Chapter 7

THE COST OF QUALITY AND

ACCOUNTING FOR PRODUCTION LOSSES

MULTIPLE CHOICE
Question Nos. 16, 17, 22, and 23 are AICPA adapted.
Question No. 24 is CIA adapted.
A

1.

The quality costs that are associated with materials and products that fail to
meet quality standards and result in manufacturing losses are known as:
A.
internal failure costs
B.
external failure costs
C.
prevention costs
D.
appraisal costs
E.
none of the above

2.

The quality costs that are associated with designing, implementing, and
maintaining the quality system are known as:
A.
appraisal costs
B.
internal failure costs
C.
external failure costs
D.
prevention costs
E.
none of the above

3.

The quality costs that are incurred to ensure that materials and products meet
quality standards are known as:
A.
external failure costs
B.
prevention costs
C.
appraisal costs
D.
internal failure costs
E.
none of the above

4.

The quality costs that are incurred because inferior quality products are shipped
to customers are known as:
A.
internal failure costs
B.
external failure costs
C.
prevention costs
D.
appraisal costs
E.
none of the above

82

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Chapter 7

5.

All of the following are characteristics of total quality management except:

A.
the company's objective for all business activity is to serve its customers
B.
top management provides an active leadership role in quality improvement
C.
all employees are actively involved in quality improvement
D.
the company maintains a loosely defined system of identifying quality
problems so as not to stifle employee creativity
E.
the company provides continuous training as well as recognition for
achievement

6.

The
A.
B.
C.
D.
E.

7.

A mathematical technique used to monitor production quality and reduce

product variability is:
A.
the method of least squares
B.
the statistical scattergraph method
C.
statistical process control
D.
linear programming
E.
none of the above

8.

Appraisal costs include all of the following except:

A.
inspecting and testing materials
B.
inspecting products during and after production
C.
obtaining information from customers about product satisfaction
D.
designing quality into the product and the production process
E.
all of the above

9.

Internal failure costs include all of the following except:

A.
the cost of the scrap
B.
the cost of warranty repairs and replacements
C.
rework
D.
downtime due to machine failures
E.
all of the above

10.

All of the following accounts would be acceptable ones to credit at the time
scrap is sold except:
A.
Scrap Sales
B.
Cost of Goods Sold
C.
Factory Overhead Control
D.
Work in Process
E.
all of the above would be acceptable

11.

Scrap includes all of the following except:

A.
the trimmings remaining after processing materials
B.
defective materials that cannot be used or returned to the vendor
C.
partially or fully completed units that are in some way defective
D.
broken parts resulting from employee or machine failures
E.
all of the above

best approach to quality improvement is to concentrate on:

prevention
detection
appraisal
increased production
none of the above

The Cost of Quality and Accounting for Production Losses

84

12.

When spoilage occurs because of some action taken by the customer, the
unrecoverable cost of the spoilage should be charged to:
A.
Work in Process
B.
Spoiled Goods Inventory
C.
Factory Overhead Control
D.
Applied Factory Overhead
E.
none of the above

13.

When spoilage occurs because of some internal failure, the unrecoverable cost
should be charged to:
A.
Work in Process
B.
Spoiled Goods Inventory
C.
Factory Overhead Control
D.
Applied Factory Overhead
E.
none of the above

14.

When rework occurs because of some action taken by the customer, the cost of
the rework should be charged to:
A.
Work in Process
B.
Spoiled Goods Inventory
C.
Factory Overhead Control
D.
Applied Factory Overhead
E.
none of the above

15.

When rework occurs because of some internal failure, the cost of the rework
should be charged to:
A.
Work in Process
B.
Spoiled Goods Inventory
C.
Factory Overhead Control
D.
Applied Factory Overhead
E.
none of the above

16.

Newman Company's Job 1865 for the manufacture of 2,200 coats was completed
during August at the unit costs presented below. Due to an internal failure in the
production process, 200 coats were found to be spoiled during final inspection
that were sold to a jobber for $6,000.
Direct materials....................................................................................
Direct labor..........................................................................................
Factory overhead.................................................................................
....................................................................................................
What would be the unit cost of good coats produced on Job 1865?
A.
$57.00
B.
$55.00
C.
$56.00
D.
$58.00
E.
none of the above
SUPPORTING CALCULATION: $20 + $18 + $18 = $56

$20
18
18
$56

85
A

Chapter 7
17.

