Download supplement b: shrinkage and lost units supplement b

SUPPLEMENT B: SHRINKAGE
ANDB:LOST
UNITS AND LOST UNITS
SUPPLEMENT
SHRINKAGE
The illustrations presented in Chapter 4 of the textbook assume units that are in process
are either completed or still awaiting completion at the end of each period. In reality, units
can disappear because of evaporation, losses, or rejection. Such missing units can be considered a normal part of the processing or may be deemed abnormal. Abnormal losses can
be thought of as costs akin to unusual losses studied in financial accounting. Normal
losses would be normal costs of operating the process department.
Two accounting treatments are prevalent for normal losses. One, the amount of the
loss can be charged to a specific loss account, which could be charged to manufacturing
overhead. Two, the amount of the loss could be spread over all of the good units of work
done during the period.
If significant in amount and truly abnormal, abnormal losses should always be
assigned to the unusual section of the income statement, where they can be offset by any
recoveries from insurance or other means.
The following illustrates the two alternative treatments of normal losses. The
weighted-average method is used for illustration.
Case 1: Normal Loss Charged to Manufacturing Overhead
Assume that Stabler Chemical had a machine breakdown causing a loss of 10,000 units
that were 100% complete as to materials and 60% complete for labour and overhead.
Exhibit SB–1 presents the cost of production report for Stabler Chemical after the
assumption is included in the data for the problem. The lost units are included in the units
accounted for, and the equivalent units lost become a separate line in the equivalent units
calculation. When costs are accounted for, the lost units, whether normal (as they are in
this case) or abnormal, are costed according to their equivalent units completed. The journal entry for normal losses would be:
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,272
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,272
The total number of units lost, both normal and abnormal, can be determined from
the quantity schedule. Units accounted for have to be transferred out, in Work in Process
at the end of the period, or lost. Thus, even when lost units cannot be physically counted,
they can be mathematically calculated by knowing the total units to account for. What is
more difficult is to distinguish normal from abnormal losses. A common approach is to
use a percentage to express what is normal. Usually this percentage is expressed in terms
of the number of units that pass a prespecified inspection point. Thus, in Exhibit SB–1,
the inspection point could be at 60% of the total production conversion process. If, for
example, 5% of good output is considered to be normal losses, then 8,000 (0.05 160,000) units would be normal losses and 2,000 abnormal. Notice the ending Work in
Process is only 40% complete so it has not reached the inspection point. Thus, the 5% figure would not be applied to the 30,000 units in the ending Work in Process.
An assumption is needed here to avoid a significant complexity. The preceding entry
assumes predetermined overhead is used so that $11,272 is an actual overhead cost that
was previously estimated when the overhead rate was calculated. Because the $11,272
includes $4,632 for overhead, overhead is being charged to overhead, resulting in some
cost duplication, but the amount of error introduced is assumed to be minor.
If the losses were considered to be abnormal, the entry to record the loss would be:
Unusual Loss—Machine Breakdown . . . . . . . . . . . . . . . . . . . . . . 11,272
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,272
LEARNING OBJECTIVE 1
Compute the cost of
lost units or shrinkage.
SB-2
Supplement B Shrinkage and Lost Units
EXHIBIT SB–1 Production Report—Weighted-Average Method
Quantity Schedule and Equivalent Units
Quantity
Schedule
Units to be accounted for:
Work in process, beginning (all materials, 30% labour and overhead
added last month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Started into production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
180,000
Total units to be accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
Equivalent Units (EU)
Units accounted for as follows:
Transferred out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Units lost, normal (100% of materials, 60% labour and overhead) . . . .
