UNIT 8: ACCOUNTING FOR SPOILAGE, REWORKED UNITS AND SCRAP

Content
8.0 Introduction
8.1 Objectives
8.2 Spoilage in General
8.3 Job Costing and Spoilage
8.3.1 Normal Spoilage
8.3.2 Abnormal Reworked
8.4 Job Costing And Scrap
8.4.1 Recognizing Scrap at the Time of Sale of Scrap
8.4.2 Recognizing Scrap at the Time of Production Scrap
8.5 Summary
8.6 Answers to Check Your Progress Exercises
8.7 Model Examination Questions

8.0 INTRODUCTION

The emphasis on quality and the high costs of spoilage, reworked units and scrap has resulted
in managers paying close attention to those costs. Spoilage refers to completed or partial
completed units that don’t meet production standard (unacceptable units of production) and
that are discarded or are sold for a disposal value. Reworked units are unacceptable units of
production that are subsequently reworked and sold as acceptable finished goods. For
example, defective units of products such as pagers, computer disk drives, computers, and
telephones can sometimes be repaired and sold as good products. Scrap is material left over
when making main or joint products. Scrap is a product that has minimal (frequently zero)
sales value compared with the sales. Examples are shaving and short lengths from
woodworking operations, steel edges left from stamping operations and end cuts from suit
making operations.

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8.1 LEARNING OBJECTIVES:

Upon completing this chapter, you should be able to:

 Distinguish among spoilage, rework, and scrap
 Describe the general accounting procedures for normal and abnormal spoilage
 Know the accounting procedures for spoilage, reworked, and scrap under job order
costing.
 Know the accounting procedures for spoilage in process costing.

8.2 SPOILAGE IN GENERAL

There are two key objectives when accounting for spoilage:

a) Determining the magnitude of the costs of spoilage.
b) Distinguishing between the costs of normal and abnormal spoilage.
Spoilage is an important consideration in any production related planning and controlling
decisions. Management must determine the most efficient production process that will keep
spoilage to a minimum. Spoilage is divided into two: normal and abnormal.

NORMAL SPOILAGE: It is a spoilage that arises under efficient operating conditions; it is an

inherent result of the particular production process. Costs of normal spoilage are typically
viewed as a part of the costs of good units manufactured.
For a given production process, management must decide the rate of spoilage it is willing to
accept as normal. Normal spoilage rates should be computed using the total good units
completed as the base, not the total actual units started. Why? Because total actual units
started also include any abnormal spoilage in addition to normal spoilage.

ABNORMAL SPOILAGE: Abnormal spoilage is spoilage that is not expected to arise under
efficient operating conditions; abnormal spoilage is usually regarded as avoidable and
controllable.
Abnormal spoilage costs are written off as losses of the accounting period in which the
detection of the spoiled units occurs.
8.3. JOB CONSTING AND SPOILAGE

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8.3.1 Normal Spoilage
In job order costing systems, normal or planned are considered as part of normal
manufacturing costs. Normal spoilage costs have commonly been accounted for by one of the
following two methods:
a) Allocated or applied to a specific job.
b) Allocated or applied to all jobs.
Normal Spoilage Attributable to Specific Job: When normal spoiled units develop from a
specific job that job should absorb this cost of spoilage by net of the salvage value of the
spoiled units, if salable. In other words, in such cases the salvaged value is removed from
work in process (WIP) inventory leaving the unsalvageable costs in the WIP. The following
entry would be made to do that:
Material Control (Spoiled Units Inventory)* …………………..xxx
WIP-Job xxx ………………………………………………….xxxx

* Material account is debited by the estimated market value of the spoiled units if it is
saleable. After posting the above journal entry the WIP inventory account represents the costs
of good units, including the unsalvageable cost of normal spoilage.
Normal Spoilage Attributable to All Jobs: In some cases, spoilage may be considered a
normal characteristics of a given production cycle. The spoilage inherent in the process only
in accidentally occurs when a specific job is being worked on. The spoilage is then not
attributable, and hence is not charged, to the j specific job. Instead, it is costed as
manufacturing overhead (MOH). The budgeted MOH allocation rate includes a provision for
normal spoilage cost. Therefore, normal spoilage cost is spread, through overhead allocation
over all jobs rather than loaded on a particular job only. The following entry would be made
to do that:
Material control (Spoiled Units Inventory)* ........................ xxx
Manufacturing Overhead .......................................................xxx
WIP-Job#205..............................................................................xxx

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* Material account is debited by the estimated market of the spoiled units if it is saleable.
Example (1) In Karim Machine Shop, 10 machine parts out of lot of 100 machine parts are
spoiled Costs assigned up to the point of inspection are Br. 4,000 per unit. The current
disposal price of the spoiled parts is estimated to Br1.200.

