CHAPTER 7

DISCUSSION QUESTIONS

Q7-1. Quality costs may be grouped into the follow- find better ways of doing things.
ing three classifications: Involvement can be successful only when
1. Prevention costs are the costs incurred to there is encouragement and an open and
prevent product failure. They include the honest environment of trust.
cost of designing high quality products 4. The company has a system of identifying
and production systems, including the quality problems, developing solutions,
costs of implementing and maintaining and setting quality improvement objec-
such systems. tives. This typically involves organizing
2. Appraisal costs are the costs incurred to employees from all ranks and from differ-
detect product failure. They include the ent organizational units along with man-
cost of inspecting and testing materials, agers who have authority to take the
inspecting products during production, necessary action to solve problems.
and the cost of obtaining information from 5. The company places a high value on its
customers about product satisfaction. employees and provides continuous train-
3. Failure costs are the costs incurred when a ing, as well as recognition for achieve-
product fails, and may occur internally or ment. Employees perform best when they
externally. Internal failure costs are those are well trained, and they have the great-
that occur during the manufacturing or pro- est capacity to contribute when they are
duction process (e.g., scrap, spoilage, and highly educated.
rework), and external failure costs are Q7-4. The concept of continuous quality improvement
those that occur after the product has differs from the concept of quality optimization
been sold (e.g., warranty repairs and in that continuous quality improvement is a
replacements, sales refunds, handling dynamic process of change under the assump-
customer complaints, and lost sales tion that the ideal is not an absolute known
resulting from poor product quality). value; whereas quality optimization is a static
Q7-2. TQM stands for total quality management, approach to finding the best solution to a
which is a company-wide approach to quality given set of fixed and known constraints.
improvement in all processes and activities. Q7-5. The first problem with trying to inspect quality
TQM is a pervasive philosophy of doing busi- into the product is that it detects internal fail-
ness that applies to all functional areas of the ures only after considerable cost has been
company and to all personnel. incurred. The second problem is that the mag-
Q7-3. Five characteristics of TQM systems are: nitude of the cost of the internal failures,
1. The company’s objective for all business detected by inspection, is rarely measured
activity is to serve its customers. The term and typically ignored.
“product” is extended to include services Q7-6. Companies should concentrate their efforts
as well as goods, and “customer” includes on preventing poor quality rather than on try-
internal users as well as those outside of ing to inspect it into the process, because it
the company who purchase the company’s will result in less total quality cost. The
products. Each employee’s activity is ori- approach is founded on the belief that by
ented to providing service to the customer. increasing prevention costs, the cost of inter-
2. Top management provides an active nal failures—such as scrap, spoilage, rework,
leadership role in the quality improvement and downtime—will decline by a larger
movement. amount than the increase in prevention costs.
3. All employees are actively involved in Q7-7. Quality costs should be measured and
quality improvement. Employees are not reported to management in order to provide
only asked to contribute ideas, but also to incentive and direction for improving quality.

7-1
7-2 Chapter 7

Large quality costs indicate large opportuni- are often quite high and often result from
ties for improvement. Also, measurements internal failures that can be eliminated.
provide a basis for monitoring the cost of Ignoring the cost of these internal failures
quality and evaluating improvements. sends a signal to managers that such costs
Q7-8. Scrap includes (1) the filings and trimmings are acceptable. Reporting such costs pro-
remaining after processing materials, (2) vides incentive for improvement, particularly if
defective materials that cannot be used or the costs are large.
returned to the vendor, and (3) broken parts Q7-10. In order to know what to do with the cost, the
resulting from employee errors or machine accountant must know whether the spoilage or
failures. Spoiled goods differ from scrap in rework is caused by the customer or by an
that they are partially or fully completed units internal failure. If spoilage or rework is the
that are in some way defective and are not result of a customer requirement, the unrecov-
economically or physically correctable. erable cost should be charged to the job. On
Spoiled goods may be units of the product or the other hand, if the spoilage or rework is the
component parts, and they may or may not consequence of an internal failure, the unre-
have a salvage value. Rework is the process coverable cost should be removed from the job
of correcting defective manufactured goods. (i.e., charged to Factory Overhead Control)
Q7-9. The cost of scrap, spoilage, and rework and reported to responsible management.
should not be ignored, because such costs
Chapter 7 7-3

EXERCISES
E7-1
(1) Accounts Receivable ................................................... 1,650
Scrap Sales (or Other Income)........................... 1,650

(2) Accounts Receivable ................................................... 1,650

Cost of Goods Sold............................................. 1,650

(3) Accounts Receivable ................................................... 1,650

Factory Overhead Control ................................. 1,650

(4) Accounts Receivable ................................................... 1,650

Work in Process ................................................. 1,650

E7-2 Spoiled Goods Inventory ............................................. 120

Factory Overhead Control ........................................... 112
Work in Process ................................................. 232

E7-3 $27,000 total job cost/1,000 chairs = $27 cost per chair

Spoiled Goods Inventory ($10 × 100 chairs).............. 1,000

Factory Overhead Control (($27 – $10) × 100)........... 1,700
Finished Goods Inventory ($27 × 900 chairs)............ 24,300
Work in Process ................................................. 27,000

E7-4 Spoiled goods inventory ($100 × 100 units) .............. 10,000

Cost of Goods Sold...................................................... 94,000
Work in Process ................................................. 104,000

