CH 07 SM

CHAPTER 7
DISCUSSION QUESTIONS
Q7-1. Quality costs may be grouped into the following three classifications:
1. Prevention costs are the costs incurred to
prevent product failure. They include the
cost of designing high quality products
and production systems, including the
costs of implementing and maintaining
such systems.
2. Appraisal costs are the costs incurred to
detect product failure. They include the
cost of inspecting and testing materials,
inspecting products during production,
and the cost of obtaining information from
customers about product satisfaction.
3. Failure costs are the costs incurred when a
product fails, and may occur internally or
externally. Internal failure costs are those
that occur during the manufacturing or production process (e.g., scrap, spoilage, and
rework), and external failure costs are
those that occur after the product has
been sold (e.g., warranty repairs and
replacements, sales refunds, handling
customer complaints, and lost sales
resulting from poor product quality).
Q7-2. TQM stands for total quality management,
which is a company-wide approach to quality
improvement in all processes and activities.
TQM is a pervasive philosophy of doing business that applies to all functional areas of the
company and to all personnel.
Q7-3. Five characteristics of TQM systems are:
1. The companys objective for all business
activity is to serve its customers. The term
product is extended to include services
as well as goods, and customer includes
internal users as well as those outside of
the company who purchase the companys
products. Each employees activity is oriented to providing service to the customer.
2. Top management provides an active
leadership role in the quality improvement
movement.
3. All employees are actively involved in
quality improvement. Employees are not
only asked to contribute ideas, but also to
Q7-4.
Q7-5.
Q7-6.
Q7-7.
7-1
find better ways of doing things.

Involvement can be successful only when
there is encouragement and an open and
honest environment of trust.
4. The company has a system of identifying
quality problems, developing solutions,
and setting quality improvement objectives. This typically involves organizing
employees from all ranks and from different organizational units along with managers who have authority to take the
necessary action to solve problems.
5. The company places a high value on its
employees and provides continuous training, as well as recognition for achievement. Employees perform best when they
are well trained, and they have the greatest capacity to contribute when they are
highly educated.
The concept of continuous quality improvement
differs from the concept of quality optimization
in that continuous quality improvement is a
dynamic process of change under the assumption that the ideal is not an absolute known
value; whereas quality optimization is a static
approach to finding the best solution to a
given set of fixed and known constraints.
The first problem with trying to inspect quality
into the product is that it detects internal failures only after considerable cost has been
incurred. The second problem is that the magnitude of the cost of the internal failures,
detected by inspection, is rarely measured
and typically ignored.
Companies should concentrate their efforts
on preventing poor quality rather than on trying to inspect it into the process, because it
will result in less total quality cost. The
approach is founded on the belief that by
increasing prevention costs, the cost of internal failuressuch as scrap, spoilage, rework,
and downtimewill decline by a larger
amount than the increase in prevention costs.
Quality costs should be measured and
reported to management in order to provide
incentive and direction for improving quality.
7-2
Large quality costs indicate large opportunities for improvement. Also, measurements
provide a basis for monitoring the cost of
quality and evaluating improvements.
Q7-8. Scrap includes (1) the filings and trimmings
remaining after processing materials, (2)
defective materials that cannot be used or
returned to the vendor, and (3) broken parts
resulting from employee errors or machine
failures. Spoiled goods differ from scrap in
that they are partially or fully completed units
that are in some way defective and are not
economically or physically correctable.
Spoiled goods may be units of the product or
component parts, and they may or may not
have a salvage value. Rework is the process
of correcting defective manufactured goods.
Q7-9. The cost of scrap, spoilage, and rework
should not be ignored, because such costs
Chapter 7
are often quite high and often result from

internal failures that can be eliminated.
Ignoring the cost of these internal failures
sends a signal to managers that such costs
are acceptable. Reporting such costs provides incentive for improvement, particularly if
the costs are large.
Q7-10. In order to know what to do with the cost, the
accountant must know whether the spoilage or
rework is caused by the customer or by an
internal failure. If spoilage or rework is the
result of a customer requirement, the unrecoverable cost should be charged to the job. On
the other hand, if the spoilage or rework is the
consequence of an internal failure, the unrecoverable cost should be removed from the job
(i.e., charged to Factory Overhead Control)
and reported to responsible management.
Chapter 7
7-3
EXERCISES
E7-1
(1)
(2)
(3)
(4)
E7-2
E7-3
E7-4
E7-5
Accounts Receivable ...................................................

Scrap Sales (or Other Income)...........................
1,650

Cost of Goods Sold.............................................
1,650

Factory Overhead Control .................................
1,650

Work in Process .................................................
1,650
Spoiled Goods Inventory .............................................