Instructions:
a) Prepare the necessary journal entry as the spoiled units are identified and given that
they are related to the particular jobs.
b) Calculate the cost of good units.

Solutions:
Units put to production= 100 units
Good units= 90 units
Spoiled units=10 units
A. the entry record the normal spoilage is given by:
Materials control (Spoiled Units Inventory)........... 1200x10
WIP- Job xxx................................................ 12.000

*Estimated salvage value= 10 x Br. 1.12, 000

As shown here above, when the spoilage is detected the spoiled goods are inventoried at
the estimated market value, i.e., Br.1.200 per unit. The effect of this accounting is that
the net cost of the normal spoilage becomes a direct cost of good units produced.

b. cost of good units= (100xBr. 4, 000)- Br. 12,000

= Br. 388,000
Or computed alternatively,
Production costs= Br. 4, 000 per unit
Total cost (to manufacture the spoiled units) = 10xBr4, 000= Br. 40,000
Br. 12, 000 Salvageable costs
Br. 40,000
Br. 28,000 Unsalvageable costs

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b) Total cost of good units = (90xBr.4,000)+Br.28,000
= Br.388,000

2. Examples (2) Addis Garment Manufacturing Company uses a job order system. The
company completes an order for 1000 denim jackets (Job # 205) at the following unit
costs:
Materials.............................................. Br. 20
Labor ................................................... 20
Overhead .............................................. 10
Total cost per unit Br. 50

During the final inspection, 50 jackets are found to be inferior and are classified as irregulars
or seconds.
They are expected to sell for Br. 10 each.
Instructions:
a) Record the cost of production of 1,000 denim jackets
b) Record the entries required to record the spoiled jackets
i. if the cost of the spoiled units is charged to the specific job
ii. If the cost of the spoiled units is charged to the factory overhead.

Solutions:
a) Entry of record the cost of production of 1,000 denim jacket
WIP - Job # 205(50x1, 000)...................................... 50,000
Raw Materials (20x1, 000) .......................................... 20,000
Salary Payable (Payroll) [20x1, 000].......................... 20,000
MOH- Applied........................................................... 10,000

b) Unit put into production = 1, 1000 units

Good units = 950 units
Spoiled units = 50 units

Under example (1), the spoiled units were identifiable with a specific job. Consequently, the
good units absorb the total cost of normal spoilage, net of salvage value. Taking example (2)

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into account the two alternative approaches used to account normal spoilage will be discussed
here under.
ALTERNATIVE: Normal spoilage Attributable to Specific Job. Here, the spoiled units are
inventoried at the estimated market value of the spoiled units, i.e. Br. 10 per unit. The
unsalvageable cost Br. 40 for each unit (Br. 50- less 10) is treated as part of the cost of good
units.
Salvageable costs = 50xBr.10= Br. 500
Unsalvageable cost = (50xBr. 50)- Br. 500=Br. 2000. This portion of the total
manufacturing costs of the spoiled units will remain in the WIP inventory account.
Stated differently, the unsalvageable cost is considered as part of the cost of good units.

Thus, the entry to record the normal spoilage is given be:

Materials Control (Spoiled Unit Inventory) ...................... 500
WIP Job # 205 ......................................................... 500

ALTERNATIVE 2: Normal Spoilage Common to All Jobs.

Here, the cost of normal spoilage is wholly (entirely) removed from the WIP account. and the
unsalvageable cost of normal spoilage is treated as manufacturing overhead. The journal
entry under this alternative follows:
Materials control (Spoiled Units Inventory) ............................... 500= 10x50
Manufacturing Overhead.............................................................. 2, 000=40x50
WIP- Job # 205 ........................................................................2,500 = 50x50

Spoilage costs charged to FOH are allocated among all jobs in production. when spoilage is
attributed to a specific job, however, the entire cost of spoilage is reflected in the cost of that
job. In the example here above, Job # 205 will be charged with only a portion of the 2,000
loss from spoilage when FOH cost is allocated to the various jobs.

