Cost Accounting 196 1, Loss is charged to all production: : 60,000 8) Work in Process 4 60,000 Materials 52,000 Payroll . 48,000 Factory Overhead Applied Materials= 4,000 x 15.00 Labor = 4,000 x 13.00 Overhead= 4,000 x 12.00 4 b) Spoiled Goods a Factory Overhead Control 44 aap Work in Process q Spoiled = 200x 18.00 WP = _—-200x 40.00 ¢) Finished Goods 152,000 Work in Process 152,000 2. is charged to the specific job. a) Work in Process 156,000 Materials 60,000 Payroll 52,000 Factory Overhead Applied 44,000 Materials= 4,000 x 15.00 Labor = 4,000x 13.00 Overhead= 4,000 x 11.00 b) Spoiled Goods 3.600 Work in Process 3,600 0) a a : 152,400 ‘ork in Process 152,400 Under the method, loss charged to all production, the unit ‘ Py cost its remains at P40.00. In spite of the spoiled units, the una noo ne Comets init costChapter 7 Accounting for Materials 197 remained the same because the increase was made at tl to the factory overhead Tate as allowance for spoil auring bi perio sapen shone Jobs without spoiled units, will absorb the additional p1.00. Upon comp Of the job, even if there were spoiled units, the unit cost will fe the same as the amount originally charged tothe job : he start (when P1.00 was added led work), All units processed On the other hand under the method, loss charged to the specific job, it will be noted that the factory overhead rate was recorded at the original amount P11.00 (allowance of P1.00 for spoiled work was not added). The remaining perfect units in the job will absorb the loss on the spoiled, resulting in an increase in the unit cost (152.400 _ ) (3,800 units = 40.10S/unit ) the increase in the unit cost (40.105 - 39.00 = 1.105) may be computed as follows: Cost of spoiled (200 x 39.00) 7,800 Less: Amount recovered from sale (200 x 18) 3,600 Loss on spoiled goods The loss on spoiled goods will be absorbed by the remaining good units (4,200 divided by 3,800 units = 1.105/unit). TWO METHODS OF ACCOUNTING FOR DEFECTIVE MATERIALS The accounting problem for defective units is the additional costs to be incurred in reprocessing the units to convert them into perfect articles. There are two methods available: 1. Charged to the specific job - same for spoiled units, if the reason for the defect is the job itself, the additional costs incurred (materials, labor, and overhead) will be charged to all units in the job. Entry:. Work in process 20 Materials Axx Payroll xxx Factory Overhead A {pplied xox198 Cost Accounting to the process and the is normal i nS omit, then the additional costs 2. Chi ion = i reaso! a arged to all production - if the ‘ormal limit, number of defective units do not exceed the : eriod. incurred will be charged to all units being processed during the p' Entry: Factory overhead control xk 0x Materials XxX Payroll sek Factory overhead applied ILLUSTRATIVE PROBLEM 10 7 7 Job 3044 called for the making of 4,000 units with these unit costs: Direct materials Pp 15.00 Direct labor 13.00 Factory overhead (includes a P1.00 : allowance for defective units) ——12.00 Total During processing 300 units were found to be defective and required the following total additional costs: materials - P2,000; labor - P4,000; and overhead - P2.000. Required: 1. Entries if the additional cost is charged to all production 2. Entries if the additional cost is charged to the specific job. 1. Additional cost is charged to all production. a) Work in Process 160,000 Materials 60,000 Payroll 000 Factory Overhead Applied ie he b) Factory Overhead Control 8,000 Materials 2,000 Payroll Z 000 Factory Overhead Applied 2. 000 c) Finished goods Work in Process 160,000 160,000 The cost of the finished goods will remain at the ori (160,000 divided by 4,000 units,= P40.00) ginal amount charged to the jodchapter 7 Accounting for Materials 199 z, Additional cost is charged to the specific job. a) Work in Process ) Materials, ahah Payroll o toe Factory Overhead Applied 44, 000 b) Work in Process Materials 6009 5,000 Payroll 4,000 Factory Overhead Applied 2,000 ¢) Finished Goods 164,000 Work in Process 164,000 The unit cost of the completed units increased from the original P39.00 to P41.00 (164,000 divided by 4,000 units). All units in the job will share in the cost incurred to re-process the defective units. ACCOUNTING FOR SCRAP MATERIAL A cost accounting system should provide a method of costing and control for scrap as it does for spoilage and defective units. When the amount of scrap produced exceeds the norm, it could be an indication of inefficiency. A predetermined rate for scrap should be prepared as a guide for comparison with the actual scrap those results. If latge differences occur, management should find the reason and correct the problem. Scrap materials have commonly been accounted for in either of the following ways. 1. If-the scrap recovered can be traced to a specific job, the entry is Scrap/Scrap Materials xox Work in Process XXX The amount recovered for the scrap will be entered negative () on the materials section of the job order cost sheet. 