Exercise 3-1(Accounting for Scrap)

Archaeous Wood Designs accumulates fairly large quantities of saw dust from the products
it manufacture. At least once a month, the scrap dusts are sold to local customers for
animal bedding or fertilizer. This month’s scrap sales on account totaled P10,450.

Required: Give the appropriate journal entry to record the sale of the scrap for each of the
following alternatives:
1. The scrap sales are regarded as a separate line item under Other Revenues.
2. The scrap sales are viewed as a reduction of Cost of Goods Sold for the month.
3. The scrap sales are viewed as an offset against manufacturing overhead
4. The scrap sales are credited to the jobs that generated the scrap.
5. If the scrap, which can be traced to a specific job, is returned to the storeroom and
is reused as direct material on a subsequent job.

ANSWER:

1. Accounts Receivable P10,450

Scrap Sales P10,450

2. Accounts Receivable 10,450

Cost of Goods Sold 10,450

3. Accounts Receivable 10,450

Factory Overhead Control 10,450

4. Accounts Receivable 10,450

Work in Process 10,450

5. Scrap Materials 10,450

Work in Process – Job #1 10,450

Work in Process - Job #2 10,450

Scrap Materials 10,450
Exercise 3-2 (Accounting for Spoilage)

Ananias Metal Co. uses a job order cost accounting system to account for its production
cost. During the current period, 400 steel chairs were molded and assembled as Job 678.
The total cost incurred on the job is:
Materials P4,800
Labor (200 hours x P10 per hour) 2,000
Factory overhead (P20 per labor hour) 4,000
Total Costs Charged to Job 678 P10,800

Before being transferred to Finished Goods Inventory, the steel chairs were inspected by
Quality Assurance Officers and 40 were found to be spoiled. The spoiled items are too
impractical and expensive to rework as it needs to be molded again, however these items
can be sold for P10 each. The company maintains a separate Spoiled Goods Inventory for
defective products and charges the unrecoverable cost of spoilage to Factory Overhead
Control (FOC) account.

Required:
1. Determine the cost of spoilage attributable to Job 678 if the spoilage was due to internal
failure.
2. Determine the unrecovered cost of spoilage of Job 678 if the spoilage was due to
internal failure.
3. Give the journal entries if the spoilage was due to internal failure
4. Journal entries if the spoilage was due to sudden change of customer’s specification and
not by the inspection of the Quality Assurance officers.
5. Journal entries if the spoilage was considered to be abnormal.

ANSWER:

1. P10,800 / 400 chairs = P27 per chair x 40 spoiled chairs = P1,080

2. Unrecovered Cost = Cost of Spoilage-Salvage value

= P1,080 - (40unitsxP10)
= P680

IF SPOILAGE IS CHARGED TO TOTAL PRODUCTION OR

IF SPOILAGE IS DUE TO INTERNAL FAILURE

3. Spoiled Goods Inventory 400

FOC 680
Work in Process 1,080
 FG/CGS…………………………………………………………… 9,720
WIP ………………………………………………………….. 9,720

*CGS ……………………………………………………………..9,720
*FG …………………………………………………………….. 9,720
OR

Spoiled Goods Inventory 400

FOC 680
Finished Goods Inventory /CGS 9,720 ( 10,800 – P1,080)
Work in Process 10,800

IF SPOILAGE IS DUE TO CHANGE IN CUSTOMERS’ SPECIFICATION

4. Spoiled Goods Inventory 400

Work in Process 400

Finished Goods Inventory/CGS 10,400

Work in Process 10,400

OR
Spoiled Goods Inventory 400
Finished Goods Inventory/CGS 10,400
Work in Process 10,800

IF SPOILAGE IS ABNORMAL

5. Spoiled Goods Inventory 400

Loss from Abnormal Spoilage 680
Work in Process 1,080

Finished Goods Inventory/CGS 9,720

Work in Process 9,720

OR

Spoiled Goods Inventory 400

LAS 680
Finished Goods Inventory/CGS 9,720
Work in Process 10,800
Exercise 3-3 (Accounting for Spoilage)

