186,720 41,280

300,000 144,000 444,000 $2,672,000

0§ × $20 7,500§ × $12

51,000§ × $20 + 51,000§ × $12 6,710§ × $20 + 6,710§ × $12

1,290§ × $20 + 1,290 × $12

15,000§ × $20 12,000§ × $12


Chapter 18 Internet Exercise

The Internet exercise is available to students only on the Prentice Hall Companion Website www.prenhall.com/horngren. Students can click on Cost Accounting, 11th ed., and access the Internet Exercise for the chapter, which links to the Web site of a company or organization. The Internet Exercise on the Web will be updated periodically so that it is current with the latest information available on the subject organization's Web site. A printout copy of the Internet exercise for this chapter as of early 2002 appears below.

The solution to the Internet exercise, which will also be updated periodically, is available to instructors from the Companion Website's faculty view. To access the solution, click on Cost Accounting, 11th ed., Faculty link, and then register once to obtain your password through the online form. After the initial registration, you will have a personal login ID and password to use to log in. A printout of the solution to the Internet exercise for this chapter as of early 2002 follows. The exercise and solution provide instructors with an idea of the content of the Internet exercise for this chapter.

18-40

http://www.prenhall.com/horngren

Internet Exercise (Cont’d.)

Internet Exercise

In addition to improving product quality and reducing costs, efforts to reduce spoilage, rework, and scrap can play an important role in improving the environment. Although many companies today are reengineering their products and processes to reduce pollution and cut costs, few companies are as ambitious as Interface, Inc., the world’s largest commercial carpet manufacturer. Go to http://www.interfaceinc.com/us/, and click on the “company information” link to get more information on Interface’s war on waste and sustainable manufacturing program.

1. Click on the “war on waste” link. What is “Quest” and what is its role in reducing waste?2. What is Interface’s long-term goal? How much does it estimate it has saved by reducing

waste?3. Click on the “sustainability” link. What is meant by sustainability?4. What are the seven steps in Interface’s sustainability model?5a. Click on “The Interface Model” link, and read CEO Ray Anderson’s story. What book

changed Anderson’s view of the environment?5b. What was the central thesis of this book?5c. What second book shaped Anderson’s views?6a. Click on the “Practices Leading Towards Sustainability,” “PLETSUS,” link and scroll

down to the sections on “Product Design” and “Materials.” What are factors a company should consider when designing a product?

6b. What factors should it consider regarding materials selection and handling?7. How can you get a copy of Interface’s sustainability report?

Solution to Internet Exercise

1. QUEST is an acronym that stands for Quality Utilizing Employee Suggestions and Teamwork. It is the key to Interface’s sustainability effort. QUEST teams around the world reexamine our sources of waste and create ways to reduce and finally eliminate waste. QUEST teams redesign and rethink products so that we can deliver more with less. They reengineer production processes to reduce resource consumption. In short, if part of a process or product doesn't add value it is eliminated.

2. Interface’s long-term goal is to create zero waste, not just in manufacturing, but also in every discipline from human resources to accounting. Interface estimates that they have saved more than $165 million since 1994.

3. Sustainability is more than environmentalism. It means managing people and natural resources with the same vigor that is applied to managing financial capital. It is about understanding the true costs of the choices that we make, and living and working in a way that does not jeopardize future social economic and natural resources.

Sustainability is a complex and interrelated challenge that drives enterprises toward maximum efficiency with their resources, maximum responsibility for their actions, and maximum return on their investment. Sustainability means a business takes no more from its environment than what it returns.

18-41

http://www.interfaceinc.com/us/

Internet Exercise (Cont’d.)

4. The seven steps in Interface’s sustainability model are: 1. Eliminate Waste - Eliminate waste, not just incrementally reduce it. 2. Benign Emissions - Eliminate the emission of molecular waste with negative or toxic

impact.3. Renewable Energy - Reduce consumption and replace nonrenewable sources with

sustainable ones. 4. Closing the Loop - Redesign processes and products to create cyclical material flows. 5. Resource Efficient Transportation - Working to reduce the transportation of products and

people in favor of moving information. This includes plant location, logistics, information technology, video-conferencing, e-mail, and telecommuting.

6. Sensitivity Hookup - Create a community within and around Interface that understands the functioning of natural systems and our impact on them.

7. Redesign Commerce - Redefine commerce to focus on the delivery of service and value instead of the delivery of material.