2. Ifthe scrap recovered are not traceable to a specific job, the entry is: Scrap/Scrap Materials XXX Miscellaneous Income , XXX200 : Cost Accounting . is: 3. Ifthe serap recovered are from factory supplies , the etry Scrap/Scrap Materials “ XXX Factory overhead control ACCOUNTING FOR WASTE MATERIAL ted either to all jobs (included The cost of disposing of waste materials may be alloca 7 di 7 a in the factory in the factory overhead application rate) or to specific jobs (not include tory overhead application rate). 1. If the cost of disposing the waste materials is allocated to all jobs, the entry is Factory overhead control or Accounts payable we 2. If the cost of disposing the waste materials is allocated to a specific job, the entry is Work in process inventory - (Job number) XXX Accounts payable a Waste exceeding a specified normal level (based on past experience) indicates inefficiencies somewhere in the production process and signals management to take corrective action. Although the cost of disposing of waste materials is minimal as compared to the total production costs, in some manufacturing and service corporations it may involve significant expenditure. For example, a chemical manufacturer may have toxic waste which requires special packaging before disposal and thus results in an expensive disposal cost. The cost of disposing of most type of waste is expected to increase significantly in the near future as existing garbage dumps fill up and more elaborate e fe and expensive forms of disposal must be developed. ‘pensive fortChapter 7 Accounting for Materials 201 ACCOUNTING FOR BASIC MATERIAL TRANSACTION S| RY TRANSACTION BUSINESS PAPER ENTRY RECORDS Purchases of Voucher supported Dr, Materials Received Materials in by invoice; receiving | Cr. Accounts section of Advance of use report and purchase Payable stock card order (PO) Emergency Voucher supported Dr, WP Material section Purchases of by invoice; Cr. Accounts of cost sheet Direct material receiving report and Payable purchase order Emergency Voucher supported Dr. FOC Factory OH Purchases of by invoice; Cr, Accounts Ledger Ind, Materials receiving report and| Payable urchase order Materials from Factory materials report Cr. WP Return of Return shipping Dr. Accounts Received section Materials and order with debit Payable of stock card ( ) | Supplies to vendor _| memo Cr. Materials issue of Materials Dr. WP Mat. section cost Direct materials Requisition Cr. Materials sheet. Issued section of stock card Issue of indirect Materials Dr. FOC OH ledger Mat. & supplies requisition Cr. Materials Issued section stock card Return of excess Returned Dr. Materials Issued section of stock card () Mat. cost sheetCost Accounting 202 QUESTIONS 1, What are the major objectives of materials control? ; ee ini amo 2. What factors should management consider in determining the amount of investment in materials? 3. What is the meaning of “order point"? 4. What kind of information and data are needed to calculate an order point? 5. Normally, a manufacturer maintains an accounting system which includes a stores ledger and a general ledger account for Materials. Describe the relationship between the stores ledger and the materials ledger. 6. A company may select an inventory costing method from a number of commonly used procedures. Briefly describe each of the following methods a. First-in, first-out b. Moving average 7. What different methods that can be used to account for the sales value of the scrap materials? 8. What distinguishes‘ product as being spoiled or defective? “9. What are the different methods of accounting for spoiled units? 