During March, Vaughan Company incurred the following costs on Job 009 for the
manufacture of 200 motors:
Original cost accumulation:
Direct materials..............................................................................
Direct labor.....................................................................................
Factory overhead (150% of direct labor).........................................

660
800
1,200
$ 2,660

Direct costs of reworking 10 units:

Direct materials..............................................................................
Direct labor.....................................................................................
........................................................................................................

$100
160
$260

The rework costs were attributable to the exacting specifications of the

customer. What is the cost per finished unit of Job 009?
A.
$15.80
B.
$14.60
C.
$14.00
D.
$13.30
E.
none of the above
SUPPORTING CALCULATION:
$2,660 + $260 + (150% x $160) = $3,160 200 = $15.80
C

18.

Spoilage occurs as a result of an internal failure in a process cost system. Using

average costing, the number of equivalent units that production costs should be
charged to would be based upon:
A.
spoiled units
B.
units transferred out and spoiled units
C.
units transferred out, spoiled units, and units in ending inventory
D.
units transferred out and units in ending inventory
E.
none of the above

19.

Spoilage occurs as a result of normal production shrinkage in a process cost

system. Using average costing, the number of equivalent units that production
costs should be charged to would be based upon:
A.
spoiled units
B.
units transferred out and spoiled units
C.
units transferred out, spoiled units, and units in ending inventory
D.
units transferred out and units in ending inventory
E.
none of the above

20.

In a process cost system, the cost of spoilage due to an internal production

failure should be recorded as:
A.
dr. Work in Process; cr. Finished Goods
B.
dr. Work in Process; cr. Factory Overhead Control
C.
dr. Factory Overhead Control; cr. Work in Process
D.
dr. Materials; cr. Factory Overhead
E.
dr. Finished Goods; cr. Work in Process

The Cost of Quality and Accounting for Production Losses

B

21.

86

Gyro Products transferred 10,000 units to one department. An additional 3,000

units of materials were added in the department. At the end of the month, 7,000
units were transferred to finished goods; while 4,000 units remained in work in
process inventory. There was no beginning inventory, and lost units were a
result of normal production shrinkage. The production costs for the period in this
department would be effectively allocated over:
A. 12,000 units
B. 11,000 units
C. 10,000 units
D.
7,000 units
E. 13,000 units
SUPPORTING CALCULATION: 7,000 + 4,000 = 11,000

22.

In manufacturing its products for the month of March, Leo Co. incurred normal
production shrinkage of $10,000 and spoilage due to internal failure of $12,000.
How much spoilage cost should Leo charge to Factory Overhead Control for the
month of March?
A.
$22,000
B.
$12,000
C.
$10,000
D.
$0
E.
none of the above

23.

Willis, Inc. instituted a new process in October. During October, 10,000 units
were started in Department A. Of the units started, 1,000 were lost in the
process due to normal production shrinkage, 7,000 were transferred to
Department B, and 2,000 remained in work in process at October 31. The work
in process at October 31 was 100% complete as to materials costs and 50%
complete as to conversion costs. Materials costs of $27,000 and conversion
costs of $40,000 were charged to Department A in October. What were the total
costs transferred to Department B?
A.
$46,900
B.
$53,600
C.
$56,000
D.
$57,120
E.
none of the above
SUPPORTING CALCULATION:
Materials: $27,000 (7,000 + 2,000) = $3
Conversion: $40,000 (7,000 + 1,000) = $5
Transferred costs: 7,000 x $8 = $56,000

87
D

Chapter 7
24.

A company that manufactures baseballs begins operations on January 1. Each

baseball requires three elements: a hard plastic core, several yards of twine that
are wrapped around the plastic core, and a piece of leather to cover the
baseball. The plastic core is started down a conveyor belt and is automatically
wrapped with the twine to the approximate size of the baseball, at which time
the leather cover is sewn to the wrapped twine. Finished baseballs are
inspected, and the ones that are defective due to internal production failure are
pulled out. Defective baseballs cannot be economically salvaged and are
destroyed. Cost and production reports for the first week of operations are:
Raw material cost..................................................................................
Conversion cost.....................................................................................
......................................................................................................