Factory Overhead Control ...........................................
Work in Process .................................................
120
112
1,650
1,650
1,650
1,650
232
$27,000 total job cost/1,000 chairs = $27 cost per chair

Spoiled Goods Inventory ($10 100 chairs)..............
Factory Overhead Control (($27 $10) 100)...........
Finished Goods Inventory ($27 900 chairs)............
Work in Process .................................................
1,000
1,700
24,300
Spoiled goods inventory ($100 100 units) ..............

Cost of Goods Sold......................................................
Work in Process .................................................
10,000
94,000

Materials (100 units $1.50)...............................
Payroll (100 units 1/4 hour $10 per hour) ...
Applied Factory Overhead
(100 1/4 hr $12 rate) .............................
700
Finished Goods Inventory ...........................................

Work in Process .................................................
6,600
27,000
104,000
150
250
300
6,600
7-4
E7-6
Chapter 7
Work in Process............................................................
Materials (1,000 units $1).................................
Payroll (1,000 units 1/6 hour $15) ................
Applied Factory Overhead (1,000 1/6 $30)..
8,500

Work in Process ($65,000 + $8,500)...................
73,500
Accounts Receivable ($73,500 150%) .....................

Sales .....................................................................
110,250
1,000
2,500
5,000
73,500
110,250
Chapter 7
7-5
E7-7
(1)
Island Company
Forming Department
Cost of Production Report
For August
Quantity Schedule
Beginning inventory ...............................
Started in process this period ..............
Materials
Transferred to Finishing Department ....

Ending inventory .....................................
Spoiled in process ..................................
100%
100%
Labor
60%
100%
Cost Charged to Department

Beginning inventory:
Materials ....................................................................................
Labor...........................................................................................
Factory overhead ......................................................................
Total cost in beginning inventory......................................
Cost added during current period:
Materials ....................................................................................
Labor...........................................................................................
Factory overhead.......................................................................
Total cost added during current period............................
Total cost charged to department ..................................................
Cost Accounted for as Follows
Charge to Factory Overhead for spoilage:
Materials ............................................
Labor ..................................................
Factory overhead ..............................
Work in Process, ending inventory:
Materials ............................................
Labor ..................................................
Total cost accounted for ........................
Units
8,000
Overhead
50%
100%
Quantity
1,000
9,000
10,000
8,000
1,500
500
10,000
Total
Cost
$ 1,260
770
1,400
$ 3,430
Equivalent
Units*
Unit
Cost**
$36,240
10,510
21,725
$68,475
$71,905
10,000
9,400
9,250
$3.75
1.20
2.50
$7.45
% Complete Unit Cost

100%
$7.45
Total Cost
$59,600
500
500
500
100%
100%
100%
$3.75
1.20
2.50
$1,875
600
1,250
1,500
1,500
1,500
100%
60%
50%
$3.75
1.20
2.50
$5,625
1,080
1,875
3,725
8,580
$71,905
7-6
Chapter 7
E7-7 (Concluded)
*Total number of equivalent units required in the cost accounted for section determined as follows:
Equivalent units transferred out.........................

Equivalent units in ending inventory .................
Equivalent units of spoilage ...............................
Total equivalent units...........................................
Materials
8,000
1,500
500
10,000
Labor
8,000
900
500
9,400
Overhead
8,000
750
500
9,250
** Total cost (i.e., the cost in beginning inventory plus the cost added during the current period)
divided by the total number of equivalent units required in the cost accounted for section
(2)
Work in ProcessFinishing Department...................

Work in ProcessForming Department ..
59,600
3,725
63,325
Chapter 7
7-7
E7-8
(1)
Juniper Company
Finishing Department
For July
Quantity Schedule
Beginning inventory................................
Received from Cutting Department.......
Materials
Labor
Overhead
40%
100%
20%
100%
20%
100%
Transferred to Finished Goods ..............


Cost from preceding department.............................................
Materials .....................................................................................
Labor...........................................................................................
Total cost in beginning inventory ....................................
Materials ....................................................................................
Labor...........................................................................................
Total cost added during current period ...........................
Transferred to Spoiled Goods inventory
at salvage value ................................
Cost of completed spoiled units .....
Less salvage value of spoiled units
Cost from preceding department ....
Materials ............................................
Labor ..................................................
Units
3,800
Quantity
500
4,500
5,000
3,800
800
400
5,000
Total
Cost
$ 5,500
1,950
1,180
1,770
$ 10,400
Equivalent
Units*
Unit
Cost**
$ 54,500
20,650
16,260
24,390
$115,800
$126,200
5,000
4,520
4,360
4,360
$12.00
5.00
4.00
6.00
$27.00

100%
$27.00
400
Total Cost
$102,600
$10.00
400
400
100%
800
800
800
800
100%
40%
20%
20%
4,000
$27.00
10.00
$10,800
4,000
$12.00
5.00
4.00
6.00
$ 9,600
1,600
640
960
6,800
12,800
$126,200
7-8
Chapter 7
E7-8 (Concluded)
Equivalent units transferred out ............

