BEC Spoilage question

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  • #1498011
    Anonymous
    Inactive

    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. $60,000

    Explanation
    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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  • #1498392
    Kodiak
    Participant

    Only half of the normal spoilage is being passed through to the income statement and that would be in COGS. The other 50,000 is passed through the income statement as a period cost. So while the answer is 60,000, you just have to be mindful that while both totals would pass through to the income statement, the normal spoilage would sit in the product cost (COGS) and the abnormal would be part of the period costs on the income statement. Does that help?

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