840
315
$ 1,155

During the week, 2,100 baseballs were completed; 2,000 passed inspection.
There was no ending work in process. The cost of the spoilage charged to
Factory Overhead is:
A.
$33
B.
$22
C.
$1,100
D.
$55
E.
none of the above
SUPPORTING CALCULATION:
Materials: $840 (2,000 + 100) = $.40
Conversion: $315 (2,000 + 100) = $.15
Spoilage: 100 x $.55 = $55
A

25.

In a
A.
B.
C.
D.
E.

process cost system, the cost of rework usually is debited to:

Factory Overhead Control
Applied Factory Overhead
Spoiled Goods Inventory
Work in Process
none of the above

The following questions are based on the Appendix to the chapter:

D

26.

If spoilage occurs as a result of an internal failure in a process cost system, using

fifo costing, the number of equivalent units that production costs should be
charged to would be based upon:
A.
spoiled units
B.
units transferred out and spoiled units
C.
units transferred out, beginning inventory, and units in ending inventory
D.
units transferred out, spoiled units, units in ending inventory, and units in
beginning inventory
E.
none of the above

The Cost of Quality and Accounting for Production Losses

88

27.

If spoilage occurs as a result of normal production shrinkage in a process cost

system, using fifo costing, the number of equivalent units that production costs
should be charged to would be based on:
A.
spoiled units
B.
units transferred out and spoiled units
C.
units transferred out, beginning inventory, and units in ending inventory
D.
units transferred out, spoiled units, units in ending inventory, and units in
beginning inventory
E.
none of the above

28.

Primo Products transferred 15,000 units to one department. An additional 5,000

units were in beginning inventory in the department. At the end of the month,
12,000 units were transferred to the next department, 6,000 units remained in
work in process, 40% complete as to conversion costs and the remaining units
were lost at the 75% stage of conversion. Beginning inventory was 60%
complete as to conversion costs and lost units were the result of internal failure.
The equivalent units of conversion cost using fifo costing is:
A.
14,400
B.
12,900
C.
13,900
D.
13,400
E.
none of the above
SUPPORTING CALCULATION:
Equivalent units in beginning inventory (40% x 5,000).......................
Equivalent units started and completed during period
(12,000 - 5,000).............................................................................
Equivalent units in ending inventory (40% x 6,000)............................
Equivalent units of spoilage (75% x 2,000).........................................
Total equivalent units...........................................................................

29.

2,000
7,000
2,400
1,500
12,900

Primo Products transferred 15,000 units to one department. An additional 5,000

units were added in the department. At the end of the month, 12,000 units were
transferred to the next department, 6,000 units remained in work in process,
40% complete as to conversion costs and the remaining units were lost at the
75% stage of conversion. Beginning inventory was 60% complete as to
conversion costs, and lost units were the result of normal production shrinkage.
The equivalent units of conversion cost using fifo is:
A.
11,400
B.
14,400
C.
12,900
D.
13,400
E.
none of the above
SUPPORTING CALCULATION:
Equivalent units in beginning inventory (40% x 5,000).......................
Equivalent units started and completed during period
(12,000 - 5,000).............................................................................
Equivalent units in ending inventory (40% x 6,000)............................
Total equivalent units...........................................................................

2,000
7,000
2,400
11,400

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Chapter 7

PROBLEMS
PROBLEM
1.
Journal Entries for Scrap. Munoz Metal Products accumulates metal shavings from the
shop floor and sells them periodically to a nearby scrap dealer. Scrap sales, on account, for
the period just ended total $2,300.
Required: Indicate the journal entries when:
(1)The
(2)The
(3)The
(4)The

scrap sales are viewed as additional revenue.

scrap sales are viewed as a reduction of the cost of goods sold during the period.
scrap sales are viewed as a reduction of factory overhead.
scrap sales are traceable to individual jobs and are viewed as a reduction in the cost
of materials used on the jobs.

SOLUTION
(1)
(2)
(3)
(4)

Accounts Receivable............................................................
Scrap Sales (or Other Income).......................................

2,300

Accounts Receivable............................................................
Cost of Goods Sold.........................................................

2,300

Accounts Receivable............................................................
Factory Overhead Control..............................................

2,300

Accounts Receivable............................................................
Work in Process..............................................................

