Spoilage, Rework, and Scrap Chapter 18
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 1 Learning Objective 1 Distinguish among spoilage, rework, and scrap.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 2 Terminology Spoilage refers to unacceptable units discarded or sold for reduced prices. Rework is units that are repaired. Scrap is material left over.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 3 Learning Objective 2 Describe the accounting procedures for normal and abnormal spoilage.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 4 Normal Spoilage Normal spoilage is spoilage that is an inherent result of the particular production process and arises even under efficient operating conditions. Normal spoilage rates should be computed using total good units completed as the base, not total actual units started in production.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 5 Abnormal Spoilage Abnormal spoilage is spoilage that should not arise under efficient operating conditions. Companies record the units of abnormal spoilage and keep a separate Loss from Abnormal Spoilage account.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 6 Process Costing and Spoilage Example Big Mountain, Inc., manufactures skiing accessories. All direct materials are added at the beginning of the production process. In October, $95,200 in direct materials were introduced into production. Assume that 35,000 units were started, 30,000 good units were completed, and 1,000 units were spoiled (all normal spoilage).
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 7 Process Costing and Spoilage Example Ending work in process was 4,000 units (each 100% complete as to direct material costs). Spoilage is detected upon completion of the process. Spoilage is typically assumed to occur at the stage of completion where inspection takes place.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 8 Process Costing and Spoilage Example Approach A recognizes spoiled units when computing output in equivalent units. Approach B does not count spoiled units when computing output in equivalent units.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 9 Approach A Example Costs to account for Divide by equivalent units Cost per equivalent unit Good units completed: 30,000 × $2.72 Add normal spoilage: 1,000 × $2.72 Costs of good units transferred out Work in process: 4,000 × $2.72 Costs accounted for ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster $95,200 35,000 $ 2.72 $81,600 2,720 $84,320 10,880 $95,200
18 ­ 10 Approach B Example Costs to account for Divide by equivalent units Cost per equivalent unit Good units completed: 30,000 × $2.80 Costs of good units transferred out Work in process, ending: 4,000 × $2.80 Costs accounted for $95,200 34,000 $ 2.80 $84,000 $84,000 11,200 $95,200
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 11 Learning Objective 3 Account for spoilage in process costing using the weighted­average method.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 12 Weighted­Average: Spoilage The following example is for the month of November and relates to Big Mountain, Inc. Direct materials are introduced at the beginning of the production cycle. Conversion costs are added evenly during the cycle.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 13 Weighted­Average: Spoilage Normally the spoiled units are 2% of the output. Assume that Big Mountain, Inc., had 1,000 units in the beginning work in process inventory, 100% complete for materials ($9,700), and 60% complete for conversion ($10,000).
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 14 Weighted­Average: Spoilage Ending work in process inventory was 4,000 units (100% materials and 20% conversion). Costs added during the month were $87,500 for materials and $72,000 for conversion. What are the costs assigned to the units completed, spoiled, and in ending work in process inventory?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 15 Physical Units (Step 1) Work in process, beginning (November 1) 100% material, 60% conversion costs 1,000 Started during November: 35,000 36,000 Good units completed and transferred out: 31,000 Work in process, ending inventory: 100% material 20% conversion costs 4,000 35,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 16 Physical Units (Step 1) What is the number of spoiled units? 36,000 – 35,000 = 1,000 What is the normal spoilage? 31,000 × 2% = 620 What is the abnormal spoilage? 1,000 – 620 = 380
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 17 Compute Equivalent Units (Step 2) Materials Conversion Completed and transferred 31,000 31,000 Normal spoilage 620 620 Abnormal spoilage 380 380 Ending inventory 4,000 800 Equivalent units 36,000 32,800 100% 20%
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 18 Compute Equivalent Unit Costs (Step 3) Beginning inventory Current costs Total Equivalent units Cost per unit Materials Conversion $ 9,700 $10,000 87,500 72,000 $97,200 $82,000 36,000 32,800 $2.70 $2.50
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 19 Summarize Total Costs (Step 4) Work in process beginning inventory: Materials $ 9,700 Conversion 10,000 Total beginning inventory $ 19,700 + Current costs: Materials Conversion = Costs to account for $87,500 72,000 $179,200