E7-5 Factory Overhead Control ........................................... 700

Materials (100 units × $1.50)............................... 150
Payroll (100 units × 1/4 hour × $10 per hour) ... 250
Applied Factory Overhead
(100 × 1/4 hr × $12 rate) ............................. 300

Finished Goods Inventory ........................................... 6,600

Work in Process ................................................. 6,600
7-4 Chapter 7

E7-6 Work in Process............................................................ 8,500

Materials (1,000 units × $1)................................. 1,000
Payroll (1,000 units × 1/6 hour × $15) ................ 2,500
Applied Factory Overhead (1,000 × 1/6 × $30).. 5,000

Cost of Goods Sold...................................................... 73,500

Work in Process ($65,000 + $8,500)................... 73,500

Accounts Receivable ($73,500 × 150%) ..................... 110,250

Sales ..................................................................... 110,250
Chapter 7 7-5

E7-7

(1) Island Company

Forming Department
Cost of Production Report
For August
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory ............................... 1,000
Started in process this period .............. 9,000
10,000
Transferred to Finishing Department .... 8,000
Ending inventory ..................................... 100% 60% 50% 1,500
Spoiled in process .................................. 100% 100% 100% 500
10,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Materials .................................................................................... $ 1,260
Labor........................................................................................... 770
Factory overhead ...................................................................... 1,400
Total cost in beginning inventory...................................... $ 3,430
Cost added during current period:
Materials .................................................................................... $36,240 10,000 $3.75
Labor........................................................................................... 10,510 9,400 1.20
Factory overhead....................................................................... 21,725 9,250 2.50
Total cost added during current period............................ $68,475
Total cost charged to department .................................................. $71,905 $7.45

Cost Accounted for as Follows Units % Complete Unit Cost Total Cost
Transferred to Finishing Department .... 8,000 100% $7.45 $59,600
Charge to Factory Overhead for spoilage:
Materials ............................................ 500 100% $3.75 $1,875
Labor .................................................. 500 100% 1.20 600
Factory overhead .............................. 500 100% 2.50 1,250 3,725
Work in Process, ending inventory:
Materials ............................................ 1,500 100% $3.75 $5,625
Labor .................................................. 1,500 60% 1.20 1,080
Factory overhead .............................. 1,500 50% 2.50 1,875 8,580
Total cost accounted for ........................ $71,905
7-6 Chapter 7

E7-7 (Concluded)

*Total number of equivalent units required in the cost accounted for section determined as follows:

Materials Labor Overhead

Equivalent units transferred out......................... 8,000 8,000 8,000
Equivalent units in ending inventory ................. 1,500 900 750
Equivalent units of spoilage ............................... 500 500 500
Total equivalent units........................................... 10,000 9,400 9,250

** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section

(2) Work in Process—Finishing Department................... 59,600

Factory Overhead Control ........................................... 3,725
Work in Process—Forming Department .. 63,325
Chapter 7 7-7

E7-8

(1) Juniper Company

Finishing Department
Cost of Production Report
For July
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 500
Received from Cutting Department....... 4,500
5,000
Transferred to Finished Goods .............. 3,800
Ending inventory ..................................... 40% 20% 20% 800
Spoiled in process .................................. 100% 100% 100% 400
5,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Cost from preceding department............................................. $ 5,500
Materials ..................................................................................... 1,950
Labor........................................................................................... 1,180
Factory overhead....................................................................... 1,770
Total cost in beginning inventory .................................... $ 10,400
Cost added during current period:
Cost from preceding department............................................. $ 54,500 5,000 $12.00
Materials .................................................................................... 20,650 4,520 5.00
Labor........................................................................................... 16,260 4,360 4.00
Factory overhead ...................................................................... 24,390 4,360 6.00
Total cost added during current period ........................... $115,800
Total cost charged to department .................................................. $126,200 $27.00

Cost Accounted for as Follows Units % Complete Unit Cost Total Cost
Transferred to Finished Goods .............. 3,800 100% $27.00 $102,600
Transferred to Spoiled Goods inventory
at salvage value ................................ 400 $10.00 4,000
Charge to Factory Overhead for spoilage:
Cost of completed spoiled units ..... 400 100% $27.00 $10,800
Less salvage value of spoiled units 400 10.00 4,000 6,800
Work in Process, ending inventory:
Cost from preceding department .... 800 100% $12.00 $ 9,600
Materials ............................................ 800 40% 5.00 1,600
Labor .................................................. 800 20% 4.00 640
Factory overhead .............................. 800 20% 6.00 960 12,800
Total cost accounted for ........................ $126,200
7-8 Chapter 7

E7-8 (Concluded)

*Total number of equivalent units required in the cost accounted for section determined as follows:

Prior
Dept. Cost Materials Labor Overhead
Equivalent units transferred out ............ 3,800 3,800 3,800 3,800
Equivalent units in ending inventory .... 800 320 160 160
Equivalent units of spoilage .................. 400 400 400 400
Total equivalent units ............................. 5,000 4,520 4,360 4,360

** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section

(2) Finished Goods Inventory ........................................... 102,600

Spoiled Goods Inventory ............................................. 4,000
Factory Overhead Control ........................................... 6,800
Work in Process—Finishing Department.......... 113,400
Chapter 7 7-9

