Question:
Job-costing spoilage and scrap. MetalWorks, Inc., manufactures various metal parts in batches as ordered by customers, and accounts for them using job costing. Job 2346-8, a large job for customer X, incurred $240,000 of direct materials costs and $620,000 of direct labor costs. MetalWorks applies overhead at a rate of 150% of direct labor cost. MetalWorks quoted customer X a fixed price for the job of $2,000,000.
The job consisted of 90,000 good units and 10,000 spoiled units with no rework or disposal value. The job also created 200 pounds of scrap which can be sold for $3 per pound.
1. Calculate the gross margin MetalWorks will earn for this job, assuming the scrap sale is treated as material, and
a. all spoilage is considered abnormal.
b. normal spoilage is 8% of good units.
c. normal spoilage is 12% of good units.
2. How would your answer to number 1 differ if the scrap sale is treated as immaterial?