Process Costing System - Case Study:
Case A. Accounting for Spoiled Units:
The House Hold Aids Company
assembles clip clothespins in three sections, and uses process
costing. Under normal operating conditions, each section has a
spoilage rate of 2%. However, spoilage can go as high as 5% and is
usually discovered when a faulty pin enters process or on final
completion by a section.
The spring mechanism is the only
material which can be saved from a spoiled unit. The production
supervisor assigns a worker once or twice a week to remove the
springs from spoiled units. The salvaged springs are placed in bins
at the assembly tables in section No1 to be used again. No
accounting entry is made of this salvage operation.
In the past, the controller has
made no attempt to account for spoilage separately. Lost unit costs
have been absorbed by the units transferred out of the section and
those remaining in the process. However, because spoilage is
increasing, a different method is needed.
Solution:
The spoiled work should be broken
into normal and abnormal spoilage. The cost of normal spoilage
should be absorbed by good completed units. All materials salvaged
should be assigned a value and placed in materials inventory.
Sectional materials costs should be reduced by the value assigned to
salvaged materials.
Abnormal spoilage should be charged
to factory overhead account. The cost to be included in this account
should be the amount accumulated against a clothespin up to the
point of being scraped, and the total loss in scraped clothespins
should be shown in the cost of production report of the department
responsible for the loss.
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