Work in process, ending (all materials, 40% labour and overhead
added this month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,000
10,000
Materials
Labour
Overhead
160,000
10,000
160,000
6,000
160,000
6,000
30,000
30,000
Total units accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
200,000
Unit Costs
Total
12,000*
178,000
12,000*
178,000
Materials Labour Overhead
Work in process, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,000
Cost added by the department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000
$ 8,000
63,000
$ 3,600
88,000
$ 5,400
132,000
Total cost (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
$ 71,000
$ 91,600
$137,400
Equivalent units (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit cost, (a) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost Reconciliation
200,000
178,000 $178,000
$1,642 $0.355 $0.515 $0.772
Costs
Cost to be accounted for:
Work in process, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,000
Cost added by the department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000
Total cost to be accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
Equivalent Units (EU)
Cost accounted for as follows:
Transferred to cooking: 160,000 $1.642 . . . . . . . . . . . . . . . . . . . . . $262,720
Normal losses
Materials (at $0.355 10,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,550
Labour (at $0.515 6,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,090
Overhead (at $0.772 6,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,632
Total normal losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,272
Work in process, ending:
Materials (at $0.355 30,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Labour (at $0.515 12,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overhead (at $0.772 12,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,650
6,180
9,264
Total work in process, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,094
Total cost accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Rounding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
300,086
86
160,000
160,000
160,000
10,000
6,000
6,000
30,000
12,000
12,000
Total cost accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
*40% 30,000 units 12,000 equivalent units.
EU Equivalent unit.
www.mcgrawhill.ca/college/garrison
SB-3
Supplement B Shrinkage and Lost Units
EXHIBIT SB–2 Production Report—Weighted-Average Method
Quantity Schedule
Quantity
Schedule
Units to be accounted for:
Work in process, beginning (all materials, 30% labour and overhead
added last month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Started into production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,000
180,000
Total units to be accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
Equivalent Units (EU)
Units accounted for as follows:
Transferred out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Units lost—normal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process, ending (all materials, 40% labour and overhead
added this month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,000
10,000*
Materials
Labour
Overhead
160,000
–0–
160,000
–0–
160,000
–0–
30,000
30,000
Total units accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
190,000
Unit Costs
Total
12,000†
172,000
12,000†
172,000
Materials Labour Overhead
Work in process, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,000
Cost added by the department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000
$ 8,000
63,000
$ 3,600
88,000
$ 5,400
132,000
Total cost (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
$ 71,000
$ 91,600
$137,400
Equivalent units (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unit cost, (a) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost Reconciliation
190,000
172,000
172,000
$1.706 $0.374 $0.533 $0.799
Costs
Cost to be accounted for:
Work in process, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,000
Cost added by the department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000
Total cost to be accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
Equivalent Units (EU)
Cost accounted for as follows:
Transferred to cooking: (160,000 $1.706) . . . . . . . . . . . . . . . . . . . . $272,960
Work in process, ending:
Materials (at $0.374 30,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,220
Labour (at $0.533 12,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,396
Overhead (at $0.799 12,000) . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,588
Total work in process, ending . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Rounding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,000
160,000
30,000
12,000
27,204
300,164
164
Total cost accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
*Total units to be accounted for 200,000 units transferred 160,000 units in process, ending 30,000 10,000 units lost.
†40% 30,000 units 12,000 EU.
EU Equivalent unit.
www.mcgrawhill.ca/college/garrison
160,000
12,000
SB-4
Supplement B Shrinkage and Lost Units
Case 2: Normal Loss Charged to All Good Output
Assume Stabler Chemical had normal evaporation of liquid evenly through the process.
The illustrated solution is presented in Exhibit SB–2. Notice first that the amount of loss
is not given in units. The units lost have to be determined from the quantity schedule by
computing the difference between the total units to be accounted for and what is known
to have been completed or is still in process.
The number of units lost is assigned a 0 equivalent units amount. The resulting
smaller number of units is used to determine the unit costs. When costs are accounted for,
the unit costs are greater because they include the costs of the evaporation or normal
losses. Thus, no entry is required to record the normal loss.
Careful thinking about these two cases presents a number of theoretical issues as to
where to charge losses and whether or not it is fair to charge Work in Process with losses
if the units in this ending inventory have not been inspected at their stage of completion.
