At Smythe Company, normal spoilage is recognized during the budgeting process and classified as a component of manufacturing overhead when determining the overhead rate. Smythe manufactures products that often require specification changes or modifications to meet its customers’ needs. Still, Smythe has been able to establish a normal spoilage rate of 2.5% of normal input. Connie Yetman, one of Smythe’s inspection managers, obtains the following information for Job Number YZ-3675 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. Yetman 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. Yetman was unable to identify a rejection pattern for the remaining 4,100 rejected units. These units can be sold at $8.40 per unit. The total cost for all 122,000 units of Job Number YZ-3675 are presented here. The job has been completed, but the costs have yet to be transferred to finished goods. Direct materials $2,635,200 Direct manufacturing labour $2,196,000 Manufacturing overhead $3,513,600 Total manufacturing costs $8,344,800 REQUIRED: 1. Calculate the unit quantities of normal and abnormal spoilage. 2. Prepare the appropriate journal entry (or entries) to properly account for Job number YZ-3675 including spoilage, disposal, and transfer of costs to finished goods control. 3. Smythe Company has small profit margins and is anticipating very low operating income for the year. The controller, John Beresford, tells Deborah Hope, the management Accountant responsible for Job number YZ-3675 the following: “ This was an unusual job. I think all 5,000 spoiled should be considered normal.” Deborah knows that similar jobs had been done in the past and that the spoilage levels YZ-3675 were much greater than in the past. She feels John 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 number YZ-3675 if the spoilage were considered normal. By how much will Smythe’s operating income be affected if all spoilage is considered normal? B) What should Deborah Hope do?
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