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 20 Assign Total Costs (Step 5) Good units completed and transferred out (31,000 units): Costs before adding normal spoilage: 31,000 × ($2.70 + $2.50) $161,200 Normal spoilage: 620 × ($2.70 + $2.50) 3,224 Total $164,424
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 21 Assign Total Costs (Step 5) Abnormal spoilage: 380 × ($2.70 + $2.50) $ 1,976 Work in process, ending (4,000 units): Direct materials (4,000 × $2.70) $10,800 Conversion (800 × $2.50) 2,000 Total $12,800
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 22 Assign Total Costs (Step 5) Costs of units completed and transferred out (including normal spoilage) $164,424 Cost of abnormal spoilage 1,976 Costs in ending inventory 12,800 Total costs accounted for $179,200 The $1,976 cost of abnormal spoilage is assigned to the Loss from Abnormal Spoilage account.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 23 Learning Objective 4 Account for spoilage in process costing using the first­in, first­out (FIFO) method.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 24 Physical Units (Step 1) Work in process, beginning (November 1): 100% material, 60% conversion costs 1,000 Started during November 35,000 36,000 Good units completed and transferred out: From beginning inventory 1,000 Started and completed 30,000 31,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 25 Physical Units (Step 1) Work in process, ending inventory: 100% material, 20% conversion costs 4,000 Normal spoilage 620 Abnormal spoilage 380
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 26 Compute Equivalent Units (Step 2) Materials Conversion Good units completed and transferred out: From beginning inventory Started and completed Normal spoilage Abnormal spoilage Ending inventory Equivalent units 0 30,000 620 380 4,000 35,000 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 400 30,000 620 380 800 32,200
18 ­ 27 Compute Equivalent Unit Costs (Step 3) Materials Current costs $87,500 Divided by equivalent units 35,000 Cost per unit $2.50 *$2.236 (rounded)
Conversion $72,000 32,200 $2.236* ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 28 Summarize Total Costs (Step 4) Work in process beginning inventory: Materials $ 9,700 Conversion 10,000 Total beginning inventory $ 19,700 + Current costs: Materials Conversion = Costs to account for: $ 87,500 72,000 $179,200
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 29 Assign Total Costs (Step 5) Good units completed and transferred out: From beginning inventory: Work in process Conversion costs added in current period (400 × $2.236) Total Started and completed: 30,000 × ($2.50 + $2.236) $ 19,700.00 894.40 $ 20,594.40 $142,080.00
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 30 Assign Total Costs (Step 5) Costs before adding normal spoilage: ($20,594.40 + $142,080.00) $162,674.40 Normal spoilage: 620 × ($2.50 + $2.236) Total 2,936.32 $165,610.72
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 31 Assign Total Costs (Step 5) Abnormal spoilage: 380 × ($2.50 + $2.236) $1,799.68 Work in process, ending (4,000 units): Direct materials (4,000 × $2.50) $10,000 Conversion (800 × $2.236) 1,789 Total $11,789
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 32 Assign Total Costs (Step 5) Costs of units completed and transferred out (including normal spoilage) $165,610.72 Cost of abnormal spoilage 1,799.68 Costs in ending inventory 11,789.00 Total costs accounted for $179,200.00 The $1,799.68 costs of abnormal spoilage are assigned to the Loss from Abnormal Spoilage account.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 33 Learning Objective 5 Account for spoilage in process costing using the standard­costing method.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 34 Standard­Costing: Spoilage The standard­costing method makes calculating equivalent unit costs unnecessary and so simplifies process costing.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 35 Journal Entries Assume that the completed units are transferred to Finished Goods. What are the journal entries? Finished Goods XXX Work in Process XXX To transfer good units completed in November
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 36 Journal Entries Loss from Abnormal Spoilage XXX Work in Process XXX To recognize abnormal spoilage detected in November
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 37 Learning Objective 6 Account for spoilage in job costing.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 38 Job Costing: Spoilage With a job­costing system, companies can decide to assign normal spoilage to specific jobs. Alternatively, they can allocate normal spoilage to all jobs as part of manufacturing overhead. Loss from abnormal spoilage is recorded as a cost of the period.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 39 Job Costing: Spoilage Assume that 5 parts out of 40 parts of Whitefish Machine Shop’s Job #10 are spoiled (normal). Costs assigned prior to the inspection point are $1,000 per part. The current disposal price of the spoiled parts is $200 per part. When the spoilage is detected, the spoiled goods are inventoried at $200 per part.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 40 Job Costing: Spoilage Normal spoilage attributable to a specific job: When normal spoilage occurs because of the specifications of a particular job, that job bears the cost of the spoilage reduced by the current disposal value of that spoilage. What is the journal entry?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 41 Job Costing: Spoilage Materials Control (spoiled goods at current disposal value): 5 × $200 1,000 Work in Process Control (Job #10) 1,000 To recognize disposal value of spoiled parts
