Cost & Mgt. Acct - I, Lecture Note - Chapter 5 & 6

Addis Ababa University, College of Business & Economics, Department of Accounting & Finance
CHAPTER FIVE
COST ALLOCATION
5.1 Cost Allocation and Cost Object
 Cost Allocation is the process of assigning costs in a cost pool to the appropriate cost
objects. It refers to the allotment of whole items of cost to a cost center.
Cost pool is allocation of costs to be assigned to a set of cost object.
Cost object is any thing for which cost data are desired- including products, product lines,
customers, jobs, and organizational subunits.
5.2 Purposes of Cost Allocation

1. To provide information for economic decisions.
2. To motivate managers and other employees.
3. To justify costs or compute reimbursement.
4. To measure income and assets for reporting to external parties.
5.3 Cost Allocation Methods

There are several issues to consider when allocating costs:
 Should different methods of allocation be used for fixed costs and for variable costs,
 Should budgeted rates or actual rates be used, and
 Should budgeted quantities or actual quantities be used?
 Single-Rate and Dual-Rate Methods

The single-rate allocation method pools all costs in one cost pool and allocates theses costs to
cost objects using the same rate per unit of the single allocation base. There is no distinction
between costs in a cost pool in terms of cost behavior, such as fixed costs versus variable costs.
The dual-rate cost allocation method classifies costs in each cost pool into sub cost pools, a
variable cost pool and a fixed cost pool. Each of these pools uses a different cost allocation base.
Example:
Sand Hill Co. (SH Co.) has a Central Computer Department; the department has two users,
Microcomputer Division and Peripheral Equipment Division. The following data apply to the
coming budget year.
Fixed costs of operating the computer facility in the

6000-18000hr relevant range Br3, 000,000/year
Total capacity available: 18,000/hrs
Budgeted long-run usage
Microcomputer Division 8,000hrs
Peripheral Equipment Division 4,000hrs
Total 12,000hrs
Budgeted variable cost per hour $200/hour used
 Assume during the year the Microcomputer uses 9,000 hrs and Peripheral Equipment uses
3,000 actual hours.
Lecture Note- Cost & Mgt. Acct I; Ch. 5&6; Instructor: Kassaye Tuji, 2022/3GC (2015EC) Page 1 of 14
1. Single Rate Allocation Method
Total cost pool =3,000,000+200*12,000 5,400,000
Budgeted usage 12,000hrs
Budgeted totals rate per hour= 5,400,000 = Br.450/hr

12,000hrs
Allocation rate for Microcomputer Division Br. 450/hr
Allocation rate for Peripheral Division Br. 450/hr
Microcomputer =9000*450= Br. 4,050,000.

Peripheral Equipment = 3000*450= Br.1, 350,000.
2. Dual-rate Allocation Method
Allocation of Fixed Costs to:

Microcomputer Division = 8000/1200hrs * 3,000,000 = Br. 2,000,000/year.
Peripheral Equipment Division = 4000/12000hrs * 3,000,000 = Br. 1,000,000/year.
Allocation of Total Costs to:

Microcomputer: 2,000,000 + (200*9000) = Br. 3,800,000.
Peripheral Equipment: 1,000,000 + (200*3000) = Br. 1,600,000.
5.4 Allocating Support Departments

Operating and Support Departments
Operating Department (Production Department) adds value to a product or service that is
observable by a customer.
Support Departments (Service Department) provide the service that assists other internal
departments.
Support Department creates a special cost allocation problem when they provide reciprocal support
to each other as well as support to operating departments.
Methods:
1. Direct Allocation Method
2. Step-Down Allocation Method
3. Reciprocal Allocation Method
Example:
ABC Engineering has two Support Departments and Two operating Departments. Costs are
accumulated in each department for planning and control purposes.
Support Departments Operating Departments
Plant Maintenance Machining
Information Systems Assembly
 The two support departments provide reciprocal support to each other as well as to the two
operating departments. Costs are accumulated in each department for planning and control
purpose.
Plant Main. Infor. Systems. Machining Assembly Total
Budgeted MOH costs
Before any inter-dept
Cost allocations $600,000 $116,000 $400,000 $200,000 1,316,000
Support work furnished
By plant maintenance:
Budgeted labor hrs - 1,600 2,400 4,000 8,000
Percentage - 20% 30% 50% 100%
By Infor. System:
Budgeted com. Hrs 200 - 1600 200 2000
Percentage 10% - 80% 10% 100%
Required: Allocate costs using the three methods.

