CHAPTER 18

Spoilage, Rework, and Scrap

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 Basic Terminology
Spoilage – units of production 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
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Basic Terminology

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 Inspection Point & 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

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 Accounting for Spoilage

Determine the magnitude of spoilage costs

Distinguish between costs of normal and abnormal spoilage

Highlight spoilage costs, not simply folded into production

costs

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 Accounting for Spoilage

Beginning WIP
1,500 units
10,000 units 7,000 units
completed

8,500 units
started Spoilage Ending WIP
1,000 units 2,000 units

Normal Abnormal
Spoilage Spoilage
700 units
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Accounting for Spoilage
Normal Spoilage occurs as a part of regular operation

of an efficient process. Costs of normal spoilage are

typically included as a component of the costs of good
units manufactured
The normal spoilage rate =

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 Accounting for Spoilage

Abnormal Spoilage is results of unusual operating problems.

Abnormal spoilage is considered avoidable and controllable.

Abnormal spoilage is recorded as a loss of the period

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Accounting for Spoilage

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 Process Costing and Spoilage
The Five-Step Procedure
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
Step 3: Compute Cost per Equivalent Unit
Step 4: Summarize Total Costs to Account For
Step 5: Assign Total Costs to: Units Completed; Spoiled Units; Units
in Ending Work in Process
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 Process Costing and Spoilage - Example
Anzio Company manufactures a recycling container in its forming department.

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Process Costing and Spoilage - Example

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WEIGHTED-AVERAGE METHOD & SPOILAGE

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WEIGHTED-AVERAGE METHOD & SPOILAGE

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FIFO METHOD & SPOILAGE

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FIFO METHOD & SPOILAGE

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 Process Costing and Spoilage - Example

Journal Entries

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Account for spoilage at various stages of completion

 Spoilage costs vary based on the point at which inspection is

carried out

 The cost of spoiled units equals all costs incurred in producing

them up to the point of inspection

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Account for spoilage at various stages of completion

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Account for spoilage at various stages of completion

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 Job Costing and Spoilage
Normal spoilage costs are inventoriable costs. It can be assigned

directly or indirectly to job.

 Normal spoilage attributable to a specific job: that job bears the
cost of the spoilage minus the disposal value of the spoilage
 Normal spoilage common to all Jobs: the spoilage is allocated
indirectly to the job as manufacturing overhead
Abnormal spoilage costs are written off as costs of the accounting

period

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 Job Costing and Spoilage - Example
In the Hull Machine Shop, 5 aircraft parts out of a job lot of
50 aircraft parts are spoiled. The costs assigned prior to the
inspection point are $2,000 per part. When the spoilage is
detected, the spoiled goods are inventoried at $600 per part,
the net disposal value.

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Job Costing and Spoilage - Example
Normal spoilage attributable to a specific job
The costs of 5 spoiled parts: 5 x 2,000 = $10,000
The disposal value of 5 spoiled parts: 5 x 600 = $3,000
The net cost of the normal spoilage: 10,000 – 3,000 = $7,000
The total cost of 45 good parts: 45x2,000 + 7,000 = $97,000
The cost per good part: 97,000/45 = $2,156/part
Entry: Dr. Materials: 3,000
Cr. Work-in-process: 3,000

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Job Costing and Spoilage - Example
Normal spoilage common to all jobs
Assume: the allocated rate of normal spoilage overhead costs is
$50 per good units
The normal spoilage overhead costs allocated to the job of 45 good
units: 50 x 45 = $2,250
The total cost of 45 good parts: 45x2,000 + 2,250 = $92,250
The cost per good part: 92,250/45 = $2,050/part
Entry: Dr. Materials: 3,000
Dr. MOH : 7,000
Cr. Work-in-process: 10,000
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Job Costing and Spoilage - Example
Abnormal Spoilage: If the spoilage is abnormal, the net

loss is charged to the Loss From Abnormal Spoilage account

Entry:

Dr. Materials: 3,000

Dr. Loss from Abnormal Spoilage: 7,000
Cr. Work-in-process: 10,000

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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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 Job Costing and Rework
Normal rework Dr. WIP
attributable to Cr. Materials, Wages Payable, MOH
a specific job allocated
Normal rework Dr. MOH
common to all jobs Cr. Materials, Wages Payable, MOH
allocated
Abnormal Dr. Loss from abnormal rework
rework Cr. Materials, Wages Payable, MOH
allocated
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Accounting for Scrap
Scrap is recognized in a firm’s accounting records either at the

time of sale or at the time of production.

If scrap is immaterial, it is recognized as revenue when sold.

If scrap is material, the net realizable value of scrap reduces

the cost of a specific job or, when common to all jobs, reduces
Manufacturing Overhead Control

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 Accounting for Scrap
Recognizing Scrap Recognizing Scrap
at the time of its sale at the time of its production
Scrap is immaterial Dr Cash/ Acc Receivable
Cr Scrap Revenue
Scrap is immaterial
Scrap returned to store
Dr . Material
Scrap Attributable Dr. Cash/Acc Receivable Cr. WIP
to a Specific Job Cr. WIP Sale of scrap
Dr. Cash / Acc Receivable
Cr. Material
Scrap returned to store
Dr. Material
Scrap Common Dr. Cash/Acc Receivable Cr MOH
to all Jobs Cr. MOH Sale of scrap
Dr. Cash / Acc Receivable
Cr. Material

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