Process Costing - Spoilage

Medium Practice Test

Cost Accounting

Medium Practice Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. Assigning 0 equivalent units for normal continuous spoilage

a. allows for expensing the cost in the period incurred
b. means that the spoilage really did not occur this period
c. increases the weighted average cost per unit of good units
d. decreases the weighted average cost per unit of good units

Answer

C. Assigning 0 equivalent units for normal spoilage makes the total equivalent units lower and the average cost per equivalent unit higher. The cost is included in the costs assigned to inventory (a.)

2. The balance in work in process in a process cost system is recorded with

a. only a transfer of good products to finished goods
b. only costs added during this period
c. beginning inventory costs plus costs added during this period
d. the balance is not recorded

Answer

D. The balance to work in process is not recorded, it is the result of costs added and costs transferred to finished goods.

3. Discrete production spoiled units are assumed to occur

a. evenly throughout the entire process
b. always at the end of the production process
c. always at the inspection point
d. after the inspection point

Answer

C. Spoilage is detected at a regular inspection point in a discrete process.

4. Abnormal spoilage in a continuous process is

a. included in the cost of all types of inventory
b. added to finished goods at the estimated cost of the equivalent units
c. expensed in the period incurred at estimated cost of equivalent units
d. never discovered, so there is no such thing as abnormal spoilage in a continuous process

Answer

C. Abnormal spoilage is always expensed as incurred by assigning costs according to the number of equivalent units.

5. Abnormal spoilage occurs in which type of process?

a. continuous or discrete
b. continuous only
c. discrete only
d. included with the cost of finished goods units

Answer

A. Abnormal spoilage can occur in a continuous or discrete process. The type of process does not make it abnormal. Abnormal is the amount that is greater than expected by management. Abnormal spoilage is always expensed as incurred.

6. Assigning costs to normal spoiled equivalent units must occur when the process is

a. continuous
b. discrete
c. continuous and discrete
d. abnormal and discrete

Answer

B. In a discrete process, normal spoilage will have equivalent units. The equivalent units must be assigned costs and this cost is added to finished goods. A continuous process does not assign costs to spoiled units because equivalent units are 0; the cost is averaged in to good units.

7. Normal spoiled units in a continuous process costing system

a. are added to the total equivalent units to increase the amount of total equivalent units
b. increase the weighted average cost per equivalent unit
c. do not have any impact on the cost of good finished product
d. cause total added costs to increase

Answer

B. A continuous process does not assign costs to spoiled units; the cost is averaged in and increases the cost of good units. Normal spoilage is 0 equivalent units. Total added costs do not change regardless of how costs are allocated to inventory accounts.

8. When normal spoilage is detected during the process, the cost of this spoilage should be included in

a. the cost of units sold during the current period only
b. the cost of units completed during the period
c. allocated to work in process and finished goods
d. none of the above

Answer

B. Normal spoilage is detected during the process in a discrete process. With a discrete process, equivalent units are determined and the cost of these equivalent units is added to finished goods. (c.) occurs with continuous normal spoilage.

9. Which of the following increases the work in process account?

a. normal spoilage
b. adding costs during the period to the production process
c. completing production
d. abnormal spoilage

Answer

B. Costs added during the process are added to the work in process account. Normal spoilage is added to finished goods (b.) and reduces work in process. Completing production is a reduction to work in process (c.). Abnormal spoilage is also a reduction to work in process (d.)

10. Which of the following decreases the work in process account?

a. abnormal spoilage
b. adding costs during the period to the production process
c. completing production
d. both a. and c.

Answer

D. A reduction to work in process occurs when goods are taken off the production line. This occurs when goods are completed or are determined to be spoiled.

