spoiled, reworked units, and scrap

18 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Spoilage, Rework,and Scrap

Chapter 18


Learning Objective 1

Distinguish among spoilage,rework, and scrap.


Terminology

Spoilage refers to unacceptable unitsdiscarded or sold for reduced prices.

Rework is units that are repaired.Scrap is material left over.



Describe the accountingprocedures for normal and

abnormal spoilage.


Normal Spoilage

Normal spoilage is spoilage that is an inherentresult of the particular production process and

arises even under efficient operating conditions.Normal spoilage rates should be computed usingtotal good units completed as the base, not total

actual units started in production.


Abnormal Spoilage

Abnormal spoilage is spoilage that should notarise under efficient operating conditions.Companies record the units of abnormalspoilage and keep a separate Loss from

Abnormal Spoilage account.


Process Costing andSpoilage 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 unitswere spoiled (all normal spoilage).



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.



Approach A recognizes spoiled units whencomputing output in equivalent units.

Approach B does not count spoiled units when computing output in equivalent units.


Approach A Example

Costs to account for $95,200Divide by equivalent units 35,000Cost per equivalent unit $ 2.72Good units completed: 30,000 × $2.72 $81,600Add normal spoilage: 1,000 × $2.72 2,720Costs of good units transferred out $84,320Work in process: 4,000 × $2.72 10,880Costs accounted for $95,200


Approach B Example

Costs to account for $95,200Divide by equivalent units 34,000Cost per equivalent unit $ 2.80Good units completed: 30,000 × $2.80 $84,000Costs of good units transferred out $84,000Work in process, ending: 4,000 × $2.80 11,200Costs accounted for $95,200



Account for spoilage inprocess costing using the

weighted-average method.


Weighted-Average: Spoilage

The following example is for the month ofNovember and relates to Big Mountain, Inc.

Direct materials are introduced at the beginningof the production cycle.

Conversion costs are added evenly during the cycle.



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).



Ending work in process inventory was 4,000 units(100% materials and 20% conversion).

Costs added during the month were $87,500 formaterials and $72,000 for conversion.

What are the costs assigned to the units completed,spoiled, and in ending work in process inventory?


Physical Units (Step 1)

Work in process, beginning (November 1)100% material, 60% conversion costs 1,000Started during November: 35,000

36,000Good units completed and transferred out: 31,000Work in process, ending inventory:100% material 20% conversion costs 4,000

35,000



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


Compute EquivalentUnits (Step 2)

Materials ConversionCompleted and transferred 31,000 31,000Normal spoilage 620 620Abnormal spoilage 380 380Ending inventory 4,000 800Equivalent units 36,000 32,800

100%100% 20%20%


Compute EquivalentUnit Costs (Step 3)

Materials Conversion Beginning inventory $ 9,700 $10,000 Current costs 87,500 72,000 Total $97,200 $82,000 Equivalent units 36,000 32,800 Cost per unit $2.70 $2.50


Summarize Total Costs (Step 4)

Work in process beginning inventory:Materials $ 9,700Conversion 10,000Total beginning inventory $ 19,700+ Current costs:

Materials $87,500Conversion 72,000

= Costs to account for $179,200


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) $161,200Normal spoilage: 620 × ($2.70 + $2.50) 3,224Total $164,424



Abnormal spoilage: 380 × ($2.70 + $2.50) $ 1,976Work in process, ending (4,000 units):Direct materials (4,000 × $2.70) $10,800Conversion (800 × $2.50) 2,000Total $12,800



Costs of units completed and transferred out (including normal spoilage) $164,424Cost of abnormal spoilage 1,976Costs in ending inventory 12,800Total costs accounted for $179,200

The $1,976 cost of abnormal spoilageis assigned to the Loss fromAbnormal Spoilage account.



Account for spoilage inprocess costing usingthe first-in, first-out

(FIFO) method.



Work in process, beginning (November 1):100% material, 60% conversion costs 1,000Started during November 35,000

36,000Good units completed and transferred out:

From beginning inventory 1,000Started and completed 30,000

31,000



Work in process, ending inventory:100% material, 20% conversion costs 4,000Normal spoilage 620Abnormal spoilage 380


Compute EquivalentUnits (Step 2)

Materials ConversionGood units completed and transferred out:From beginning inventory 0 400Started and completed 30,000 30,000Normal spoilage 620 620Abnormal spoilage 380 380Ending inventory 4,000 800Equivalent units 35,000 32,200


Compute EquivalentUnit Costs (Step 3)

Materials ConversionCurrent costs $87,500 $72,000Divided by equivalent units 35,000 32,200Cost per unit $2.50 $2.236**$2.236 (rounded)


Summarize Total Costs (Step 4)