Equivalent units in ending inventory ....
Equivalent units of spoilage ..................
Total equivalent units .............................
Prior
Dept. Cost Materials
3,800
3,800
800
320
400
400
5,000
4,520
Labor
3,800
160
400
4,360
Overhead
3,800
160
400
4,360
(2)

Work in ProcessFinishing Department..........
102,600
4,000
6,800
113,400
Chapter 7
E7-9
(1)
7-9
Carver Petroleum Inc.

Cracking Department
For May
Quantity Schedule
Started in process this period ...............
Transferred to Refining Department......
Lost in process .......................................
Materials
Conversion Cost
100%
70%

Materials ....................................................................................
Conversion cost.........................................................................
Materials ....................................................................................
Conversion cost.........................................................................
Total cost charged to department .................................................
Materials ............................................
Conversion cost ................................
Units
49,000
6,000
6,000
Quantity
5,000
55,000
60,000
49,000
6,000
5,000
60,000
Total
Cost
$ 1,900
240
$ 2,140
Equivalent
Units*
$20,100
5,080
$25,180
$27,320
55,000
53,200
.40
.10
$.40
.10
$

100%
$.50
100%
70%
Unit
Cost**
.50
Total Cost
$24,500
$2,400
420
2,820
$27,320
Equivalent units transferred out .....

Equivalent units in ending inventory
Total equivalent units .......................
Materials
49,000
6,000
55,000
Conversion Cost
49,000
4,200
53,200
(2)
Work in ProcessRefining Department ....................

Work in ProcessCracking Department ..........
24,500
24,500
7-10
Chapter 7
E7-10 APPENDIX
(1)
Suarez Company
Tooling Department
For March
Quantity Schedule
Started this period ..................................
Materials
100%
Labor
70%
100%
100%
60%
90%
Overhead
60%
40%
90%
Quantity
2,000
13,000
15,000
7,000
3,000
5,000
15,000

Materials .....................................................................................
Labor...........................................................................................
Materials .....................................................................................
Labor...........................................................................................
Total
Cost
$ 1,600
290
950
$ 2,840
Equivalent
Units*
$ 9,750
2,380
9,200
$21,330
$24,170
13,000
11,900
11,500

Transferred to Finishing Department:
From beginning inventory................
Cost to complete this period:
Materials ...............................
Labor .....................................
Factory overhead .................
Started and completed this period .
Total cost transferred to
Finishing Department ................
Materials ............................................
Labor ..................................................
Materials ............................................
Labor ..................................................
Unit Cost
Units
Current %
Unit
Cost**
$.75
.20
.80
$1.75
Total Cost
$2,840
2,000
2,000
2,000
5,000
0%
30%
40%
100%
$ .75
.20
.80
$1.75
0
120
640
$ 3,600
8,750
$12,350
5,000
5,000
5,000
100%
90%
90%
$ .75
.20
.80
$3,750
900
3,600
3,000
3,000
3,000
100%
60%
40%
$ .75
.20
.80
$2,250
360
960
8,250
3,570
$24,170
Chapter 7
7-11
E7-10 APPENDIX (Concluded)

* Number of equivalent units of cost added during the current period determined as follows:
To complete beginning inventory ............................

Started and completed this period ...........................
Ending inventory.........................................................
Spoiled units ...............................................................
Total equivalent units .................................................
Materials
0
5,000
3,000
5,000
13,000
Labor
600
5,000
1,800
4,500
11,900
Overhead
800
5,000
1,200
4,500
11,500
** Cost added during the current period divided by the number of equivalent units of cost added during the current period
(2)

Work in ProcessTooling Department .............
12,350
8,250
20,600
7-12
Chapter 7
E7-11 APPENDIX
(1)
Matrix Furniture Company

For September
Quantity Schedule
Received from Fabricating Department
Materials
80%
Labor
40%
Overhead
40%
100%
100%
60%
100%
60%
100%