ABNORMAL SPOILAGES
Spoilage in excess what is normal for a particular production process is known as abnormal
spoilage. it can be controlled by the production personnel and is usually the result of
inefficient operation. The total cost of abnormal spoilage should be removed from the WIP
inventory account and then treated as period cost titled "Loss from Abnormal Spoilage"

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3. Example (1) Assume that 5,000 units (Job # 105) are put in to production at the cost of Br,
20,000.
The unit cost on Job # 105 would be Br. 4.00 (Br. 20,000/5,000). If 20 units were found to be
spoiled with a salvage value of Br. 0.50 each and no spoilage was anticipated for job # 105.

Instruction: Present the entry to account for the cost of abnormal spoilage.
Solutions:
In this example spoilage was not anticipated. Therefore, the entire spoilages (20 units) are
abnormal.
Salvageable cost = 0.50x 20=Br.10
Unsalvageable cost = (4.00 - 0.5 x 20) = Br. 70. It is period cost recorded "Loss from
Abnormal spoilage"
Materials control ......................................10
Loss from Abnormal Spoilage ............... 70
WIP- Job # 105 .................................. 80

4. Example (2) Assume that 10, 000 units were put into production for Job # 109 when the
total cost of production was Br. 300,000. Normal spoilage for the same job is estimated to
be 50 units. At the completion of production, only 9910 units were good. Salvage value of
the spoiled units was Br. 5 each.

Instruction:
Instruction: Present the required entries to record the above data. Assumes the normal
spoilage is allocated to a specific job.
Solutions:
Unit put in to production = 10.000 units
Good units = 9,910 units
Normal spoilage = 50 units
Spoiled units = 90 units
Abnormal spoilage = 40 units

i. entry record the abnormal spoilage (50 units)

Material control .................................. 250*(1)
WIP- Job # 109 ....................................... 250

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ii. Entry to record the abnormal spoilage (40 units)
Materials control ........................................... 200*(2)
Loss from Abnormal spoilage ...................... 1,000*(3)
WIP- Job # 109 ....................................................... 1,200
*(1) 250= 5x50
*(2) 200 =5x40
*(3) 1,000=(30-5)x40

Check your progress - 1

1. Distinguish among normal and abnormal spoilage
2. Which of the following defects are avoidable under efficient working condition.
A. Normal spoilage C. Scraps
B. Abnormal Spoilage D. None of the above
3. If spoilage is normal and inherent to the production process, its salvageable value is
irrelevant for cost computation of good units
A. True B. False
4) On a particular job a corporation produced 10,000 units at a cost of $45 per unit; 200 of
the units were defective; the defective units are considered to be normal as part of the
production process; each defective unit was reworked at a cost of $4 for materials and
$8 for labor; manufacturing overhead is applied at the rate of 100% of direct labor costs.
Pass journal entry
5) On a particular job a corporation produced 10,000 units at a cost of $45 per unit; 200 of
the units were defective; the defective units are considered to be normal as part of the
production process for the specific job; each defective unit was reworked at a cost of $4
for materials and $8 for labor; manufacturing overhead is applied at the rate of 100% of
direct labor costs. Pass journal entry
6) On a particular job a corporation produced 10,000 units at a cost of $45 per unit; 200 of
the units were defective; the defective units are considered to be abnormal; each
defective unit was reworked at a cost of $4 for materials and $8 for labor; manufacturing
overhead is applied at the rate of 100% of direct labor costs. Pass journal entry

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 4.3 JOB COSTING AND REWORKED UNITS

NORMAL REWORKED UNITS

Like spoiled units, reworked units are classified as normal or abnormal. the number of
defective unit in any particular production process that can be expected despite efficient
operations are known as normal reworked units. Normal reworked (defective) units may be
accounted for by the following two methods:
i. Allocated to specific jobs
ii. Allocated to all jobs.

NORMAL Reworked Unit Attributed to specific job: When rework is normal but occurs
because of the requirements of a specific job, the rework costs are charged to Work in process
inventory of that job. The entry is as follows:
WIP- Job xxx ...............................................xxx
Materials .............................................................xxx
Salary and Wages payable ..................................xxx
MOH- Applied ....................................................xxx

Normal Reworked Units Common to All jobs: When reworked costs are incurred, FOH-
control account is charged because rework costs have already been charged to WIP as part of
applied FOH. The following entry would be made:
FOH- control .............................................................xxx
Materials ................................................................................. xxx
Salary (Payroll) Payable ......................................................... xxx
FOH- Applied ..........................................................................xxx