2,300

2,300
2,300
2,300
2,300

PROBLEM
2.
Spoilage in a Job Order Cost System. Walker Inc. manufactures custom wood products.
During the current period, an order for 2,000 workbenches was begun on Job 1994. After
the job was completed, the benches were inspected and 100 units were determined to be
defective. The customer has agreed to accept the order with only 1,900 units instead of
the quantity originally ordered. The spoiled units can be sold as seconds for $25 each.
Spoiled goods are kept in a separate inventory account from finished goods. Total costs
charged to
Job 1994 follow:
Materials .........................................................................................................
Labor (200 hours x $15 per hour).....................................................................
Factory overhead ($9.50 per labor hour)..........................................................
Total cost charged to Job 1994..........................................................................
Custom jobs are marked up 150 percent on cost.

$ 5,100
3,000
1,900
$10,000

The Cost of Quality and Accounting for Production Losses

90

Required:
(1)

(2)

Assuming that the defective units were the result of an internal failure (i.e., an
employee error or a machine failure), prepare the appropriate general journal entries
to record the transfer of the defective units to a separate inventory account and the
completion and shipment of Job 1994 to the customer.
Assuming that the defective units were the result of a change in design specified by
the customer after the units were completed, prepare the appropriate general
journal entries to record the transfer of the defective units to the separate inventory
account and the completion and shipment of Job 1994 to the customer.

SOLUTION
(1)

(2)

Spoiled Goods Inventory (10 units x $25 salvage)...............

Factory Overhead Control.....................................................
Work in Process (10 units x $50* cost)...........................

250
250

Cost of Goods Sold...............................................................

Work in Process ($10,000 - 500)....................................

9,500

Accounts Receivable ($9,500 x 150%).................................

Sales..............................................................................

14,250

Spoiled Goods Inventory (10 units x $25 salvage)...............

Work in Process..............................................................

250

Cost of Goods Sold...............................................................

Work in Process ($10,000 - $250)..................................

9,750

Accounts Receivable ($9,750 x 150%).................................

Sales..............................................................................

14,625

* $10,000 total job cost

= $50 per unit
200 units on job

500
9,500
14,250
250
9,750
14,625

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Chapter 7

PROBLEM
3.
Entries for Charging Rework Costs Caused by Internal Failure and by Change in
Customer Specification. Albany Appliances manufactured 100 microwave ovens in a
recent production run and discovered that 10 ovens were defective and required reworking
as follows:
Rework cost per unit:
Materials..........................................................................................................
Labor................................................................................................................
Factory overhead.............................................................................................
Total...........................................................................................................
Normal production cost per unit:
Materials..........................................................................................................
Labor................................................................................................................
Factory overhead.............................................................................................
Total...........................................................................................................

$ 10
25
25
$ 60
$ 50
75
75
$ 200

Required:
(1)
(2)

Prepare the journal entries to record (a) the normal production costs, (b) the rework
costs, and (c) the transfer of the job costs to Finished Goods assuming that rework
costs were caused by an internal failure.
Prepare the same journal entries as in (1), assuming that rework costs were caused
by a change in customer specifications.

SOLUTION
(1)

(a)

(b)

(c)
(2)

Work in Process...........................................................
Materials................................................................
Payroll....................................................................
Applied Factory Overhead.....................................

Debit
20,000

5,000
7,500
7,500

Factory Overhead Control ($60 x 10)..........................

Materials................................................................
Payroll....................................................................
Applied Factory Overhead.....................................

600

Finished Goods ($200 x 100).......................................

Work in Process......................................................

20,000

100
250
250
20,000

(a)

Same as first entry in (1) (a) above.

(b)

Work in Process...........................................................
Materials................................................................
Payroll....................................................................
Applied Factory Overhead.....................................

600

Finished Goods............................................................
Work in Process......................................................

20,600

(c)

Credit

100
250
250
20,600

The Cost of Quality and Accounting for Production Losses

92

PROBLEM
4.
Computation of Equivalent Units With Production Losses. Potter Paint Company
manufactures paint in three departments using a process cost system with an average cost
flow assumption. Selected cost and production data for the Blending Department, the
second department in the production process, for the month just ended, are as follows:
Units
Units
Units
Units
Units

in beginning work in process........................................................................

received from Mixing Department................................................................
transferred to Finishing Department............................................................
in ending work in process.............................................................................
spoiled due to internal failure......................................................................