Work in process beginning inventory:Materials $ 9,700Conversion 10,000Total beginning inventory $ 19,700+ Current costs: Materials $ 87,500 Conversion 72,000= Costs to account for: $179,200



Good units completed and transferred out:From beginning inventory:Work in process $ 19,700.00Conversion costs added incurrent period (400 × $2.236) 894.40Total $ 20,594.40Started and completed:30,000 × ($2.50 + $2.236) $142,080.00



Costs before adding normal spoilage:($20,594.40 + $142,080.00) $162,674.40

Normal spoilage:620 × ($2.50 + $2.236) 2,936.32Total $165,610.72



Abnormal spoilage:380 × ($2.50 + $2.236) $1,799.68

Work in process, ending (4,000 units):Direct materials (4,000 × $2.50) $10,000Conversion (800 × $2.236) 1,789Total $11,789



Costs of units completed and transferred out (including normal spoilage) $165,610.72Cost of abnormal spoilage 1,799.68Costs in ending inventory 11,789.00Total costs accounted for $179,200.00

The $1,799.68 costs of abnormal spoilage areassigned to the Loss from Abnormal Spoilage

account.



Account for spoilage inprocess costing using thestandard-costing method.


Standard-Costing: Spoilage

The standard-costing method makescalculating equivalent unit costsunnecessary and so simplifies

process costing.


Journal Entries

Assume that the completed units are transferredto Finished Goods.

What are the journal entries?Finished Goods XXX

Work in Process XXXTo transfer good units completed in November


Journal Entries

Loss from Abnormal Spoilage XXXWork in Process XXX

To recognize abnormal spoilage detected inNovember



Account for spoilage in job costing.


Job Costing: Spoilage

With a job-costing system, companies candecide 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.



Assume that 5 parts out of 40 parts of WhitefishMachine Shop’s Job #10 are spoiled (normal).

Costs assigned prior to the inspection pointare $1,000 per part.

The current disposal price of the spoiled partsis $200 per part.

When the spoilage is detected, the spoiled goodsare inventoried at $200 per part.



Normal spoilage attributable to a specific job:When normal spoilage occurs because of the

specifications of a particular job, that jobbears the cost of the spoilage reduced by

the current disposal value of that spoilage.What is the journal entry?



Materials Control(spoiled goods at currentdisposal value): 5 × $200 1,000

Work in Process Control (Job #10) 1,000To recognize disposal value of spoiled parts



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



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?



Materials Control(spoiled goods at currentdisposal value): 5 × $200 1,000Manufacturing OverheadControl (normal spoilage) 4,000

Work in Process Control (Job #10) 5,000To recognize spoiled parts



Abnormal spoilage:If the spoilage is abnormal, the net loss is

highlighted and always charged to anabnormal loss account.

Assume that the 5 parts of Whitefish MachineShop’s Job #10 are considered abnormal spoilage.




Materials Control(spoiled goods at currentdisposal value): 5 × $200 1,000Loss from Abnormal Spoilage 4,000

Work in Process Control (Job #10) 5,000To recognize spoiled parts



Account for rework in job costing.


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 havealready been assigned to Job #10 before rework.



Rework Units Example

Work in Process (Job #10) 1,800Various Accounts 1,800

To charge rework costs to the jobNormal rework common to all jobs:

Debit Manufacturing Overhead Control(rework costs).

Abnormal rework:Debit Loss from Abnormal Rework.



Account for scrap.


Recognizing Scrap

Scrap is recognized in the accountingrecords 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.


Recognizing Scrap Example

Assume that Job #10 of Whitefish MachineShop generates normal scrap with a totalsales value of $300 (it is assumed that the

scrap returned to the storeroom is sold quickly).Recognizing scrap at the time of its sale:




Cash or Accounts Receivable 300Sales of Scrap 300

To record other revenue sale of scrapScrap attributable to a specific job:

Job-costing systems sometimes trace the saleof scrap to the jobs that yielded the scrap.

Assume that the scrap can be tracedspecifically to Job #10.



What is the journal entry?Cash or Accounts Receivable 300

Work in Process (Job #10) 300To record sale of scrap

Scrap common to all jobs:Cash or Accounts Receivable 300

Manufacturing Overhead Control 300To record other revenue sale of scrap



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 300

Work in Process (Job #10) 300To record scrap returned to stores



What is the journal entry when scrap is commonto all jobs and it is returned to the storeroom?

Materials Control 300Manufacturing Overhead Control 300

To record scrap returned to stores



What is the journal entry when scrap is sold?Cash or Accounts Receivable 300

Materials Control 300To record other revenue sale of scrap



What is the journal entry when scrap is reused?Work in Process Control 300

Materials Control 300To record use of scrap


End of Chapter 18

spoiled, reworked units, and scrap

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