Question 1 All of the following accounts may, under certain circumstances, be cr

Question

Question 1

All of the following accounts may, under certain circumstances, be credited for the revenue from scrap materials sales except:

MOH

WIP

Scrap Revenue

Raw Materials

Question 2

Which of the following statements is NOT true?

Spoilage is a normal part of the manufacturing process

Spoilage might occur in a single job.

Spoilage might effect multiple jobs.

If spoiled goods represented more than 1% of a job, they would automatically be considered abnormal.

IncorrectQuestion 3

Costs of abnormal spoilage are considered

Period costs

Product costs

Inventoriable costs

Conversion Costs

None of the above

Question 4

If a company incurs costs to repair defective inventory items, those costs would most likely be _________

expensed.

charged either to MOH or WIP.

charged to Finished goods.

Charged to Raw material.

Question 5

Ulla Industries spent $100,000 in Job 25-92 making 10,000 units of Product 122-45. 30 of the 10,000 units completed were defective and could not be repaired or sold as seconds. This was considered normal spoilage in the company and was not directly related to the job specifications. Which of the following statements is true?

No journal entry should be made

Ulla should debit WIP for $300 and credit MOH for $300.

Ulla should debit Spoiled Goods Inventory for $300 and credit WIP for $300

Ulla should debit MOH for $300 and credit WIP for $300.

Explanation / Answer

Solution 1)

The following items would be credited in Contract Account in order to derive Profit and Loss :-

1) Work in Progress: A contractor undertakes to execute the contract on the basis of the price agreed upon, and this price is known as the contract price. The contract price is payable by the contractee either in a lump sum on the completion of the contract or in installments on the basis of the work done.

Incomplete contracts are referred to as work-in-progress includes the value of work certified and the cost of work uncertified. When less than 1/3 of the work is complete, the net expenditure incurred up to date is taken to be the value of work-in-progress. Net expenditure means gross expenditure MINUS value of material, plant in hand at the end of the year.

Accounting Entry for WIP :-

Work in Progress A/C     Dr. xxxxxx

                To Contract A/C                Cr. xxxxxx

2) Scrap Revenue:- Revenue is a part of Nominal A/C. Any proceed received from the Sale of Scrap would be Credited.

3) Raw Material:- Raw Material Purchased for further production would be debited to the Profit and Loss A/C. Any Sale of Raw Material or Transfer to other Unit would be credited to the Profit and Loss A/c. Closing Balance of the Material would also be credited to the Profit and Loss A/C.

Solution 2 :-

Spoilage is the production that fails to meet quality or dimensional requirements and so much damaged in manufacturing operations that they are not capable of rectification and hence has to be withdrawn and sold off without further processing. Rectification can be done but its cost may be uneconomic.

Spoilage is usually associated with perishable raw materials such as food products but spoilage can occur in the production of any product.

Spoilage is the same concept as scrap or waste, but spoilage is different to a by-product) or a joint product. Whereas by-products can be further processed and sold on, spoilage usually has no market value, and is disposed of rather than sold.

For example, a company makes and sells fruit juice. Their production process creates three different products: the juice, lemon and orange oil, and orange peel.

Whilst the oil is not the intended product, it can be further processed and sold as well as the main product; the oil is therefore a by-product. However, the orange peel would be considered spoilage or waste, as it is disposed of rather than sold or used within another product.

Normal and abnormal spoilage

Within any production process, it is difficult to completely avoid waste or scrap. The standard amount of waste or scrap that occurs throughout the production process is known as normal spoilage. Normal spoilage should correspond to the amount of goods produced - the more goods, the more normal spoilage.

Any waste or spoilage that is not an expected part of the production process is known as abnormal spoilage. Abnormal spoilage does not directly correspond to the number of units produced, and is considered an unexpected surplus.

For example, a restaurant sells vegetable soup. The vegetable peel cannot be used in the soup or in any other items from the menu, so is thrown away and considered normal spoilage. However, some of the vegetables go off before being used in the soup. This is not a normal part of the production process, so is considered abnormal spoilage.

Spoilage in Accounting

Abnormal spoilage is not included in the product cost as the cost cannot be attributed to a specific sale. Instead, abnormal spoilage is considered a separate, unrecoverable expense which should be recorded as a loss in a “loss for abnormal spoilage” account.

The Accounting of Spoilage and defectives is as follows:-

Spoilage/ defectives A/C              Dr. xxxxxx

                To Profit and Loss A/C    Cr. xxxxxx

Therefore, spoiled goods represented more than 1% of a job would be considered as abnormal as it affects the profits inversely. It would be treated as defective product.

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