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When is a company justified in inventorying scrap?

Short Answer

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A company is justified in inventorying scrap when the scrap materials have high value, there is potential for reusing or recycling the materials, legal or regulatory requirements mandate it, the company generates a significant amount of scrap materials regularly, and inventorying scrap influences its financial statements. These factors can help a company better manage resources, comply with regulations, and provide an accurate representation of its financial health.
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Step 1: 1. High value of scrap materials

If the scrap materials have relatively high value, it makes sense for a company to include them as part of their inventory. This is because these materials can be sold, reused, or recycled and contribute to the company's revenue.

Step 2: 2. Potential for reusing or recycling

If a company can reuse or recycle the scrap materials in its operations, it may be justified in inventorying the scrap as part of its inventory. This can help the company save money on purchasing new raw materials and make better use of available resources.

Step 3: 3. Legal and regulatory requirements

Some industries have legal and regulatory requirements to account for and manage their waste and scrap materials. In such cases, inventorying scrap may be necessary for compliance with these regulations and to avoid potential fines or penalties.

Step 4: 4. Frequent generation of scrap materials

If a company generates a significant amount of scrap materials on a regular basis, it may be justified in inventorying the scrap. This can help the company better track and manage these materials, as well as plan for their disposal, recycling, or sale.

Step 5: 5. Influence on financial statements

Depending on the total value and turnover of the scrap materials, inventorying them can have a considerable impact on the company's financial statements. By inventorying the scrap, a company can provide a more accurate representation of its assets, liabilities, and overall financial health. In conclusion, a company is justified in inventorying scrap when the value of the scrap materials is significant, there is potential for reusing or recycling the materials, it is required by legal or regulatory standards, they generate a substantial amount of scrap materials regularly, and it impacts the financial statements. The specific conditions under which inventorying scrap is justified may vary depending on the industry and company's operations.

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Most popular questions from this chapter

Chapter 18

All of the following are accurate regarding the treatment of normal or abnormal spoilage by a firm with the exception of: a. Abnormal spoilage is excluded in the standard cost of a manufactured product. b. Normal spoilage is capitalized as part of inventory cost. c. Abnormal spoilage has no financial statement impact. d. Normal and abnormal spoilage units affect the equivalent units of production.

Chapter 18

The Russell Company has an extensive job-costing facility that uses a variety of metals. Consider each requirement independently. 1\. Job 372 uses a particular metal alloy that is not used for any other job. Assume that scrap is material in amount and sold for 480 dollars quickly after it is produced. Prepare the journal entry. 2\. The scrap from Job 372 consists of a metal used by many other jobs. No record is maintained of the scrap generated by individual jobs. Assume that scrap is accounted for at the time of its sale. Scrap totaling 4,500 dollars is sold. Prepare two alternative journal entries that could be used to account for the sale of scrap. 3\. Suppose the scrap generated in requirement 2 is returned to the storeroom for future use, and a journal entry is made to record the scrap. A month later, the scrap is reused as direct material on a subsequent job. Prepare the journal entries to record these transactions.

Chapter 18

Jellyfish Machine Shop is a manufacturer of motorized carts for vacation resorts. Patrick Cullin, the plant manager of Jellyfish, obtains the following information for Job #10 in August 2017\. A total of 46 units were started, and 6 spoiled units were detected and rejected at final inspection, yielding 40 good units. The spoiled units were considered to be normal spoilage. Costs assigned prior to the inspection point are 1,100 dollars per unit. The current disposal price of the spoiled units is 235 dollars per unit. When the spoilage is detected, the spoiled goods are inventoried at 235 dollars per unit. 1\. What is the normal spoilage rate? 2\. Prepare the journal entries to record the normal spoilage, assuming the following: a. The spoilage is related to a specific job. b. The spoilage is common to all jobs. c. The spoilage is considered to be abnormal spoilage.

Chapter 18

In the shipping department of World Class Steaks, conversion costs are added evenly during the process, and direct materials are added at the end of the process. Spoiled units are detected upon inspection at the end of the process and are disposed of at zero net disposal value. All completed work is transferred to the next department. The transferred-in costs for May equal the total cost of good units completed and transferred out in May from the prep department, which were calculated in Problem \(18-35\) using the weighted- average method of process costing. Summary data for May follow. For the shipping department, use the weighted-average method to summarize the total costs to account for and assign those costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.

Chapter 18

"Normal spoilage is planned spoilage." Discuss.

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