Question

Cost of Spoiled Units

Lieu Company is a specialty print shop. Usually, printing jobs are priced at standard cost plus 50 percent. Job 631 involved printing 400 wedding invitations with the following standard costs:

Direct materials	$180
Direct labor	40
Overhead	100
Total	$320

Normally, the invitations would be taken from the machine, the top one inspected for correct wording, spelling, and quality of print, and all of the invitations wrapped in plastic and stored on shelves designated for completed jobs. In this case, however, the technician decided to go to lunch before inspecting and wrapping the job. He stacked the unwrapped invitations beside the printing press and left. One hour later, he returned and found the invitations had fallen on the floor and been stepped on. It turned out that about 40 invitations were ruined and had to be discarded. An additional 40 invitations were then printed to complete the job.

Required:

1. Calculate the cost of the spoiled invitations. If required, round your answer to the nearest cent.
$

2. What is the price of Job 631?
$

3. Suppose that another job, 705, also required 400 wedding invitations. The standard costs are identical to those of Job 631. However, Job 705 required an unusual color of ink that could only be obtained in a formula that was difficult to use. Lieu printers know from experience that getting this ink color to print correctly requires trial and error. In the case of Job 705, the first 40 invitations had to be discarded due to inconsistencies in the color of ink. What is the cost of the spoilage? If required, round your answer to the nearest cent.
$

4. What is the price of Job 705? If required, round your answer to the nearest cent.
$

Answer 1

DM	$180
DL	40
OH	100
Total cost	320
No of wedding invitations	400
Cost per wedding invitation	0.80

Q1. No of wedding invitations spoiled = 40

Cost of spoiled invitations = 40*0.8 = $32

As this amounts to normal loss cost of spoiled invitations should be charged to profit or loss account.

2. Total cost of Job 631. $320

Add markup @50% $160

Total price. $480

3. Cost of spoilage remains same at $32 which should be charged to Job 705 because it is specific cost related to Job 705

4. Normal cost of Job 705. $320

Cost of spoilage. $32

Total cost. $352

Add markup @50% $176

Total price. $528