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Why is normal spoilage allocated to the income statement in this question?
During May, Mercer Company completed 50,000 units costing $600,000, exclusive of spoilage allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000 units, costing $80,000, were 50 percent complete at May 31. All units are inspected between the completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the month was $20,000, and abnormal spoilage of $50,000 was also incurred during the month.
The portion of total spoilage that should be charged against revenue in May is:
a. $50,000
b. $20,000
c. $70,000
d. $60,000Explanation
Choice “d” is correct.
Normal spoilage is allocated to good production
(Normal spoilage)×(Percent sold)
$20,000 x 50% = $10,000
Abnormal spoilage is charged to the income statement
Abnormal spoilage = 50,000
Total = $60,000
Note that since inspection of units does not occur until the completion of manufacturing, none of the spoilage is allocated to the partially completed units.
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