1. Direct Allocation Method
This method is the most widely used method of allocating support department costs. This
method allocates each support department costs directly to the operating departments.

Budgeted MOH cost
Allocation by Plant Mai. (600,000) 225,000 375,000
(2400/6400, 4000/6400)
Allocation by Inf. System 0 (116,000) 103,111 12,889

(1600/1800, 200/1800)
Total Budgeted MOH of
Operating departments 0 $728,111 $587,889 $1,316,000
 Advantage of this method:
 Simplicity
 No need to predict the usage of support department service by other support
departments.
 Disadvantage
 Failure to recognize reciprocal services provided among support departments.
2. Step-Down Allocation Method (Sequential Allocation Method)
 Allows the partial recognition of the service rendered by support departments to
other support departments.
 This method requires the support departments to be ranked (sequenced) in order
that the step-down allocation is to proceed. Different sequences will result in
different allocation of support department costs to operating departments.
 Popular step-down begins with the support department that renders the highest
percentage of its total services to other support departments and so on, ending with
the support department that renders the lowest percentage of its total services to
other support departments.

Budgeted MOH cost
Allocation by Plant Mai. (600,000) 120,000 180,000 300,000
(1600/8000, 2400/8000, 4000/8000) 236,000
Allocation by Inf. Syste. 0 (236,000) 209,778 26,222
(1600/1800, 200/1800)
Total Budgeted MOH of 0 $789,778 $526,222 $1,316,000
Operating departments
Note: The step-down method does not recognize the total services that support department
provide to each other.
3. Reciprocal Allocation Method

 Allocates cost by explicitly including the mutual services provided among all
support departments.
 Conceptually the direct method and the step-down allocation method are less
accurate than the reciprocal method when the support departments provide service
to another reciprocally.
 The reciprocal method enables us to incorporate interdepartmental relationships
fully not only the support department cost allocations.
 Implementing the reciprocal allocation method requires three steps:
Step 1. Express Support Department Costs and support department reciprocal relationships
in the form of Linear Equation. (Y= a + bX)
Let PM be the complete reciprocated costs1 of Plant Maintenance and IS be the
complete reciprocated costs to Information Systems.
PM = $600,000 + 0.1 IS
IS = $116,000 + 0.2 PM
0.1 IS =% of the Information System work used by Plant Maintenance
0.2 PM =% of the Plant Maintenance work used by Information System
Step 2. Solve the cost of linear equation to obtain the complete reciprocated costs of each
support departments.
PM = 600,000 + 0.1 (116,000 + 0.2PM)

PM = 600,000 + 11,600 + 0.02PM
0.98PM = 611,600
PM = $624,082
IS = 116,000 + 0.2(624,082)
IS = $ 240,816
Step 3. Allocate the complete reciprocated costs of each department to all other departments
(both support department and operating departments).

Budgeted MOH cost
Allocation by Plant Mai. (624,082) 124,816 187,225 312,041
(1600/8000, 2400/8000, 4000/8000)
Allocation by Inf. Syste. 24,082 (240,816) 192,652 24,082

