Question

Holistic Path Ltd manufactures the "Super" brand of food supplements which is produced in two separate departments sequentially: Mixing, and Packaging. The output from the Mixing department is transferred to the Packaging department for further processing before the finished products are transferred to the Finished Goods store. The following information of process inputs, outputs and work in process relates to the Packaging department for the month of February 2020:
in kg
Opening work in process
21,360
Inputs transferred from Mixing department
88,480
Output completed
78,720
Closing work in process
23,360
The opening and closing work in process are respectively 40 per cent and 70 per cent complete as to conversion costs.
Raw materials are added at the beginning of the manufacturing process. However, conversion costs are incurred evenly throughout the manufacturing process.
Spoilages are assumed to occur at the stage of completion where inspection takes place and these spoilages can be sold at an estimated disposal value $2.00 per kg. All spoilage are assumed to be from units started during the month.
Inspection takes place when the products are 80% complete.
The opening work in process included the transferred-in costs of $97,600 from the Mixing department, raw material costs of $48,720 and conversion costs of $52,480.
Costs incurred during the period were:
Transferred-in costs, Mixing department
$442,400
Raw material input
$265,440
Conversion costs
$324,576
The company uses FIFO method of process costing and assuming that the normal spoilage are 5 per cent of the units inspected.

I have done the questions required from this but i need to know two things:

What is the accounting treatment for Spoilage that can be sold? ( does it reduce the COGS? or it is added as a revenue in Profit and loss?)
Does it include normal and abnormal spoilage?

Answer 1

The treatment is different for normal and abnormal spoilage.

1. Normal spoilage: If normal spoilage has a disposable value, the net dispoable value is credited to the work in process account which in turn reduces the COGS. Net disposal value here is the cost of the spoilage minus the disposal value of the spoilage.

Journal entry:

Materials Control... Dr

Work in process control a/c

2. Abnormal spoilage : Abnormal spoilage is treated separately and not included in the cost of goods manufactured. It is charged to the Profit and Loss at the net disposal cost.

Journal entry:

Profit and Loss ... Dr

Loss from abnormal spoilage

Hope your doubt is clarified. Anything else please comment!