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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.

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 failures—such as scrap, spoilage, rework,
and downtime—will decline by a larger
amount than the increase in prevention costs.
Quality costs should be measured and

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.


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Chapter 7

7-3

EXERCISES
E7-1
(1)
(2)
(3)
(4)

E7-2


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

Factory Overhead Control ...........................................
Materials (100 units × $1.50)...............................

Materials (1,000 units × $1).................................
Payroll (1,000 units × 1/6 hour × $15) ................
Applied Factory Overhead (1,000 × 1/6 × $30)..

8,500

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


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Chapter 7

7-5

E7-7

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
Transferred to Finishing Department ....
Charge to Factory Overhead for spoilage:
Materials ............................................
Labor ..................................................
Factory overhead ..............................
Work in Process, ending inventory:
Materials ............................................
Labor ..................................................
Factory overhead ..............................
Total cost accounted for ........................

Units
8,000

Overhead

50%
100%

Quantity
1,000
9,000

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

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 Process—Finishing Department...................
Factory Overhead Control ...........................................
Work in Process—Forming Department ..


100%

20%
100%

20%
100%

Transferred to Finished Goods ..............
Ending inventory .....................................
Spoiled in process ..................................

Cost Charged to Department
Beginning inventory:
Cost from preceding department.............................................
Materials .....................................................................................
Labor...........................................................................................
Factory overhead.......................................................................
Total cost in beginning inventory ....................................
Cost added during current period:
Cost from preceding department.............................................
Materials ....................................................................................
Labor...........................................................................................
Factory overhead ......................................................................
Total cost added during current period ...........................
Total cost charged to department ..................................................
Cost Accounted for as Follows
Transferred to Finished Goods ..............
Transferred to Spoiled Goods inventory
at salvage value ................................

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

% Complete Unit Cost
100%
$27.00

400


4.00
6.00

$ 9,600
1,600
640
960

6,800

12,800
$126,200


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7-8

Chapter 7

E7-8 (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 .............................

Prior
Dept. Cost Materials


102,600
4,000
6,800
113,400


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Chapter 7

E7-9
(1)

7-9

Carver Petroleum Inc.
Cracking Department
Cost of Production Report
For May

Quantity Schedule
Beginning inventory................................
Started in process this period ...............
Transferred to Refining Department......
Ending inventory .....................................
Lost in process .......................................

Materials


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
$


Conversion Cost
49,000
4,200
53,200

** 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 Process—Refining Department ....................
Work in Process—Cracking Department ..........

24,500
24,500


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7-10

Chapter 7

E7-10 APPENDIX
(1)

Suarez Company
Tooling Department
Cost of Production Report

15,000
7,000
3,000
5,000
15,000

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 ..................................................

Total
Cost
$ 1,600
290
950
$ 2,840

Equivalent
Units*

$ 9,750


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


40%

$ .75
.20
.80

$2,250
360
960

8,250

3,570
$24,170


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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 .................................................

12,350
8,250
20,600


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7-12

Chapter 7

E7-11 APPENDIX
(1)

Matrix Furniture Company
Finishing Department
Cost of Production Report
For September

Quantity Schedule
Beginning inventory................................
Received from Fabricating Department
Transferred to Finished Goods ..............
Ending inventory .....................................
Spoiled in process ..................................

Materials
80%

Labor

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

Charge to Factory Overhead for spoilage:
Cost of completed spoiled units .....
Less salvage value of spoiled units
Work in Process, ending inventory:
Cost from preceding department ....
Materials ............................................
Labor ..................................................
Factory overhead ..............................
Total cost accounted for ........................

Units

Current %

Unit Cost

Total Cost
$19,920

1,200
1,200
1,200
3,800

20%
60%
60%
100%

$ 1.00


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 ...
Started and completed this period .
Ending inventory...............................
Spoiled units .....................................


** Cost added during the current period divided by the number of equivalent units of cost added during the current period

(2)

Finished Goods Inventory ...........................................
Spoiled Goods Inventory .............................................
Factory Overhead Control ...........................................
Work in Process—Finishing Department..........

101,200
8,400
5,600
115,200


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7-14

Chapter 7

E7-12 APPENDIX
(1)

Lanai Pop Inc.
Cooking Department
Cost of Production Report
For December



Cost Charged to Department
Beginning inventory:
Cost from preceding department.............................................
Materials .....................................................................................
Labor...........................................................................................
Factory overhead.......................................................................
Total cost in beginning inventory......................................
Cost added during current period:
Cost from preceding department.............................................
Materials ....................................................................................
Labor...........................................................................................
Factory overhead.......................................................................

