20/01/2023

SPOILAGE, SCRAP, REWORK

LECTURE 6

Outline

Basic terminology
Accounting for spoilage
Types of spoilage
Process costing and spoilage
Job costing and spoilage
Accounting for scrap

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Basic Terminology

• Spoilage—units of production, either fully or partially completed,

that do not meet the specifications required by customers for good
units and that are discarded or sold for reduced prices
• Rework—units of production that do not meet the specifications
required by customers but which are subsequently repaired and
sold as good finished goods.
• Scrap—residual material that results from manufacturing a
product. Scrap has low total sales value compared with the total
sales value of the product

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

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Types of Spoilage

• Normal spoilage is spoilage inherent in a particular production

process that arises under efficient operating conditions.
• 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.
• Management makes a conscious decision about the production
rate per hour which will generate a certain level of normal
spoilage

Types of Spoilage

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 on the income statement

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Units of normal spoilage can be counted or not

counted when computing output units (physical
or equivalent) in a process costing system.

Process Counting all spoilage is considered preferable

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

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
The 5-Step computation of output units

Procedure for Step 3: Summarize total costs to account for .

Process Costing
with Spoilage
Step 4: Compute cost per equivalent unit.

Units completed
Step 5: Assign total costs
Spoiled units
to: Units in ending work-in-process

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Lecture example – 19-35 & 19-36

conversion costs are added evenly during the process
direct materials are added at the beginning of the process
Spoiled units are detected upon inspection at the end of the process have zero net disposal value

Physical units DM Conversion

OWIP 3,600
Started during the period 30,000
To account for 33,600
Good units completed & transferred out 24,600
Normal spoilage (10% * 24,600) 2,460
Abnormal spoilage 1,500
CWIP 5,040
To account for 33,600

Lecture example- WAC

Statement of equivalent units

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Lecture example- WAC

Statement of costs
Total production DM Conversion
costs
OWIP 7,269

Cost added during the period 100,159

Total costs 107,428

Cost per EU

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Lecture example- WAC

Assignment of cost
Total costs DM Conversion

Good units completed & transferred out

Costs before adding normal spoilage

Normal spoilage

Total costs of good units completed

Abnormal spoilage

CWIP

Total costs

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Physical units DM Conversion

OWIP 3,600
Started during the period 30,000
To account for 33,600
Good units completed & transferred out
From OWIP 3,600
Started & completed (24,600-3,600) 21,000
Normal spoilage 2,460
Abnormal spoilage 1,500
CWIP 5,040
To account for 33,600

Lecture example- FIFO

Statement of equivalent units

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Lecture example- FIFO

Statement of costs
Total costs DM Conversion

OWIP 7,269

Cost added during the period 100,159

Total costs 107,428

Cost per EU

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Total costs DM Conversion

Good units completed & transferred out

OWIP
Costs added to OWIP

Started & completed

Normal spoilage

Total costs of good units completed

Abnormal spoilage

CWIP

Total

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Job Costing and Spoilage

Job-costing systems generally distinguish between normal spoilage

attributable to a specific job from normal spoilage common to all jobs.

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 minus the disposal value of the spoilage

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Job Costing and Spoilage

Normal spoilage common to all jobs: in some cases, spoilage may be considered a normal
characteristic of the production process

The spoilage is costed as manufacturing The budgeted manufacturing overhead rate

overhead because it is common to all jobs. includes a provision for normal spoilage

Abnormal 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 loss from abnormal rework account that
appears on the income statement

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No distinction is made between

normal and abnormal scrap because
no cost is assigned to scrap.

The only distinction made is between

Accounting scrap attributable to a specific job
for Scrap and scrap common to all jobs
• Planning and control, including physical
tracking
• Inventory costing, including when and how it
affects operating income
• NOTE: Many firms maintain a distinct account
for scrap costs

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Accounting for Scrap

Scrap attributable to a specific job—job- Done only when the tracing can be done in an economic
costing systems sometime trace the scrap feasible way
revenues to the jobs that yielded the scrap. No cost assigned to scrap

Scrap common to all jobs—all products bear Expected scrap revenues are considered when setting is
production costs without any credit for scrap lower than it would be if the overhead budget had not
revenues except in an indirect manner been reduced by expected scrap revenues

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Recognizing scrap at the time of its

production—sometimes the value of
the scrap is material, and the time
between storing and selling it can
be long.
Accounting
for Scrap The firm assigns an inventory cost
to scrap at a conservative estimate
of its net realizable value so that
production costs and related scrap
revenues are recognized in the
same accounting period

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