Exhibit SB–1 provides an opportunity to look at one type of complication. Normal
losses have to be calculated and separated from abnormal losses where both types of
losses are present. In Exhibit SB–1, 10,000 units of normal losses represent all of the units
lost. In addition, these units were lost at the 60% stage of production. If, however, the ending work in process had reached or passed the 60% stage, then normal losses could be
separated from the known total losses by applying the normal loss percentage to both the
completed units and the ending work in process.
For example, if the lost units totalled 10,000 and the ending work in process was 70%
complete instead of the assumed 40%, then a normal loss percentage of, say, 5% would
be applied as follows to separate normal and abnormal:
5% 160,000 8,000 (from completed items)
5% 30,000 1,500 (from ending work in process)
Total normal losses
Abnormal
Total losses
9,500
500 (balance of losses)
10,000
QUESTIONS
SB–1 Describe two methods of dealing with normal losses in a process.
SB–2 Which of the two methods of dealing with normal losses would you prefer from a management control perspective? Why?
PROBLEMS
PROBLEM SB–1 Processing Cost and Spoilage
Caper Company Ltd. operates under a processing cost system for one of its products. During June
2007, 7,946 units were put into production and 7,000 units were completed and transferred out.
Inspection occurs when the process is 50% complete, and normal spoilage amounts to 10% of the
good units passed. The ending work in process is 75% complete. There were no beginning inventories, and during June, $79,464 of direct materials were applied at the beginning of the process;
conversion costs of $73,920 were applied evenly during the process. No abnormal spoilage was
incurred during June.
Required:
Compute the cost of goods completed and the cost of the ending inventory of work in process.
Charge the costs of all normal spoilage to all good output.
(CGA, adapted)
www.mcgrawhill.ca/college/garrison
Supplement B Shrinkage and Lost Units
PROBLEM SB–2 Processing Cost, Second Department: Spoilage
Chesley Company uses a process costing system to account for the costs of three production departments (Departments I, II, and III). Department II receives units from Department I and applies conversion costs evenly throughout the process. During the month 62,720 units were completed and
transferred to Department III. When the units are 90 percent complete, they are inspected and all
materials are then added to the good units.
The following is additional information related to Department II for the month of May 2007:
a.
The company put 3,920 units in process at the beginning of May 2007. They were estimated to be 40 % complete. Costs associated with these units were as follows:
Department I costs . . . . . . . . . . . . . . . . . .
Department II costs . . . . . . . . . . . . . . . . .
b.
c.
During May 68,600 units were received from Department I at a cost of $401,800.
Actual costs incurred by Department II during the month were:
Materials . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion costs . . . . . . . . . . . . . . . . . . .
d.
$19,600
$ 3,528
$ 24,500
205,800
There were 7,840 units in process at the end of the month that were estimated to be 70
percent complete.
Required:
1. Prepare a cost of production report for Department II for May using the weighted-average
method. Note: Calculations of unit costs should be rounded to five decimal places.
2. Explain briefly one major difference between the weighted-average method and the FIFO
method. No calculations are required.
3. How much could Chesley save if it was able to reduce its spoilage to zero? Would society benefit from such an action?
PROBLEM SB–3 Processing Cost, Second Department: Spoilage Evans Company has two
production departments—Assembly and Finishing. The Finishing Department received 14,000
units from the Assembly Department during the month of December. The cost of these units was
$138,320.
Inspection takes place in the Finishing Department when the units are 80% complete. Normal
spoilage is 3%. Materials are added immediately to the good units that pass inspection.
On December 1, the Finishing Department had 2,800 units in process. These units were 60%
complete. These units contained $28,000 of Assembly Department costs and $14,000 of conversion
costs.
The Finishing Department used $19,845 of materials and $221,200 of conversion costs during
December. At the end of December, the Finishing Department had 1,400 units on hand that were
60% complete. During December, 14,700 units were transferred to finished goods. Evans company
accounts for its inventory using the weighted-average method.
Required:
1. Prepare a December cost of production report for Evans Company.
2. Calculate the equivalent units for December if Evans had used the FIFO method of process
costing.