Materials .....................................................................................
Labor...........................................................................................
Materials .....................................................................................
Labor...........................................................................................
Quantity
1,200
6,000
7,200
5,000
1,500
700
7,200
Total
Cost
$ 14,160
1,210
1,300
3,250
$ 19,920
Equivalent
Units*
Unit
Cost**
$ 72,000
6,240
12,240
30,600
$121,080
$141,000
6,000
6,240
6,120
6,120
$12.00
1.00
2.00
5.00
$20.00
Chapter 7
7-13

Transferred to Finished Goods:
Materials ...............................
Labor .....................................
Started and completed this period
Transferred to Spoiled Goods inventory
at salvage value ................................
Materials ............................................
Labor ..................................................
Units
Current %
Unit Cost
Total Cost
$19,920
1,200
1,200
1,200
3,800
20%
60%
60%
100%
$ 1.00
2.00
5.00
$20.00
240
1,440
3,600
$ 25,200
76,000
$101,200
700
$12.00
700
700
100%
1,500
1,500
1,500
1,500
100%
100%
60%
60%
8,400
$20.00
12.00
$14,000
8,400
$12.00
1.00
2.00
5.00
$18,000
1,500
1,800
4,500
5,600
25,800
$141,000
*Number of equivalent units of cost added during the current period determined as follows:
To complete beginning inventory ...

Ending inventory...............................
Spoiled units .....................................
Prior Dept.
Cost
0
3,800
1,500
700
6,000
Material
240
3,800
1,500
700
6,240
Labor
720
3,800
900
700
6,120
Overhead
720
3,800
900
700
6,120
(2)

101,200
8,400
5,600
115,200
7-14
Chapter 7
E7-12 APPENDIX
(1)
Lanai Pop Inc.

Cooking Department
For December
Quantity Schedule
Received from Mixing Department ........
Transferred to Bottling Department ......
Lost in process........................................
Materials
75%
Labor
25%
100%
75%
Overhead
25%
75%
Quantity
10,000
40,000
50,000
37,000
8,000
5,000
50,000

Materials .....................................................................................
Labor...........................................................................................
Materials ....................................................................................
Labor...........................................................................................
Total
Cost
$ 2,920
305
140
210
$ 3,575
Equivalent
Units*
$10,850
1,500
2,430
3,645
35,000
37,500
40,500
40,500

$18,425
$22,000

Transferred to Bottling Department:
Materials ...............................
Labor .....................................
Factory overhead ................
Materials ............................................
Labor ..................................................
Total cost accounted for.........................
Unit Cost
Units
Current %
Unit
Cost**
$.31
.04
.06
.09
$.50
Total Cost
$3,575
10,000
10,000
10,000
27,000
25%
75%
75%
100%
$.04
.06
.09
$.50
100
450
675
$ 4,800
13,500
$18,300
8,000
8,000
8,000
8,000
100%
100%
75%
75%
$.31
.04
.06
.09
$2,480
320
360
540
3,700
$22,000
Chapter 7
7-15


Prior
0
2,500
27,000
27,000
8,000
8,000
35,000
37,500
Labor
7,500
27,000
6,000
40,500
Overhead
7,500
27,000
6,000
40,500
(2)
Work in ProcessBottling Department .....................

Work in ProcessCooking Department ..........
18,300
18,300
7-16
Chapter 7
PROBLEMS
P7-1
(1)
(2)
Spoiled Goods Inventory (200 units $1.75).............

Work in Process .................................................
350
1,450
Accounts Receivable ($550 + $350)............................

Scrap Sales .........................................................
Spoiled Goods Inventory ...................................
900
1,800
550
350
P7-2
(1)
(2)
$90,000 total job cost = $18 per unit

5,000 units on job
Spoiled Goods Inventory (200 units $15 salvage) .
Work in Process (200 units $18 cost).............
3,000
600

Work in Process ($90,000 $3,600) ..................
86,400

Sales .....................................................................
120,960
Spoiled Goods Inventory (200 units $15 salvage)

Work in Process .................................................
3,000

Work in Process ($90,000 $3,000) ...................
87,000

Sales .....................................................................
121,800
3,600
86,400
120,960
3,000
87,000
121,800
Chapter 7
7-17
P7-3
(1)
(2)

Materials (100 units $2)....................................
Payroll (100 units 1/2 hr $12 rate) ...............
(100 1/2 hr $24 rate) .............................
2,000

Work in Process .................................................
200,000
Accounts Receivable ($200,000 150%) ...................

Sales .....................................................................
300,000
Work in Process............................................................
Materials (100 units $2)....................................
Payroll (100 units 1/2 hour $12 rate) ..........
(100 1/2 hr $24 rate) .............................
2,000

Work in Process ($200,000 + $2,000).................
202,000
Accounts Receivable ($202,000 150%) ...................

