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(A) Total cost of good units completed and
transferred out
(B) Abnormal spoilage (292 units)
(C) Work-in-process, ending (520 units)
785,565
86,724
117,000
(292# $207) + (292# $90)
(520# $207) + (104# $90)
(A)+(B)+(C) Total costs accounted for
$989,289
$715,599
$273,690
# Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.
18-26 (25 min.) FIFO method, spoilage.
Refer to the information in Exercise 18-25.
Required:
1. Do Exercise 18-25 using the FIFO method of process costing.
2. Should WaferCo’s managers choose the weighted-average method or the FIFO method?
Explain briefly.
SOLUTION
1. Solution Exhibit 18-26, Panel A, calculates the equivalent units of work done in the current
period for each cost category in September 2014.
Solution Exhibit 18-26, Panel B, summarizes WaferCo’s production costs for September
2014, calculates the costs per equivalent unit for each cost category, and assigns total costs to units
completed and transferred out (including normal spoilage) to abnormal spoilage and to units in
ending work in process under the FIFO method.
SOLUTION EXHIBIT 18-26
First-in, First-out (FIFO) Method of Process Costing with Spoilage,
WaferCo for September 2014
PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units
(Step 1)
(Step 2)
Equivalent Units
Flow of Production
Physical
Units
Direct
Materials
Conversion
Costs
Work in process, beginning (given)
Started during current period (given)
To account for
Good units completed and transferred out
during current period:
From beginning work in process||
1,200 (100% −100%); 1,200 (100% − 30%)
Started and completed
1,100 100%; 1,100 100%
Normal spoilage*
1,200
2,557
3,457
1,200
1,100#
345
0
1,100
345
840
1,100
345
345 100%; 345 100%
Abnormal spoilage†
292 100%; 292 100%
Work in process, ending‡
520 100%; 520 20%
Accounted for
Equivalent units of work done in current period
292
520
3,457
292
520
2,257
292
104
2,681
||Degree of completion in this department: direct materials, 100%; conversion costs, 30%.
#2,300 physical units completed and transferred out minus 1,200 physical units completed and transferred out from
beginning work in process inventory.
*Normal spoilage is 15% of good units transferred out: 15% 2,300 = 345 units. Degree of completion of normal
spoilage in this department: direct materials, 100%; conversion costs, 100%.
†Abnormal spoilage = Actual spoilage − Normal spoilage = 637 − 345 = 292 units. Degree of completion of
abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.
‡Degree of completion in this department: direct materials, 100%; conversion costs, 20%.
PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process
Inventory
Total
Production
Costs
Direct
Materials
Conversion
Costs
(Step 3) Work in process, beginning (given)
Costs added in current period (given)
Total costs to account for
(Step 4) Costs added in current period
Divided by equivalent units of work done in current period
Cost per equivalent unit
(Step 5) Assignment of costs:
Good units completed and transferred out (2,300 units)
$158,635
830,654
$989,289
$ 142,321
573,278
$715,599
$573,278
2,257
$ 254.00
$ 16,314
257,376
$273,690
$257,376
2,681
$ 96.00
Work in process, beginning (1,200 units)
Costs added to beg. work in process in current period
Total from beginning inventory before normal
spoilage
Started and completed before normal spoilage
(1,100 units)
Normal spoilage (345 units)
(A) Total costs of good units completed and
transferred out
(B) Abnormal spoilage (292 units)
(C) Work in process, ending (520 units)
$158,635
80,640
239,275
385,000
120,750
745,025
102,200
142,064
$142,321 + $16,314
(0§ $254) + (840§ $96)
(1,100§ $254) + (1,100§ $96)
(345§ $254) + (345§ $96)
(292§ $254) + (292§ $96)
(520§ $254) + (104§ $96)
(A)+(B)+(C) Total costs accounted for
$989,289
$715,599
+ $273,690
§Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.
Beginning
Inventory
Work Done in
Current Period
Direct materials
Conversion costs
Total cost per unit
$118.60 ($142,321 1,200 equiv. units)
45.32 ($ 16,314 360 equiv. units)
$163.92
$254.00
96.00
$350.00
Direct
Materials
Conversion
Costs
Cost per equivalent unit (weighted-average)
$207*
$90*
Cost per equivalent unit (FIFO)
$254**
$96**
* from Solution Exhibit 18-25, Panel B
**from Solution Exhibit 18-26, Panel B
The cost per equivalent unit differs between the two methods because each method uses different
costs as the numerator of the calculation. FIFO uses only the costs added during the current period
whereas weighted-average uses the costs from the beginning work-in-process as well as costs
added during the current period. Both methods also use different equivalent units in the
denominator.
