Scrap

18 - 1 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Spoilage, Rework,
and Scrap
Chapter 18
Learning Objective 1
Distinguish among spoilage,
rework, and scrap.
Terminology
Spoilage refers to unacceptable units
discarded or sold for reduced prices.
Rework is units that are repaired.
Scrap is material left over.
Describe the accounting
procedures for normal and
abnormal spoilage.
Normal Spoilage
Normal spoilage is spoilage that is an inherent
result of the particular production process and
arises even under efficient operating conditions.
Normal spoilage rates should be computed using
total good units completed as the base, not total
actual units started in production.
Abnormal Spoilage
Abnormal spoilage is spoilage that should not
arise under efficient operating conditions.
Companies record the units of abnormal
spoilage and keep a separate Loss from
Abnormal Spoilage account.
Process Costing and
Spoilage Example
Big Mountain, Inc., manufactures skiing accessories.
All direct materials are added at the beginning of
the production process.
In October, $95,200 in direct materials were
introduced into production.
Assume that 35,000 units were started, 30,000
good units were completed, and 1,000 units
were spoiled (all normal spoilage).
Process Costing and
Spoilage Example
Ending work in process was 4,000 units
(each 100% complete as to direct material costs).
Spoilage is detected upon completion of the process.
Spoilage is typically assumed to occur at the stage
of completion where inspection takes place.
Process Costing and
Spoilage Example
Approach A recognizes spoiled units when
computing output in equivalent units.
Approach B does not count spoiled units
when computing output in equivalent units.
Approach A Example
Costs to account for $95,200
Divide by equivalent units 35,000
Cost per equivalent unit $ 2.72
Good units completed: 30,000 $2.72 $81,600
Add normal spoilage: 1,000 $2.72 2,720
Costs of good units transferred out $84,320
Work in process: 4,000 $2.72 10,880
Costs accounted for $95,200
Approach B Example
Costs to account for $95,200
Divide by equivalent units 34,000
Cost per equivalent unit $ 2.80
Good units completed: 30,000 $2.80 $84,000
Costs of good units transferred out $84,000
Work in process, ending: 4,000 $2.80 11,200
Costs accounted for $95,200
Account for spoilage in
process costing using the
weighted-average method.
Weighted-Average: Spoilage
The following example is for the month of
November and relates to Big Mountain, Inc.
Direct materials are introduced at the beginning
of the production cycle.
Conversion costs are added evenly during the cycle.
Normally the spoiled units are 2% of the output.
Assume that Big Mountain, Inc., had 1,000 units
in the beginning work in process inventory,
100% complete for materials ($9,700), and 60%
complete for conversion ($10,000).
Ending work in process inventory was 4,000 units
(100% materials and 20% conversion).
Costs added during the month were $87,500 for
materials and $72,000 for conversion.
What are the costs assigned to the units completed,
spoiled, and in ending work in process inventory?
Physical Units (Step 1)
Work in process, beginning (November 1)
100% material, 60% conversion costs 1,000
Started during November: 35,000
36,000
Good units completed and transferred out: 31,000
Work in process, ending inventory:
100% material 20% conversion costs 4,000
35,000
What is the number of spoiled units?
36,000 35,000 = 1,000
What is the normal spoilage?
31,000 2% = 620
What is the abnormal spoilage?
1,000 620 = 380
Compute Equivalent
Units (Step 2)
Materials Conversion
Completed and transferred 31,000 31,000
Normal spoilage 620 620
Abnormal spoilage 380 380
Ending inventory 4,000 800
Equivalent units 36,000 32,800
100% 20%
Compute Equivalent
Unit Costs (Step 3)
Beginning inventory $ 9,700 $10,000
Current costs 87,500 72,000
Total $97,200 $82,000
Cost per unit $2.70 $2.50
Summarize Total Costs (Step 4)
Work in process beginning inventory:
Materials $ 9,700
Conversion 10,000
Total beginning inventory $ 19,700
+ Current costs:
Materials $87,500
Conversion 72,000
= Costs to account for $179,200
Assign Total Costs (Step 5)
Good units completed and transferred out
(31,000 units):
Costs before adding normal spoilage:
31,000 ($2.70 + $2.50) $161,200
Normal spoilage: 620 ($2.70 + $2.50) 3,224
Total $164,424
Abnormal spoilage: 380 ($2.70 + $2.50) $ 1,976
Work in process, ending (4,000 units):
Direct materials (4,000 $2.70) $10,800
Conversion (800 $2.50) 2,000
Total $12,800
Costs of units completed and transferred out
(including normal spoilage) $164,424
Cost of abnormal spoilage 1,976
Costs in ending inventory 12,800
Total costs accounted for $179,200
The $1,976 cost of abnormal spoilage
is assigned to the Loss from
Abnormal Spoilage account.
process costing using
the first-in, first-out
(FIFO) method.