Work in process, beginning inventory:

Cost from preceding department.....................................................................
Materials..........................................................................................................
Labor................................................................................................................
Factory overhead.............................................................................................
Costs added during the period:
From preceding department............................................................................
Materials..........................................................................................................
Labor................................................................................................................
Factory overhead.............................................................................................

5,000
25,000
20,000
7,000
3,000
$ 4,200
1,960
895
685
$15,900
8,775
4,550
3,770

The paint is inspected at the end of the process in the Blending Department to detect any
spoiled batches. Ending inventory is 75% complete as to materials and 25% complete as to
conversion costs.
Required:
(1)
(2)

Compute the equivalent units of production for each cost element in the Blending
Department for the month just ended.
Determine the average cost per equivalent unit for each cost element.

SOLUTION
(1)......................................................

From
Preceding
Department
Equivalent units transferred out........... 20,000
Equivalent units in ending inventory....
7,000
Equivalent units of spoilage.................
3,000
Total equivalent units........................... 30,000

Materials
20,000
5,250
3,000
28,250

Labor
20,000
1,750
3,000
24,750

Overhead
20,000
1,750
3,000
24,750

93
(2)......................................................

Chapter 7
From
Preceding
Department

Cost in beginning inventory.................. $ 4,200

Cost added during the period............... 15,900
Total cost to be accounted for............... $20,100
Divide by equivalent units.................... 30,000
Cost per equivalent units...................... $
.67

Materials
$ 1,960
8,775
$10,735
28,250
$
.38

Labor
$

895
4,550
$ 5,445
24,750
$
.22

Overhead
$

685
3,770
$ 4,455
24,750
$
.18

PROBLEM
5.
Spoilage With a Salvage Value in a Process Cost System Using an Average Cost
Flow Assumption. Carter Company manufactures a single product in two departments,
Cutting and Finishing. Units of a product are started in the Cutting Department and then
transferred to the Finishing Department where they are completed. Units are inspected at
the 80% stage of completion in the Finishing Department. Good units are transferred to
finished goods inventory when completed and spoiled units are transferred to a separate
inventory account. Spoiled units are inventoried at their salvage value of $3 each, and the
unrecoverable cost of spoilage, which was caused by an internal failure, should be charged
to the appropriate account.
Materials are added at the beginning of the production process. At the end of June,
2,000 units were still in process in the Finishing Department, 100% complete as to
materials and 60% complete as to conversion costs. During July, 20,000 units were
transferred from the Cutting Department to the Finishing Department and 15,000 were
transferred from the Finishing Department to finished goods inventory. At the end of July,
the Finishing Department still had 4,000 units in process, 100% complete as to materials
and 20% complete as to conversion costs. Cost data related to July operations in the
Finishing Department follow:
Beginning
Costs charged to the department:.................................................... Inventory
Cost from preceding department................................................ $6,050
Materials.....................................................................................
3,410
Labor..........................................................................................
1,638
Factory overhead........................................................................
2,184

Added
This Period
$54,450
30,690
14,742
19,656

Required: Complete the following cost of production report for the Finishing Department
based on the data presented for July, assuming the company uses a process cost system
with average costing to account for its production.

The Cost of Quality and Accounting for Production Losses

94

SOLUTION
Carter Corporation
Finishing Department
Cost of Production Report
For July, 19-Quantity Schedule
Beginning inventory................................
Received from Cutting Department.........
Transferred to finished goods..................
Ending inventory.....................................
Spoiled in process....................................

Cost Charged to Department

Beginning inventory:
Cost from preceding department.......
Materials.............................................
Labor. .................................................
Factory overhead................................
Total cost in beginning inventory. .
Cost added during period:
Cost from preceding department.......
Materials.............................................
Labor. .................................................
Factory overhead................................
Total cost added during period......
Total cost charged to the department......

