CHAPTER 18
Spoilage, Rework, and Scrap
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Basic Terminology
Spoilage: sản phẩm hỏng – units of production that do not
meet the specifications required by customers for good units
and that are discarded or sold for reduced prices
Rework: sản phẩm có thể lm lại – units of production that
do not meet the specifications required by customers but
which are subsequently repaired and sold as good finished
goods
Scrap: phế liệu thu hồi – residual material that results from
manufacturing a product. Scrap has low total sales value
compared with the total sales value of the product
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Basic Terminology
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Inspection Point & Spoilage
Inspection Point – the stage of the production process at
which products are examined to determine whether they are
acceptable or unacceptable units.
Spoilage is typically assumed to occur at the stage of
completion where inspection takes place
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Accounting for Spoilage
Determine the magnitude of spoilage costs
Distinguish between costs of normal and abnormal spoilage
Highlight spoilage costs, not simply folded into production
costs
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Accounting for Spoilage
Beginning WIP
1,500 units
10,000 units
7,000 units
completed
Spoilage
Ending
WIP
1,000
2,000 units
units
8,500 units
started
Abnormal
Normal Spoilage
Spoilage
700 units
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300 units
Accounting for Spoilage
Normal Spoilage occurs as a part of regular operation
of an efficient process. Costs of normal spoilage are
typically included as a component of the costs of good
units manufactured
The normal spoilage rate = 𝑇ℎ𝑒 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑛𝑜𝑟𝑚𝑎𝑙 𝑠𝑝𝑜𝑖𝑙𝑎𝑔𝑒
𝑇𝑜𝑡𝑎𝑙 𝑔𝑜𝑜𝑑 𝑢𝑛𝑖𝑡𝑠 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑒𝑑
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Accounting for Spoilage
Abnormal Spoilage is results of unusual operating problems.
Abnormal spoilage is considered avoidable and controllable.
Abnormal spoilage is recorded as a loss of the period
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Accounting for Spoilage
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Process Costing and Spoilage
The Five-Step Procedure
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
Step 3: Compute Cost per Equivalent Unit
Step 4: Summarize Total Costs to Account For
Step 5: Assign Total Costs to: Units Completed; Spoiled Units; Units
in Ending Work in Process
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Process Costing and Spoilage - Example
Anzio Company manufactures a recycling container in its forming department.
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Process Costing and Spoilage - Example
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WEIGHTED-AVERAGE METHOD & SPOILAGE
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WEIGHTED-AVERAGE METHOD & SPOILAGE
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FIFO METHOD & SPOILAGE
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FIFO METHOD & SPOILAGE
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Process Costing and Spoilage - Example
Journal Entries
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Account for spoilage at various stages of completion
 Spoilage costs vary based on the point at which inspection is
carried out
 The cost of spoiled units equals all costs incurred in producing
them up to the point of inspection
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Account for spoilage at various stages of completion
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Account for spoilage at various stages of completion
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Job Costing and Spoilage
Normal spoilage costs are inventoriable costs. It can be assigned
directly or indirectly to job.
 Normal spoilage attributable to a specific job: that job bears the
cost of the spoilage minus the disposal value of the spoilage
 Normal spoilage common to all Jobs:
the spoilage is allocated
indirectly to the job as manufacturing overhead
Abnormal spoilage costs are written off as costs of the accounting
period
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Job Costing and Spoilage - Example
In the Hull Machine Shop, 5 aircraft parts out of a job lot of
50 aircraft parts are spoiled. The costs assigned prior to the
inspection point are $2,000 per part. When the spoilage is
detected, the spoiled goods are inventoried at $600 per part,
the net disposal value.
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Job Costing and Spoilage - Example
Normal spoilage attributable to a specific job
The costs of 5 spoiled parts: 5 x 2,000 = $10,000
The disposal value of 5 spoiled parts: 5 x 600 = $3,000
The net cost of the normal spoilage: 10,000 – 3,000 = $7,000
The total cost of 45 good parts: 45x2,000 + 7,000 = $97,000
The cost per good part: 97,000/45 = $2,156/part
Entry:
Dr. Materials: 3,000
Cr. Work-in-process: 3,000
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Job Costing and Spoilage - Example
Normal spoilage common to all jobs
Assume: the allocated rate of normal spoilage overhead costs is
$50 per good units
The normal spoilage overhead costs allocated to the job of 45 good
units: 50 x 45 = $2,250
The total cost of 45 good parts: 45x2,000 + 2,250 = $92,250
The cost per good part: 92,250/45 = $2,050/part
Entry:
Dr. Materials: 3,000
Dr. MOH
: 7,000
Cr. Work-in-process: 10,000
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Job Costing and Spoilage - Example
Abnormal Spoilage: If the spoilage is abnormal, the net
loss is charged to the Loss From Abnormal Spoilage account
Entry:
Dr. Materials: 3,000
Dr. Loss from Abnormal Spoilage: 7,000
Cr. Work-in-process: 10,000
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Job Costing and Rework
Three types of rework:
1.
Normal rework attributable to a specific job – the rework
costs are charged to that job
2.
Normal rework common to all jobs – the costs are charged
to manufacturing overhead and spread, through overhead
allocation, over all jobs
3.
Abnormal rework – is charged to the Loss from Abnormal
Rework account that appears on the income statement
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Job Costing and Rework
Normal rework
Dr. WIP
a specific job
allocated
Normal rework
Dr. MOH
attributable to
common to all jobs
Abnormal
rework
Cr.
Cr.
Materials,
Materials,
allocated
Wages
Payable,
MOH
Wages
Payable,
MOH
Dr. Loss from abnormal rework
Cr.
Materials,
allocated
Wages
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Payable,
MOH
Accounting for Scrap
Scrap is recognized in a firm’s accounting records either at the
time of sale or at the time of production.
If scrap is immaterial, it is recognized as revenue when sold.
If scrap is material, the net realizable value of scrap reduces the
cost of a specific job or, when common to all jobs, reduces
Manufacturing Overhead Control
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Accounting for Scrap
Scrap is immaterial
Recognizing Scrap
Recognizing Scrap
at the time of its sale
at the time of its production
Dr Cash/ Acc Receivable
Cr Scrap Revenue
Scrap is immaterial
Scrap Attributable
to a Specific Job
Scrap Common
to all Jobs
Dr. Cash/Acc Receivable
Cr. WIP
Scrap returned to store
Dr . Material
Cr. WIP
Sale of scrap
Dr. Cash / Acc Receivable
Cr. Material
Scrap returned to store
Dr. Material
Dr. Cash/Acc Receivable
Cr MOH
Cr. MOH
Sale of scrap
Dr. Cash / Acc Receivable
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Cr. Material