Sales .....................................................................
303,000
200
600
1,200
200,000
300,000
200
600
1,200
202,000
303,000
7-18
P7-4 (1)
Chapter 7
Billingsley Company
Cutting Department
For April
Quantity Schedule
Transferred to Assembling Department
Materials
100%
100%
Labor
60%
90%

Materials .....................................................................................
Labor ..........................................................................................
Materials .....................................................................................
Labor...........................................................................................
Transferred to Assembling Department
Materials ............................................
Labor ..................................................
Materials ............................................
Labor .................................................
Units
18,000
Overhead
60%
90%
Quantity
5,000
20,000
25,000
18,000
4,000
3,000
25,000
Total
Cost
$ 1,260
789
1,789
$ 3,838
Equivalent
Units*
Unit
Cost**
$36,240
10,761
21,311
$68,312
$72,150
25,000
23,100
23,100
$1.50
.50
1.00
$3.00

100%
$3.00
Total Cost
$54,000
3,000
3,000
3,000
100%
90%
90%
$1.50
.50
1.00
$4,500
1,350
2,700
4,000
4,000
4,000
100%
60%
60%
$1.50
.50
1.00
$6,000
1,200
2,400
8,550
9,600
$72,150
Equivalent units transferred out.........................

Equivalent units in ending inventory .................
Equivalent units of ...............................................
Total equivalent units .........................................
Materials
18,000
4,000
3,000
25,000
Labor
18,000
2,400
2,700
23,100
Overhead
18,000
2,400
2,700
23,100
Chapter 7
7-19
P7-4 (Continued)
Billingsley Company
Assembling Department
For April
Quantity Schedule
Received from Cutting Department.......
Materials
Labor
Overhead
80%
100%
20%
100%
20%
100%
Transferred to Finished Goods Inventory


Cost from preceding department ...........................................
Materials .....................................................................................
Labor...........................................................................................
Materials .....................................................................................
Labor...........................................................................................
Total cost added during current period ...........................
Transferred to Spoiled Goods Inventory
at salvage value ................................
Materials ............................................
Labor ..................................................
Units
17,000
Quantity
4,000
18,000
22,000
17,000
4,000
1,000
22,000
Total
Cost
$ 12,000
38,028
3,356
5,034
$ 58,418
Equivalent
Units*
Unit
Cost**
54,000
163,372
15,444
23,166
$255,982
$314,400
22,000
21,200
18,800
18,800
$ 3.00
9.50
1.00
1.50
$15.00

100%
$15.00
1,000
Total Cost
$255,000
$ 3.00
1,000
1,000
100%
4,000
4,000
4,000
4,000
100%
80%
20%
20%
3,000
$15.00
3.00
$15,000
3,000
$3.00
9.50
1.00
1.50
$12,000
30,400
800
1,200
12,000
44,400
$314,400
7-20
Chapter 7
P7-4 (Concluded)
* Total number of equivalent units required in the cost accounted for section determined as follows:

Equivalent units of spoilage ............
Prior
17,000
17,000
4,000
3,200
1,000
1,000
22,000
21,200
Labor
17,000
800
1,000
18,800
Overhead
17,000
800
1,000
18,800
(2)
Work in ProcessAssembling Department ..............

Work in ProcessCutting Department .............
54,000
8,550

Work in ProcessAssembling Department .....
255,000
3,000
12,000
62,550
270,000
Chapter 7
7-21
P7-5
(1)
Hulvey Brewery Company

Mixing and Brewing Department
For January
Quantity Schedule
Transferred to Canning Department......
Lost in process .......................................
Materials
100%
Labor
40%

Materials .....................................................................................
Labor.........................................................................................
Materials .....................................................................................
Labor...........................................................................................

Transferred to Canning Department......
Materials ............................................
Labor ..................................................
Units
28,000
%
Complete
100%
6,000
6,000
6,000
100%
40%
40%
Overhead
40%
Quantity
4,000
36,000
40,000
28,000
6,000
6,000
40,000
Total
Cost
$ 600
88
128
$ 816
Equivalent
Units*
$4,840
824
1,088
$6,752
$7,568
34,000
30,400
30,400
$.16
.03
.04
$.23
Unit Cost
$.23
$.16
.03
.04
Unit
Cost**
Total Cost
$6,440
$960
72
96
1,128
$7,568
Equivalent units transferred out................................

Equivalent units in ending inventory ........................
Total equivalent units .................................................
Materials
28,000
6,000
34,000
Labor
28,000
2,400
30,400
Overhead
28,000
2,400
30,400
7-22
Chapter 7
P7-5 (Continued)
Hulvey Brewery Company
Canning Department
For January
Quantity Schedule
Received from Mixing and
Brewing Department ........................
Spoiled in process .................................
Materials
Labor
Quantity
2,000
28,000
30,000
100%
100%
60%
80%

Materials ....................................................................................
Labor...........................................................................................
Materials ....................................................................................
Labor ..........................................................................................