(200/2000 1600/2000, 200/2000)
Total Budgeted MOH of
Operating departments 0 0 $779,877 $536,123 $1,316,000
1
Complete reciprocated cost mean the support departments own cost plus any interdepartmental cost allocations.
5.5 Allocating Common Costs
A common cost is a cost of operating a facility, activity, or like cost object that is shared by two or
more users.
To illustrate, consider Ayele, a senior student in Lincoln University who has been invited
to an interview with an employer in Mekele. The round trip Addis-Mekele airfare costs
Br.1, 200. A week prior to leaving Ayele is also invited to an interview with an employer in
Dessie. The Addis-Dessiee round trip airfare costs Br. 800. Ayele decided to combine the
two recurring trips into an Addis-Mekele-Dessie trip that will cost $1,500 in airfare. The
Br1, 500 is a common cost that benefits both prospective employers.
Two methods of allocating this common cost are:
1. Stand-Alone Cost-Allocation Method
This method uses information pertaining to each user of a cost object as a separate entity to
determine the cost-allocation weights.
For the common cost $1,500, information about the separate (standalone) round-trip
airfares ($1200, and $800) is used to determine the allocation weights.
Mkele employer: $1,200 * 1,500 = 0.60*1,500= $900

$1,200 + $ 800
Dessie employer: $800 * 1,500 = 0.4 * 1,500 = $600

$800 + $1,200
Advantage: Fairness occurs because each employer bears a proportionate share of total costs in
relation to their individual stand-alone costs.
2. Incremental Cost Allocation Method
 This method ranks the individual users of a cost object and then uses this ranking to
allocate costs among those users.
 The first ranked user of the cost object is termed the primary user. The second
ranked user is termed the incremental party and is allocated the additional cost that
arises from there being two users instead of only the primary user.
Assume in the example the Mekele employer is viewed as the primary party.
Ayele’s rational is that he had already committed to go to Mekele before
accepting the invitations to interview in Dessie. The cost allocation would be:
Party Cost Allocated Costs remaining to be

Allocated to other parties
Mekele (primary) $1,200 $300 ($1,500 - $1,200)

Dessie (incremental) 300 0
Had the Dessie employer been chosen as the primary party, the cost allocations would
have been Dessie $800 and Mekele $700(1500-800).
 Under the incremental method, the primary party typically receives the highest
allocation of the common costs. Most users in common cost situations propose
themselves as the incremental party.
=========================The End===============================
CHAPTER SIX
Accounting for Spoilage, Defective Units and Scrap
6.1 Spoilage, Rework, and Scrap