Materials

Labor

100%
100%

20%
80%
Total
Cost

Overhead

20%
80%
Equivalent
Units*

Quantity
2,000
20,000
22,000
15,000
4,000
3,000
22,000
Unit
Cost

6,050
3,410
1,638
2,184
$ 13,282
$ 54,450
30,690
14,742
19,656
$119,538
$132,820

22,000
22,000
18,200
18,200

$2.75
1.55
.90
1.20
$6.40

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Chapter 7

Cost Accounted for as Follows Units

Transferred to
finished goods......................
15,000
Transferred to spoiled goods
inventory at salvage value...
3,000
Charge to factory overhead
for spoilage:
Cost from preceding
department.....................
3,000
Materials..............................
3,000
Labor. ..................................
3,000
Factory overhead.................
3,000
Less salvage value of
spoiled units...................
Work in process,
ending inventory:
Cost from preceding
department.....................
Materials..............................
Labor. ..................................
Factory overhead.................
Total cost accounted for............

%
Complete
100%

100%
100%
80%
80%

3,000

4,000
4,000
4,000
4,000

100%
100%
20%
20%

Unit
Cost

Total
Cost

$ 6.40

$96,000

3.00

9,000

$ 2.75
1.55
.90
1.20

$ 8,250
4,650
2,160
2,880
$17,940

3.00

9,000

$ 2.75
1.55
.90
1.20

11,000
6,200
720
960

8,940

18,880
$132,820

* Total number of equivalent units required in the cost accounted for section determined as
follows:

Equivalent units transferred out..............

Equivalent units in ending inventory.......
Equivalent units of spoilage....................
Total equivalent units..............................

Prior
Dept. Cost
15,000
4,000
3,000
22,000

Materials
15,000
4,000
3,000
22,000

Labor
15,000
800
2,400
18,200

Overhead
15,000
800
2,400
18,200

The Cost of Quality and Accounting for Production Losses

96

PROBLEM
6.
Production Shrinkage in a Process Cost System Using an Average Cost Flow
Assumption. Carrera Chemical Inc. uses a process cost system with an average cost flow
assumption to account for the production of its only product. The product is manufactured
in two departments. Units of product are started in the Cooking Department and then
transferred to the Blending Department where they are completed. Because of the intense
heat applied in the Cooking Department, some of the production volume is lost to
evaporation. Labor and overhead are treated as one element of cost in the Cooking
Department (i.e., conversion cost). Data related to May operations in the Cooking
Department follow:
Units
Units
Units
Units

in beginning inventory...................................................................................
started in process this period........................................................................
transferred to the Blending Department this period......................................
in ending inventory (100% materials, 40% conversion cost)........................

Costs charged to the department:....................................................

Materials.....................................................................................
Conversion cost...........................................................................

Beginning
Inventory
$4,375
2,975

10,000
45,000
40,000
9,000

Added
This Period
$11,795
6,181

Required: Prepare a cost of production report for the Cooking Department based on the
data presented for May.

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Chapter 7

SOLUTION
Carrera Chemical Inc.
Cooking Department
Cost of Production Report
For May, 19-Quantity Schedule..............................................
Beginning inventory..............................................
Started in process this period................................

Materials

Transferred to Blending Department......................

Ending inventory...................................................
Lost in process.......................................................

Cost Charged to Department...........................

Beginning inventory:
Materials...........................................................
Conversion cost................................................
Total cost in beginning inventory................
Cost added during period:
Materials...........................................................
Conversion cost................................................
Total cost added during period....................
Total cost charged to the department....................

Cost Accounted for as Follows Units

Transferred to Blending
Department.......................... 40,000
Work in process,
ending inventory:
Materials..............................
9,000
Conversion cost...................
9,000
Total cost accounted for............

100%

Total
Cost

Conversion
Cost

40%

Quantity
10,000
45,000
55,000
40,000
9,000
6,000
55,000

Equivalent
Units*

Unit
Cost

49,000
43,600

$.33
.21

$ 4,375
2,975
7,350
$ 11,795
6,181
$ 17,976
$ 25,326

$.54

%
Complete

Unit
Cost

Total
Cost

100%

$.54

$21,600

100%
40%

$.33
.21

$2,970
756

3,726
$25,326

* Total number of equivalent units required in the cost accounted for section determined as
follows:

Equivalent units transferred out.......................................................

Equivalent units in ending inventory...............................................
Total equivalent units.......................................................................

Materials
40,000
9,000
49,000

Conversion
Cost
40,000
3,600
43,600

The Cost of Quality and Accounting for Production Losses

98

This problem is based on material presented in the Appendix to the chapter.

