ACCT 3420

Intermediate Managerial Accounting

Chapter 19

Spoilage, Rework, and Scrap

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Learning Objectives (1 of 2)
1. Distinguish among spoilage, rework and scrap,
and apply the appropriate methods to account for
normal and abnormal spoilage.
2. Apply process-costing methods to account for
spoilage using weighted-average and first-in,
first-out (FIFO) methods.
3. Apply the standard-costing method to account for
spoilage.

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Learning Objectives (2 of 2)
4. Allocate costs of normal spoilage.
5. Apply job cost allocation procedures to account
for spoilage in job costing.
6. Apply cost allocation procedures to account for
reworked units and scrap.

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Spoilage, Rework and Scrap
• Spoilage — output that fails to attain either a
specified performance level or standard of
composition
• Rework - Conversion of production rejects into
reusable products of the same or lower quality
• Scrap - Residual material with a low total sales
value, often zero, compared with the total sales
value of the product (may be reused or firm may
have to pay to remove)

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The Goal of 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
• 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.

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Types of Spoilage — Abnormal
• 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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The Process of Accounting for Spoilage

Exhibit 19-2 Using Equivalent Units to Account for the Direct Materials Costs of Good and Spoiled Units for
Chipmakers, Inc., for May

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Inspection Points and Spoilage
• Inspection point — stage of production process
where products are examined to determine if they
are acceptable or unacceptable units.
• Spoilage is typically assumed to occur at the stage
of completion where inspection takes place.
– Normal spoilage costs are allocated to units in ending
WIP only if they have passed the inspection point
– WIP not sufficiently complete will not be allocated any
costs of spoilage
– When there are multiple inspection points, WIP will attract
spoilage costs as it passes each point
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The Five-Step Procedure for Process
Costing with Spoilage (1 of 2)
• 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 for Process
Costing with Spoilage (2 of 2)
• Step 3: Summarize total costs to account for
• Step 4: Compute cost per equivalent unit
• Step 5: Assign total costs to:
– Units completed
– Spoiled units
– Units in ending work in process

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Process Costing — Weighted Average
Method and Spoilage
• The cost per good unit completed and transferred
out equals the total costs transferred out, including
the costs of normal spoilage, divided by the
number of good units produced
• The cost of abnormal spoilage is assigned to the
Loss from Abnormal Spoilage account and does
not affect the cost of good units

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Process Costing — Weighted Average
Method and Spoilage (steps 1 and 2)

Exhibit 19-3A Weighted-Average Method of Process Costing with Spoilage for the Forming Department for
July

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Process Costing — Weighted Average
Method and Spoilage (steps 3, 4, and 5)

Exhibit 19-3B Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory

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Process Costing — FIFO Method and
Spoilage
• FIFO includes incremental effort to complete goods
from previous period
• Under FIFO, previous period goods are transferred
out first
• Pure FIFO would require normal spoilage costs to be
split using costs of goods started and completed in
current period and those completed from beginning
WIP
• Simpler, modified FIFO only uses costs of the current
period in assigning normal spoilage costs
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Process Costing — FIFO Method and
Spoilage (steps 1 and 2)

Exhibit 19-4A First-In, First-Out (FIFO) Method of Process Costing with Spoilage for the Forming
Department for July

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Process Costing — FIFO Method and
Spoilage (steps 3, 4 and 5)

Exhibit 19-4B Summarize the Total Costs to Account For, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process Inventory

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Allocating Costs of Normal Spoilage
• Normal spoilage is inherent in a given production
process.
• Normal Spoilage Attributable to a Specific Job
– The job bears the cost of the spoilage plus the disposal value of
the spoilage
• Normal Spoilage Common to All Jobs
– In some cases, spoilage may be considered a normal
characteristic of the production process
– The spoilage is treated as manufacturing overhead because it is
common to all jobs
– The Budgeted Manufacturing Overhead Rate includes a provision
for normal spoilage
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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.
• 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 Reworked Units
• Reworked units are unacceptable units of
production that are subsequently reworked into
good units and sold.
• Three types of rework:
1. Normal rework attributable to a specific job (rework
costs are charged to that job)
2. Normal rework common to all jobs (costs are charged
to manufacturing overhead and allocated to all jobs)
3. Abnormal rework (charged to the Loss from Abnormal
Rework account 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.
• The only distinction made is between scrap
attributable to a specific job and scrap common to
all jobs.

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Aspects of Accounting for Scrap
• Two aspects of accounting for scrap:
– 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.
• Scrap is recognized at:
– Time of production, or
– Time of sale

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Recognizing Scrap at Time of Sale (1 of 2)
• Scrap Attributable to a Specific Job:
– Job-costing systems sometimes trace the scrap
revenues to the jobs that yielded the scrap
– Done only when the tracing can be done in an
economically feasible way
– No cost assigned to scrap
– Revenue from sale of scrap reduces overall costs of
job

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Recognizing Scrap at Time of Sale (2 of 2)
• Scrap Common to All Jobs
– All products bear production costs without any credit
for scrap revenues except in an indirect manner
• Expected scrap revenues are considered when
setting overhead budget rate
– The budgeted overhead rate is thus lower than if no
credit for scrap is recognized

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Recognizing Scrap at Time of Production
• If the value of the scrap is material, and the time
between storing and selling it is long, then this
recognition at time of production is preferred
• The firm assign 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
• Applied only where the tracing of scrap can be
done in an economically feasible way

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