Example (1) Assume that 20 units were found to be defective on Job # 202 and had be
reworked the cost of reworking the defective units is as follows:
Direct materials......................................... Br. 1,000
Direct labor ................................................ 400
Factory overhead ............................... 50 % of direct labor cost

Instruction: Present the entry required to account for normal defective labor cost

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 a) If applied to a specific job
b) If applied to all jobs

Solutions:
Total rework cost:
Direct materials.................................... Br. 1,000
Direct labor .......................................... 400
Factory overhead (50% x 400)............. 200
Total cost Br. 1,600

a) Entry to record normal reworked units applied to specific job:

WIP - Job # 202.............................................................. 1,600
Materials ............................................................... 1, 000
Salary (Payroll) payable .......................................... 400
FOH- Applied ....................................................... 200

b) Entry to record normal reworked units applied to all jobs:

FOH-Control …………………………………3,225
Materials ……………………………………….1000
Salary (Payroll)payable ……………………….. 400
FOH-Applied ………………………………….. 200

8.3.2 Abnormal Reworked Units

The number of defective unit that exceed what is considered to be normal for an efficient
operation is known as abnormal defective units. The total cost of reworking abnormal
defective units should be charged to a “Loss
“Loss from Defective Units” account.
The following entry would be made to do that:
Loss from Abnormal Defective Units ……………………..xxx
Materials………………………………xxx
Salary(Payroll) Payable……………….xxx
FOH-Applied………………………….xxx

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Example (1) Assume that 40,000 units are placed in to production for Job # 302. Normal
defectives are estimated to be 400 units. Actual defective units were 1,000 units. The total
cost to rework the 1,000 defective units was as follows:
Direct Materials ………………………… Br. 500
Direct labor ……………………………... 1,000
Factory overhead ……………………….. 50% of direct labor cost.

Instruction: Present the entry required to account for defective units. Assume that normal
rework costs are applied to specific jobs.

Solution:
Units put in to production = 40,000 units
Defective units = 1000 units
Normal defective units = 400 units
Abnormal defective units = 600 units

Rework costs per unit:

Direct material = Br. 500 = Br. 0.50
1,000
Direct labor = Br. 1,000 = Br. 1.00
1,000
Cost of normal reworked units:
Direct materials (0.50x400) ………………. Br. 200
Direct labor (1x400)……………………….. 400
Factory overhead (400x0.5) ……………….. 200
Total cost Br. 800

Cost of abnormal reworked units

Direct materials (0.5x600) ……………… Br. 300
Direct labour (1x600) …………………… 600
Factory overhead (600x.5)……………….. 300
Total Cost 1200

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*Entry to record the normal reworked units is given by:
WIP-Job # 302 ……………………800
Materials …………………………………200
Salary (Payroll) Payable …………………400
FOH-Applied …………………………….200
*Entry record the abnormal reworked units is given by:
Loss from Abnormal Defective Units ………………1,200
Materials ……………………………………….300
Salary (Payroll) Payable ……………………….600
FOH-Applied ………………………………….300
The above two journal entries would be combined as follows:
WIP-Job # 302 ……………………………………….800
Loss from Abnormal Defective Units ……………...1,200
Materials ……………………………………………..500
Salary (Payroll) Payable ……………………………1,000
FOH-Applied ……………………………………… 500

**Accounting for rework in process costing only requires abnormal rework to be

distinguished from normal rework. Abnormal rework is accounted for as in job costing. Since
masses of similar units are manufactured, accounting for normal rework follows the
accounting described for rework common to all jobs.

8.4 JOB COSTING AND SCRAP

Scrap is material left over when making main or joint products. Scrap is a product that has
minimal (frequently zero) sales value compared with the sales.
There are two major aspects of accounting for scrap:
i. Planning and control, including physical tracking
ii. Inventory costing, including when and how to affect operating income
The issues regarding the accounting for scrap are:
i. When should any value of scrap be recognized in the accounting records: at the
time of production of scrap or at the time of sale & scrap?

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 ii. How should revenue be accounted for?

8.4.1 Recognizing Scrap at the time of sale of scrap

Scrap Attributable to a Specific Job: Job costing systems sometimes trace the sales of scrap to
the jobs that yielded the scrap. This method is used only when the tracing can be done in an
economically feasible way. The journal entry is:
Scrap returned to storeroom: No Journal entry. (Memo of quantity received and related job is
entered in the inventory record.)
Sales of Scrap: Cash (Account Receivable)…………………xxx
WIP Control……………………………………..xxx
Posting made to specific job record

Unlike spoilage and rework, there is no cost attached to the scrap, and scrap, and hence no
normal or abnormal scrap. All scrap sales, whatever the amount, are credited to the specific
job. Scrap sales reduce the materials’ costs of the job.