E7-9
(1) Carver Petroleum Inc.
Cracking Department
Cost of Production Report
For May
Quantity Schedule Materials Conversion Cost Quantity
Beginning inventory................................ 5,000
Started in process this period ............... 55,000
60,000
Transferred to Refining Department...... 49,000
Ending inventory ..................................... 100% 70% 6,000
Lost in process ....................................... 5,000
60,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Materials .................................................................................... $ 1,900
Conversion cost......................................................................... 240
Total cost in beginning inventory...................................... $ 2,140
Cost added during current period:
Materials .................................................................................... $20,100 55,000 $.40
Conversion cost......................................................................... 5,080 53,200 .10
Total cost added during current period............................ $25,180
Total cost charged to department ................................................. $27,320 $ .50

Cost Accounted for as Follows Units % Complete Unit Cost Total Cost
Transferred to Refining Department...... 49,000 100% $.50 $24,500
Work in Process, ending inventory:
Materials ............................................ 6,000 100% .40 $2,400
Conversion cost ................................ 6,000 70% .10 420 2,820
Total cost accounted for ........................ $27,320

*Total number of equivalent units required in the cost accounted for section determined as follows:

Materials Conversion Cost

Equivalent units transferred out ..... 49,000 49,000
Equivalent units in ending inventory 6,000 4,200
Total equivalent units ....................... 55,000 53,200

** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section

(2) Work in Process—Refining Department .................... 24,500

Work in Process—Cracking Department .......... 24,500
7-10 Chapter 7

E7-10 APPENDIX

(1) Suarez Company

Tooling Department
Cost of Production Report
For March
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 100% 70% 60% 2,000
Started this period .................................. 13,000
15,000
Transferred to Finishing Department .... 7,000
Ending inventory ..................................... 100% 60% 40% 3,000
Spoiled in process .................................. 100% 90% 90% 5,000
15,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Materials ..................................................................................... $ 1,600
Labor........................................................................................... 290
Factory overhead....................................................................... 950
Total cost in beginning inventory...................................... $ 2,840
Cost added during current period:
Materials ..................................................................................... $ 9,750 13,000 $.75
Labor........................................................................................... 2,380 11,900 .20
Factory overhead ...................................................................... 9,200 11,500 .80
Total cost added during current period............................ $21,330
Total cost charged to department .................................................. $24,170 $1.75

Cost Accounted for as Follows Units Current % Unit Cost Total Cost
Transferred to Finishing Department:
From beginning inventory................ $2,840
Cost to complete this period:
Materials ............................... 2,000 0% $ .75 0
Labor ..................................... 2,000 30% .20 120
Factory overhead ................. 2,000 40% .80 640 $ 3,600
Started and completed this period . 5,000 100% $1.75 8,750
Total cost transferred to
Finishing Department ................ $12,350
Charge to Factory Overhead for spoilage:
Materials ............................................ 5,000 100% $ .75 $3,750
Labor .................................................. 5,000 90% .20 900
Factory overhead .............................. 5,000 90% .80 3,600 8,250
Work in Process, ending inventory:
Materials ............................................ 3,000 100% $ .75 $2,250
Labor .................................................. 3,000 60% .20 360
Factory overhead .............................. 3,000 40% .80 960 3,570
Total cost accounted for ........................ $24,170
Chapter 7 7-11

E7-10 APPENDIX (Concluded)

* Number of equivalent units of cost added during the current period determined as follows:

Materials Labor Overhead

To complete beginning inventory ............................ 0 600 800
Started and completed this period ........................... 5,000 5,000 5,000
Ending inventory......................................................... 3,000 1,800 1,200
Spoiled units ............................................................... 5,000 4,500 4,500
Total equivalent units ................................................. 13,000 11,900 11,500

** Cost added during the current period divided by the number of equivalent units of cost added dur-
ing the current period

(2) Work in Process—Finishing Department................... 12,350

Factory Overhead Control ........................................... 8,250
Work in Process—Tooling Department ............. 20,600
7-12 Chapter 7

E7-11 APPENDIX

(1) Matrix Furniture Company

Finishing Department
Cost of Production Report
For September
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 80% 40% 40% 1,200
Received from Fabricating Department 6,000
7,200
Transferred to Finished Goods .............. 5,000
Ending inventory ..................................... 100% 60% 60% 1,500
Spoiled in process .................................. 100% 100% 100% 700
7,200

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Cost from preceding department............................................. $ 14,160
Materials ..................................................................................... 1,210
Labor........................................................................................... 1,300
Factory overhead....................................................................... 3,250
Total cost in beginning inventory...................................... $ 19,920
Cost added during current period:
Cost from preceding department............................................. $ 72,000 6,000 $12.00
Materials ..................................................................................... 6,240 6,240 1.00
Labor........................................................................................... 12,240 6,120 2.00
Factory overhead....................................................................... 30,600 6,120 5.00
Total cost added during current period............................ $121,080
Total cost charged to department ................................................. $141,000 $20.00
Chapter 7 7-13

E7-11 APPENDIX (Concluded)

Cost Accounted for as Follows Units Current % Unit Cost Total Cost
Transferred to Finished Goods:
From beginning inventory................ $19,920
Cost to complete this period:
Materials ............................... 1,200 20% $ 1.00 240
Labor ..................................... 1,200 60% 2.00 1,440
Factory overhead ................. 1,200 60% 5.00 3,600 $ 25,200
Started and completed this period 3,800 100% $20.00 76,000
Total cost transferred to
Finishing Department ................ $101,200
Transferred to Spoiled Goods inventory
at salvage value ................................ 700 $12.00 8,400
Charge to Factory Overhead for spoilage:
Cost of completed spoiled units ..... 700 100% $20.00 $14,000
Less salvage value of spoiled units 700 12.00 8,400 5,600
Work in Process, ending inventory:
Cost from preceding department .... 1,500 100% $12.00 $18,000
Materials ............................................ 1,500 100% 1.00 1,500
Labor .................................................. 1,500 60% 2.00 1,800
Factory overhead .............................. 1,500 60% 5.00 4,500 25,800
Total cost accounted for ........................ $141,000

