[jessanqi]

hi,

I still don’t understand why the normal spoilage not included in the Equivalents units? I think it’s part of the inventory cost.

Can some please advise. Thank you for the help!!

Question

Barkley Company adds materials at the beginning of the process in department M. Data concerning the materials used in March of the current year’s production are as follows:
Work-in-process at March 1 16,000
Started during March 34,000
Completed and transferred to next department during March 36,000
Normal spoilage incurred 4,000
Work-in-process at March 31 10,000

Using the weighted-average method, the equivalent units for the materials unit cost calculation are

A. 30,000
B. 34,000
C. 40,000
D. 46,000

Explanation
The correct answer is D. There are two main methods used for calculating equivalent units in process costing: FIFO and weighted average (WA). The main difference between the WA and FIFO methods for process costing is that under FIFO, separate equivalent units (EU) and related costs must be determined for beginning work-in-process (WIP) inventory and current period production. With WA, current costs are combined with prior period costs and all units are carried at an average cost of production. The key to WA is that all units completed during the period are started and completed during that period. Therefore, the percentage of work performed last period on the beginning work-in-process inventory is ignored.

Using WA, the beginning WIP and the units started in the current period are considered together as a single group of units for the allocation of materials cost. Because materials are added at the beginning of the process, materials cost are allocated even to those units which remain in WIP at the end of the period, since materials have already become part of the units.

With the weighted average method of process costing, all units completed during a particular period are accounted for as a single grouping or batch. There is no distinction between completed units which were begun during the period and those units which were already in process at the beginning of the period.

Normal spoilage (vs. abnormal spoilage) becomes part of the costs of good production since it is anticipated that every production process will have a certain degree of normal spoilage. As a result, the equivalent units calculation will not allocate an amount for normal spoilage because it will be absorbed in determining the cost for the good units produced.

The equivalent units for the materials unit cost calculation is as follows:
Completed units in March 36,000
Add: March 31 Work-in-process 10,000
Total equivalent units for materials cost 46,000

[rencpa]

Let somebody else help you with this one. BUT…

Yes, normal spoilage is part of the inventory cost ==> BS

And abnormal spoilage is part of the period expense ==> IS

Good luck!

[jgod]

The purpose of finding equivalent units is to allocate costs to ending WIP and finished goods. It’s answering the question “We have all these costs, we have these units in WIP we have these finished goods, how should we cost them?”

If you have equivalent finished units that are spoilage, that means some of the costs have to be allocated to the spoilage.

By leaving out EU’s for spoilage all costs including the actual costs of the spoilage (be it material and/or labor) gets allocated to WIP and FG only.

There are occasions where EU are calculated for spoilage. I’m not too certain about how that works but I think that is getting too detailed for the CPA exam.

Hope that helps.

AUD- 99 (6/8/16)
REG- TBD
FAR- TBD
BEC- TBD

[RB]

You have 2 good explanations already, lets see if this adds anything:

Equivalent units:

Okay – so first general piece, remember that FIFO takes all costs and equivalent units ADDED during the period, and W.A. takes all totals ending for both costs and equivalent units.

Second – to answer your question here:

So, your total equivalent units in weighted average is based on everything finished plus what’s in ending inventory, that’s the total population, so the $36,000 plus $10,000 ending inventory.

This question is somewhat a trick, because normal spoilage is already accounted for somewhere between those two costs. Normal spoilage goes to finished goods, then it sits there until its part of COGS. So if you know total finished in the period and total in ending inventory there’s nothing more to add, normal spoilage is in there.

[Felix The Cat]

Hi RB,

Thanks for your explanation.

So the normal spoilage is already included in the ‘Completed and Transfered' figure?

Cheers

FTC.

[Author]

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