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Chapter 5 Spoilage, Rework, and Scrap

This document discusses accounting for spoilage, rework, and scrap in manufacturing processes. It defines spoilage, rework, and scrap and explains how to account for normal versus abnormal amounts. Process costing and job costing methods are outlined for tracking and assigning costs of spoilage and rework. Scrap is also addressed, including how costs are assigned for scrap attributable to specific jobs versus common to all jobs.

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Mulugeta Girma
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943 views21 pages

Chapter 5 Spoilage, Rework, and Scrap

This document discusses accounting for spoilage, rework, and scrap in manufacturing processes. It defines spoilage, rework, and scrap and explains how to account for normal versus abnormal amounts. Process costing and job costing methods are outlined for tracking and assigning costs of spoilage and rework. Scrap is also addressed, including how costs are assigned for scrap attributable to specific jobs versus common to all jobs.

Uploaded by

Mulugeta Girma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 5 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.
 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.
 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.
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 5-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.
 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 EndingWork in Process
Steps 1 & 2 Illustrated
Steps 3, 4 & 5 Illustrated
Steps 1 & 2, Illustrated
Steps 3, 4 & 5, Illustrated
Steps 1 & 2, Illustrated
Steps 3, 4 & 5, Illustrated
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 Accounting for Spoilage

 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.
 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 Accounting for 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.
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 & 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.
Accounting for Scrap

 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 economic 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.
Accounting for Scrap

 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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