*Number of equivalent units of cost added during the current period determined as follows:

Prior Dept.
Cost Material Labor Overhead
To complete beginning inventory ... 0 240 720 720
Started and completed this period . 3,800 3,800 3,800 3,800
Ending inventory............................... 1,500 1,500 900 900
Spoiled units ..................................... 700 700 700 700
Total equivalent units ....................... 6,000 6,240 6,120 6,120

** Cost added during the current period divided by the number of equivalent units of cost added dur-
ing the current period

(2) Finished Goods Inventory ........................................... 101,200

Spoiled Goods Inventory ............................................. 8,400
Factory Overhead Control ........................................... 5,600
Work in Process—Finishing Department.......... 115,200
7-14 Chapter 7

E7-12 APPENDIX

(1) Lanai Pop Inc.

Cooking Department
Cost of Production Report
For December
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 75% 25% 25% 10,000
Received from Mixing Department ........ 40,000
50,000
Transferred to Bottling Department ...... 37,000
Ending inventory ..................................... 100% 75% 75% 8,000
Lost in process........................................ 5,000
50,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Cost from preceding department............................................. $ 2,920
Materials ..................................................................................... 305
Labor........................................................................................... 140
Factory overhead....................................................................... 210
Total cost in beginning inventory...................................... $ 3,575
Cost added during current period:
Cost from preceding department............................................. $10,850 35,000 $.31
Materials .................................................................................... 1,500 37,500 .04
Labor........................................................................................... 2,430 40,500 .06
Factory overhead....................................................................... 3,645 40,500 .09
Total cost added during current period............................ $18,425
Total cost charged to department .................................................. $22,000 $.50

Cost Accounted for as Follows Units Current % Unit Cost Total Cost
Transferred to Bottling Department:
From beginning inventory................ $3,575
Cost to complete this period:
Materials ............................... 10,000 25% $.04 100
Labor ..................................... 10,000 75% .06 450
Factory overhead ................ 10,000 75% .09 675 $ 4,800
Started and completed this period . 27,000 100% $.50 13,500
Total cost transferred to
Finishing Department ................ $18,300
Work in Process, ending inventory:
Cost from preceding department .... 8,000 100% $.31 $2,480
Materials ............................................ 8,000 100% .04 320
Labor .................................................. 8,000 75% .06 360
Factory overhead .............................. 8,000 75% .09 540 3,700
Total cost accounted for......................... $22,000
Chapter 7 7-15

E7-12 APPENDIX (Concluded)

*Number of equivalent units of cost added during the current period determined as follows:

Prior
Dept. Cost Materials Labor Overhead
To complete beginning inventory ... 0 2,500 7,500 7,500
Started and completed this period . 27,000 27,000 27,000 27,000
Ending inventory............................... 8,000 8,000 6,000 6,000
Total equivalent units ....................... 35,000 37,500 40,500 40,500

** Cost added during the current period divided by the number of equivalent units of cost added dur-
ing the current period

(2) Work in Process—Bottling Department ..................... 18,300

Work in Process—Cooking Department .......... 18,300
7-16 Chapter 7

PROBLEMS
P7-1

(1) Spoiled Goods Inventory (200 units × $1.75)............. 350

Factory Overhead Control ........................................... 1,450
Work in Process ................................................. 1,800

(2) Accounts Receivable ($550 + $350)............................ 900

Scrap Sales ......................................................... 550
Spoiled Goods Inventory ................................... 350

P7-2

$90,000 total job cost = $18 per unit

(1) 5,000 units on job

Spoiled Goods Inventory (200 units × $15 salvage) . 3,000

Factory Overhead Control ........................................... 600
Work in Process (200 units × $18 cost)............. 3,600

Cost of Goods Sold...................................................... 86,400

Work in Process ($90,000 – $3,600) .................. 86,400

Accounts Receivable ($86,400 × 140%) ..................... 120,960

Sales ..................................................................... 120,960

(2) Spoiled Goods Inventory (200 units × $15 salvage) 3,000

Work in Process ................................................. 3,000

Cost of Goods Sold...................................................... 87,000

Work in Process ($90,000 – $3,000) ................... 87,000

Accounts Receivable ($87,000 × 140%) ..................... 121,800

Sales ..................................................................... 121,800
Chapter 7 7-17

P7-3

(1) Factory Overhead Control ........................................... 2,000

Materials (100 units × $2).................................... 200
Payroll (100 units × 1/2 hr × $12 rate) ............... 600
Applied Factory Overhead
(100 × 1/2 hr × $24 rate) ............................. 1,200

Cost of Goods Sold...................................................... 200,000

Work in Process ................................................. 200,000

Accounts Receivable ($200,000 × 150%) ................... 300,000

Sales ..................................................................... 300,000

(2) Work in Process............................................................ 2,000

Materials (100 units × $2).................................... 200
Payroll (100 units × 1/2 hour × $12 rate) .......... 600
Applied Factory Overhead
(100 × 1/2 hr × $24 rate) ............................. 1,200