Spoilage is unacceptable units of production that are discarded or are sold for reduced prices. Both
partially completed or fully completed units of output can be spoiled.
Rework is unacceptable units of production that are subsequently repaired and sold as acceptable
finished goods. For example, defective units of products such as computers detected during
production or immediately after production but before units are shipped to customers can
sometimes be reworked and sold as good products.
Scrap is material left over when making a product(s). It has low sales value compared with the
sales value of the product(s).
6.2. Types of Spoilage
The key objectives in accounting for spoilage are determining the magnitude of the costs of
spoilage and distinguishing between the costs of normal and abnormal spoilage.
 Normal Spoilage
Normal Spoilage is spoilage that is an inherent result of the particular production process and
arises even under efficient operating conditions. For a given production process, management must
decide the rate of spoilage it is willing to accept as normal. Costs of normal spoilage are typically
treated as component of the costs of good unit manufactured because good units cannot be made
without the simultaneous appearance of spoiled units. Normal spoilage rates should be computed
using total units completed as the base, not total actual units started in production. Because total
units started also include any abnormal spoilage in addition to normal spoilage. Moreover, the
normal spoilage is the amount of expected spoilage associated or related to the goods units
produced.
 Abnormal Spoilage
Abnormal Spoilage is spoilage that should not arise under efficient operating conditions. It is not
an inherent result of the particular production process. Abnormal spoilage is regarded as avoidable
and controllable. Line operators and other plant personnel can generally decrease abnormal
spoilage by minimizing machine break downs, accidents and the like. Abnormal spoilage costs are
written off as losses of the accounting period in which detection of the spoiled units occurs.
6.3. Process Costing and Spoilage
A key issue in accounting for spoilage in process-costing systems is how to count spoiled units.
Units of abnormal spoilage should be counted and recorded separately. But what units of abnormal
spoilage should be counted and recoded? These units can either be counted (Approach A) or not
counted (Approach B).
Approach A leads to more accurate product costs because it makes visible the costs
associated with normal spoilage and spreads it over good units.
Approach B is less accurate because it spreads the costs of normal spoilage over all units.
Example: Anzio Co. manufactures a wooden recycling container in its Forming Department.
Direct materials for this product are introduced at the beginning of the production cycle.
At the start of production, all direct materials required to make one output unit are bundled in a
single kit. Conversion costs are added evenly during the cycle. Some units of this product are
spoiled as a result defects only detectable at inspection of finished units. Normally spoiled units
are 10% of the goods output. Summary of data for July 2004 are:
Physical Units for July 2004
Work in Process, beginning inventory (July 1) 1,500 units
Direct Materials (100% complete)
Conversion costs (60% complete)
Started during July 8,500 units
Completed and transferred out during July 7,000 good units
Work in Process, ending inventory (July 31) 2,000 units
Direct Materials (100% complete)
Conversion costs (50% complete)
Total Costs for July 2004
Work in process, beginning inventory
Direct materials (1,500 equivalent units * Br. 8) Br. 12,000
Conversion costs (900 equivalent units * Br.10) 9,000 Br. 21,000
Direct materials costs added during July 76,500
Conversion costs added during July 89,100
Total costs to account for Br.186, 600
Step 1: Summarize the Flow of Physical Units of Output. Identify units of both normal and
abnormal spoilage.
Spoiled Units= (Beginning units + Units started)-(Goods units transferred out + ending units)
= (1,500+8,500) – (7,000 + 2,000)
= 1,000 units
Normal Spoilage is 10% of the 7,000 units of good output, or 700 units. Thus,
Abnormal Spoilage = Total Spoilage – Normal Spoilage
= 1,000-700
= 300units
Step 2: Compute output interims of Equivalent Units.
Step 3: Compute Equivalent unit costs.
Step 4: summarize Total Costs to Account for.
Step 5: Assign Total Costs to units completed, to spoiled units, and to units in ending
work-in process.
WEIGHTED AVERAGE
Physical units and Equivalent units (Step 1&2)
Equivalent Units
Flow of Production Physical Direct Conversion
Units Materials costs
Work in process, beginning 1,500
Started during current period 8,500
To account for 10,000
Goods units completed and transferred out
during current period: 7,000 7,000 7,000
Normal Spoilage
700*100%; 700*100% 700 700 700
Abnormal Spoilage
300*100%; 300*100% 300 300 300
Work in process, ending
2,000*100%; 2,000*50% 2,000 2,000 1,000
Accounted for 10,000
Work done in current period 10,000 9,000
Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Production Materials costs
Costs
(Step 3) Work in process, beginning Br.21,000 Br.12,000 Br.9,000
Costs added during the current period 165,600 76,500 89,100
Costs incurred to date divided by Br. 88,500/ Br. 98,100/
Equivalent units of work done to date 10000 9000
Cost per equ. unit of work done Br.8.85 Br.10.90
(Step 4) Total costs to account for Br.186,600
(Step 5) Assignment of Costs
Goods units comp. and tran. out :
Costs before adding normal spoilage 138,250 (7,000*8.85) (7,000*10.9)
Normal Spoilage (700 units) 13,825 700*8.85 700*10.9
Total cost of goods comp. and tra. out 152, 075
Abnormal Spoilage(300 units) 5,925 300*8.85 300*10.90
Work in process, ending (2,000 units)
Direct Materials 17,700 2,000*8.85
Conversion costs 10,900 1,000*10.90
Total work in process 28,600
Total costs accounted for Br186,600
FIFO Method
Equivalent Units
Flow of Production Physical Direct Conversion
Units Materials costs
Work in process, beginning 1,500
Started during current period 8,500
To account for 10,000
Good units completed and transferred out
during current period:
From beginning work in process:
1,500*(100%-100%); 1,500*(100%-60%) 1,500 0 600
Started and Completed:
5,500*100%, 5,500*100% 5,500 5,500 5,500
Normal Spoilage
700*100%;700*100% 700 700 700
Abnormal Spoilage
300*100%; 300*100% 300 300 300
Work in process, ending
2,000*100%; 2,000*50% 2,000 2,000 1,000
Accounted for 10,000
Work done in current period 8,500 8,100
Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Production Materials costs
Costs
(Step 3) Work in process, beginning Br.21,000
Costs added current period 165,600 76,500/ 89,100/
Divided by equivalent units 8,500 8,100
Costs per equivalent unit of work done
in the current period Br. 9 Br. 11
(Step 4) Total costs to account for Br.186,600
(Step 5) Assignment of Costs
Good units completed and transferred out:
Work in process, beginning (1,500 units) Br. 21,000
Direct Materials added in current period 0 0*9
Conversion costs added in current period 6,600 600*11
Total from beg. inventory before spoilage 27,600
Started and completed BNS(5,500units) 110,000 5,500*9 5,500*11
Normal Spoilage (700 units) 14,000 700*9 700*11
Total costs of goods units transferred out 151,600
Abnormal Spoilage (300 units) 6,000 300*9 300*11
Work in process, ending (2000 units)
Direct Materials 18,000 2000*9
Conversion costs 11,000 1,000*11
Total work in process, ending 29,000
Total costs accounted for Br.186,600
 Journal Entries
Weighted Average FIFO
Finished Goods 152,075 151,600
Work-in Process-Forming 152,075 151,600
