Question

Vikings, Inc., manufactures custom-made furniture on a job-order basis. It uses a normal costing system in its factory. It treats the costs associated with spoilage and reworked units as arising due to the specifications of a particular job. At the beginning of the year 2018, overhead rate was set at $12 per machine hour. During January 2018, Job 200J, for the production of 200 executive chairs, was completed at the following costs per unit: Direct materials $10 and Direct labor of $10. A total of 200 machine-hours were used in the production of chairs.  Final inspection of Job 200J disclosed 30 chairs with defective castors. New castors were manually attached to these chairs at a total cost of $860 (cost of castors $540 and direct labor $260). 20 other chairs broke in the compression test and the cushions salvaged from these chairs were sold for a total cash value of $60. These 20 broken chairs were considered to be normal spoilage. What is the per unit cost of the good chairs in Job 200J?

Answer 1

Calaculation of per unit cost of good chairs in Job 200J:

Particulars	($)
Direct material (200 chairs×$10)	$2000
Direct labor (200 chairs×$10)	$2000
Overheads (200 machine hours×$12)	$2400
Total production cost of 200 chairs	$6400
Replacement cost of defective castors: ($540+$260)	$860
Normal loss on spoilage of 20 broken chairs (note1)	$580
Total cost of good chairs	$7840
Number of goods chairs (200 - 20)	180 chairs
Total unit cost of good chairs	$43.5

Notes:

1. Normal Loss on spoilage of 20 broken chairs

Production Cost of 1 chair

= Cost of 200 chairs/200 chairs

= $6400/200 chairs

= $32

Cost of 20 broken chairs = 20×$32 = $640

Given that,

Salvage value realised from broken chairs = $60

Therefore,

Normal loss

= Cost of 200 broken chairs - salvaged value realised

= $640 - $60

= $580

Any normal loss on spoilage of goods cant be avoided and should be considered and included in cost of production.

_______×________

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