Henderson Industrial manufactures plastic cartons for local dairies. The historical amount of spoilage that it experiences is 1% of all production. Each spoiled carton consumes plastic resin having a cost of $0.25. Henderson’s cost accountant includes the cost of this resin in the carton bill of materials. The line items in the bill of materials are:
|
Line Item |
Cost |
|
Resin |
$0.2500 |
|
Plastic cap |
0.0200 |
|
Label |
0.0150 |
|
Spoilage |
0.0025 |
|
Total cost |
$0.2875 |
The spoilage line item in the bill of materials is calculated as:
1% Probability of occurrence x $0.25 cost per unit
Henderson then multiplies the total cost in the bill of materials by the number of units produced in the period to calculate its cost of goods sold, thereby incorporating the cost of spoilage into its cost of goods.