BEC - Spoilage, Cost, and Inventory Flow

Question 1

Hoyt Co. manufactured the following units:

Saleable 5,000
Unsaleable (normal spoilage) 200
Unsaleable (abnormal spoilage) 300
The manufacturing cost totaled $99,000.

What amount should Hoyt debit to finished goods?

A. 	$90,000.
B. 	$93,600.
C. 	$95,400.
D. 	$99,000.

Answer 1

B. $93,600.

Normal spoilage is a manufacturing cost because it is an expected and inherent part of production. Thus, it is included in the cost of finished goods. Abnormal spoilage is the amount of spoilage in excess of normal spoilage, and it is treated as a period cost.

The total units completed are 5,500 (5,000 + 200 + 300). Of this total, 5,200 are included in finished goods. Thus, 5,200/5,500 of the total cost incurred is included in finished goods. The remainder is a period cost.

Debit to finished goods = $93,600 = (5,200/5,500)$99,000

Question 2

Normal spoilage

Answer 2

normal spoilage is an expected part of the production process. The cost represents units or materials that were lost in the normal production process. They are indirect manufacturing costs (overhead) and, thus, are inventoriable.

Question 3

Abnormal spoilage

Answer 3

unexpected, and is over and above the anticipated level. It represents a loss for financial accounting purposes. No benefit is derived from abnormal spoilage and it is considered a period cost

Question 4

In June, Delta Co. experienced scrap, normal spoilage, and abnormal spoilage in its manufacturing process. The cost of units produced includes
A. Scrap, but not spoilage.
B. Normal spoilage, but neither scrap nor abnormal spoilage.
C. Scrap and normal spoilage, but not abnormal spoilage.
D. Scrap, normal spoilage, and abnormal spoilage.

Answer 4

C. Scrap and normal spoilage, but not abnormal spoilage.

Scrap is the material left over after making a product. It has minimal or no sales value. Scrap is automatically included in work in process for a product because it is part of the material cost of a product. In many manufacturing settings, it is impossible to use every bit of material input. For example, the circular punch-outs for conduit boxes are scrap.
Normal spoilage is output that cannot be sold through normal channels. It is an inherent result of production. In many cases, it is not cost effective to attempt to reduce the normal spoilage cost to zero. It is a normal part of the production process and, therefore, its cost is included in the cost of units produced.

Abnormal spoilage is considered avoidable. It occurs as a result of an unexpected event, such as a machine breakdown or accident. This cost is treated as a loss rather than a normal production cost.

Question 5

During the month of March Year 1, Nale Co. used $300,000 of direct materials. On March 31, Year 1, Nale’s direct materials inventory was $50,000 more than it was on March 1, Year 1.
Direct material purchases during the month of March Year 1 amounted to

A. 	$0.
B. 	$250,000.
C. 	$300,000.
D. 	$350,000.

Answer 5

D. $350,000

Purchases is the amount required to provide the materials used ($300,000) and the increase in inventory ($50,000) for total purchases of $350,000.
Beginning material inventory + purchases = ending material inventory + material used
Purchases = ending inventory - beginning inventory + material used
Purchases = inventory increase + materials used
Purchases = $50,000 + $300,000
= $350,000

Question 6

Calculate Cost of Goods Sold

Answer 6

Beginning Inventory
\+ Purchases (net)
= Goods available for sale
-  Ending Inventory
= Cost of Goods Sold

Question 7

Calculate the dollar value of the goods that were completed during the period and transferred to finished goods.

Answer 7

\+	Beg. Value WIP	
\+	Current Period Additions:	
\+ Direct Materials*	
\+ Direct Labor	
\+ Overhead	
−	Ending Value WIP	
=	Cost of Goods Manufactured	--> to additions to Finished Goods Inventory

*The current period direct materials costs are calculated by analyzing the Direct Materials Inventory account:

\+	Beg. Direct Materials	
\+	Purchases (net)	
=	Direct Materials Available for Use	
−	Ending Direct Materials	
=	Direct Materials Used	--> to Direct Materials line on schedule of cost of goods manufactured

Question 8

Schedule of Cost of Goods Sold

Answer 8

Beginning Finished Goods
+ Cost of Goods Manufactured –> from the Schedule of CGM
Goods Available for Sale
− Ending Finished Goods
= Cost of Goods Sold –> appears as a line item on the I.S.

Question 9

Example of a schedule of COGS

Answer 9

Step 1: Calculate the raw materials used during the period:

\+	Beg. Direct Materials	+ $120,000
\+	Purchases (net)	+ $800,000
=	Materials Available for Use	+ $920,000
−	Ending Direct Materials	− $100,000
=	Direct Materials Used	= $820,000
Step 2: Calculate the cost of goods manufactured:

\+	Beginning Value WIP		$180,000
\+	Current Period Additions:		
\+ Direct Materials used	+ $820,000	
\+ Direct Labor	+ $120,000	
\+ Overhead Applied	+ $700,000	
$1,640,000
= Total Manufacturing Costs		$1,820,000
−	Ending Value WIP		$120,000
=	Cost of Goods Manufactured		$1,700,000
Step 3: Calculate the cost of goods sold:

Beginning Finished Goods	+ $250,000
\+	Cost of Goods Manufactured	+ $1,700,000
Goods Available for Sale	= $1,950,000
−	Ending Finished Goods	− $350,000
=	Cost of Goods Sold	= $1,600,000