Chapter five

Accounting For Spoilage, Re-Work and Scrap

Generally, manufacturing operations cannot escape the occurrence of certain losses or output reduction due to
scrap, spoilage, or defective work. Although sometimes these are the cost of doing good units, management
and the entire personnel of an organization should cooperate to reduce such losses to a minimum. As long as
they occur, however, they must be reported and controlled.
Definition of terminologies
Scrap Materials: are raw materials left over from the production process that cannot be put back into the
production for the same purpose. However, they may be useful for different purpose or production process.
Waste Materials: are parts of raw materials left over after production that has no further use or resale value.
Sometimes cost may be incurred to dispose waste materials.
Spoiled Units: are units that do not meet production standards and are either sold for their salvage value or
discarded. Spoiled units have imperfections that cannot be economically corrected. They may be sold as items
of inferior quality or “seconds”.
Defective (rework) units: are units that do not meet production standards and must be further processed in
order to be salable as good units. Such units have imperfections considered correctable because the market
value of the corrected units will be greater than the total cost incurred for the units.
Note: scrap is the by-product of the production of the primary product whereas spoiled and defective goods
are not by-products but imperfections of the primary product.

Types of Spoilage

The key objectives in accounting for spoilage are determining the magnitude of the costs of spoilage and
distinguishing between the costs of normal and abnormal spoilage.

Normal Spoilage

Normal Spoilage is spoilage that is an inherent result of the particular production process and arises even
under efficient operating conditions. For a given production process, management must decide the rate of
spoilage it is willing to accept as normal. Costs of normal spoilage are typically treated as component of the
costs of good unit manufactured because good units cannot be made without the simultaneous appearance of
spoiled units. Normal spoilage rates should be computed using total units completed as the base, not total
actual units started in production. Because total units started also include any abnormal spoilage in addition to
normal spoilage. Moreover, the normal spoilage is the amount of expected spoilage associated or related to
the good units produced.

Abnormal Spoilage
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Abnormal Spoilage is spoilage that should not arise under efficient operating conditions. It is not an inherent
result of the particular production process. Abnormal spoilage is regarded as avoidable and controllable. Line
operators and other plant personnel can generally decrease abnormal spoilage by minimizing machine break
downs, accidents and the like. Abnormal spoilage costs are written off as losses of the accounting period in
which detection of the spoiled units occurs.

Job Costing and Spoilage

The concepts of normal and abnormal spoilage also apply to job-costing systems. Abnormal spoilage is
usually regarded as controllable by the manager. Costs of abnormal spoilage are not considered as inventor
able costs and are written off as costs of the period in which detection occurs. Normal Spoilage costs in job-
costing systems just as in process costing systems are inventor able costs, although managements are
tolerating only small amounts of spoilage as normal.

Spoilage is an important consideration in any production and cost related to planning and control decision.
Since in most cases spoilage is unavoidable, management must determine the most efficient production
process that will keep spoilage to a minimum possible. When assigning costs, job-costing systems generally
distinguish between normal spoilage attributable to a specific job and normal spoilage common to all jobs.
Generally, as it is mentioned above in this chapter, spoilage is classified into two: normal and abnormal.

1. Normal spoilage:
Is spoilage that results despite efficient production method. The costs of normal spoilage are considered to
be unavoidable cost of producing good units and are therefore treated as a product cost. Normal spoilage
costs are accounted for in two ways:
 Applied to a specific job
 Applied to all jobs
Normal spoilages are recorded in an asset account like “Spoiled Goods Inventory” account.
2. Abnormal spoilage:
Is spoilage in excess of what is considered normal for a particular production process. The total cost
of abnormal spoilage should be charged to an expense account like “Loss from Abnormal Spoilage”
account.
Example-1
Assume that in ABC Company 10,000 units were put into production for job 09. The total cost of production
was $ 300,000. Normal spoilage for the job is estimated to be 50 units. At the completion of production only
9,910 units were good. All spoiled units are estimated to have a salvage value of $5 each.
Required:

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1. Present the required journal entry assuming normal spoilage is-
A. Applied to a specific job
B. Applied to all jobs
2. Compute the unit cost of the remaining finished good units.
Solution
To record normal spoilage:
a) To specific job
Spoiled Goods Inventory…………250
WIP-job 09…….…………………….250
b) To all jobs:
Spoiled Goods Inventory…………250
FOH- Control…………………….1, 250
WIP- job 09……..……………….1, 500
To record abnormal spoilage:
Spoiled goods inventory...……….200
Loss from Abnormal Spoilage……1,000
WIP-job 09…................................... 1,200
Example-2

In a Machine Shop 5 aircraft parts out of a job lot of 50 aircrafts parts are spoiled. Costs assigned prior to
inspection point are $2,000 per part. The current disposal price of the spoiled parts is estimated to be $600 per
part. When the spoilage is detected, the spoiled goods are inventoried at $600 per part.

Normal Spoilage attributable to a specific job:

Materials Control (5*$600) 30001

Work-in Process Control (specific job) (5*$600) 3000

Note that the Work-in Process Control (specific job) has already been debited $10,000 for the spoiled parts (5
spoiled parts * $2,000 per part). The effect of the $3,000 entry is that the net cost of the normal spoilage,
$7,000 ($10,000-$3,000) becomes an additional cost of the 45(50-5) good units produced. The total cost of
the 45 good units is $97,000. $90,000 (45units*$2,000 per unit) incurred to produce the good units plus the
$7,000 net cost of normal spoilage.