Total
Cost
$ 2,920
305
140
210
$ 3,575

Equivalent
Units*

$10,850
1,500
2,430
3,645


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




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Chapter 7

7-15

E7-12 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...............................
Total equivalent units .......................

Prior
Dept. Cost Materials
0
2,500
27,000
27,000
8,000
8,000
35,000
37,500

Labor
7,500
27,000

(2)

Spoiled Goods Inventory (200 units × $1.75).............
Factory Overhead Control ...........................................
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) .
Factory Overhead Control ...........................................
Work in Process (200 units × $18 cost).............


120,960
3,000
87,000
121,800


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Chapter 7

7-17

P7-3
(1)

(2)

Factory Overhead Control ...........................................
Materials (100 units × $2)....................................
Payroll (100 units × 1/2 hr × $12 rate) ...............
Applied Factory Overhead
(100 × 1/2 hr × $24 rate) .............................

2,000

Cost of Goods Sold......................................................
Work in Process .................................................

200,000


1,200
202,000
303,000


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7-18

P7-4 (1)

Chapter 7

Billingsley Company
Cutting Department
Cost of Production Report
For April

Quantity Schedule
Beginning inventory................................
Started in process this period ...............
Transferred to Assembling Department
Ending inventory .....................................
Spoiled in process ..................................

Materials

100%
100%


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

.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

*Total number of equivalent units required in the cost accounted for section determined as follows:



7-19

P7-4 (Continued)
Billingsley Company
Assembling Department
Cost of Production Report
For April
Quantity Schedule
Beginning inventory................................
Received from Cutting Department.......

Materials

Labor

Overhead

80%
100%

20%
100%

20%
100%

Transferred to Finished Goods Inventory
Ending inventory .....................................
Spoiled in process ..................................

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

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

800
1,000
18,800

Overhead
17,000
800
1,000
18,800

** 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 Process—Assembling Department ..............
Factory Overhead Control ...........................................
Work in Process—Cutting Department .............

54,000
8,550

Finished Goods Inventory ...........................................
Spoiled Goods Inventory .............................................
Factory Overhead Control ...........................................
Work in Process—Assembling Department .....

255,000
3,000
12,000


Labor

40%

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
Transferred to Canning Department......
Work in Process, ending inventory:
Materials ............................................
Labor ..................................................
Factory overhead ..............................
Total cost accounted for ........................

Units
28,000

%


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



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7-22

Chapter 7

P7-5 (Continued)
Hulvey Brewery Company
Canning Department
Cost of Production Report
For January
Quantity Schedule
Beginning inventory................................
Received from Mixing and
Brewing Department ........................
Transferred to Finished Goods Inventory
Ending inventory .....................................
Spoiled in process .................................

Materials

Labor

Quantity
2,000
28,000
30,000


Materials ...........................................
Labor .................................................
Factory overhead ..............................
Total cost accounted for.........................

Overhead

60%
80%

25,000
1,000
4,000
30,000

Total
Cost
$ 550
190
75
150
$ 965

Equivalent
Units*

Unit
Cost**

$ 6,440

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

1,000
1,000
Equivalent units of spoilage ............
4,000
4,000
Total equivalent units .......................
30,000
30,000

Labor
25,000
600
3,200
28,800

Overhead
25,000
600
3,200
28,800

** 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 Process—Canning Department ....................
Work in Process—Mixing and
Brewing Department .................................


Started this period ..................................
Transferred to Finishing Department ....
Ending inventory .....................................
Spoiled in process ..................................

Materials
100%

Labor
70%

100%
100%

40%
60%

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 .................................................


6,375
$17,680
$20,940

9,000
8,500
8,500

$1.02
.25
.75
$2.02


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Chapter 7

7-25

P7-6 APPENDIX (Continued)
Cost Accounted for as Follows
Transferred to Finishing Department:
From beginning inventory ..............
Cost to complete this period:
Labor .....................................
Factory overhead .................
Started and completed this period .
Total cost transferred to Finishing
Department ................................


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%

Labor
600
7,000
600
300
8,500

Overhead
600
7,000
600
300
8,500

** Cost added during the current period divided by the number of equivalent units of cost added during the current period