The following table summarizes the costs assigned to units completed and those still in
process under the weighted-average and FIFO process-costing methods for our example.
FIFO
(Solution
Exhibit 18-26B)
Wtd.-Avg.
(Solution
Exhibit 18-25B)
Difference
Cost of units completed and transferred out
Abnormal spoilage
Work in process, ending
Total costs accounted for
$745,025
102,200
142,064
$989,289
$785,565
86,724
117,000
$989,289
− $40,540
+ $15,476
+ $25,064
The FIFO ending inventory is higher than the weighted-average ending inventory by $25,064. This
is because FIFO assumes that all the lower-cost prior-period units in work in process are the first
to be completed and transferred out while ending work in process consists of only the higher-cost
current-period units. The weighted-average method, in contrast, smoothes the cost per equivalent
unit by assuming that more of the higher-cost units are completed and transferred out, while some
lower-cost units in beginning work in process are placed in ending work in process. It similarly
costs the abnormal spoilage incurred during the period using a blended cost rate rather than the
higher current-period cost (as in the FIFO method, which assigns $15,476 more in costs to that
spoilage). As a result, the FIFO method results in a relatively lower cost of units completed and
transferred out and a higher ending work-in-process inventory.
WaferCo’s managers should consider the weighted-average method because it leads to a
higher cost of goods completed and transferred (and sold), thereby lowering taxes. The managers
may have an incentive, however, to use the FIFO method and show a higher level of current
income if their compensation increases with higher operating income or if there are debt
covenants that would be violated by showing lower income. WaferCo’s managers may also
consider advantage of the FIFO method, which is that it provides better information for
spoilage
Started and completed before normal spoilage
(1,100 units)
Normal spoilage (345 units)
(A) Total costs of good units completed and
transferred out
(B) Abnormal spoilage (292 units)
(C) Work in process, ending (520 units)
(A)+(B)+(C) Total costs accounted for
374,000
117,300
899,300
99,280
135,200
$1,133,780
(1,100§ $240) + (1,100§ $100)
(345§ $240) + (345§ $100)
(292§ $240) + (292§ $100)
(520§ $240) + (104§ $100)
$829,680 + $304,100
*Work in process, beginning has 1,200 equivalent units (1,200 physical units 100%) of direct materials and 360
equivalent units (1,200 physical units 30%) of conversion costs.
§Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-25, Panel A.
2. To show better performance, a department supervisor might report a higher degree of
completion resulting in understated cost per equivalent unit and overstated operating income. If
performance for the period is very good, the department supervisor may be tempted to report a
lower degree of completion reducing income in the current period. This has the effect of
reducing the costs carried in ending inventory and the costs carried to the following year in
beginning inventory. In other words, estimates of degree of completion can help to smooth
earnings from one period to the next.
To guard against the possibility of bias, managers should ask supervisors specific
questions about the process they followed to prepare estimates. Top management should always
emphasize obtaining the correct answer, regardless of how it affects reported performance. This
emphasis drives ethical actions throughout the organization.
18-28 (20–30 min.) Spoilage and job costing.
(L. Bamber) Barrett Kitchens produces a variety of items in accordance with special job orders
from hospitals, plant cafeterias, and university dormitories. An order for 2,100 cases of mixed
vegetables costs $9 per case: direct materials, $4; direct manufacturing labor, $3; and
manufacturing overhead allocated, $2. The manufacturing overhead rate includes a provision for
normal spoilage. Consider each requirement independently.
Required:
1. Assume that a laborer dropped 420 cases. Suppose part of the 420 cases could be sold to a
nearby prison for $420 cash. Prepare a journal entry to record this event. Calculate and explain
briefly the unit cost of the remaining 1,680 cases.
2. Refer to the original data. Tasters at the company reject 420 of the 2,100 cases. The 420 cases
are disposed of for $840. Assume that this rejection rate is considered normal. Prepare a journal
entry to record this event, and do the following:
a. Calculate the unit cost if the rejection is attributable to exacting specifications of this
particular job.
b. Calculate the unit cost if the rejection is characteristic of the production process and is not
attributable to this specific job.
c. Are unit costs the same in requirements 2a and 2b? Explain your reasoning briefly.
3. Refer to the original data. Tasters rejected 420 cases that had insufficient salt. The product can