Cost of Goods Sold...................................................... 202,000

Work in Process ($200,000 + $2,000)................. 202,000

Accounts Receivable ($202,000 × 150%) ................... 303,000

Sales ..................................................................... 303,000
7-18 Chapter 7

P7-4 (1) Billingsley Company

Cutting Department
Cost of Production Report
For April
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 5,000
Started in process this period ............... 20,000
25,000
Transferred to Assembling Department 18,000
Ending inventory ..................................... 100% 60% 60% 4,000
Spoiled in process .................................. 100% 90% 90% 3,000
25,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Materials ..................................................................................... $ 1,260
Labor .......................................................................................... 789
Factory overhead....................................................................... 1,789
Total cost in beginning inventory .................................... $ 3,838
Cost added during current period:
Materials ..................................................................................... $36,240 25,000 $1.50
Labor........................................................................................... 10,761 23,100 .50
Factory overhead ...................................................................... 21,311 23,100 1.00
Total cost added during current period............................ $68,312
Total cost charged to department ................................................. $72,150 $3.00

Cost Accounted for as Follows Units % Complete Unit Cost Total Cost
Transferred to Assembling Department 18,000 100% $3.00 $54,000
Charge to Factory Overhead for spoilage:
Materials ............................................ 3,000 100% $1.50 $4,500
Labor .................................................. 3,000 90% .50 1,350
Factory overhead .............................. 3,000 90% 1.00 2,700 8,550
Work in Process, ending inventory:
Materials ............................................ 4,000 100% $1.50 $6,000
Labor ................................................. 4,000 60% .50 1,200
Factory overhead .............................. 4,000 60% 1.00 2,400 9,600
Total cost accounted for ........................ $72,150

*Total number of equivalent units required in the cost accounted for section determined as follows:

Materials Labor Overhead

Equivalent units transferred out......................... 18,000 18,000 18,000
Equivalent units in ending inventory ................. 4,000 2,400 2,400
Equivalent units of ............................................... 3,000 2,700 2,700
Total equivalent units ......................................... 25,000 23,100 23,100

** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section
Chapter 7 7-19

P7-4 (Continued)

Billingsley Company
Assembling Department
Cost of Production Report
For April
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 4,000
Received from Cutting Department....... 18,000
22,000
Transferred to Finished Goods Inventory 17,000
Ending inventory ..................................... 80% 20% 20% 4,000
Spoiled in process .................................. 100% 100% 100% 1,000
22,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Cost from preceding department ........................................... $ 12,000
Materials ..................................................................................... 38,028
Labor........................................................................................... 3,356
Factory overhead....................................................................... 5,034
Total cost in beginning inventory...................................... $ 58,418
Cost added during current period:
Cost from preceding department ........................................... 54,000 22,000 $ 3.00
Materials ..................................................................................... 163,372 21,200 9.50
Labor........................................................................................... 15,444 18,800 1.00
Factory overhead....................................................................... 23,166 18,800 1.50
Total cost added during current period ........................... $255,982
Total cost charged to department .................................................. $314,400 $15.00

Cost Accounted for as Follows Units % Complete Unit Cost Total Cost
Transferred to Finished Goods .............. 17,000 100% $15.00 $255,000
Transferred to Spoiled Goods Inventory
at salvage value ................................ 1,000 $ 3.00 3,000
Charge to Factory Overhead for spoilage:
Cost of completed spoiled units ..... 1,000 100% $15.00 $15,000
Less salvage value of spoiled units 1,000 3.00 3,000 12,000
Work in Process, ending inventory:
Cost from preceding department .... 4,000 100% $3.00 $12,000
Materials ............................................ 4,000 80% 9.50 30,400
Labor .................................................. 4,000 20% 1.00 800
Factory overhead .............................. 4,000 20% 1.50 1,200 44,400
Total cost accounted for......................... $314,400
7-20 Chapter 7

P7-4 (Concluded)

* Total number of equivalent units required in the cost accounted for section determined as follows:

Prior
Dept. Cost Materials Labor Overhead
Equivalent units transferred out ..... 17,000 17,000 17,000 17,000
Equivalent units in ending inventory 4,000 3,200 800 800
Equivalent units of spoilage ............ 1,000 1,000 1,000 1,000
Total equivalent units ....................... 22,000 21,200 18,800 18,800

** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section

(2) Work in Process—Assembling Department .............. 54,000

Factory Overhead Control ........................................... 8,550
Work in Process—Cutting Department ............. 62,550

Finished Goods Inventory ........................................... 255,000

Spoiled Goods Inventory ............................................. 3,000
Factory Overhead Control ........................................... 12,000
Work in Process—Assembling Department ..... 270,000
Chapter 7 7-21

P7-5

(1) Hulvey Brewery Company

Mixing and Brewing Department
Cost of Production Report
For January
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 4,000
Started in process this period ............... 36,000
40,000
Transferred to Canning Department...... 28,000
Ending inventory ..................................... 100% 40% 40% 6,000
Lost in process ....................................... 6,000
40,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Materials ..................................................................................... $ 600
Labor......................................................................................... 88
Factory overhead....................................................................... 128
Total cost in beginning inventory...................................... $ 816
Cost added during current period:
Materials ..................................................................................... $4,840 34,000 $.16
Labor........................................................................................... 824 30,400 .03
Factory overhead....................................................................... 1,088 30,400 .04
Total cost added during current period............................ $6,752
Total cost charged to department .................................................. $7,568 $.23

