Spoilage, Rework, and Scrap
Chapter 18
4-2
Spoilage, Rework & Scrap
1. Spoilage—units of production, either fully or
partially completed, that do not meet the
specifications required by customers for good units
and that are discarded or sold for reduced prices
2. Rework—units of production that do not meet the
specifications required by customers but which are
subsequently repaired and sold as good finished
goods.
3. Scrap—residual material that results from
manufacturing a product. Scrap has low total sales
value compared with the total sales value of the
product.
4-3
Spoilage
Normal spoilage
▫ For individual job - charge to job
▫ As part of normal operations - charge to overhead
Abnormal spoilage
▫ Charge to loss account
4-4
The Five-Step Procedure for Process
Costing with Spoilage
• Step 1: Summarize the flow of Physical Units of
Output – identify both normal and abnormal
spoilage
• Step 2: Compute Output in Terms of Equivalent
Units. Spoiled units are included in the
computation of output units
4-5
The Five-Step Procedure for Process
Costing with Spoilage
•
•
•
Step 3: Compute Cost per Equivalent Unit
Step 4: Summarize Total Costs to Account For
Step 5: Assign Total Costs to:
1. Units Completed
2. Spoiled Units
3. Units in Ending Work in Process
4-6
Spoilage – Weighted average Example
Work in process, May 1: 1,500 units
Materials:
100% complete.
Conversion: 60% complete.
Production started during May:
Good units completed during May:
$
12,000
9,000
8,500 units
7,000 units
Costs added to production in May
Materials cost
Conversion cost
$ 76,500
89,100
Work in process, May 31: 2,000 units
Materials
100% complete.
Conversion
50% complete.
Normal spoilage as a percentage of good units
10%
4-7
Spoilage – Weighted average Example
Section 1: Quantity Schedule with Equivalent Units
Work in process, Beginning
Started into production
To account for:
Equivalent units
Materials
Conversion
Good units completed and transferred
Normal spoilage
Abnormal spoilage
Work in process, ending
Accounted for
Work done to date
4-8
Spoilage – Weighted average Example
Section 2: Compute cost per equivalent unit
Total
Cost
Work in process, beginning
Costs added in current period
Total cost to account for:
Equivalent units of work done to date
Cost per equivalent unit
Materials
Conversion
4-9
Spoilage– Weighted average Example
Section 3: Cost Reconciliation
Total
Cost
Good units completed & transferred out
Cost before adding normal spoilage
Normal spoilage
Total costs of good units
Abnormal spoilage
Work in process, ending
Total cost accounted for
Materials
Conversion
4-10
Normal spoilage attributable to a
specific job – Journal entry
• 5 units out of a job lot of 50 units are spoiled.
Costs assigned prior to the inspection point are
$2,000 per unit. When the spoilage is detected,
the spoiled goods are inventoried at $600 per
unit, the net disposal value.
4-11
Normal spoilage common to all jobs –
Journal entry
• 5 units out of a job lot of 50 units are spoiled.
Costs assigned prior to the inspection point are
$2,000 per unit. When the spoilage is detected,
the spoiled goods are inventoried at $600 per
unit, the net disposal value.
4-12
Abnormal spoilage – Journal entry
• 5 units out of a job lot of 50 units are spoiled.
Costs assigned prior to the inspection point are
$2,000 per unit. When the spoilage is detected,
the spoiled goods are inventoried at $600 per
unit, the net disposal value.
4-13
Rework & Scrap
1. If rework costs are tracked, they are recorded
similarly to spoilage.
2. Scrap is recorded at time of production or time
of sale.
3. Sale of scrap can be credited to individual jobs
or to overhead
4-14
End of Chapter 18