6.1 Job Order Costing Flashcards
Use of Job-Order Costing:
Job-order costing is concerned with accumulating costs by specific job.
1) This method is appropriate when producing products with individual characteristics
(e.g., yachts), or when identifiable groupings are possible (e.g., jewelry).
2) Units (jobs) should be dissimilar enough to warrant the special recordkeeping required
by job-order costing.
3) Products are usually custom made for a specific customer.
Spoilage
Output that does not meet the quality standards for salability is considered spoilage
Normal Spoilage
is the amount expected in ordinary course of production
-the cost of normal spoilage is included in the cost the good units produced
if the normal spoilage can be sold, its value should not be included in the cost of good units produced and the entry is
Dr Spoiled inventory ( at fair market value )
Cr work in process - job xx
Abnormal Spoilage
is spoilage over and above the amount expected in ordinary course of production
- abnormal spoilage treated as period cost
If the abnormal spoilage is worthless, it should be discarded. The entry is
DR - Loss from abnormal spoilage
(costs up to point of inspection) $XXX
CR - Work-in-process – Job 1015 $XXX
If the abnormal spoilage can be sold, it should be sold. The entry is
Spoiled inventory $XXX
Loss from abnormal spoilage (difference) XXX
Work-in-process – Job 1015
(costs up to point of inspection) $XXX
Reworks
Rework consists of [unacceptable units] that can be repaired and sold as acceptable units.
#Normal rework may be attributable to a job or to all jobs. It is debited to
a) A job (job costing) or
b) Manufacturing overhead and allocated (job and process costing).
# Abnormal rework is debited to a loss (job and process costing).
Scrap
Scrap is leftover material with no attached cost and low sales value. It may be recognized
as revenue (debit cash, credit revenue) at the time of sale.
1) Material scrap revenue attributable to (a) a job or (b) all jobs (or a process) is credited
to work-in-process or manufacturing overhead, respectively.
6A company uses a job-order cost system in accounting for its manufacturing operations. Because its processes are labor oriented, it applies manufacturing overhead on the basis of direct labor hours (DLH). Normal spoilage is defined as 4% of the units passing inspection. The company includes a provision for normal spoilage cost
in its budgeted manufacturing overhead and manufacturing overhead rate. Data regarding a job consisting of 30,000
units are presented below:
Volume Data:
Good units passing inspection 28,500
Units failing inspection (spoiled) 1,500
Total units in job 30,000
Cost Data: Per Unit Total Cost
Direct materials $ 18.00$ 540,000
Direct labor (2 DLH at $16.00/DLH) 32.00_960,000
Manufacturing overhead (2 DLH at $30.00/DLH) 60.00 _ 1,800,000
Total $110.00 _$3,300,000
The 1,500 units that failed inspection required .25 direct labor hours per unit to rework the units into good units.
What is the proper charge to the loss from abnormal spoilage account?
A. $1,440
B. $4,140
C. $3,450
D. Zero.
Answer (B) is correct.
Normal spoilage equals 1,140 units (28,500 good units × 4%), so abnormal spoilage equals 360 units
(1,500 total spoiled units – 1,140 units of normal spoilage). Given that .25 DLH is needed to rework a
spoiled unit, the loss from abnormal spoilage is $4,140 {360 units × [($16 × .25) direct labor + ($30 ×
.25) manufacturing overhead]}.
For materiality reasons, no entry is made until the scrap metal is sold. At that time, debit cash and credit
factory overhead control for the quantity sold at the current market price. [ explain more]
Making a memorandum entry at the time of recovery is appropriate. The value of the scrap is then
recognized at the time of sale. The factory overhead control account is credited because scrap is
inevitable to the company’s production operations and not attributable to a specific job. This
accounting method has the effect of spreading the revenue from scrap sales over all jobs or products.