%
Cost Accounted for as Follows Units Complete Unit Cost Total Cost
Transferred to Canning Department...... 28,000 100% $.23 $6,440
Work in Process, ending inventory:
Materials ............................................ 6,000 100% $.16 $960
Labor .................................................. 6,000 40% .03 72
Factory overhead .............................. 6,000 40% .04 96 1,128
Total cost accounted for ........................ $7,568

*Total number of equivalent units required in the cost accounted for section determined as follows:

Materials Labor Overhead

Equivalent units transferred out................................ 28,000 28,000 28,000
Equivalent units in ending inventory ........................ 6,000 2,400 2,400
Total equivalent units ................................................. 34,000 30,400 30,400

** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section
7-22 Chapter 7

P7-5 (Continued)

Hulvey Brewery Company

Canning Department
Cost of Production Report
For January
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 2,000
Received from Mixing and
Brewing Department ........................ 28,000
30,000
Transferred to Finished Goods Inventory 25,000
Ending inventory ..................................... 100% 60% 60% 1,000
Spoiled in process ................................. 100% 80% 80% 4,000
30,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Cost from preceding department............................................. $ 550
Materials .................................................................................... 190
Labor........................................................................................... 75
Factory overhead....................................................................... 150
Total cost in beginning inventory .................................... $ 965
Cost added during current period:
Cost from preceding department ........................................... $ 6,440 30,000 $.233
Materials .................................................................................... 1,520 30,000 .057
Labor .......................................................................................... 789 28,800 .030
Factory overhead ...................................................................... 1,578 28,800 .060
Total cost added during current period............................ $10,327
Total cost charged to department .................................................. $11,292 $.380

%
Cost Accounted for as Follows Units Complete Unit Cost Total Cost
Transferred to Finished Goods Inventory 25,000 100% $.380 $ 9,500
Charge to Factory Overhead for spoilage:
Cost from preceding department ... 4,000 100% $.233 $932
Materials ........................................... 4,000 100% .057 228
Labor ................................................. 4,000 80% .030 96
Factory overhead ............................. 4,000 80% .060 192 1,448
Work in Process, ending inventory:
Cost from preceding department ... 1,000 100% $.233 $233
Materials ........................................... 1,000 100% .057 57
Labor ................................................. 1,000 60% .030 18
Factory overhead .............................. 1,000 60% .060 36 344
Total cost accounted for......................... $11,292
Chapter 7 7-23

P7-5 (Concluded)

*Total number of equivalent units required in the cost accounted for section determined as follows:

Prior
Dept. Cost Materials Labor Overhead
Equivalent units transferred out ..... 25,000 25,000 25,000 25,000
Equivalent units in ending inventory 1,000 1,000 600 600
Equivalent units of spoilage ............ 4,000 4,000 3,200 3,200
Total equivalent units ....................... 30,000 30,000 28,800 28,800

** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section

(2) Work in Process—Canning Department .................... 6,440

Work in Process—Mixing and
Brewing Department ................................. 6,440

Finished Goods Inventory ........................................... 9,500

Factory Overhead Control ........................................... 1,448
Work in Process—Canning Department .......... 10,948
7-24 Chapter 7

P7-6 APPENDIX

(1) Hadenville Tool Company

Fabricating Department
Cost of Production Report
For April
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 100% 70% 70% 2,000
Started this period .................................. 9,000
11,000
Transferred to Finishing Department .... 9,000
Ending inventory ..................................... 100% 40% 40% 1,500
Spoiled in process .................................. 100% 60% 60% 500
11,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Materials ..................................................................................... $ 1,900
Labor........................................................................................... 340
Factory overhead....................................................................... 1,020
Total cost in beginning inventory...................................... $ 3,260
Cost added during current period:
Materials ..................................................................................... $ 9,180 9,000 $1.02
Labor .......................................................................................... 2,125 8,500 .25
Factory overhead ...................................................................... 6,375 8,500 .75
Total cost added during current period............................ $17,680
Total cost charged to department ................................................. $20,940 $2.02
Chapter 7 7-25

P7-6 APPENDIX (Continued)

Cost Accounted for as Follows Units Current % Unit Cost Total Cost
Transferred to Finishing Department:
From beginning inventory .............. $3,260
Cost to complete this period:
Labor ..................................... 2,000 30% $ .25 150
Factory overhead ................. 2,000 30% .75 450 $ 3,860
Started and completed this period . 7,000 100% $2.02 14,140
Total cost transferred to Finishing
Department ................................ $18,000
Charge to Factory Overhead for spoilage:
Materials ............................................ 500 100% $1.02 $ 510
Labor .................................................. 500 60% .25 75
Factory overhead ............................. 500 60% .75 225 810
Work in Process, ending inventory:
Materials ........................................... 1,500 100% $1.02 $1,530
Labor .................................................. 1,500 40% .25 150
Factory overhead .............................. 1,500 40% .75 450 2,130
Total cost accounted for ........................ $20,940

*Number of equivalent units of cost added during the current period determined as follows:

Materials Labor Overhead

To complete beginning inventory ....................... 0 600 600
Started and completed this period..................... 7,000 7,000 7,000
Ending inventory .................................................. 1,500 600 600
Spoiled units ........................................................ 500 300 300
Total equivalent units ......................................... 9,000 8,500 8,500