Cost from preceding department ...
Materials ...........................................
Labor .................................................
Factory overhead .............................
Cost from preceding department ...
Materials ...........................................
Labor .................................................
Overhead
60%
80%
25,000
1,000
4,000
30,000
Total
Cost
$ 550
190
75
150
$ 965
Equivalent
Units*
Unit
Cost**
$ 6,440
1,520
789
1,578
$10,327
$11,292
30,000
30,000
28,800
28,800
$.233
.057
.030
.060
$.380
Units
25,000
%
Complete
100%
Unit Cost
$.380
4,000
4,000
4,000
4,000
100%
100%
80%
80%
$.233
.057
.030
.060
$932
228
96
192
1,000
1,000
1,000
1,000
100%
100%
60%
60%
$.233
.057
.030
.060
$233
57
18
36
Total Cost
$ 9,500
1,448
344
$11,292
Chapter 7
7-23
P7-5 (Concluded)
Prior
25,000
25,000
1,000
1,000
Equivalent units of spoilage ............
4,000
4,000
30,000
30,000
Labor
25,000
600
3,200
28,800
Overhead
25,000
600
3,200
28,800
(2)
Work in ProcessCanning Department ....................

Work in ProcessMixing and
Brewing Department .................................
6,440

Work in ProcessCanning Department ..........
9,500
1,448
6,440
10,948
7-24
Chapter 7
P7-6 APPENDIX
(1)
Hadenville Tool Company

Fabricating Department
For April
Quantity Schedule
Materials
100%
Labor
70%
100%
100%
40%
60%

Materials .....................................................................................
Labor...........................................................................................
Materials .....................................................................................
Labor ..........................................................................................
Overhead
70%
40%
60%
Quantity
2,000
9,000
11,000
9,000
1,500
500
11,000
Total
Cost
$ 1,900
340
1,020
$ 3,260
Equivalent
Units*
Unit
Cost**
$ 9,180
2,125
6,375
$17,680
$20,940
9,000
8,500
8,500
$1.02
.25
.75
$2.02
Chapter 7
7-25
P7-6 APPENDIX (Continued)

Transferred to Finishing Department:
From beginning inventory ..............
Labor .....................................
Total cost transferred to Finishing
Department ................................
Materials ............................................
Labor ..................................................
Factory overhead .............................
Materials ...........................................
Labor ..................................................
Units
Current %
Unit Cost
Total Cost
$3,260
2,000
2,000
7,000
30%
30%
100%
$ .25
.75
$2.02
150
450
$ 3,860
14,140
$18,000
500
500
500
100%
60%
60%
$1.02
.25
.75
$ 510
75
225
1,500
1,500
1,500
100%
40%
40%
$1.02
.25
.75
$1,530
150
450
810
2,130
$20,940
To complete beginning inventory .......................

Started and completed this period.....................
Ending inventory ..................................................
Spoiled units ........................................................
Total equivalent units .........................................
Materials
0
7,000
1,500
500
9,000
Labor
600
7,000
600
300
8,500
Overhead
600
7,000
600
300
8,500
7-26
Chapter 7

Hadenville Tool Company
For April
Quantity Schedule
Received from Fabricating Department
Materials
100%
Labor
40%
Overhead
40%
100%
100%
60%
100%
60%
100%

Materials .....................................................................................
Labor ..........................................................................................
Materials .....................................................................................
Labor ..........................................................................................
Quantity
3,000
9,000
12,000
9,900
2,000
100
12,000
Total
Cost
$ 6,100
3,500
520
780
$10,900
Equivalent
Units*
Unit
Cost**
$18,000
10,800
4,000
6,000
$38,800
$49,700
9,000
9,000
10,000
10,000
$2.00
1.20
.40
.60
$4.20
Chapter 7
7-27
P7-6 APPENDIX (Concluded)

Transferred to Finished Goods:
Labor .....................................
Total cost transferred to Finished Goods
Transferred to Spoiled Goods Inventory
at salvage value ...............................
Work in Process, ending inventory
Materials ............................................
Labor ..................................................
Units
Current %
Unit Cost
Total Cost
$10,900
3,000
3,000
6,900
60%
60%
100%
100
$ .40
.60
$4.20
720
1,080
$1.00
100
100
100%
2,000
2,000
2,000
2,000
100%
100%
60%
60%
$12,700
28,980
$41,680
100
$4.20
1.00
420
100
$2.00
1.20
.40
.60
$ 4,000
2,400
480
720
320
7,600
$49,700