5a. Paul Hawken's book, The Ecology of Commerce.5b. The central thesis of the book is that “while business is part of the problem, it can also be

a part of the solution. Business is the largest, wealthiest, most pervasive institution on Earth, and responsible for most of the damage. It must take the lead in directing the Earth away from collapse, and toward sustainability and restoration.”

5c. The second book was Ishmael, by Daniel Quinn.

6a. Design considerations include:• Redesign products to use fewer direct materials while delivering the same or greater

value. • Replace nonrenewable materials with more sustainable materials, such as recycled

and reclaimed post-consumer or post-industrial waste materials. • Eliminate use of hazardous chemicals. • Design products to minimize consumption of energy and other materials. • Design products to last longer, make products durable. • Design products to be repaired or selectively replaced when only a portion wears out. • Develop products out of easily separated components, or out of one material to

facilitate recycling.• Consider the entire life cycle of product, including how it will be recovered and made

into another useful product.6b. Materials considerations include:

• Adopt a zero waste mentality, design processes to create no waste or scrap. • Adopt a zero defect mentality, most material defects become waste. • Eliminate all smokestacks, effluent pipes, and hazardous waste. • Adopt high efficiency planning and scheduling practices to minimize waste. • Network with other companies to use waste as inputs for other processes. • Buy direct materials in bulk to minimize packaging. • Carefully segregate waste materials for reuse or recycling.

18-42

• Develop processes to utilize internal scrap materials. Internet Exercise (Cont’d.)

• Develop technology to quickly stop processes to minimize waste created by off quality processes.

• Take corrective action on quality problems as far before manufacturing as possible to minimize waste.

• Closely measure all material waste to monitor material efficiency.

7. You can order a copy online at: http://www.interfaceinc.com/us/company/sustainability/request_report.asp

Chapter 18 Case

THE UNITED LIBBEY-NIPPON PLANT: RESPONSIBILITY AND ACCOUNTING FOR SCRAP

The United L/N case explores issues of scrap accounting involving two glass fabrication plants of the Libbey-Owens-Ford Co. (L-O-F group). This case demonstrates that changes in a plant’s production operations may necessitate changes in its scrap accounting system. In particular, it focuses on the costs and benefits of determining the causes of product defects in a fully automated production setting.

The primary problem at the United L/N Plant is that its yield is substantially lower than budgeted. The higher than anticipated scrap rate makes it difficult for the plant to meet profit goals set by its joint L-O-F and Nippon Sheet Glass board of directors. Responsibility for the high scrap rate is shared by both the Rossford plant (bad glass) and United L/N itself (improper machine setup or machine malfunction). At issue is the appropriate means of sharing the economic costs resulting from scrap.

The L-O-F management is very wary of decentralization. The company has a tradition of centralized control. Senior executives do not want to change Rossford’s status either as a standard cost center or as a supplier of United L/N. The two plants’ managements were therefore instructed to negotiate a mutually agreeable solution to their dispute, which centers on disposition of the United L/N scrap variance.

1. One way to proceed with requirement 1 of the case is to have one group of students role-play members of the Rossford Plant negotiating team and have another group of students role-play members of the United L/N negotiating team.

18-43

http://www.interfaceinc.com/us/company/sustainability/request_report.asp

Case Exercise (Cont’d.)

Points made by the Rossford team

a. At the Rossford plant, experienced personnel inspect glass after each operation and when units are finished. These inspectors strongly believe that the problems with yields at United L/N are caused by problems with the plant’s automated machines and the inability of its personnel both to set the control dials properly and to otherwise operate the equipment. This belief is reinforced by an unsubstantiated rumor that the yield rate of one of the three United L/N shifts is much higher than that of the other two. The Rossford team may want to propose that the L-O-F board of directors obtain more direct evidence on this issue.

b. Rossford’s management could argue that the plant should be charged only the Rossford manufacturing cost of units that are scrapped because of defects in the raw glass that it transfers. This solution would require identification of the specific causes of scrap at United L/N, which would further require changes in the plant’s production lines.

c. As a compromise, the Rossford negotiators could offer to accept a prorated share of the scrap variance (and thereby a share of United L/N’s fabrication costs) if United L/N’s management would take the necessary steps to determine where scrapped units become defective.

d. The Rossford team could further propose a rigorous quality inspection at the United L/N receiving point, which would necessitate unpacking and repacking the specially designed racks of glass. If such inspection were accepted by United L/N, then Rossford personnel could argue that no portion of future (and presumably lower) scrap variances should be assigned to their plant.