11. The company produces fruit juice in which spoilage takes place on a discrete basis with inspection occurring at 80% of conversion. Management considers normal spoilage to be 3.5% of gallons placed into production. 70% of materials are added at 5% conversion and 30% of materials are added at 90% conversion. The following operating statistics are available for the current month:

Beginning Inventory -30% complete for conversion 6,000 gallons
Started during the month 188,000 gallons
Ending Inventory – 30% complete for conversion 5,000 gallons
Spoiled 3,400 gallons

Cost information:

Material Conversion
Beginning $ 7,903 $ 13,406
Added this period $247,501 $398,128

A. Calculate FIFO equivalent units of production for materials and conversion:
B. Compute the value of work in process and finished goods.
C. Compute the value of abnormal spoilage
D. Make all required journal entries for the current month

Answer

A. Equivalent units schedule – FIFO

Quantity
Went in during the period:
Beginning Inventory 6,000
+Started In to Production 188,000
=Total Units to be accounted for: 194,000
Equivalent Units
Quantity Material Conversion
Came out during the period:
          Beginning Inventory     6,000     1,800     4,200
          +Started and Completed : 179,600 179,600 179,600
          +Ending Inventory     5,000      3,500      1,500
          Normal spoilage     3,400      2,380      2,720
          Abnormal spoilage           0            0             0
          =Total units accounted for 194,000 187,280 188,020

Material equivalent units is based on what would be added at the given % of
conversion.
70% is in because the other 30% is added when it is 90% which has not yet occurred.

Normal Spoilage = .035 x 188,000 started = 6,580; however, the total was only
3,400 units (all normal and no abnormal)

B. Value WIP and FG

1st – Compute cost per unit using FIFO: use only the $ added this period / equiv. units

Material Conversion
Added this period $247,501 $398,128
Equivalent units 187,280 188,020
Cost per Eq. Unit $1.32 $2.12


2nd – Value WIP:

Material:            3,500 x $1.32   =   $ 4,620
Conversion:      1,500 x $2.12   =    $ 3,180
Total value                                        $ 7,800 WIP value


3rd – Value FG – This is done in 4 parts:

Beginning Inventory $ (7,903 +13,406) $21,309
Beginning Inventory done this period
     Material 1,800 x $1.32 $ 2,376
     Conversion 4,200 x $2.12 $ 8,904
Started/Completed this period
     Material 179,600 x $1.32 $237,072
     Conversion 179,600 x $2.12 $380,752
          (or together 179,600 x $3.44)
Normal Spoilage:
     Material 2,380 x $1.32 $ 3,142
     Conversion 2,720 x $2.12     $ 5,766
          Total Finished Goods $659,321


C. There is no abnormal spoilage. $ 0

D. All Journal Entries:

Work in Process           645,629
           Raw Materials                            247,501
           Salaries Payable, cash…           398,128

Finished Goods            659,321
               Work in Process                   659,321

12. The company produces fruit juice in which spoilage takes place on a continuous basis. Beginning inventory consists of 10,000 units and is 25% complete for conversion. Ending inventory consists of 4,000 units and is 75% complete for conversion. Total spoiled units were 18,000. Management expects spoilage to be 1.5% of gallons placed into production. 90% of materials are added at 5% conversion and 10% of materials are added at 70% conversion. The company started 200,000 gallons of fruit juice during the month. Costs in process at the beginning of the period were $2,067 for materials and $8,430 for conversion. Costs added to work in process during the period were $42,975 for materials and $169,750 for conversion.

A. Calculate FIFO equivalent units of production for materials and conversion:
B. Compute the value of work in process and finished goods.
C. Compute the value of abnormal spoilage
D. Make all required journal entries for the current month

Answer

A. Equivalent units schedule – FIFO

Quantity
Went in during the period:
Beginning Inventory 10,000
+Started In to Production  
200,000
=Total Units to be accounted for: 210,000
Equivalent Units
Quantity Material Conversion
Came out during the period:
       Beginning Inventory   10,000     1,000     7,500
       +Started and Completed : 178,000 178,000 178,000
       +Ending Inventory      4,000     4,000      3,000
       Normal spoilage      3,000            0              0
       Abnormal spoilage    15,000  15,000    15,000
       =Total units accounted for 210,000 198,000 203,500

Normal Spoiled = 1.5% x 200,000 = 3,000
Total spoiled – normal spoiled = abnormal spoiled
18,000 – 3,000 = 15,000

Normal continuous process is always 0 equivalent units
Abnormal continuous process is always 100% equivalent units

B. Value WIP and FG

1st – Compute cost per unit using FIFO: use only the $ added this period / equiv. units

Material Conversion
Added this period $42,975 $169,750
Equivalent units 198,000   203,500
Cost per Eq. Unit    $0.22      $0.83