Maddox Metal World manufactures custom sheet metal products. During the current period,
an order for 1,250 custom sheets for trailers was begun as Job 450 for Norfolk Trains. After
250 units had been completed, the customer decided to change the design specifications for
the metal sheets. The design change was successfully implemented on the 1,000 units that
were not complete at the date of the change order; however, the 250 completed units could
not be reworked to meet the customer’s new design. As a consequence, an additional 250
units had to be manufactured to meet the number of orders. The customer does not want
the 250 units but the company can sell it in the second market for P100 each. Spoiled goods
are kept in an inventory account that is separate from Finished Goods. Total cost charged to
Job 450 for Norfolk Trains are:
Materials P 125,000
Labor (3,000 hours x P15 per hour) 45,000
Factory overhead (P30 per labor hour) 90,000
Total cost charged to Job 450 P 260,000
=======
Required:
1. Compute the cost to be transferred to Spoiled Goods Inventory.
2. Compute the cost of the job shipped to the customer.
3. Provide the appropriate journal entry for the sold job.
4. If the spoilage was due to internal failure, provide the appropriate journal entry.
5. If the spoilage was considered abnormal, provide the appropriate journal entry.

ANSWER to Exercise 3-3 (Accounting for Spoilage)

1. Cost of Spoiled Goods Inventory = 250 units x P100 = P25,000

2. Cost of Good Sold = P260,000 - 25,000

= P235,000

3. Spoiled Goods Inventory 25,000 SGI …………………25,000

Cost of Goods Sold 235,000 WIP ………………………..25,000
Work In Process 260,000 OR
CGS ………………….235,000
WIP .……………………….235,000
4. Spoiled Goods Inventory 25,000 SGI 25,000
Factory Overhead Control 18,333 FOC 18,333
Cost of Goods Sold 216,667 WIP ……………………………….43,333 *
Work in Process 260,000 OR 260,000 / 1,500 u = UPC P173.33/u
173.33 x 250 spoiled u = 43,332.50*

CGS ………… 216,667

WIP …………………….. 216,667
260,000 – 43,333 = 216,667

5. Spoiled Goods Inventory 25,000

Loss on Abnormal Spoilage 18,333
Cost of Goods Sold 216,667
Work in Process 260,000

Exercise 3-4(Accounting for Spoilage)

Edcynth Company manufactures picture frames of all sizes and shapes and uses job order
costing system. There is always some spoilage in each production run. The following costs
relate to the current run:
Estimated overhead (exclusive of spoilage) P400,000
Spoilage (estimated) 62,500
Sales Value of spoiled frames 28,750
Labor hours 250,000
The actual cost of spoiled picture frame is P7.00. During the year, 425 frames are
considered spoiled. Each spoiled frame can be sold for P4. The spoilage is considered to be
part of the job.
Required:
1. Compute the predetermined overhead rate if it is based on labor hours.
2. Prepare the journal entry to record the spoilage.
3. Prepare the journal entry if the spoilage relates only to Job#12 rather than being part of
all production runs.

ANSWER to Exercise 3-6 (Accounting for Spoilage)

1. P400,000 + 62,500 - 28,750 = P433,750 / 250,000Labor hours = P1.735 per DLH

2. Spoiled Goods Inventory 425 frames x P4 1,700

FOC 425 frames x P3 1,275
Work in Process 425frames x P 7 2,975

3. Spoiled Goods Inventory 1,700

Work in Process 1,700
Exercise 3-5 (Spoilage)

Hardiflex Company's Job 1865 for the manufacture of 2,200 coats was completed during
August at the unit costs presented below. Due to an internal failure in the production
process, 200 coats were found to be spoiled during final inspection that were sold to a
jobber for P6,000.

Direct materials P20

Direct labor 18
Factory overhead 18
P 56

What would be the unit cost of good coats produced on Job 1865?

Work in Process
TPC 2,200 x 56 = 123,200 Cost of Spoilage 200 x 56 = 11,200

Balance End 112,000/2,000 u = 56

Exercise 3-6 (Accounting for Rework Costs)

Afton Furniture Inc. manufactures several different designs of indoor furniture. Production
costs are accounted for using a job order cost system. During the current period, 250 metal
tables were manufactured on Job 897. Costs charged to the job before inspection are:
Materials P8,250; Labor (375 hours x P10 per hour) P3,750; Factory overhead (@ P12 per
hour) P4,500. Inspection revealed that steel hand holder had not been attached to the
furniture. To correct the oversight, a small part was welded to the furniture and was
repainted. The small part cost P15 for each furniture, and the primer and paint cost P25 for
each furniture. Each furniture required ¼ hour of labor.

