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Continuation Cost Acctg. Acctg. For Materials
Continuation Cost Acctg. Acctg. For Materials
FOR MATERIALS SPOILED UNITS , DEFECTIVE UNITS , SCRAP MATERIAL AND WASTE MATERIAL
IN A JOB ORDER COST SYSTEM
FREIGHT IN
DIRECT CHARGING – the freight incurred on the purchase of raw materials is The term spoiled units , defective , scrap material and waste material are not
added to the invoice price. The account debited for the freight is materials. synonymous , and they should not be used interchangeably.
The effect is an increase in the unit cost. If two or more materials are
purchased and delivered in the same time , the freight must be allocated Spoiled units – are units that do not meet production standards and are
using the following methods; either sold for their salvage value or discarded. When spoiled units are
a. Relative peso value method – freight is allocated on the basis of discovered, they are taken out of production and no further work is
the peso value of the items purchased. This is used for materials performed on them.
purchased and expressed in different terms of measurement.
b. Relative weight method – freight is allocated on the basis of the Defective units – are units that do not meet production standards and must
weight of the items purchased . be processed further in order to be salable as good units or as irregulars
INDIRECT CHARGING – the freight incurred on the purchase of raw materials
Scrap material – are left over from the production process that cannot be put
is charged to factory overhead control account .
back into production for the same purpose , but may be usable for a different
Illustration ;
purpose or production process or which may be sold to outsiders for a
An invoice for raw materials A,B,C is received from David Corporation . The
minimal amount
invoice totals are A 25,000 B 15,000 C 10,000 . The freight charge on this
shipment weighing 10,000 lbs. is 1,500 . Shipping weights for the respective
Waste materials – are left over from the production process that has no
materials are 5,000, 2,000 and 1,000 respectively .
further use or resale value and may require cost for their disposal
3. The cost per pound in the materials ledger cards A, B, C if freight Work in process xxx
is allocated using
The amount debited to spoiled goods and credited to work in process is
a. Relative peso value method
equal to the number of units spoiled multiplied by the estimated sales value
b. Relative weight method
per unit
a. Relative peso value method
Material weight Freight/ Share in Total cost Cost per Work in process xxx
lb. freight lb.
A 5,000 0.1875 937.50 25,937.50 5.1875 The amount debited to spoiled goods is equal to the number of units spoiled
B 2,000 0.1875 375.00 15,375.00 7.6875 multiplied by the estimated sales value per unit. The amount credited to
C 1,000 0.1875 187.50 10,187.50 10.1875 work in process is equal to the total cost incurred / charged to the spoiled
8,000 1,500.00 51,500.00 units. The loss is charged to factory overhead control .
Freight per pound 1500/8000 = 0.1875
If the number of units spoiled exceed the limit set by the company , or if the
5000 x .1875 = 937.50
reason is not considered normal to the process, the loss on the spoiled units
is charged to a loss account .
25937.50/5000 – 5.1875
Illustrative problem
even those jobs without spoiled units , will absorb the additional
1. Upon completion of the job, even if there were spoiled units ,
the unit cost will be the same as the amount originally charged to
the job.
Job 3044 called for the making of 4,000 with these unit costs On the other hand under the method loss charged to specific job,
it will be noted that the factory overhead rate was recorded at the
Direct materials 15 original amount 11 , allowance of 1 for spoiled work was not
added. The remaining perfect units in the job will absorb the loss
Direct labor 13
on the spoiled resulting the increase in the unit cost.
152400/3800 units = 40.105 /unit
Factory overhead includes a 1
The increase in the unit cost 40.105 -39 = 1.105 may be
computed as follows
Allowance for spoiled work 12
Cost of spoiled 200 x 39 7,800
Total 40 Less ; amount recovered from sale 200x18 3,600
Los on spoiled goods 4,200
When the order was completed , 200 rejected units, a normal number, were The loss on spoiled goods will be absorbed by the remaining good
sold for 18 each units 4200/3800 units = 1.105 per unit
Job 3044 called for the making of 4,000 units with these unit
Materials 4,000 x 15
costs
Labor 4,000 x 13
Direct materials 15
Overhead 4,000 x 11
Direct labor 13
Factory overhead , includes
b. Spoiled goods 3,600
A 1 allow for def. units 12
Work in process 3,600
Total 40
c. Finished goods 152,400
During processing 300 units were found to be defective and
Work in process 152,400
required the following total additional costs ; materials
2,000 labor 4,000 and overhead 2,000
Under the method, loss is charged to all production , the unit cost
Required ;
of the completed units remains at 40. In spite of the spoiled units ,
1. Entries of the additional cost is charged to all
the unit cost remained the same because the increase was made
production
at the start when 1 was added to the factory overhead rate as
allowance for spoiled work. All units processed during the period
2. Entries if the additional cost is charged to the specific
job
The cost of the finished goods will remain at the original amount
charged to the job 160,000/4000 units = 40