Scrap Common to All Jobs: The journal entry in this case is:
Scrap returned to storeroom: No Journal entry. (Memo of quantity received and related job is
entered in the inventory record.)

When scrap is sold, the simplest accounting is to record scrap sales as a separate line item of
other revenues. The journal entry is:
Sales of scrap: Cash (Account Receivable)……………..xxx
Sales of Scrap……………………………….xxx

However, many companies account for the sales as offsets against manufacturing overhead.
The journal entry is:

Sales of Scrap: Cash (Account Receivable) …………….xxx

Manufacturing Overhead Control……………..xxx
Posting made to subsidiary record-“Sales of Scrap” column on
department cost record.

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This method does not link scrap with any particular physical product. Instead, all products
bear regular production costs without any credit for scrap sales except in an indirect manner.
The sales of the scrap are considered when setting budgeted manufacturing overhead rates.
Thus, the budgeted overhead rate is lower than it would be if no credit for scrap sales were
allowed in the overhead budge. This accounting is used in both process costing and job
costing system.
Example (1) Mendoza Company has an extensive job costing facility that uses a variety of
metals. Consider each requirement independently.

Instruction
i. Job 372 uses a particular metal alloy that is not used for any other job. Assume that
scrap is accounted for at the time of sale of scrap. The scrap is sold for Br. 490
Prepare the journal entry.
ii. The scrap from job 372 consists of metal used by many jobs. No record is
maintained for the scrap generated by individual jobs. Assume that scrap is
accounted for at the time of its sale. Scrap totaling Br. 4,000 is sold. Prepare two
journal entries that could be used to account for the sale
Solutions:
i. Cash (Account Receivable) ………………………. 490
WIP ……………………………………….490
ii. Alternative 1:
Cash (Account Receivable) ……………4,000
Sales of Scrap ………………………….. 4,000
Alternative II:
Cash (Account Receivable) ……………………. 4,000
Manufacturing Overhead Control ……………….. 4,000

8.4.2 Recognizing scrap at the time of production of scrap

Our preceding illustrations assume that scrap retuned to the storeroom is sold or disposed of
quickly and hence not assigned an inventory cost figure. Scrap, however, sometimes has a
significant market value, and the time between storing it and selling or reusing it can be quite
long. Under this condition, the company is justified in inventorying scrap at a conservative

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estimate of net realizable value so that production costs and related scrap recovery may be
recognized in the same accounting period. Some companies tend to delay sales of scrap until
the market price is most attractive. Volatile prices fluctuations are typical for scrap metal. If
scrap inventory becomes significant it should be inventoried some “reasonable value”-a
difficult task in the face of volatile market prices.

Scrap Attributable to a Specific Job: The journal entry in the Mendoza Company example is:
Scrap returned to storeroom: Material Control ……… 490
WIP……………………..490

Scrap Common to All Jobs: The journal entry in this case is:
Scrap returned to storeroom: Material Control …………. 4,000
Manufacturing Overhead Control ……………………4,000

Observe that Materials Control account is debited in place of Cash or Account Receivable.
When this scrap is sold, the journal entry is:
Sales of Scrap: Cash (Account Receivable) ……….xxx
Material Control ………xxx
Scrap is sometimes reused as direct materials rather than sold as scrap. Then it should be
debited to material Control as a class of direct materials and carried at its estimated net
realizable value. For example, the entries when the scrap generated is common to all jobs are:
Scrap returned to storeroom: Material Control…….xxx
Manufacturing Overhead Control ……………xxx

Reuse of scrap: Work in Process………….xxx

Material Control……..xxx

The accounting for scrap under process costing follows the accounting for jobs when scrap is
common to all jobs since process costing is used to cost the mass manufacture of similar units.
The high cost of scrap focuses management’s attention on ways to reduce scrap and to use it
more profitably.
Example (2) Refer requirement (ii) of example (1) on page 14 above. Suppose that the scrap
generated is returned to the storeroom for the future use and a journal entry is made to record

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the scrap. A month later, the scrap is reused as direct material on a subsequent job. Prepare
the journal entries to record these transactions.
Solutions:
Scrap returned to storeroom: Material Control ………..4,000
Manufacturing Overhead Control ………..4,000