Required:
1. Prepare the journal entries to record the rework and transfer to the Finished Goods
Inventory.
2. If the rework was due to customer change rather than internal failure, what will be the
journal entries to record the rework and transfer to the Finished Goods Inventory.
3. If the rework was considered by the company as abnormal, what will be the necessary
journal entries to record the rework and transfer.
Answer to Exercise 3-6:

1. Factory Overhead Control 1,750

Materials (250xP1.50) 375
Payroll (250x1/4xP10) 625
Applied FOH (250x1/4xP12) 750

Finished Goods 16,500

Work in Process 16,500

2. Work in Process 1,750

Materials (250xP1.50) 375
Payroll (250x1/4xP10) 625
Applied Factory Overhead 750

Finished Goods 18,250

Work in Process 18,250 …….16,500 +1,750 Total Dr. to WIP

3. Loss from Abnormal Rework 1,750

Materials (250xP1.50) 375
Payroll (250 x ¼ x P10) 625
Applied Factory Overhead 750

Finished Goods 16,500

Work in Process 16,500

Exercise 3-7(Accounting for Rework Costs)

Esmael Electronic Inc. manufactures gauges and instruments for aircraft. During the current
year, an order for 2,500 units of a custom design gauge was begun for Cebu Aircraft
International. The cost incurred on the job are: Materials – P50,000; Labor (2,500 hours
xP15 per hour) – P37,500; Factory Overhead (P30 per direct labor hour) – P75,000. Before
taking delivery of the gauges, engineers at Cebu Aircraft changed the design specification.
The change requires the replacement of some parts. The material cost was P1 and required
25 minutes for installation of each gauge. The change affected all 2,500 gauges
manufactured on the job.

Required: Prepare the journal entries to record:

1. the rework costs and the shipment of the completed jobs to the customer.
2. the rework if it was due to internal failure.
3. the rework if it was considered abnormal.
Answer to Exercise 3-7:

1. Work in process 49,375

Materials (2,500xP1) 2,500
Payroll (2,500x25/60xP15) 15,625
Applied Factory Overhead 31,250

Cost of Goods Sold 211,875

Work in Process 211,875

2. Factory Overhead Control 49,375

Materials (2,500xP1) 2,500
Payroll (2,500x25/60xP15) 15,625
Applied Factory Overhead 31,250

3. Loss from Abnormal Rework 49,375

Materials (2,500xP1) 2,500
Payroll (2,500x25/60xP15) 15,625
Applied Factory Overhead 31,250

Exercise 3-8 (Rework)

During March, Nikolai Co. incurred the following costs on Job #110 for the manufacture of
200 motors:
Original cost accumulation:
Direct materials P1,650
Direct labor P2,000
Factory overhead (150% of Direct Labor)
Direct cost of reworking 10 units:
Direct Materials P250
Direct Labor P400

Required: Compute the unit cost of Job #110 if the rework cost:
1. is directly attributable to that job.
2. was a result of an internal failure due to the employee’s error.

Answer to Exercise 3-8:

1. P1,650+2,000+(2,000x1.5)+250+400+(400x1.5)= P7,900 / 200motors = P39.50 /motor

2. P1,650+2,000+(2,000x1.5)=P6,650 / 200motors = P33.25 /motor

Exercise 3-9 (Rework)

A company that manufactures baseball started its operations on January 1. Each baseball
requires three elements: a hard plastic core, several yards of twine that are wrapped
around the plastic core, and a piece of leather to cover the baseball. The plastic core is
started down a conveyor belt and is automatically wrapped with the twine to the
approximate size of the baseball, at which time the leather cover is sewn to the wrapped
twine. Finished baseballs are inspected, and the ones that are defective due to internal
production failure are pulled out. Defective baseballs cannot be economically salvaged and
are destroyed. Cost and production reports for the first week of operations are: Raw
material cost- P840 and Conversion cost- P 315

During the week, 2,100 baseballs were completed; 2,000 passed inspection. There was no
ending work in process. The cost of the spoilage charged to Factory Overhead is_________

Answer to Exercise 3-9:

(P840 + P315) / 2,100 = P0.55 per baseball x 100 spoiled baseballs

= P55 as Cost of Spoilage charged to FOC

as it has no salvage value

OR

Materials: (P840  / (2,000 + 100) = P.40

Conversion: (P315  / (2,000 + 100) = P.15
Spoilage: 100 x P.55 = P55