Question

Suppose a firm with​ non-zero inventory balances is considering whether to classify spoilage as normal or abnormal. Which of the following sentences is​ true?

A.

Classifying spoilage as abnormal rather than normal results in an increase in current operating income.

B.

Classifying spoilage as normal rather than abnormal results in an increase in current operating income.

C.

Classifying spoilage as normal rather than abnormal results in a decrease in current operating income.

D.

Classifying spoilage as normal rather than abnormal results in same current operating income.

Answer 1

The correct answer is "B. Classifying spoilage as normal rather than abnormal results in an increase in current operating income."

Reason: Normal spoilage is added to the cost of goods manufactured as same as considered to be inventoriable and an expected expense under normal circumstances. However abnormal spoilage is not considered inventoriable or recoverable and hence is written off in that particular accounting period.

Hence if we classify spoilage as normal rather than abnormal, it will result in an increase in the current operating income.