Problem 8 – Process Costing with Spoilage
Kristina Company, which manufactures quality paint sold at premium prices, uses a
single production department. Production begins with the blending of various chemicals,
which are added at the beginning of the process, and ends with the canning of the paint.
Canning occurs when the mixture reaches the 90% stage of completion. The gallon cans
are then transferred to the Shipping Department for crating and shipment. Labor and
overhead are added continuously throughout the process.
Prior to May, when a change in the process was implemented, WIP inventories were
insignificant. The change in the process enables greater production but results in material
amounts of WIP for the first time. The company has always used the WA method to
determine equivalent production and unit costs. Now, production management is
considering changing from the WA method to the FIFO method.
Spoilage is detected when the mixture reaches the 60% stage of completion. Normal
spoilage is equal to 2% of units transferred out.
The following data relate to actual production during the month of May:
COSTS FOR MAY
Work-in-process inventory, May 1
(4,000 litres 25% complete):
Direct materials-chemicals
Direct labor
Factory overhead
May costs added:
Direct materials-chemicals
Direct materials-cans
Direct labor
Factory overhead
UNITS FOR MAY - Litres
Work-in-process inventory, May 1 (25% complete)
Sent to Shipping Department
Started in May
Work-in-process inventory, May 31 (80% complete)
$ 45,600
6,250
18,750
228,400
7,000
35,000
105,000
4,000
19,350
21,000
5,000
Required –
Calculate the cost of units transferred out and the cost of abnormal spoilage using (a)
FIFO and (b) weighted average.
© CMA Ontario 2011