Normal Spoilage common to all jobs

Materials Control (spoiled goods at disposal value 5*$600) 3000

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 MOH Control (normal spoilage $10,000-$3,000) 7000
Work-in Process Control (specific job 5*$2,000) 10000

Abnormal Spoilage:

Materials Control (spoiled goods at current disposal value: 3000

Loss from Abnormal Spoilage 7000
Work-in Process Control (specific job) 10000
Accounting for defective (rework) units
As with spoiled units, defective units are classified as either normal or abnormal.
Normal defective units: The numbers of defective units in any particular production process that can be
expected despite efficient operations are known as normal defective units. Normal defective rework costs may
be:
A) Applied to a specific job.
B) Applied to all jobs.
Abnormal defective units: The number of defective units in excess of what is considered to be normal for an
efficient productive operation is called abnormal defective units. The total cost of reworking abnormal
defective units should be charged to “Loss from Abnormal Defective” Account.
Example-1
Assume that 40,000 units are placed into production for job 10. Normal defective units for this job are
estimated to be 400 whereas actual defective units were 1000.The total cost to rework the 1000 defective units
was as follows:
Per unit
Direct materials…………..$500……$0.50
Direct labor………………..1000……1.00
FOH-applied……………… 500…….0.50
$2000 $2.00
Required: Present the required entry assuming that normal rework costs are applied to
a. A specific job
b. All jobs
Solution
Abnormal defective = total defective –normal defective.
=1000 units –400 units = 600 units
To record normal defective
A) To specific job
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 WIP-job 10 (400x Br 2)……………….800
Materials (400x0.5)………....................200
Payroll (400x0.1)………………….…...400
FOH-Applied……….…………...…….200
B) To all jobs
FOH-control………………………..800
Materials…………….……………...200
Payroll……………………………..400
FOH-Applied………….……………200

To record abnormal Defectives:

Loss from Abnormal Defects (600x$2)………..1,200
Material (600x0.5)………………………………..300
Payroll (600x1)……………………………………600
FOH-Applied (600x0.5)…………………………..300
A compound entry can also be made
a) WIP-Job 10………………………………..800
Loss from Abnormal Defectives…………1,200
Materials………………………………… 500
Payroll………………………….…….…. 1,000
FOH-Applied…….…………………………500
b) FOH- control……………….……….. 800
Loss from defects……….………….. 1,200
Materials ………………….……………. 500
Payroll …………………………………….1, 000
FOH-Applied……………………………....500

Example-2

Consider Hull Machine Shop; assume that the 5 spoiled parts used in the illustration are reworked. The
journal entry for the $10,000 of total cost assigned to the 5 spoiled units before considering rework costs are
as follows:

Work-in Process Control (Specific Job) 10000

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 Materials Control 4000

Wage payable Control 4000

MOH Allocated 2000

Normal Rework common to all jobs:

MOH Control (rework costs) 3800

Materials Control 800

Wage payable control 2000

MOH Allocated 1000

Abnormal rework:

Loss from Abnormal Rework 3800

Materials Control 800

Wage Payable Control 2000

MOH Allocated 1000

Accounting for Scrap Materials

As for spoilage and defective units, the cost accounting system should provide a method of costing and
control for scrap. When the amount of scrap produced exceeds the norm it could be an indicator of
inefficiency. When the scarp value is small no entry is made until the scarp is sold. At the time the scarp is
sold the following entry will be made:
Cash (A/R)…… …….xxx
Scrap Revenue/WIP/FOH-con……………..xxx
The income from scrap sales is usually reported as “Other Income” in the income statement. When the value
of the scarp is relatively high an inventory card will be prepared and if both the quantity and the market value
of the scrap are known, the following journal entries are made.
To record the inventory:
Scrap Materials………………………..xxx
Scrap Revenue /WIP / FOH-ctrl…………..xxx
When the scrap is sold:
Cash (A/R)…………………xxx
Scrap Materials………………….xxx
Note:
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1. Sometimes scrap may be sold for more or less than the value at which it is recorded.
Any difference between the sales price and the recorded value is treated as an adjustment to the account
that was originally credited. (i.e., WIP, FOH- control, Scrap Revenue, Miscellaneous income, etc)
2. If the market value of the scrap is not known, no journal entry is made until the scrap is sold. At the time of
sale, the following entry is made:
Cash…………….……………………..xxx
Scrap Revenue (WIP or FOH-ctrl)…………..xxx
Example
Bisrat Teshome Company maintains a Scrap Inventory account for metal scrap recovered from operations in
the cutting department. On September 8, 2005 5,300 pounds of scrap with an estimated market value of
$2,385 are transferred from the Factory to the storeroom.
Instruction: make journal entries to record
1. The storage of the metal scrap. (Credit WIP account)
2. The cash sale of 1,900 pounds of scrap at recorded value.
3. The sale of 2,100 pounds of scrap at $0.52 per pound on credit.
4. The sale of 1,300 pounds of scrap at $ 0.39 per pound on credit.
Solution
1. Scrap Material……………..2,385
WIP…………………………….2, 385
2. Cash……………………….855
Scrap Materials……………855
3. A/R……………………..1,092
Scrap Material………………945
WIP…………………………147
4. A/R……………………507
WIP…………………....78
Scrap Material……………585

Accounting for Waste Material

As has been said some costs may be incurred to dispose waste materials. These costs may be allocated to all
jobs or charged to a specific job. The journal entry is as follows:
a) To specific job

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 WIP-Job y…………..xxx
Cash (A/R)…………….xxx
b) To all jobs
FOH-Control……………xxx
Cash (A/R)…………..xxx