(To transfer good units completed in July)
Loss from Abnormal Spoilage 5,925 6,000
Work-in Process-Forming 5,925 6,000
(To recognize abnormal spoilage detected in July)
 Inspection Points and Allocating Costs of Normal Spoilage
The above illustration assumes inspection upon completion. Spoilage might actually occur at
various stages of the production cycle, but it typically detected only at one or more specific
inspection points.
An inspection point is the stage of the production cycle where products are checked to determine
whether they are acceptable or unacceptable units. The cost of spoiled units is assumed to be all
costs incurred by spoiled units prior to inspection. When spoiled units have a disposal value, the
net cost spoilage is computed by deducting disposal value from the costs of the spoiled goods
accumulated to the inspection point
6.4. Job Costing and Spoilage
The concepts of Normal and Abnormal Spoilage also apply to job-costing systems. Abnormal
spoilage is usually regarded as controllable by the manager. Costs of abnormal spoilage are not
considered as inventoriable costs and are written off as costs of the period in which detection
occurs. Normal Spoilage costs in job-costing systems just as in process costing systems are
inventoriable costs, although managements are tolerating only small amounts of spoilage as
normal.
When assigning costs, job-costing systems generally distinguish between normal spoilage
attributable to a specific job and normal spoilage common to all jobs. Normal spoilage attributable
to a specific job is assigned to that job, a step unnecessary in process costing since masses of
identical or similar units are manufactured.
Example: In a Machine Shop 5 aircraft parts out of a job lot of 50 aircrafts parts are spoiled. Costs
assigned prior to inspection point are $2,000 per part. The current disposal price of the spoiled
parts is estimated to be $600 per part. When the spoilage is detected, the spoiled goods are
inventoried at $600 per part.
Normal Spoilage attributable to a specific job: When normal spoilage occurs because of the
specifications of a particular job, that job bears the cost of the spoilage reduced by the current
disposal value of the normal spoilage is:
Materials Control (5*$600) 30002
Work-in Process Control (specific job) (5*$600) 3000
2
Spoiled goods at current disposal value.
 Note that the Work-in Process Control (specific job) has already been debited $10,000 for the spoiled
parts (5 spoiled parts * $2,000 per part). The effect of the $3,000 entry is that the net cost of the normal
spoilage, $7,000 ($10,000-$3,000) becomes an additional cost of the 45(50-5) good units produced.
The total cost of the 45 good units is $97,000. $90,000 (45units*$2,000 per unit) incurred to produce the
good units plus the $7,000 net cost of normal spoilage.
Normal Spoilage common to all jobs: In some cases, spoilage may be considered a normal
characteristics of a given production cycle. The spoilage inherent in production only coincidently
occurs when a specific job is being worked on. The spoilage is not then attributable, and hence is
not charged, to the specific job. Instead it is considered as manufacturing overhead. The journal
entry is:
Materials Control (spoiled goods at disposal value 5*$600) 3000
MOH Control (normal spoilage $10,000-$3,000) 7000
Work-in Process Control (specific job 5*$2,000) 10000
When normal spoilage is common to all jobs, the budgeted MOH rate includes a provision for
normal spoilage cost. Therefore, normal spoilage cost is spread, through overhead allocation, over
all jobs rather than loaded on particular jobs only. The total cost of the 45 good units is $90,000
(45 units*$2,000 per unit) plus a prorated share of the $7,000 of normal spoilage overhead costs.
Abnormal Spoilage: if the spoilage is abnormal, the net loss highlighted and always charged to an
abnormal loss account. Unlike normal spoilage costs, abnormal spoilage costs are not included as a
part of the cost of goods unit produced. The total cost of the 45 good units is $90,000 (45
units*$2,000 per unit).
Materials Control (spoiled goods at current disposal value: 3000
Loss from Abnormal Spoilage 7000
Work-in Process Control (specific job) 10000
6.5. Rework (Defective units)
Rework is unacceptable units of production that are subsequently repaired and sold as acceptable
finished goods.
Example: Consider Hull Machine Shop; assume that the 5 spoiled parts used in the illustration are
reworked. The journal entry for the $10,000 of total cost assigned to the 5 spoiled units before
considering rework costs are as follows:
Work-in Process Control (Specific Job) 10000
Materials Control 4000
Wage payable Control 4000
MOH Allocated 2000
Normal Rework common to all jobs: When rework is normal and not attributable to any specific
job, the costs of rework are charged to MOH and spread through overhead allocation, over all jobs.
MOH Control (rework costs) 3800
Wage payable control 2000
MOH Allocated 1000
Abnormal rework: if the work is abnormal, it is recorded by charging abnormal rework to a
separate loss account.
Loss from Abnormal Rework 3800
Wage Payable Control 2000
MOH Allocated 1000
Accounting for rework in a process costing system also requires abnormal rework to be
distinguished from normal rework. A process costing system accounts for abnormal rework in the
same way as a job-costing system. Accounting for normal rework follows the accounting described
for normal rework common to all jobs because masses of identical or similar units are
manufactured in process costing systems.
6.6. Accounting for Scrap
Scrap is a material left over when making a product(s); it has low sales value compared with the
sales value of the product(s). There are no distinctions of normal and abnormal scrap, but scrap
attributable to a specific job is distinguished from scrap common to all jobs.
There are two major aspects of accounting for scrap:
1. Planning and control, including physical tracking.
2. Inventory costing, including when and how to affect operating income
The question here is:
 When should the value of scrap be recognized in the accounting records at the time scrap is
produced or at the time scrap is sold?
 How should revenue from scrap be accounted for?
To illustrate: In Hull Co. assuming that the manufacturer of aircraft parts generates scrap. We
further assume that the scrap from a job has a total sales value $900.
6.6.1. Recognizing Scrap at the Time of its Sale:
When the dollar amount of scrap is immaterial, the simplest accounting is to make a memo of the
quantity of scrap returned to the storeroom and to regard scrap sales as a separate line item of other
revenues. The only journal entry is:
Cash or A/R 900
Sales of Scrap 900
(Sale of Scrap)
When the dollar amount of scrap is material and the scrap is sold quickly after it is produced, the
accounting depends on whether the scrap is attributable to a specific job or common to all jobs.
 Scrap attributable to a specific job: Job costing system sometimes trace the sales of scrap
to the jobs that yielded the scrap. This method is used only when the tracing can be done in
an economical feasible way.
The journal entry is:
For scrap returned to storeroom: No journal entry3
Sale of Scrap: Cash or A/R 900
3
Memo of quantity received and related job is entered in the inventory record.
Work-in Process Control 900
Unlike spoilage and rework, there is no cost attached to the scrap, and hence no distinction is made
between normal and abnormal scrap. All scarp sales, whatever the amount, are credited to the
specific job. Scrap sales reduce the costs of the job.
 Scrap common to all jobs:

