Richmond Company manufactures products that often require specification changes or modifications to meet customers’ needs. Still, Richmond has been able to establish a normal spoilage rate of 2.5% of normal input. Normal spoilage is recognized during the budgeting process and classified as a component of manufacturing overhead when determining the overhead rate.
Rose Drummond, one of Richmond’s inspection managers, obtains the following information for Job No. R1192-122 that was recently completed. A total of 122,000 units were started, and 5,000 units were rejected at final inspection yielding 117,000 good units.
Drummond noted that 900 of the first units produced were rejected because of a design defect that was considered very unusual; this defect was corrected immediately, and no further units were rejected for this reason. These units were disposed of after incurring an additional cost of $1,440. Drummond was unable to identify a rejection pattern for the remaining 4,100 rejected units. These units can be sold at $8.40 per unit.
750 CHAPTER 18 Direct materials......... $2,635,200
Direct manufacturing labour............. 2,196,000
Manufacturing overhead............... 3,513,600
Total manufacturing costs.............. $8,344,800
The total costs for all 122,000 units of Job No. R1192-122 are presented here. The job has been completed, but the costs have yet to be transferred to Finished Goods.
1. Calculate the unit quantities of normal and abnormal spoilage.
2. Prepare the appropriate journal entry (or entries) to properly account for Job No. R1192-122,including spoilage, disposal, and transfer of costs to Finished Goods Control.
3. Richmond Company has small profit margins and is anticipating very low operating income for the year. The controller, Thomas Rutherford, tells Martha Perez, the management accountant responsible for Job No. R1192-122, the following: “This was an unusual job. I think all 5,000 spoiled units should be considered normal.” Martha knows that similar jobs had been done in the past and that the spoilage levels for Job R1192-122 were much greater than in the past. She feels Thomas made these comments because he wants to show higher operating income for the year.
a. Prepare the journal entry (or entries), similar to the journal entry (or entries) prepared in requirement 2, to account for Job No. R1192-122 if all spoilage were considered normal. By how much will Richmond’s operating income be affected if all spoilage I considered normal?
b. What should Martha Perez do?