10. What are the different methods of accounting for defective units?Chapter 7 Accounting for Materials 203 PROBLEMS a Problem 1 The Norman Company predicts that 64,000 units of material will be used during the ar. The materials are expected to Cost P20.00 per unit. It is anticipated that it will cost P 40.00 to place each order. The annual carrying cost is P 2.00 . Determine: a. The most economical order quantity b. The total cost of. ordering and carrying at the EOQ point Problem 2 Abner Company has an annual demand of 13,000 units of Material A. The cost per unit is P14, The order cost is P200 per order; and the annual inventory carrying cost per unit is P5.20. Assume that the units will be required evenly throughout the year. Required: Compute for the following: a. Economic order quantity b, Number of orders in a year. Cc. Average inventory based on economic order quantity. d, Total carrying cost and total ordering costs at economic order quantity. Problem 3 Olive Corporation buys a material for P20 per unit. Sixteen thousand parts a year are needed. Carrying cost is P3.00 per unit and the ordering cost is P15. Required: a. Compute the economic order quantity. b. Prepare a tabular analysis to compute the total costs assuming the following order sizes: 100 units, 200 units, 400 units, 1,600 units and 6,400 units. The table should have the following columns: order size, number of orders, cost per order, total ordering costs, average inventory, carrying.cost per unit, total carrying costs, and total costs.Cost Accounting 204 tt Co. Invoice totals are: X_ harges on this shipment of terials are 10,000, 6,000, Problem 4 An invoice for X, Y, and Z is received from P 125,000; Y - P 75,000; Z - P100,000 18,000 pounds total P7,500. Weights for tl and 7,500 pounds. Required: 1. Cost per pound to be entere fran +h material, based o 2. Cost per pound to be entered on the stock cards for eac! , n shipping weight. ji Heavyweight The freight he respective mal don the stock cards for each materials, based on Probjem 5 Maxie Company regularly buys merchandise from D: trade discount of 20/10/10 from the list price. For # Company purchased merchandise with a list price 0 n/30. Requirements: J. The amount debited to Materials if the purchase discount is treated as other income (Purchases recorded at gross). 2. The amount debited to Materials if the purchase discount is treated as a reduction of purchases. (Recorded as net) awson Suppliers and is allowed a he month of September, Maxie £ P100,000 and terms of 2/10, Problem 6 The following information is to be used in costing inventory on August 31, August 1 Beginning balance 1,600 units at P6.00 5 Purchased 400 units at P7.00 9 Purchased 400 units at P8.00 16 Issued 800 units 24 Purchase i 27 Issued 100 cane eat Required: The cost of materials used and the cost assigned to th by each of these perpetual inventory costing methods: 1. First-in, first-out 2. Average. ¢ August 31 inventoryChapter 7 Accounting for Materials 205 Problem 7 The Bedrock Company is a manufacturer of golf clothing. During the month, the company cut and assembled 10,000 golf jackets. One hundred of the jackets did not meet specifications and were considered “seconds.” Seconds are sold for P1,000.00 per jacket, whereas first quality jackets sell for P2,500,00. During the month, Work in Process was charged for P3,600,000 of materials, P4,000,000 of labor, and factory overhead is applied at 120% of direct labor (including allowance of 20% of direct labor for spoiled units) Required: Entries required for each of the following conditions: a, Loss due to spoiled work is spread over all jobs. b. Loss due to spoiled work is charged to this specific job. (factory overhead is applied at 100% of direct labor cost Cc. Compute the unit cost of the good units under (a) and (b) Problem 8 Kyralei Co. manufacture golf carts and other recreational equipment. One order for RAGC Corporation for 2,000 carts showed the following costs per unit: direct materials - P400; direct labor P200; and factory overhead applied at 140% of direct labor cost if defective work is charged to a specific job and 150% if defective work is charged to all jobs. Final inspection revealed that wheels were assembled with improper bearings. The wheels were disassembled and the proper bearings inserted. The cost of correcting each defective cart consists of P20 added cost for bearings, P40 for labor, and factory overhead at the predetermined rate, Required: A. Prepare journal entries to record correction of the defective units and transfer of the work in process to finished goods if: 1. The RAGC is to be charged with the cost of defective units. 2. The cost of correcting the defective units is not charged to RAGC. B. Compute the cost per unit of finished goods if: 1. The RAGC is to be charged with the cost of defective units 2. The cost of correcting the defective units is not charged to RAGC