** Cost added during the current period divided by the number of equivalent units of cost added dur-
ing the current period
7-26 Chapter 7

P7-6 APPENDIX (Continued)

Hadenville Tool Company

Finishing Department
Cost of Production Report
For April
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 100% 40% 40% 3,000
Received from Fabricating Department 9,000
12,000
Transferred to Finished Goods .............. 9,900
Ending inventory ..................................... 100% 60% 60% 2,000
Spoiled in process .................................. 100% 100% 100% 100
12,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Cost from preceding department............................................. $ 6,100
Materials ..................................................................................... 3,500
Labor .......................................................................................... 520
Factory overhead....................................................................... 780
Total cost in beginning inventory...................................... $10,900
Cost added during current period:
Cost from preceding department............................................. $18,000 9,000 $2.00
Materials ..................................................................................... 10,800 9,000 1.20
Labor .......................................................................................... 4,000 10,000 .40
Factory overhead....................................................................... 6,000 10,000 .60
Total cost added during current period............................ $38,800
Total cost charged to department ................................................. $49,700 $4.20
Chapter 7 7-27

P7-6 APPENDIX (Concluded)

Cost Accounted for as Follows Units Current % Unit Cost Total Cost
Transferred to Finished Goods:
From beginning inventory .............. $10,900
Cost to complete this period:
Labor ..................................... 3,000 60% $ .40 720
Factory overhead ................. 3,000 60% .60 1,080 $12,700
Started and completed this period . 6,900 100% $4.20 28,980
Total cost transferred to Finished Goods $41,680
Transferred to Spoiled Goods Inventory
at salvage value ............................... 100 $1.00 100
Charge to Factory Overhead for spoilage:
Cost of completed spoiled units ..... 100 100% $4.20 $ 420
Less salvage value of spoiled units 100 1.00 100 320
Work in Process, ending inventory
Cost from preceding department .... 2,000 100% $2.00 $ 4,000
Materials ............................................ 2,000 100% 1.20 2,400
Labor .................................................. 2,000 60% .40 480
Factory overhead .............................. 2,000 60% .60 720 7,600
Total cost accounted for ........................ $49,700

* Number of equivalent units of cost added during the current period determined as follows:

Prior
Dept. Cost Materials Labor Overhead
To complete beginning inventory ... 0 0 1,800 1,800
Started and completed this period . 6,900 6,900 6,900 6,900
Ending inventory............................... 2,000 2,000 1,200 1,200
Spoiled units ..................................... 100 100 100 100
Total equivalent units ....................... 9,000 9,000 10,000 10,000

** Cost added during the current period divided by the number of equivalent units of cost added dur-
ing the current period

(2) Work in Process—Finishing Department................... 18,000

Factory Overhead Control ........................................... 810
Work in Process—Fabricating Department ...... 18,810

Finished Goods Inventory ........................................... 41,680

Spoiled Goods Inventory ............................................. 100
Factory Overhead Control ........................................... 320
Work in Process—Finishing Department.......... 42,100
7-28 Chapter 7

P7-7 APPENDIX

(1) Carlton Chemical Company

Distillation Department
Cost of Production Report
For June
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 100% 20% 20% 4,000
Started this period .................................. 16,000
20,000
Transferred to Refining Department...... 14,000
Ending inventory. .................................... 100% 80% 80% 2,000
Lost in process........................................ 4,000
20,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Materials .................................................................................... $ 3,624
Labor........................................................................................... 96
Factory overhead..................................................................... 480
Total cost in beginning inventory...................................... $ 4,200
Coat added during current period:
Materials .................................................................................... $10,800 12,000 $ .90
Labor .......................................................................................... 1,480 14,800 .10
Factory overhead ...................................................................... 7,400 14,800 .50
Total cost added during current period............................ $19,680
Total cost charged to department .................................................. $23,880 $1.50
Chapter 7 7-29

P7-7 APPENDIX (Continued)

Cost Accounted for as Follows Units Current % Unit Cost Total Cost
Transferred to Refining Department:
From beginning inventory .............. $4,200
Cost to complete this period:
Labor ..................................... 4,000 80% $ .10 320
Factory overhead ................. 4,000 80% .50 1,600 $ 6,120
Started and completed this period . 10,000 100% $1.50 15,000
Total cost transferred to
Refining Department .................. $21,120
Work in Process, ending inventory:
Materials ............................................ 2,000 100% $ .90 $1,800
Labor .................................................. 2,000 80% .10 160
Factory overhead .............................. 2,000 80% .50 800 2,760
Total cost accounted for......................... $23,880

* Number of equivalent units of cost added during the current period determined as follows:

Materials Labor Overhead

To complete beginning inventory ....................... 0 3,200 3,200
Started and completed this period..................... 10,000 10,000 10,000
Ending inventory .................................................. 2,000 1,600 1,600
Total equivalent units........................................... 12,000 14,800 14,800

** Cost added during the current period divided by the number of equivalent units of cost added dur-
ing the current period
7-30 Chapter 7

P7-7 APPENDIX (Continued)

Carlton Chemical Company

Refining Department
Cost of Production Report
For June
Quantity Schedule Materials Labor Overhead Quantity
Beginning inventory................................ 100% 50% 50% 2,000
Received from Distillation Department . 14,000
16,000
Transferred to Finished Goods Inventory 12,000
Ending inventory ..................................... 100% 30% 30% 2,000
Lost in process ....................................... 2,000
16,000