2nd – Value WIP:

Material:          4,000 x $0.22 = $ 880
Conversion:    3,000 x $0.83 = $ 2,490
Total value                                  $ 3,370 WIP value

3rd – Value FG – This is done in 4 parts:

Beginning Inventory $ ($2,067 + $8,430) $   10,497
Beginning Inventory done this period
       Material 1,000 x $0.22 $        220
       Conversion 7,500 x $0.83 $     6,225
Started/Completed this period
       Material 178,000 x $0.22 $  39,160
       Conversion 178,000 x $0.83 $147,740
          (or together 178,000 x $1.05)
Normal Spoilage :
       Material 0 x $0.22 $            0
       Conversion x $0.83  $            0
              Total Finished Goods $203,842

C. Abnormal Spoilage:

Material 15,000 x $0.22 $ 3,300
Conversion 15,000 x $0.83 $12,450
Total          
$15,750

D. All Journal Entries:

Work in Process                      212,725
            Raw Materials                          42,975
            Salaries Payable, cash…                  169,750

Finished Goods                                    203,842
             Work in Process                                   203,842

Loss from abnormal spoilage            15,750
           Work in Process                                  15,750

13. The company uses a weighted average process costing system. All materials are added at the beginning of the process. The company started 25,000 units into production this period and had 2,000 units in process at the beginning of the period that were 20% as to conversion and 3,000 units in process at the end of the period that were 80% complete as to conversion. Normal spoilage is 3% of total units transferred during the period. The company transferred 22,300 units to finished goods. Costs in inventory at the beginning of the period were $4,970 for materials and $8,500 for conversion. Costs added to work in process during the period were $49,900 for materials and $89,750 for conversion. Inspection occurs at 75% of conversion.

A. Calculate equivalent units of production for materials and conversion:
B. Compute the value of work in process and finished goods.
C. Compute the value of abnormal spoilage
D. Make all required journal entries for the current month

Answer

Normal spoilage = 3% x units transferred of 22,300 = 669 gallons
Abnormal spoilage = total spoilage computed below – normal spoilage 669 =

A. Equivalent units schedule – Weighted Average

Quantity
Went in during the period:
Beginning Inventory 2,000
+Started In to Production 25,000
=Total Units to be accounted for: 27,000
Equivalent Units
Quantity Material Conversion
Came out during the period:
      Beginning Inventory 2,000 2,000 2,000
      +Started and Completed : 20,300 20,300 20,300
      +Ending – 80% conversion   3,000   3,000   2,400
      Normal spoilage     669     669     502
      Abnormal spoilage  1,031   1,031     773
      =Total units accounted for 27,000 27,000 25,975

Normal Spoilage = .03 x 22,300 = 669
Abnormal Spoilage is the amount that it takes to get to 27,000 total

Material is 100% because all is added at the beginning of the process

B. Value Inventory:

1st – Compute average cost per equivalent unit:

Material Conversion
Beginning $ 4,970 $ 8,500
Added this period $49,900 $ 89,750
      Total $54,870 $ 98,250
/ Equivalent Units above  27,000   25,975
= Cost per Equivalent Unit   $2.03    $3.78

2nd – Value WIP:

Material:         3,000 x $2.03 = $ 6,090
Conversion:   2,400 x $3.78 = $ 9,072
 Total value                                $15,162 WIP value

Value FG:

Beginning + S/C                x total cost per unit
2,000 + 20,300 = 22,300  x ($2.03 + $3.78) = $129,563

Normal Spoilage:

       Material: 669 x $2.03 = $ 1,358
       Conversion:
       Total Value:
502 x $3.78 = $ 1,898
                         $ 3,256

Total Finished Goods (Beg + S/C + N. S.) $132,819

C. Abnormal Spoilage:

Material:         1,031 x $2.03   =  $ 2,093
Conversion:       773 x $3.78  =   $ 2,922
Total value                                    $ 5,015

D. Record all journal entries:

Work in Process                      139,650
             Raw Materials                           49,900
             Salaries Payable, cash…          89,750

Finished Goods                       132,819
            Work in Process                     132,819

Loss from abnormal spoilage       5,015
              Work in Process                        5,015