Please help me understand this Q?
A company uses a job-order cost system in accounting for its manufacturing operations. Because its processes are labor-oriented, it applies manufacturing overhead on the basis of direct labor hours (DLH).
Normal spoilage is defined as 4% of the units passing inspection. The company includes a provision for normal spoilage cost in its budgeted manufacturing overhead and manufacturing overhead rate.
Data regarding a job consisting of 30,000 units are presented below.
Volume Data:
Total units in job
30,000
Units failing inspection (spoiled)
1,500
Good units passing inspection
28,500
Cost Data:
Per unit
Total cost
Direct materials
$ 18.00
$ 540,000
Direct labor
2 DLH @ $16.00/DLH
32.00
960,000
Manufacturing overhead
2 DLH @ $30.00/DLH
60.00
1,800,000
Total
$110.00
$3,300,000
The 1,500 units that failed inspection required .25 DLH of direct labor hours per unit to rework the units into good units. What is the proper charge to the Loss from Abnormal Spoilage account?
$1,440
$4,140
$3,450
Zero
This answer is correct because manufacturing overhead is appropriately charged for the normal spoilage (provision is made for normal spoilage in manufacturing overhead) and the correct spoilage and rework cost calculations are used [Normal: 1,140 × ($4.00 + $7.50); Abnormal: 360 × ($4.00 + $7.50)] = $4,140.
Supporting Calculations
Normal/Abnormal Spoilage Calculation: Correct Incorrect
Total spoilage in units 1,500 1,500
Normal spoilage calculation
28,500 × .04 1,140
30,000 × .04 1,200
Abnormal spoilage 360 300
Rework Cost per Unit Calculation:
Direct labor cost per unit (.25 × $16.00) $ 4.00 $ 4.00
Manufacturing overhead (.25 × $30.00) 7.50 —
Total cost per unit $11.50 $ 4.00
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