PROBLEM
7.
Spoilage With a Salvage Value in a Process Cost System With a Fifo Cost Flow
Assumption. School Craft Petroleum Company uses a process cost system with a fifo cost
flow assumption to account for production, which is manufactured in two departments.
Units of product are started in the Cracking Department and then transferred to the
Refining Department where they are completed. Units are inspected at the end of the
production process in the Refining Department. Good units are transferred to finished
goods inventory and spoiled units are transferred to a separate inventory account. Spoiled
units are inventoried at their salvage value of $8 each, and the unrecoverable cost of
spoilage resulting from an internal production failure is charged to the appropriate account.
Data related to September operations in the Refining Department follow:
Units
Units
Units
Units
Units

in beginning inventory (60% materials, 30% labor, 30% overhead).............

received from Cracking Department this period............................................
transferred to the finished goods inventory this period.................................
transferred to special inventory account this period.....................................
in ending inventory (100% materials, 50% labor, 50% overhead)................

Beginning
Costs charged to the department:.................................................... Inventory
Cost from preceding department................................................ $17,889
Materials.....................................................................................
2,733
Labor...........................................................................................
7,278
Factory overhead........................................................................ 12,350

2,800
8,400
7,600
1,100
2,500

Added
This Period
$68,040
11,900
30,063
51,016

Required: Prepare a cost of production report for the Refining Department based on the
data presented for September.

99

Chapter 7

SOLUTION
School Craft Petroleum Company
Refining Department
Cost of Production Report
For September, 19-Quantity Schedule
Beginning inventory................................
Received from Cracking Department.......
Transferred to finished goods..................
Ending inventory.....................................
Spoiled in process....................................

Cost Charged to Department

Beginning inventory:
Cost from preceding department.......
Materials.............................................
Labor .................................................
Factory overhead................................
Total cost in beginning inventory. .
Cost added during current period:
Cost from preceding department.......
Materials.............................................
Labor .................................................
Factory overhead................................
Total cost added during period......
Total cost charged to the department......

Materials
60%

100%
100%

Labor
30%

Overhead
30%

50%
100%

50%
100%

Total
Cost

Equivalent
Units*

Quantity
2,800
8,400
11,200
7,600
2,500
1,100
11,200
Unit
Cost

$ 17,889
2,733
7,278
12,350
$ 40,250
$ 68,040
11,900
30,063
51,016
$161,019
$201,269

8,400
9,520
9,110
9,110

$ 8.10
1.25
3.30
5.60
$ 18.25

The Cost of Quality and Accounting for Production Losses

Cost Accounted for as Follows

Transferred to finished goods:
From beginning inventory......
Cost to complete this
period:
Materials......................
Labor...........................
Factory overhead.........
Started and completed
this period........................
Total cost transferred to
Finishing Department.......
Transferred to spoiled goods
inventory at salvage value....
Charged to factory overhead for
spoilage:
Cost of completed spoiled
units.................................
Less salvage value of spoiled
units.................................
Work in process,
ending inventory:
Cost from preceding
department.......................
Materials................................
Labor. ....................................
Factory overhead...................
Total cost accounted for..............

Units

%
Complete

100
Unit
Cost

Total
Cost
$ 40,250

2,800
2,800
2,800

40%
70%
70%

$ 1.25
3.30
5.60

4,800

100%

$18.25

$ 1,400
6,468
10,976

$ 59,094
87,600
$ 146,694

1,100

1,100

$ 8.00

100%

1,100

2,500
2,500
2,500
2,500

100%
100%
50%
50%

8,800

$18.25

$20,075

8.00

8,800

$ 8.10
1.25
3.30
5.60

$20,250
3,125
4,125
7,000

11,275

34,500
$ 201,269

* Number of equivalent units of cost added during the current period determined as follows:

To complete beginning inventory........

Started and completed this period......
Ending inventory.................................
Spoiled units.......................................
Total equivalent units..........................

Prior
Dept. Cost
0
4,800
2,500
1,100
8,400

Materials
1,120
4,800
2,500
1,100
9,520

Labor
1,960
4,800
1,250
1,100
9,110

Overhead
1,960
4,800
1,250
1,100
9,110