Question

Ram furnitures produces chairs and tables in accordance with job orders from customers. Given below are the details of a recent order. Number of chairs in the job order Unit cost per chair (Breakup given below) DM COSE DL cost Manufacturing overhead cost 70 $95.00 $40.00 $35.00 $20.00 The manufacturing overhead cost per chair (given above) includes a provision for normal spoilage. 6 chairs were found to be below acceptable quality and sold to a scrap dealer for $12 per chair Prepare the appropriate journal entries for spoilage for the three independent cases given below. Also calculate the average cost of one good unit of chair in the job order for each of the three cases. a) The rejection due to unacceptable quality is considered as abnormal spoilage b) The rejection is considered normal and the rejection is attributable to the exacting specifications of this job c) The rejection is considered normal and the rejection is not attributable to this job and is a characteristic of the production process

Answer 1

(a) Journal Entry for abnormal spoilage as rejected due to unacceptable quality

Material control account Dr. 72

Loss on abnormal spoilage . Dr. 498

To Work in process account. 570

( For being, abnormal spoilage is recorded as a separate expense which is the net value after deduction of scrap value of spoiled chair )

Average cost of one good unit of chair in the job order is

Total cost of 64 good units = 64 × 95 = 6080

Average cost of one good unit chair = 6080 / 64 = $95

(b) Journal Entry for normal rejection and attributable to specific job  

Work in progress ( specific Job) Dr 570

To Cost of Goods 570  

( For being, the cost of normal rejected chairs accounted- 6×95)

Material controls account . Dr 72

To Work in progress ( specific Job) 72

( For being, the scrap value of normal rejection being accounted- 6× 12)

Average cost of one good unit of chair in the job order is

Cost of 6 chairs = 95× 6= 570

Scrap value of 6 chairs = 6× 12= 72

Total cost of normal spoilage = 498

Total cost of goods units (64 chairs)= ( 64 chairs × 95) + 498 = 6080 + 498 = 6578

Therefore the average cost of one good unit of chair = 6578/64 = $ 102.78125

​​​( c) Journal Entry for normal rejection and not attributable to this job

Material control account Dr. 72

Manufacturing overhead control accountDr. 498

To Work in process account. 570

( For being, normal spoilage not attributable to a specific job being accounted- )

Average cost of one good unit of chair in the job order will be

Here the normal spoilage is common to all jobs as it is a characteristic of production process. So the manufacturing overhead already includes this as a provision in its budgeted costing. So the cost would be $ 95 itself. And also in the absence of information regarding other goods units produced in over all production , the normal spoilage distribution is not able to spread to all other jobs.