The journal entry in this case is:
Scrap returned to storeroom: No journal entry.
Sale of scrap: Cash or A/R 900
MOH Control 900
This method does not link scrap with any particular job or product. Instead, all products bear
regular production costs without any credit for scrap sales except in an indirect manner. The
expected sales are considered when setting the budgeted MOH rate. Thus, the budgeted OH rate is
lower than it would be if the OH budget had not been reduced by the expected sales of scrap. This
accounting for scrap is both in process costing and job costing systems.
6.6.2. Recognizing Scrap at the Time of its Production
In the preceding illustration the assumption is that scrap returned to the storeroom is sold quickly
and hence not assigned an inventory cost figure. Sometimes however, the value of scrap is not
immaterial, and the time between storing it and selling or reusing it can be quite long. Under
conditions, the company is justified in inventory scrap at a conservative estimate conditions of net
realizable value so that production costs and related scrap recovery are recognized in the same
accounting period. Some companies tend to delay sales of scrap until the market price is most
attractive.
 Scrap attributable to a specific job: The journal entry in the example is:
Scrap returned to storeroom: Materials Control 900
Work-in Process Control 900
 Scrap common to all jobs: The journal entry in this case is
MOH Control 900
 Observe that Materials Control account is debited in place of Cash/A/R.
When the scarp is sold, the journal entry is:
Sale of Scrap: Cash or A/R 900
 Scrap is sometimes reused as direct materials rather than sold as scrap. In this case, it should be
debited to Materials Control as a type of direct materials and carried at its estimated net realizable
value. For example, the entries when the scarp generated is common to all jobs are:
MOH Control 900
Reuse of Scrap: Work-in Process Control 900
 The accounting for scrap under process costing is like the accounting under jobs costing when
scrap is common to all jobs because process costing applies to the manufacture of masses of
identical or similar units. The high cost of scrap focuses manager’s attention on ways to reduce
scrap and to use it more profitably.
================================================================