PROBLEM SB–4 Processing Cost, Second Department: Spoilage The Mosley Co. Ltd. has
two departments and uses a weighted-average processing cost system. The following information
pertains to Department 2 for the month of April 2007.
a. At March 31, 2007, the work in process inventory in Department 2 consisted of 6,000 units that
were 50% complete and had been charged $56,000 for Department 1 costs, and $24,000 for
conversion costs in Department 2.
b. During April, 22,000 units were received from Department 1 at a cost of $224,000.
c. Department 2 costs during April were $24,000 for materials and $156,000 for conversion costs.
d. 16,000 units were completed and transferred to finished goods.
e. At the end of April, 10,000 units were still in process in Department 2. They were estimated to
be 60% complete.
In Department 2, it is expected that 5% of good output will be spoiled. Inspection takes place at the
end of the process. Materials are added after inspection in Department 2.
www.mcgrawhill.ca/college/garrison
SB-5
SB-6
Supplement B Shrinkage and Lost Units
Required:
1. Prepare the cost of production report for the month of April 2003 for Department 2.
2. Was the spoilage in Department 2 greater or less than normal? What was its cost to Mosley?
3. How much could Mosley save if it could cut its normal spoilage to 2%?
(CGA, adapted)
PROBLEM SB–5 Processing Cost, Second Department: Spoilage Atkinson Company uses
a process costing system to account for the costs of three production departments (Departments I,
II, and III). Department II receives units from Department I and applies conversion costs evenly
throughout the process. During May 96,040 units were received from Department I at a cost of
$562,520. When the units are 90 % complete, they are inspected and all materials are then added to
the good units.
The following is additional information related to Department II for the month of May 2007:
a.
The company put 5,488 units in process at the beginning of May 2007. They were estimated to be 40 % complete. Costs associated with these units were as follows:
Department I costs . . . . . . . . . . . .$27,440
Department II costs . . . . . . . . . . .$ 4,940
b.
Actual costs incurred by Department II during the month were:
Materials . . . . . . . . . . . . . . . . . .$ 34,300
Conversion costs . . . . . . . . . . . . . .288,120
c.
d.
During the month 87,808 units were completed and transferred to Department III.
There were 7,840 units in process at the end of the month that were estimated to be 85 %
complete.
Required:
1. Prepare a cost of production report for Department II for May using the weighted-average
method. Note: Calculations of unit costs should be rounded to five decimal places.
2. Explain briefly one major difference between the weighted-average method and the FIFO
method. No calculations are required.
3. How much could Atkinson save if it was able to reduce its spoilage to zero? Would society
benefit from such an action?
PROBLEM SB–6 Processing Cost, Second Department: Spoilage The Dipchand Co. Ltd.
operates under a weighted-average processing cost system. It has two departments, 1 and 2. In
Department 2, materials are added at the end of the process, following inspection. Normal spoilage
is considered to be 9% of good output. Labour and overhead costs are assumed to apply evenly
throughout the process.
Inventory at the beginning of the period was one-half complete; ending inventory is two-thirds
complete.
Following are the costs and unit production statistics for November 2007:
Beginning inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800 units
Received from Department 1 . . . . . . . . . . . . . . . . . . . .11,200 units
Completed and transferred to
finished goods storeroom . . . . . . . . . . . . . . . . . . . . . 9,800 units
Ending inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 units
Costs
Beginning inventory . . . . . . . . . . . .
Current costs . . . . . . . . . . . . . . . . .
Transferred
from
Department 1
Materials
Labour
Overhead
$ 8,540
39,460
—
$9,800
$ 1,960
16,800
$ 770
7,070
Required:
1. Prepare a cost of production report for Department 2, including the amount to be charged to
finished goods, the value of the ending inventory, and the disposition of the cost of spoiled units.
2. If Dipchand could improve processing in Department 2 and cut spoilage by 50%, what could
it save?
www.mcgrawhill.ca/college/garrison