[Anonymous]

Hey guys, quick question from Becker:

During May, Mercer Company completed 50,000 units costing $600,000, exclusive of spoilage allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000 units, costing $80,000, were 50 percent complete at May 31. All units are inspected between the completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the month was $20,000, and abnormal spoilage of $50,000 was also incurred during the month.
The portion of total spoilage that should be charged against revenue in May is:
a. $60,000
b. $50,000
c. $20,000
d. $70,000
The answer is A, $60,000. (Normal spoilage of $20,000 x 50% sold) $10,000 + $50,000 abnormal spoilage. Can someone explain to me why the $10,000 is being added into this when they’re asking for spoilage that should be charged against revenue? I thought normal spoilage was a product cost that’s carried on the balance sheet. How does this work its way of being netted against revenue on the income statement? Thanks!

[So FAR So Good]

50% of the units were sold, so 50% of the normal spoilage that was inventoriable was reducing revenue under COGS. Half of the normal spoilage remains in inventory on the balance sheet until sold.

F - 91 (6/5/2016)
A - 7/30/2016
R - 10/8/2016
B - 12/10/2016

[rossch201]

Additionally, this part “All units are inspected between the completion of manufacturing and transfer to finished goods inventory. ” identifies that any spoilage is only on “COMPLETED” units – so the additional 10,000 units have nothing to do w/ the spoilage amount.

[Anonymous]

Okay, that makes more sense! For some reason I thought because it was a product cost on the balance sheet that it would be netted on the balance sheet. Thanks guys!

[Author]

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