Spoilage, Rework,

and Scrap

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 Basic Terminology
 Spoilage – units of production, either fully or
partially completed, but that do not meet the
specifications required by customers for good
units and as a result they are discarded or sold
for reduced prices. EX. Expired foods might be sold.
 Rework – units of production that do not meet
the specifications required by customers but
which are subsequently repaired and sold as
good finished goods. EX. Simple damage
 Scrap – residual material that results from
manufacturing a product. Scrap has low total sales
value compared with sales value of the product.
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 Accounting for Spoilage
 Accounting for spoilage aims:
to determine the magnitude of spoilage costs
and
to distinguish between costs of normal and
abnormal spoilage
 To manage, control and reduce spoilage
costs, they should be highlighted, not
simply folded into production costs
 Note: Waste is often used to refer to the
part of raw materials left over after
production that has no further use or resale
value. © 2009 Pearson Prentice Hall. All rights reserved.
 Types of Spoilage
Normal Spoilage – is spoilage inherent in
a particular production process that arises
under efficient operating conditions
Management determines the normal
spoilage rate
Costs of normal spoilage are typically
included as a component of the costs of
good units manufactured because good
units cannot be made without also
making some units that are spoiled
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 Types of Spoilage- cont’d
 Abnormal Spoilage – is spoilage that is not
inherent in a particular production process and
would not arise under normal operating
conditions
Abnormal spoilage is considered avoidable and
controllable
Units of abnormal spoilage are calculated and
recorded in the Loss from Abnormal Spoilage
account, which appears as a separate line item
no the income statement
Abnormal spoilage is not inventorable
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 Process Costing and 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
Cost of spoiled units is assumed to be all costs
incurred on them prior to inspection point.
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 Process Costing and Spoilage
 In determining physical or equivalent units:
Abnormal spoilage  should be counted and
recorded separately.
Normal spoilage two approaches:
I. Include the spoiled units (spoilage as a separate
element of cost)
II. Exclude (ignore) the spoiled units in your count
(method of neglect)
 Approach I makes spoiled units visible. It treats the cost
of spoiled units as a separate element of cost

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 The Five-Step Procedure for Process
Costing with Spoilage
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
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 The Five-Step Procedure – cont’d
 Step 3: Compute Cost per Equivalent
Unit
 Step 4: Summarize Total Costs to
Account For
 Step 5: Assign Total Costs to:
1. Units Completed
2. Spoiled Units
3. Units in Ending Work in Process
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 Process costing and spoilage – Example
Appleton Company makes wooden toys in its
Forming Department, and it uses the weighted-
average method of process costing.
All direct materials are added at the beginning
of the process, and conversion costs are added
evenly during the process.
Spoiled units are detected upon inspection at
the end of the process and are disposed of at
zero net disposal value.
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18-10
Summary data for August 2009 are:

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18-11
1. For each cost category, calculate equivalent units.
Appleton Company for August 2009

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Pearson
Prentice
Hall. All
rights
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reserved. 18-12
3rd, 4th and 5th Steps

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18-13
 Job Costing and
Accounting for Spoilage
Job costing systems generally distinguish
between normal spoilage attributable to a
specific job from normal spoilage common to all
jobs
When normal spoilage occurs because of the
specifications of a particular job, that job bears
the cost of the spoilage minus the disposal value
of the spoilage

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 Job Costing and
Accounting for Spoilage
 When normal Spoilage is Common to all
Jobs, it is accounted as manufacturing
overhead and allocated.
The Budgeted Manufacturing Overhead Rate
includes a provision for normal spoilage
 If the spoilage is abnormal, the net loss is charged to
the Loss From Abnormal Spoilage account.
 Abnormal spoilage costs are not included as a part of the
cost of good units produced

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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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 Accounting for Scrap
 No distinction is made between
normal and abnormal scrap because
no cost is assigned to scrap
 If scraps have sales value we will be faced with two
issues:
When should the value of scrap be recognized in
the accounting records:- at the time scrap is
produced or at the time scrap is sold
How should revenues from scrap be accounted
for? Two methods: Other revenue and Cost
reduction.
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 Recognizing scrap at time of sales: two methods
I) ScrapRecognized as Other Revenue
 Used when the dollar amount of scrap is
immaterial
 No entry is made in the accounts until
the scrap is sold.
 Regards scrap sales as a separate line
item of other revenues Note that no
entry is made on the books when scrap is
returned to materials inventory.
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 Cont’d…………………
II) Scrap Recognized as a cost reduction
 it is used when the dollar amount of
scrap is material and the scrap is sold
quickly after it is produced.
 It regards scrap sales as a reduction of the
cost of producing the product.
 To apply this method, we should
distinguish whether the scrap is
attributable to a specific job or is
common to all jobs.
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 Cont’…….
 When Scrap is Attributable to a Specific Job, the

sale of scrap would reduce the WIP inventory of

the specific job in which the scrap originated.
Cash A/R--------- ----------- XXX
Work-in-Process Control --------XXX
 All scrap revenues, whatever the amount, are credited

to the specific job.

 Scrap revenues reduce the costs of the job.

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 Cont’d……..
When Scrap is Common to all
Jobs – all products bear
production costs .
The actual amount received when the
scrap is sold is treated as an actual
overhead cost reduction.
Cash A/R--------- ----------- XXX

FOH Control ---------------XXX

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 Recognizing scraps at the time of production
Applied when the value of the scrap is material,
and the firm to delay sales of scrap
Enables to recognize production costs and
related scrap revenues in the same accounting
period.
I) Scrap Recognized as Other Revenue
Materials control (scrap inventory) -- xxx
Scrap Revenues ---------------- xxx
(To record Scrap returned to storeroom)

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 Recognizing scraps at the time of
production
II) Scrap Recognized as a cost reduction
A) Scrap Attributable To a Specific Job
Materials control (scrap inventory) ------XXX
Work-in-Process Control -------- XXX
(To record Scrap returned to storeroom)
B) Scrap Common to All Jobs
Materials control (scrap inventory) ------ XXX
Manufacturing Overhead
Control --- XXX
(to record Scrap returned to storeroom)
 When the scrap is sold, the journal entry is:
Cash or Accounts Receivable ------- XXX
material control(scrap inventory)-----xxx
Materials© 2009
Control (scrap
Pearson Prentice inventory)
Hall. All rights reserved. -----XXX
End of chapter

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