Spoiled units .....................................
Prior
0
0
6,900
6,900
2,000
2,000
100
100
9,000
9,000
Labor
1,800
6,900
1,200
100
10,000
Overhead
1,800
6,900
1,200
100
10,000
(2)

Work in ProcessFabricating Department ......
18,000
810

41,680
100
320
18,810
42,100
7-28
Chapter 7
P7-7 APPENDIX
(1)
Carlton Chemical Company

Distillation Department
For June
Quantity Schedule
Ending inventory. ....................................
Lost in process........................................
Materials
100%
Labor
20%
100%
80%

Materials ....................................................................................
Labor...........................................................................................
Factory overhead.....................................................................
Coat added during current period:
Materials ....................................................................................
Labor ..........................................................................................
Overhead
20%
80%
Quantity
4,000
16,000
20,000
14,000
2,000
4,000
20,000
Total
Cost
$ 3,624
96
480
$ 4,200
Equivalent
Units*
Unit
Cost**
$10,800
1,480
7,400
$19,680
$23,880
12,000
14,800
14,800
$ .90
.10
.50
$1.50
Chapter 7
7-29

Transferred to Refining Department:
Labor .....................................
Refining Department ..................
Materials ............................................
Labor ..................................................
Units
Current %
Unit Cost
Total Cost
$4,200
4,000
4,000
10,000
80%
80%
100%
$ .10
.50
$1.50
320
1,600
$ 6,120
15,000
$21,120
2,000
2,000
2,000
100%
80%
80%
$ .90
.10
.50
$1,800
160
800
2,760
$23,880
To complete beginning inventory .......................

Started and completed this period.....................
Ending inventory ..................................................
Total equivalent units...........................................
Materials
0
10,000
2,000
12,000
Labor
3,200
10,000
1,600
14,800
Overhead
3,200
10,000
1,600
14,800
7-30
Chapter 7

Carlton Chemical Company
Refining Department
For June
Quantity Schedule
Received from Distillation Department .
Lost in process .......................................
Materials
100%
Labor
50%
100%
30%
Overhead
50%
30%
Quantity
2,000
14,000
16,000
12,000
2,000
2,000
16,000

Materials ....................................................................................
Labor ..........................................................................................
Total cost in beginning inventory.......................................
Materials .....................................................................................
Labor...........................................................................................
Total
Cost
$ 3,500
240
160
900
$ 4,800
Equivalent
Units*
Unit
Cost**
$21,120
1,440
1,740
10,440
$34,740
$39,540
12,000
12,000
11,600
11,600
$1.76
.12
.15
.90

Transferred to Finished Goods:.............
Labor ....................................
Total cost transferred to Finished
Goods ..........................................
Materials ............................................
Labor ..................................................
Unit Cost
Units
Current %
$2.93
Total Cost
$4,800
2,000
2,000
10,000
50%
50%
100%
$ .15
.90
$2.93
150
900
$ 5,850
29,300
$35,150
2,000
2,000
2,000
2,000
100%
100%
30%
30%
$1.76
.12
.15
.90
$3,520
240
90
540
4,390
$39,540
Chapter 7
7-31
P7-7 APPENDIX (Concluded)


Prior
0
0
10,000
10,000
2,000
2,000
12,000
12,000
Labor
1,000
10,000
600
11,600
Overhead
1,000
10,000
600
11,600
(2)
Work in ProcessRefining Department ....................