Cost & Mgt. Acct - I, Lecture Note - Chapter 5 & 6

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost & Mgt. Acct - I, Lecture Note - Chapter 5 & 6

Uploaded by

Copyright:

Available Formats

Addis Ababa University, College of Business & Economics, Department of Accounting & Finance

5.2 Purposes of Cost Allocation

5.3 Cost Allocation Methods

 Single-Rate and Dual-Rate Methods

Fixed costs of operating the computer facility in the

Budgeted totals rate per hour= 5,400,000 = Br.450/hr

Microcomputer =9000*450= Br. 4,050,000.

2. Dual-rate Allocation Method

Allocation of Fixed Costs to:

Allocation of Total Costs to:

5.4 Allocating Support Departments

Required: Allocate costs using the three methods.

Plant Maintenance Machining

Information Systems Assembly

Support Departments Operating Departments

Allocation by Inf. System 0 (116,000) 103,111 12,889

Plant Maintenance Machining

Information Systems Assembly

Support Departments Operating Departments

3. Reciprocal Allocation Method

PM = 600,000 + 0.1 (116,000 + 0.2PM)

Plant Maintenance Machining

Information Systems Assembly

Support Departments Operating Departments

Allocation by Inf. Syste. 24,082 (240,816) 192,652 24,082

Mkele employer: $1,200 * 1,500 = 0.60*1,500= $900

Dessie employer: $800 * 1,500 = 0.4 * 1,500 = $600

Party Cost Allocated Costs remaining to be

Mekele (primary) $1,200 $300 ($1,500 - $1,200)

6.1 Spoilage, Rework, and Scrap

Calculation of Product Costs (Steps 3, 4, and 5)

Calculation of Product Costs (Steps 3, 4, and 5)

 Scrap common to all jobs:

You might also like