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 42 Job Costing: Spoilage Work in Process (Job # 10) Parts 40,000 Parts 1,000 (40 × $1,000) (5 × $200) Balance 39,000 What is the total cost of the 35 good units? (35 × $1,000) + (5 × $800) = $39,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 43 Job Costing: Spoilage Normal spoilage common to all jobs: In some cases, spoilage may be considered a normal characteristic of a given production cycle. The spoilage is not charged to a specific job. What is the journal entry?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 44 Job Costing: Spoilage Materials Control (spoiled goods at current disposal value): 5 × $200 1,000 Manufacturing Overhead Control (normal spoilage) 4,000 Work in Process Control (Job #10) 5,000 To recognize spoiled parts
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 45 Job Costing: Spoilage Abnormal spoilage: If the spoilage is abnormal, the net loss is highlighted and always charged to an abnormal loss account. Assume that the 5 parts of Whitefish Machine Shop’s Job #10 are considered abnormal spoilage. What is the journal entry?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 46 Job Costing: Spoilage Materials Control (spoiled goods at current disposal value): 5 × $200 1,000 Loss from Abnormal Spoilage 4,000 Work in Process Control (Job #10) 5,000 To recognize spoiled parts
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 47 Learning Objective 7 Account for rework in job costing.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 48 Rework Units Example Normal rework attributable to a specific job: Assume that the 5 parts of Whitefish Machine Shop’s Job #10 can be reworked for a total cost of $1,800. $5,000 of costs associated with these parts have already been assigned to Job #10 before rework. What is the journal entry?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 49 Rework Units Example Work in Process (Job #10) 1,800 Various Accounts 1,800 To charge rework costs to the job Normal rework common to all jobs: Debit Manufacturing Overhead Control (rework costs). Abnormal rework: Debit Loss from Abnormal Rework.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 50 Learning Objective 8 Account for scrap.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 51 Recognizing Scrap Scrap is recognized in the accounting records either at the time of its sale or at the time of its production. Sale of scrap, if immaterial, is often recognized as other revenues.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 52 Recognizing Scrap Example Assume that Job #10 of Whitefish Machine Shop generates normal scrap with a total sales value of $300 (it is assumed that the scrap returned to the storeroom is sold quickly). Recognizing scrap at the time of its sale: What is the journal entry?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 53 Recognizing Scrap Example Cash or Accounts Receivable 300 Sales of Scrap 300 To record other revenue sale of scrap Scrap attributable to a specific job: Job­costing systems sometimes trace the sale of scrap to the jobs that yielded the scrap. Assume that the scrap can be traced specifically to Job #10.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 54 Recognizing Scrap Example What is the journal entry? Cash or Accounts Receivable 300 Work in Process (Job #10) 300 To record sale of scrap Scrap common to all jobs: Cash or Accounts Receivable 300 Manufacturing Overhead Control 300 To record other revenue sale of scrap
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 55 Recognizing Scrap Example Assume that the scrap is inventoriable. What is the journal entry when scrap is attributable to Job #10 and it is returned to the storeroom? Materials Control Work in Process (Job #10) To record scrap returned to stores
300 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 300 18 ­ 56 Recognizing Scrap Example What is the journal entry when scrap is common to all jobs and it is returned to the storeroom? Materials Control 300 Manufacturing Overhead Control 300 To record scrap returned to stores
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 57 Recognizing Scrap Example What is the journal entry when scrap is sold? Cash or Accounts Receivable 300 Materials Control 300 To record other revenue sale of scrap
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 58 Recognizing Scrap Example What is the journal entry when scrap is reused? Work in Process Control Materials Control To record use of scrap
300 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 300 18 ­ 59 End of Chapter 18
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 18 ­ 60