Question on normal spoilage & weighted-average method

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  • #158493 Reply

    Hi everyone, I'm a little bit confused as to when you should or should not include normal spoilage in EU computations. Is it safe to assume that if the question does not state that “spoiled units are assigned to units completed and transferred” that we should not include spoilage in finished goods?

    First question

    a company adds material at the beginning of the process in department m. Data concercing the materials used in March production are as follows:

    WIP at 3/1 16,000 units

    Started during March 34,000 units

    Completed and transferred to next department during March 36,000 units

    Normal spoilage incurred 4,000 units

    WIP at 3/31 10,000

    Using weighted-average method, the equivalent units for the materials unit cost calculation are: answer: 46,000

    Ok I have no problem solving this question

    Finished Goods is 36k

    plus WIP end Materials 10k x 100% = 10,000 (ending wip is 16k +34k -36k -4k)

    Total equivalent units for materials = 46,000

    Now the second question (this is the one that confuses me):

    Forming department is the first of two-stage production process. spoilage is identified when the units have completed the forming process. costs of spoiled units are assigned to units completed and transferred to the second department in the period spoilage is identified. the following info concerns the company's conversion costs in may 2005

    WIP 5/1 (50% complete) 2000 units, conversion costs 10,000

    units started during may 8000 units, conversion costs 75,500

    normal spoilage 500

    units completed & transferred 7,000 units

    ending work-in-process (80% complete) 2,500

    Using the weighted average method, what was the company's conversion cost transferred to the second production department? answer 67,500

    this is how I solved it

    Finished Goods is 7,000

    plus WIP end Conversion 2,500 x 80% = 2,000 (ending wip is 2k +8k -500 -7k)

    Total equivalent units for conversion costs = 9,000

    Total conversion costs 85,500 divided by Equivalent units 9,000 = 9.5

    conversion cost 7,000 x 9.5 = 66,500. According the answer key this is incorrect because I'm supposed to include the normal spoilage of 500 in Finished goods when calculating the equivalent units. So the correct rate is 85,500/9,500 = 9.0 and the correct conversion cost is 7,500 x 9 = 67,500.


    #3003567 Reply
    Gias Ahmed

    Total cost = $10,000 Beginning + $75,500 Current = $85,500.

    Equivalent units = 7,000 Completed + 500 Spoilage + Ending work in process 2,000 @ 80% of 2,500 = 9,500 units.

    Allocated cost per equivalent unit = $85,500 ÷ 9,500 = $9.

    Cost to be transferred to second production department = 7,000 x $9 Completed + 500 x $9 Spoilage = $63,000 + $4,500 = $67,500.

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