Work in ProcessDistillation Department .......
21,120

Work in ProcessRefining Department ...........
35,150
21,120
35,150
7-32
Chapter 7
CASES
C7-1
Although improvement in product quality was clearly a stated goal at Star Disk
Corporation, the companys reward structure suggests otherwise. Employees
cannot be expected to put quality first if rewards are dispensed for achieving
objectives that are often in conflict with quality improvement (i.e., short-run
production volume goals). The quality improvement effort seems to have been
focused solely on manufacturing activity, and the approach taken seems to
have been to improve quality by inspecting it into the product. Such an
approach is inadequate, because it waits too late in the process (i.e., after costs
have been incurred in manufacturing defective products, instead of before) and
focuses on only one piece of the problem rather than the whole problem.
In order to turn the problem around, top management must become
actively involved. The reward structure should be changed to ensure compatibility with quality goals. Quality teams that include employees from all business
functions (product design as well as manufacturing) and all levels (labor as well
as management) should be created to help identify quality problems and find
ways to solve the identified problems. Top management should actively participate in these teams in order to emphasize the importance of quality, coordinate
efforts between organization units, and provide direction. Employees are more
likely to become motivated when they understand the importance of quality,
and top management participation and leadership underscore that importance.
In addition, all employees must refocus their efforts on serving their respective
customers. The data presented in the case suggest that managers from the different departments put all their attention on meeting production volume goals
rather than on meeting the needs of their customers (i.e., the department
receiving their output).
Although product inspection should be continued, emphasis should be
shifted to preventing poor quality rather than detecting it. Prevention should
start with product design and extend throughout the entire manufacturing
process. Some things to be considered include:
(a) reducing the number of parts required in the product;
(b) using higher quality materials;
(c) using standardized parts;
(d) using well-known production technologies where possible;
(e) minimizing retoolings;
(f)
increasing employee training;
(g) reorganizing the manufacturing facility from production departments to
manufacturing cells to promote teamwork and decrease inventory costs;
(h) upgrading or modifying machinery;
(i)
installing a statistical process control system to monitor production quality and reduce production variability.
Chapter 7
7-33
C7-1 (Concluded)
A few of the biggest and most urgent problems should be identified and
tackled. In order to achieve results, effort should be concentrated on a few
costly problems that can be solved. Tackling too many problems results in dispersed efforts and little observable accomplishment. Improving quality takes
time and never ends. The company and its employees need some successes to
build confidence and create the momentum needed to turn the quality problem
around.
C7-2
Product cost may be increasing as a result of an increasing amount of scrap,

spoilage, and rework. Since the costs of these internal failures are not measured, management cannot evaluate the significance of the problem. In addition,
since these costs are not measured, employees have no incentive to reduce or
eliminate them. Treating scrap, spoilage, and rework as a normal production
cost encourages such waste. As a consequence, overall costs rise. The companys cost accountants should develop a system of determining the cost of
scrap, spoilage, and rework; implement the system (i.e., begin measuring such
costs); and report these costs to responsible managers. If the cost of scrap,
spoilage, and rework is high, management should initiate a quality improvement program that concentrates on preventing these internal failures. This may
involve organizing employee quality teams to identify problems and develop
solutions, locating new vendors to obtain higher quality materials, redesigning
products to improve quality, modifying or upgrading manufacturing machinery,
training or retraining employees, and/or reorganizing the production processes.

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CHAPTER 7

find better ways of doing things.

are often quite high and often result from

Accounts Receivable ...................................................

Accounts Receivable ...................................................

Accounts Receivable ...................................................

Accounts Receivable ...................................................

Spoiled Goods Inventory .............................................

$27,000 total job cost/1,000 chairs = $27 cost per chair

Spoiled goods inventory ($100 100 units) ..............

Factory Overhead Control ...........................................

Finished Goods Inventory ...........................................

Cost of Goods Sold......................................................

Accounts Receivable ($73,500 150%) .....................

Transferred to Finishing Department ....

Cost Charged to Department

% Complete Unit Cost

Equivalent units transferred out.........................

Work in ProcessFinishing Department...................

Transferred to Finished Goods ..............

Cost Charged to Department

% Complete Unit Cost

Equivalent units transferred out ............

Finished Goods Inventory ...........................................

Carver Petroleum Inc.

Cost Charged to Department

% Complete Unit Cost

Equivalent units transferred out .....

Work in ProcessRefining Department ....................

Cost Charged to Department

Cost Accounted for as Follows

E7-10 APPENDIX (Concluded)

To complete beginning inventory ............................

Work in ProcessFinishing Department...................

Matrix Furniture Company

Cost Charged to Department

E7-11 APPENDIX (Concluded)

To complete beginning inventory ...

Finished Goods Inventory ...........................................

Lanai Pop Inc.

Cost Charged to Department

Total cost added during current period............................

Cost Accounted for as Follows

E7-12 APPENDIX (Concluded)

To complete beginning inventory ...

Work in ProcessBottling Department .....................

Spoiled Goods Inventory (200 units $1.75).............

Accounts Receivable ($550 + $350)............................

$90,000 total job cost = $18 per unit

Cost of Goods Sold......................................................

Accounts Receivable ($86,400 140%) .....................

Spoiled Goods Inventory (200 units $15 salvage)

Cost of Goods Sold......................................................

Accounts Receivable ($87,000 140%) .....................

Factory Overhead Control ...........................................

Cost of Goods Sold......................................................

Accounts Receivable ($200,000 150%) ...................

Cost of Goods Sold......................................................

Accounts Receivable ($202,000 150%) ...................

Cost Charged to Department

% Complete Unit Cost

Equivalent units transferred out.........................

Transferred to Finished Goods Inventory