Check your progress II

1) On a particular job a corporation produced 10,000 units at a cost of $45 per unit; 200 of
the units were spoiled; the spoiled units are considered to be normal as part of the
production process; each spoiled unit can be sold as scrap for an estimated net realizable
value of $5. Pass journal entry
2) On a particular job a corporation produced 10,000 units at a cost of $45 per unit; 200 of
the units were spoiled; the spoiled units are considered to be normal as part of the
production process for the specific job; each spoiled unit can be sold as scrap for an
estimated net realizable value of $5. Pass journal entry
3) On a particular job a corporation produced 10,000 units at a cost of $45 per unit; 200 of
the units were spoiled; the spoiled units are considered to be abnormal; each spoiled unit
can be sold as scrap for an estimated net realizable value of $5. Pass journal entry

4) During January a corporation produced 10,000 units at a cost of $45 per unit; 200 of the
units were defective; the defective units are considered to be normal; each defective unit
was reworked at a cost of $4 for materials and $8 for labor; manufacturing overhead is
applied at the rate of 100% of direct labor costs journal entry

5) During January a corporation produced 10,000 units at a cost of $45 per unit; 200 of the
units were defective; the defective units are considered to be abnormal; each defective unit
was reworked at a cost of $4 for materials and $8 for labor; manufacturing overhead is
applied at the rate of 100% of direct labor costs journal entry

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8.5 SUMMARY

1. Defective Units--production that does not meet quality standards or designated product
specifications and is reworked to a sufficient quality level so that it can be sold
through normal distribution channels
a. Normal Defective Units--the number of defective units that are expected as
part of the production process
b. Abnormal Defective Units--the number of defective units that arise for unusual
or abnormal reasons
2. Spoilage--production that does not meet quality standards or designated product
specifications and is not reworked to a sufficient quality level so that it can be sold
through normal distribution channels
a. Normal Spoilage--the number of spoiled units that are expected as part of the
production process
b. Abnormal Spoilage--the number of spoiled units that arise for unusual or
abnormal reasons
Defective Units
1. Job Order Costing a. Accounting
1) Normal Defective Units--the cost to rework the normal defective units is treated as a
necessary cost to obtain the goods units of output
a) Production Process--if the defective units are expected as part of the production process,
the cost to rework the defective units is included in the pre-determined overhead rate
and, therefore, is added to the manufacturing overhead account to offset the applied
overhead
b) Specific Job--if the defective units arise from the production process for the specific job
(higher quality standards, lower tolerances, etc.), the cost to rework the defective units is
not included in the pre-determined overhead rate; therefore, the cost to rework the
defective units is added to the work in process account so that the specific job is charged
the cost to rework the defective units
2) Abnormal Spoilage--the cost to rework the abnormal defective units is treated as an
expense for the period

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2. Process Costing a. Accounting
1) Normal Defective Units--the cost to rework the normal defective units is treated as a
necessary cost to obtain the goods units of output, is included in the pre-determined overhead
rate, and, therefore, is added to the manufacturing overhead account to offset the applied
overhead
2) Abnormal Spoilage--the cost to rework the abnormal defective units is treated as an
expense for the period
C. Spoilage
1. Job Order Costing--the cost of the spoiled units is computed in the same manner as the
cost of production when no spoilage exists
a. Accounting
1) Normal Spoilage--the cost of the normal spoilage is treated as a necessary cost to obtain
the goods units of output
a) Production Process--if the spoiled units are expected as part of the production process, the
cost of the spoilage less any salvage value of the spoiled units is included in the pre-
determined overhead rate and, therefore, is transferred to the manufacturing overhead account
to offset the applied overhead
b) Specific Job--if the spoiled units arise from the production process for the specific job
(higher quality standards, lower tolerances, etc.), the cost of the spoilage less any salvage
value of the spoiled units is not included in the pre-determined overhead rate; therefore, any
salvage value of the spoiled units is removed from the work in process account so that the
specific job is charged with the net cost of the spoiled units

2) Abnormal Spoilage--the cost of the abnormal spoilage less any salvage value of the
spoiled units is treated as an expense for the period
2. Process Costing--the cost of spoiled units is computed in the same manner as the cost of
production when no spoilage exists
a. Accounting
1) Normal Spoilage--the cost of the normal spoilage less any salvage value of the spoiled
units is treated as a necessary cost to obtain the goods units of output, is included in the pre-