2. Points made by the United L/N team

a. The United L/N position is that inspection at Rossford is insufficient to detect all defects. Similarly, these defects would not be detectable even if raw glass manufactured at Rossford was inspected by United L/N. These defects only show up at one of the subsequent processing steps but the root cause of these defects is the bad raw glass supplied by Rossford.

b. The United L/N team could argue that the entire scrap cost (price paid for the raw glass plus all of United L/N’s manufacturing costs, not just the costs incurred until the glass is scrapped) should be charged to Rossford. Their main argument is that the various stages in the production process are so closely linked together that the plant incurs costs at the subsequent stages even when glass is scrapped at an earlier stage.

c. Since the demand for United L/N’s products is high, United L/N’s team could argue for full price of the lite (which includes the opportunity cost of not producing the lite).

d. The United L/N team could argue that introducing inspection at various points in the process would destroy the state-of-the-art, totally automated concept of the plant, create inventories and hence add to product costs, and complicate the simple process-costing system United L/N currently enjoys. They would be unwilling to bear these costs only to resolve the current dispute.

18-44


3. To improve its yield and its profit performance, United L/N’s management must determine and correct the problems that are causing excessive amounts of scrap in the plant’s production process. The problems would include bad glass, flaws in the automated equipment, and improper operation of the equipment by plant technicians. Determining where units become defective necessarily precedes determining why they become defective.

To answer the “where” question, United L/N’s personnel could (1) rigorously inspect raw glass received from Rossford and other shipping plants to practically eliminate bad glass as a cause of defects, and (2) install and operate monitoring equipment after each stage of the production process. If successful, these steps could considerably reduce the disputes between United L/N and its suppliers. In fact, in the plant’s negotiations, Rossford personnel have pushed hard for installation of such equipment. However, inspection of raw glass is not an “exact science,” and United L/N managers could continue to argue that some defects detected in processing were caused by bad glass.

Operation of the monitoring equipment would create a situation similar to that of the Rossford plant, where units are visually inspected after each discrete processing step. Work-in-process inventory would accumulate at each monitoring station. As the number of units in inventory increased, so would the need for overhead support. Moreover, the plant’s accountants would almost certainly create a separate cost pool for each sub-process so that units scrapped at different points could be appropriately costed. Creation of these cost pools could be accompanied by assignment of separate management responsibility for each one.

These changes would add substantial complexity to an otherwise simple process-costing system. They would also destroy the state-of-the-art, totally automated concept of the plant. Whether the benefits of the changes would outweigh the costs is debatable. However, the United L/N plant was designed with the assumption that very high work quality would be the norm. Management and operating personnel working together must solve their quality problems or some modification of the organization of production resources is inevitable.

4. One solution to the problem would be to store inventory in front of the furnaces so that they could be kept filled to optimal levels at all times. The effects of this action would be similar to the effects of installing monitoring equipment as discussed above. Work-in-process inventory would be introduced in production lines that were designed specifically to function without it, and inventory support costs would increase with the size of the inventory. It could also lead to separate management responsibility for the two areas. The number of cost pools would probably increase and the process of tracing costs to output would become substantially more complex than at present.

18-45


Another alternative would be to attack the operating problems directly instead of incurring the costs of storage, inventory, and additional plant support services. Any reduction in the scrap rate of a pattern cutting or edging operation would result in fewer gaps in the line going into the furnace and translate into increased furnace efficiency. If the more experienced Rossford personnel are correct, much room for improvement remains in the ability of United L/N technicians to set up and operate their machines. With or without the aid of monitoring equipment, management should continue to work with them to refine their skills and thereby increase the yield of the plant.

If Rossford and United L/N were independent companies, they could negotiate a market price for raw glass, incorporating the risk of bad glass into the contract. Similarly, if L-O-F were to make Rossford a profit center instead of a cost center, the two managements could negotiate a price that incorporates the risk of bad glass. Additionally, if the managements of each plant were given decentralized decision-making authority, they could decide whether to sell to, and buy from, each other. The cost allocation issues then would not be so critical.

18-46

spoilage, rework, and scrap

Documents