Cost12eppt 18

CHAPTER 18
Spoilage, Rework, and Scrap

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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 18-2
Basic Terminology
 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
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
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
Process Costing and Spoilage
 Units of Normal Spoilage can be counted or
not counted when computing output units
(physical or equivalent) in a process-costing
system
 Counting all spoilage is considered preferable
Inspection Points 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
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
The Five-Step Procedure for Process
Costing with Spoilage
 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
Steps 1 - 5
Weighted-Average Method
Step 1: Summarize Physical Units Step
2: Compute Equivalent Units
STEP 1 STEP 2
Equivalent Units
Physical Direct Conversion
Flow of Production Units Materials Costs
Beginning Work in Process 25
Units Started during the current period 75
Total Units to Account For 100
Units Completed and Transferred Out During the Current Period: 100% 80 80 80
Normal Spoilage 7
100% complete as to materials 7
100% complete as to conversion costs 7
Abnormal Spoilage 3
100% complete as to materials 3
Ending Work in Process
10
Ending WIP is: 100% complete as to materials
10
10% complete as to conversion costs
1
Units Accounted For
100
Work Done in Current Period Only
100 91
Step 3: Cost per Equivalent Unit
Step 4: Summarize Total Costs
STEP 4 STEP 3
Total
Product Direct Conversion
Costs Materials Costs
Beginning Work in Process $ 4,000 $ 1,000 $ 3,000
Current Period Costs Added 14,000 4,000 10,000
Total Costs to Account For $ 18,000 5,000 13,000
Divide by Equivalent Units from Step 2 100 91
Cost per Equivalent Unit $ 50.00 $ 142.86
Step 5: Assign Total Costs
Cost Assignment:
Multiply Equivalent Units from Step 2 Direct Conversion Total
by Cost per Unit from Step 3 Materials Costs Costs
Good Units Completed and Transferred Out:

Costs Before Adding Normal Spoilage
Direct Materials: 90 X $50.00 $ 4,000
Conversion Costs: 90 X $142.86 $ 11,429 $ 15,429
Normal Spoilage:
Direct Materials: 7 X $50.00 $ 350
Conversion Costs: 7 X $142.86 1,000 $ 1,350
Total Cost of Good Units Completed & Transferred Out $$ 16,779
16,779
Abnormal Spoilage
Direct Materials: 3 X $50.00 150
Conversion Costs: 3 X $142.86 429 579
579
Ending Work in Process
643
Total Cost Accounted For $ 18,000
(Ties to Step 4, rounded to nearest $) $ 18,000
Steps 1 - 5
First-in, First-out Method

Step 1: Summarize Physical Units Step
2: Compute Equivalent Units
STEP 1 STEP 2
Equivalent Units
Physical Direct Conversion
Flow of Production Units Materials Costs
Beginning Work in Process 25
Units Started during the current period 75
Total Units to Account For 100
Good Units Completed and Transferred Out During the Current Period
From Beginning Work in Process: 25
Direct Materials (added at the start of the process): 25 X 0% this month 0
Conversion Costs (60 % completed last month): 25 X 40% this month 10
From Units Started & Completed This Month: 55
Direct Materials: 55 X 100% this month 55
Conversion Costs: 55 X 100% this month 55
Normal Spoilage: 7
Abnormal Spoilage: 3
Ending Work in Process 10
Ending WIP is: 100% complete as to materials 10
Units Accounted For 100
Work Done in Current Period Only 75 76
Step 3: Cost per Equivalent Unit
Step 4: Summarize Total Costs
STEP 4 STEP 3
Total
Product Direct Conversion
Costs Materials Costs
Beginning Work in Process $ 4,000
Current Period Costs Added 14,000 4,000 10,000
Total Costs to Account For $ 18,000 4,000 10,000
Divide by Equivalent Units from Step 2 75 76
Cost per Equivalent Unit $ 53.33 $ 131.58
Step 5: Assign Total Costs
Cost Assignment:
Multiply Equivalent Units from Step 2 Direct Conversion Total
by Cost per Unit from Step 3 Materials Costs Costs
Good Units Completed and Transferred Out:

Beginning Work in Process
Balance at start of period (work done in prior period) $ 1,000 $ 3,000
Add: Cost to finish beginning WIP
Direct Materials: 0 X $53.33 -
Conversion Costs: 10 X $131.58 1,316
Total from Beginning Inventory before normal spoilage $ 5,316
Units Started & Completed (all work done this period)

Direct Materials: 55 X $53.33 2,933
Conversion Costs: 55 X $131.58 7,237
Total Cost of Units Started & Completed before nomal spoilage 10,170
Normal Spoilage:
Conversion Costs: 7 X $131.58 921
Total Cost of Normal Spoilage 1,294
Total Cost of Good Units Completed & Transferred Out 16,780
16,780
Abnormal Spoilage:
Conversion Costs: 3 X $131.58 395
Total Cost of Normal Spoilage 555
555
Ending Work in Process (work done to-date)

665
Total Cost Accounted For $ 18,000

18,000
Standard Costing
 Either method may be modified by the
replacement of actual costs with
predetermined Standard Costs
 Simplifies methods since cost per equivalent
unit is not recalculated. Cost per equivalent
unit is simply the standard costs per unit.
Job Costing and Spoilage
 Job-costing systems generally distinguish
between normal spoilage attributable to a
specific job from normal spoilage common to
all jobs
Job Costing and
 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
Job Costing and
 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
overhead because it is common to all jobs
 The Budgeted Manufacturing Overhead Rate
includes a provision for normal spoilage
Job Costing and
 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
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
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
Aspects of Accounting for Scrap
1. Planning and Control, including physical
tracking
2. Inventory costing, including when and how it
affects operating income
NOTE: Many firms maintain a distinct

account for scrap costs
 Scrap Attributable to a Specific Job – job-
costing systems sometime 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
 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 is lower than it would be if the
overhead budget had not been reduced by
expected scrap revenues
 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
 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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CHAPTER 18

Spoilage, Rework, and Scrap

Good Units Completed and Transferred Out:

First-in, First-out Method

Good Units Completed and Transferred Out:

Units Started & Completed (all work done this period)

Ending Work in Process (work done to-date)

Total Cost Accounted For $ 18,000

NOTE: Many firms maintain a distinct

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