GEORGIA CORPORATION   ……

GEORGIA CORPORATION

……. makes custom wood tables and utilizes a job-order costing system.  The following standard cost information is available with respect to the production of one type X office desk and shelf combination:

Direct matirial     3 Yards @     $10 per yard

Direct labour       5 hours @      $20 per hour

Overhead (all fixed)

Applied at the rate  of          $10 per direct labour hour

JOB 123, from a specialty furniture retailer, called for the production of 10 Type X office desk systems.  JOB 678 from a different retailer called for the production of 12 of these same desks.

In all of the situations below, assume that all costs are already charged to the jobs in question; that is, as costs are incurred, they are charged to the job (recorded on the job cost card) in question (WIP).

REQUIRED:

1. What is spoilage?

2. What is normal spoilage? How is the amount determined?  How is this accounted for before the period?  How is it accounted for during the period?  How is it accounted for at the end of the period?

3. What is abnormal spoilage?  How is the amount determined? How is this accounted for before the period?  How is it accounted for during the period?  How is it accounted for at the end of the period?
4. In #2 and #3 above, how are your answers different if spoilage product is salable?
5. How much is the unit cost of ONE Type X office desk above? _____________________
6. How much is the expected cost of JOB 123? ___________________

7. During the production of JOB 123, 2 yards of wood were split, so that the job required more wood and one half hour to replace these split pieces. On average, when producing desks, up to 10% of the wood might be split as part of the production process, and accordingly, this spoilage on JOB 123 is considered normal.  The split wood cannot be resold and must be discarded.  Assuming that this was all charged to the WIP for the job:

1. The correcting journal entry to account for this would be:

2. WHY is this the correct entry?

3. The cost of JOB123 charge to the customer would then be:__________________
4. Assume the same facts as above, except that split would cannot be used for other production, but can be resold to hardware stores for $2 per yard.  The correcting entry to record the spoilage would be:

5. WHY is this the correct entry?

8. Now assume instead, that the extra 2 yards and time noted above were as a result of a special requirement of the retail customer, rather than the overall process.  Now what correcting entry would be made?

1. The correcting journal entry to account for this would be:

2. The cost of JOB123 would then be:__________________

3. Assume the same facts as above, except that split would cannot be used for other production, but can be resold to hardware stores for $2 per yard.  The correcting entry to record the spoilage would be:

4. WHY is this the correct entry?

9. NOW ASSUME that the extra materials and time noted above were caused by a totally unexpected event – say lightning struck the building while JOB123 was in process.  Assume again that the damaged wood cannot be sold or reused and must be discarded.

1. The correcting journal entry to account for this would be:

2. WHY is this the correct entry?
3. The cost of JOB123 would then be:__________________
4. Assume the same facts as above, except that split would cannot be used for other production, but can be resold to hardware stores for $2 per yard.  The correcting entry to record the spoilage would be:

5. WHY is this the correct entry?

6. The company is considering hiring someone to inspect all wood after it arrives at the factory, but prior to production.  Discuss the pros and cons of hiring an inspector.  From a quantitative standpoint, how might you decide whether or not to hire an inspector?