Question

Question 2 (35 marks) Wing Shun Ltd (Wing Shun) produces a soft drink product called “Super'. The company adopts the first-in, first-out (FIFO) method of process costing for its manufacturing operations. Direct materials are added when the production process is 10% complete, and conversion costs are added evenly during the process. Some units of this product are spoiled as a result of defects not detectable until Wing Shun inspects at the 60% stage of completion. Spoiled units are disposed of at zero net disposal value. The following is the company's production data in June 2020 Conversion Costs Physical Direct Units Materials (Super) 30,000 $2,900,000 $320,000 30% ? 50,000 50,000 16,000 Beginning work in process (1 June) Degree of completion of beginning work in process Started in June Goods units completed and transferred out during June Work in process, ending inventory (June 30) Degree of completion of ending work in process Total costs added during June Normal spoilage as a percentage of good units Degree of completion of normal spoilage Degree of completion of abnormal spoilage ? 20% 11,600,000 $5,529,000 10% ? ? ? ? Required: (a) For each cost category, compute equivalent units. Show physical units in the first column of your schedule. (20 marks) (7 marks) (b) Summarize the total costs to account for; calculate the cost per equivalent unit for each cost category; and assign costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process. 2 (c) 'Managers do not care about whether the spoilage is normal or abnormal because both of them are considered costs to a company.' (8 marks) Comment on the statement above.

Answer 1

@physical units Category Equrinlent units For convasion 30,000 begening work in process Equevalent units For direct material 30,000 (304 complete so DM add of lov. completed) 9000 (3.07 of 30,000) Production started 20,000 and completed in 20,000 (en total 50,000 frans ferred 3000 is from begeniny wip) U1,000 (20,000+ 21,000) (21,000 remaining pushton of begening wip) 16,000 3200 16,000 ending work in process (Full DM added (20% of 16000) Lecause 2o4. Production is completed) 14.000 sporlage 14,ooo १५०० (cov. completed) (6 for process worle Beganeng dereet me te real 2,900,000 Cosd 2,900,000 (30,000 = 96.67 unet equivalent per convesson cost 3,20,000 Cost pen equivalent unod 3,20,000/4,000 = 35.55 In June diveet material 11, 600,000

50,000 Cost per equivalent unlt 2.32 Convesson 5,529,000 Equivalend Ending 41,000 a 3200+2400 - 52,600 үеи (05.11 Total Cost of goods Completed and fronsferred Legening wip (30000 units) direct matereal 2,900,000 Conversion cost 320,0000 In June 4309,510 4,640,000 for 20,000 units (total equ.unit is Globo @losili and 21000 es from begining wip) Normal sporlage Sooo (or good onits 1,160,000 315, 330 501000) (5000 Gults @232) (3000, 604. units @ los 11) Total cost of Goods 8,700,000 1,7448qo. completed and transferred
Total cost of goods completed and transfered=8,700,000+4,944,840=13,644,840

total cost of abnormal spoilage

No of abnormal spoilage=9000

Direct material cost=9000*232=2,088,000

conversion equivalent units=9000*0.6=5400

conversion cost=5400*105.11=567594

total cost of abnormal sppoilage=2,655,594

Total cost of ending WIP

Direct material=16000*232=3,712,000

Conversion=(16,000*0.2)105.11=336,352

total cost of ending WIP=3,712,000+336,352=4,048,352

C)

Normal spoilage cost is part of production cost . Such cost is speard over good units . Normal spoilage cost is related to production units where as abnormal spoilage cost is shown separately. Abnormal spoilage cost can be avoided . Normal spoilage cost is charged on goods where as abnormal spoilage cost is recognized as loss