Cost Charged to Department Total Equivalent Unit

Beginning inventory: Cost Units* Cost**
Cost from preceding department............................................. $ 3,500
Materials .................................................................................... 240
Labor .......................................................................................... 160
Factory overhead....................................................................... 900
Total cost in beginning inventory....................................... $ 4,800
Cost added during current period:
Cost from preceding department............................................. $21,120 12,000 $1.76
Materials ..................................................................................... 1,440 12,000 .12
Labor........................................................................................... 1,740 11,600 .15
Factory overhead....................................................................... 10,440 11,600 .90
Total cost added during current period............................ $34,740
Total cost charged to department .................................................. $39,540 $2.93

Cost Accounted for as Follows Units Current % Unit Cost Total Cost
Transferred to Finished Goods:.............
From beginning inventory................ $4,800
Cost to complete this period:
Labor .................................... 2,000 50% $ .15 150
Factory overhead ................. 2,000 50% .90 900 $ 5,850
Started and completed this period . 10,000 100% $2.93 29,300
Total cost transferred to Finished
Goods .......................................... $35,150
Work in Process, ending inventory:
Cost from preceding department .... 2,000 100% $1.76 $3,520
Materials ............................................ 2,000 100% .12 240
Labor .................................................. 2,000 30% .15 90
Factory overhead .............................. 2,000 30% .90 540 4,390
Total cost accounted for ........................ $39,540
Chapter 7 7-31

P7-7 APPENDIX (Concluded)

*Number of equivalent units of cost added during the current period determined as follows:

Prior
Dept. Cost Materials Labor Overhead
To complete beginning inventory ... 0 0 1,000 1,000
Started and completed this period . 10,000 10,000 10,000 10,000
Ending inventory............................... 2,000 2,000 600 600
Total equivalent units ....................... 12,000 12,000 11,600 11,600

** Cost added during the current period divided by the number of equivalent units of cost added dur-
ing the current period

(2) Work in Process—Refining Department .................... 21,120

Work in Process—Distillation Department ....... 21,120

Finished Goods Inventory ........................................... 35,150

Work in Process—Refining Department ........... 35,150
7-32 Chapter 7

CASES

C7-1 Although improvement in product quality was clearly a stated goal at Star Disk
Corporation, the company’s reward structure suggests otherwise. Employees
cannot be expected to put quality first if rewards are dispensed for achieving
objectives that are often in conflict with quality improvement (i.e., short-run
production volume goals). The quality improvement effort seems to have been
focused solely on manufacturing activity, and the approach taken seems to
have been to improve quality by inspecting it into the product. Such an
approach is inadequate, because it waits too late in the process (i.e., after costs
have been incurred in manufacturing defective products, instead of before) and
focuses on only one piece of the problem rather than the whole problem.
In order to turn the problem around, top management must become
actively involved. The reward structure should be changed to ensure compati-
bility with quality goals. Quality teams that include employees from all business
functions (product design as well as manufacturing) and all levels (labor as well
as management) should be created to help identify quality problems and find
ways to solve the identified problems. Top management should actively partic-
ipate in these teams in order to emphasize the importance of quality, coordinate
efforts between organization units, and provide direction. Employees are more
likely to become motivated when they understand the importance of quality,
and top management participation and leadership underscore that importance.
In addition, all employees must refocus their efforts on serving their respective
customers. The data presented in the case suggest that managers from the dif-
ferent departments put all their attention on meeting production volume goals
rather than on meeting the needs of their customers (i.e., the department
receiving their output).
Although product inspection should be continued, emphasis should be
shifted to preventing poor quality rather than detecting it. Prevention should
start with product design and extend throughout the entire manufacturing
process. Some things to be considered include:
(a) reducing the number of parts required in the product;
(b) using higher quality materials;
(c) using standardized parts;
(d) using well-known production technologies where possible;
(e) minimizing retoolings;
(f) increasing employee training;
(g) reorganizing the manufacturing facility from production departments to
manufacturing cells to promote teamwork and decrease inventory costs;
(h) upgrading or modifying machinery;
(i) installing a statistical process control system to monitor production qual-
ity and reduce production variability.
Chapter 7 7-33

C7-1 (Concluded)

A few of the biggest and most urgent problems should be identified and
tackled. In order to achieve results, effort should be concentrated on a few
costly problems that can be solved. Tackling too many problems results in dis-
persed efforts and little observable accomplishment. Improving quality takes
time and never ends. The company and its employees need some successes to
build confidence and create the momentum needed to turn the quality problem
around.

C7-2 Product cost may be increasing as a result of an increasing amount of scrap,

spoilage, and rework. Since the costs of these internal failures are not meas-
ured, management cannot evaluate the significance of the problem. In addition,
since these costs are not measured, employees have no incentive to reduce or
eliminate them. Treating scrap, spoilage, and rework as a normal production
cost encourages such waste. As a consequence, overall costs rise. The com-
pany’s cost accountants should develop a system of determining the cost of
scrap, spoilage, and rework; implement the system (i.e., begin measuring such
costs); and report these costs to responsible managers. If the cost of scrap,
spoilage, and rework is high, management should initiate a quality improve-
ment program that concentrates on preventing these internal failures. This may
involve organizing employee quality teams to identify problems and develop
solutions, locating new vendors to obtain higher quality materials, redesigning
products to improve quality, modifying or upgrading manufacturing machinery,
training or retraining employees, and/or reorganizing the production processes.