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determined overhead rate, and is, therefore, added to the manufacturing overhead account to
offset the applied overhead
a) Cost of Good Units--sometimes in practice an estimate of the cost of the normal
spoilage less any salvage value of the spoiled units is not included in the pre-determined
overhead rate, and, therefore, the cost of the normal spoilage less any salvage value of the
spoiled units is added to the cost of the good units of output
2) Abnormal Spoilage--the cost of the abnormal spoilage less any salvage value of
the spoiled units is treated as an expense for the period
b. Illustrations
1) A corporation uses a weighted average process costing system;
on January 1, 3,000 units were in process--80% complete in regards to materials and 70%
complete in regards to conversion costs--at a cost of materials of $38,120 and a cost of
conversion costs of $40,950; during January 19,000 units were started; during January
materials costs of $282,000 and conversion costs of $378,000 were added to production;
during January 20,000 units were completed; on January 31, 2,000 units were in process--
60% complete in regards to materials and 50% complete in regards to conversion costs; 500
of the completed units were spoiled; company-wide standards state that a spoilage rate of 2%
of completed units is considered to be normal; spoilage is detected at the end of the
manufacturing process; it is assumed that the spoiled units came entirely from the units started
and completed during January.
Beginning Inventory 3,000
Units Started 19,000
22,000

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 _ Equivalent Units _
Conversion
Materials _ Costs _
Good Units Completed 19,500 19,500 19,500
(100% x 19,500) (100% x 19,500)
Normal Spoilage 400 400 400
(2% x 20,000) (100% x 400) (100% x 400)
Abnormal Spoilage 100 100 100
(500 – 400) (100% x 100) (100% x 100)
Ending Inventory 2,000 1,200 1,000
(60% x 2,000) (50% x 2,000)
22,000 21,200 21,000

Beginning Inventory Costs 79,070 38,120 40,950

Current Costs 660,000 282,000 378,000

739,070 320,120 418,950

Cost Per Unit 15.10 19.95

(320,120 / 21,200) (418,950 / 21,000)

Good Units Completed 683,475 294,450 389,025
(15.10 x 19,500) (19.95 x 19,500)
Normal Spoilage 14,020 6,040 7,980
(15.10 x 400) (19.95 x 400)
Abnormal Spoilage 3,505 1,510 1,995
(15.10 x 100) (19.95 x 100
Ending Inventory 38,070 18,120 19,950
_ _ (15.10 x 1,200) (19.95 x 1,000)
739,070 320,120 418,950

Finished Goods Inventory 683,475

Manufacturing Overhead 14,020
Loss from Abnormal Spoilage 3,505
Work in Process 701,000

Cost per Unit = 683,475 / 19,500 = 35.05

Finished Goods Inventory 683,570

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2) A corporation uses a FIFO process costing system; on January 1, 3,000 units were in
process--80% complete in regards to materials and 70% complete in regards to
conversion costs--at a cost of materials of $38,120 and a cost of conversion costs of
$40,950; during January 19,000 units were started; during January materials costs of
$282,000 and conversion costs of $378,000 were added to production; during January
20,000 units were completed; on January 31, 2,000 units were in process--60% complete
in regards to materials and 50% complete in regards to conversion costs; 500 of the
completed units were spoiled; company-wide standards state that a spoilage rate of 2%
of completed units is considered to be normal; spoilage is detected at the end of the
manufacturing process; it is assumed that the spoiled units came entirely from the units
started and completed during January
Beginning Inventory 3,000
Units Started 19,000
22,600

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 Equivalent Units _
Conversion
_ Materials _ Costs _
Beginning Inventory 3,000 600 900
(20% x 3,000) (30% x 3,000
Good Units Started and
Completed 16,500 16,500 16,500
(19,500 – 3,000) (100% x 16,500) (100% x 16,500)
Normal Spoilage 400 400 400
(2% x 20,000) (100% x 400) (100% x 400)
Abnormal Spoilage 100 100 100
(500 – 400) (100% x 100) (100% x 100)
Ending Inventory 2,000 1,200 1,000
_ _ (60% x 2,000) (50% x 2,000)
22,000 18,800 18,900

Beginning Inventory Costs 79,070 38,120 40,950

Current Costs 660,000 282,000 378,000
739,070 320,120 418,950

Cost Per Unit 15.00 20.00

(282,000 / 18,800) (378,000 / 18,900)

