Cost Accounting Procedure
for Defective Work:
In the manufacturing processes, imperfections may arise because of faults in materials, labor, or
machines.
If the unit can be reprocessed on one or more stages and made into a standard saleable product,
it is often profitable to rework the defective units. Although spoiled work cannot usually be made
into a first class finished unit without uneconomical expenditures, defective work can be corrected
to meet specified standards by adding materials, labor, and factory overhead. Two methods of
accounting for the added cost to upgrade the defective work are appropriate, depending upon
circumstances:
If defective work is experienced in regular manufacturing, the additional cost to correct defective
units (based on previous experience) is included in the predetermined factory over head and in
the resulting factory overhead rate. Actual rework cost is charged to factory overhead control.
For example, assume that a company has an order for 500 units of a product that has direct
production costs of $5 for materials and $3 for labor, with factory overhead charged to production
at 200% of labor cost, 50 units are found to be defective and are to be reworked at a total cost of
$30 for materials, $60 for labor, and overhead at 200% of direct labor cost. The journal entries
are:
Work in process Materials
Work in process Labor
Work in process Factory overhead
Materials
Labor
Applied Factory overhead
Factory overhead control
Materials
Labor
Applied Factory overhead
Finished Goods
Work in process Materials
Work in process Labor
Work in process Factory overhead
Dr.
2,500
1,500
3,000
Cr.
2,500
1,500
3,000
210
30
60
120
7,000
2,5000
1,500
3,000
The unit cost of the completed unit is $14 ($7,000 / 500 units)
Suppose, however, that the same company received a special order for 500 units with the
agreement stating that any defective work is charge able to the contract. During production, 50
units are improperly assembled. The total cost to correct these defective units is $30 for
materials, $60 for labor, and 200% of the direct labor cost for factory overhead. The entries in this
case are:
Work in process Materials
Work in process Labor
Work in process Factory overhead
Materials
Labor
Applied Factory overhead
Work in process Materials
Work in process Labor
Work in process Factory overhead
Materials
Labor
Applied Factory overhead
Finished Goods
Work in process Materials
Work in process Labor
Work in process Factory overhead
Dr.
2,500
1,500
3,000
Cr.
2,500
1,500
3,000
30
60
120
30
60
120
7,210
2,530
1,560
3,120
The unit cost in this case is$14.42 instead of $14
Whenever the defective work cost is charged directly to the job, a slight overcharge of factory
overhead results because of the inclusion of rework cost in the factory overhead rate. One
remedy to correct this discrepancy would be either to create a new independent overhead rate or
to separate costs for the special job.