Beginning Inventory 106,070 38,120 40,950

9,000 18,000
(15.00 x 600) (20.00 x 900)
Good Units Started and
Completed 577,500 247,500 330,000
(15.00 x 16,500) (20.00 x 16,500)
Normal Spoilage 14,000 6,000 8,000
(15.00 x 400) (20.00 x 400)
Abnormal Spoilage 3,500 1,500 2,000
(15.00 x 100) (20.00 x 100)
Ending Inventory 38,000 18,000 20,000
_ _ (15.00 x 1,200) (20.00 x 1,000)
739,070 320,120 418,950

Finished Goods Inventory 683,570

(106,070 + 577,500)
Manufacturing Overhead 14,000
Loss from Abnormal Spoilage 3,500
Work in Process 701,070

Cost per Unit:

Beginning Inventory = 106,070 / 3,000 = 35.36

Started and Completed = 577,500 / 16,500 = 35.00

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8.7 ANSWERS TO CHECK YOUR PROGRESS
1. Normal Spoilage is the number of spoiled units that are expected as part of
the production process were as Abnormal spoilage is the number of spoiled units that
arise for un usual or abnormal reasons.
2. A - Normal spoilage
3. B - False
4. Manufacturing Overhead 4,000
(200 x (4 + 8 + 100% x 8))
Materials 800
(200 x 4)
Wages Payable 1,600
(200 x 8)
Applied Overhead 1,600
(200 x 8)

Cost per Unit = 10,000 x 45 / 10,000 = 45

5. Work in Process 4,000

(200 x (4 + 8 + 100% x 8))
Materials 800
(200 x 4)
Wages Payable 1,600
(200 x 8)
Applied Overhead 1,600
(200 x 8)

Cost per Unit = (10,000 x 45 + 4,000) / 10,000 = 45.40

6. Loss from Abnormal Defective Units 4,000

(200 x (4 + 8 + 100% x 8))
Materials 800

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 (200 x 4)
Wages Payable 1,600
(200 x 8)
Applied Overhead 1,600
(200 x 8)

Cost per Unit = 10,000 x 45 / 10,000 = 45

Answer for check your progress II

1. Manufactured Overhead 8,000
(200 x (45 – 5))
Spoiled Inventory 1,000
(200 x 5)
Work in Process 9,000
Cost per Unit = (10,000 x 45 – 9,000) / (10,000 – 200) = 45

2. Spoiled Inventory 1,000

(200 x 5)
Work in Process 1,000
Cost per Unit = (10,000 x 45 – 1,000) / (10,000 – 200) = 45.82
3. Loss from Abnormal Spoilage 8,000
(200 x (45 – 5))
Spoiled Inventory 1,000
(200 x 5)
Work in Process 9,000

Cost per Unit = (10,000 x 45 – 9,000) / (10,000 – 200) = 45

4. Manufacturing Overhead 4,000

(200 x (4 + 8 + 100% x 8))
Materials 800
(200 x 4)
Wages Payable 1,600
(200 x 8)

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 Applied Overhead 1,600
(200 x 8)

Cost per Unit = 10,000 x 45 / 10,000 = 45

5. Loss from Abnormal Defective Units 4,000

(200 x (4 + 8 + 100% x 8))
Materials 800
(200 x 4)
Wages Payable 1,600
(200 x 8)
Applied Overhead 1,600
(200 x 8)

Cost per Unit = 10,000 x 45 / 10,000 = 45

8.7 MODEL EXAMINATION QUESTIONS

a) Multiple choice questions:

1. The type of spoilage that is expected under efficient operating environment is
A) Normal spoilage
B) Abnormal spoilage
C) Scrap
D) Rework
2. In job costing, the costs of normal spoilage that occurs due to the specification of
particular job is charged to:
A) Manufacturing overhead.
B) to a specific job
C) Allocated to all jobs
D) All of the above
3. A scrap is recorded when
A) It is produced
B) Sold

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 C) All of the above
D) None of the above
b) Essay type question
1. Scrap is avoidable discuss
2. The inspection point is the key point to the allocation process of spoilage costs” Do
you agree? Explain.
3. List the three types of defects.
c) Work out
The following data, in physical units describe a grinding process for January
Work in process, beginning 19000
Started during period 150000
Spoiled units 12000
Good units completed and
transferred out 132000
Work in process ending 25000

Inspection occurs at the 100% conversion stage. Normal spoilage is 5% good units passing
inspection

Required
1. compute normal spoilage in units
2. Compute abnormal spoilage in units
3. Assume that the equivalent unit cost of spoiled unit is Br 10. Compute the
amount of potential savings if all spoilage were eliminated, assuming that all other
cost would be unaffected. Comment your answer

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