Work in process, beginning (November 1):
Started during November 35,000
36,000
Good units completed and transferred out:
From beginning inventory 1,000
Started and completed 30,000
31,000
Work in process, ending inventory:
Normal spoilage 620
Abnormal spoilage 380
Compute Equivalent
Units (Step 2)
Good units completed
and transferred out:
From beginning inventory 0 400
Started and completed 30,000 30,000
Normal spoilage 620 620
Abnormal spoilage 380 380
Ending inventory 4,000 800
Compute Equivalent
Unit Costs (Step 3)
Current costs $87,500 $72,000
Divided by equivalent units 35,000 32,200
Cost per unit $2.50 $2.236*
*$2.236 (rounded)
Summarize Total Costs (Step 4)
Work in process beginning inventory:
Materials $ 9,700
Conversion 10,000
Total beginning inventory $ 19,700
+ Current costs:
Materials $ 87,500
Conversion 72,000
= Costs to account for: $179,200
Good units completed and transferred out:
From beginning inventory:
Work in process $ 19,700.00
Conversion costs added in
current period (400 $2.236) 894.40
Total $ 20,594.40
Started and completed:
30,000 ($2.50 + $2.236) $142,080.00
Costs before adding normal spoilage:
($20,594.40 + $142,080.00) $162,674.40
Normal spoilage:
620 ($2.50 + $2.236) 2,936.32
Total $165,610.72
Abnormal spoilage:
380 ($2.50 + $2.236) $1,799.68
Work in process, ending (4,000 units):
Direct materials (4,000 $2.50) $10,000
Conversion (800 $2.236) 1,789
Total $11,789
Costs of units completed and transferred out
(including normal spoilage) $165,610.72
Cost of abnormal spoilage 1,799.68
Costs in ending inventory 11,789.00
Total costs accounted for $179,200.00
The $1,799.68 costs of abnormal spoilage are
assigned to the Loss from Abnormal Spoilage
account.
process costing using the
standard-costing method.
Standard-Costing: Spoilage
The standard-costing method makes
calculating equivalent unit costs
unnecessary and so simplifies
process costing.
Journal Entries
Assume that the completed units are transferred
to Finished Goods.
What are the journal entries?
Finished Goods XXX
Work in Process XXX
To transfer good units completed in November
Journal Entries
Loss from Abnormal Spoilage XXX
Work in Process XXX
To recognize abnormal spoilage detected in
November
Account for spoilage in job costing.
Job Costing: Spoilage
With a job-costing system, companies can
decide to assign normal spoilage to specific jobs.
Alternatively, they can allocate normal spoilage
to all jobs as part of manufacturing overhead.
Loss from abnormal spoilage is recorded as
a cost of the period.
Assume that 5 parts out of 40 parts of Whitefish
Machine Shops Job #10 are spoiled (normal).
Costs assigned prior to the inspection point
are $1,000 per part.
The current disposal price of the spoiled parts
is $200 per part.
When the spoilage is detected, the spoiled goods
are inventoried at $200 per part.
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 reduced by
the current disposal value of that spoilage.
What is the journal entry?
Materials Control
(spoiled goods at current
disposal value): 5 $200 1,000
Work in Process Control (Job #10) 1,000
To recognize disposal value of spoiled parts
Work in Process (Job # 10)
Parts 40,000 Parts 1,000
(40 $1,000) (5 $200)
Balance 39,000
What is the total cost of the 35 good units?
(35 $1,000) + (5 $800) = $39,000
Normal spoilage common to all jobs:
In some cases, spoilage may be considered a
normal characteristic of a given production cycle.
The spoilage is not charged to a specific job.
Materials Control
Manufacturing Overhead
Control (normal spoilage) 4,000
To recognize spoiled parts
Abnormal spoilage:
If the spoilage is abnormal, the net loss is
highlighted and always charged to an
abnormal loss account.
Assume that the 5 parts of Whitefish Machine
Shops Job #10 are considered abnormal spoilage.
Materials Control
Loss from Abnormal Spoilage 4,000
To recognize spoiled parts
Account for rework in job costing.
Rework Units Example
Normal rework attributable to a specific job:
Assume that the 5 parts of Whitefish Machine Shops
Job #10 can be reworked for a total cost of $1,800.
$5,000 of costs associated with these parts have
already been assigned to Job #10 before rework.
Rework Units Example
Work in Process (Job #10) 1,800
Various Accounts 1,800
To charge rework costs to the job
Normal rework common to all jobs:
Debit Manufacturing Overhead Control
(rework costs).
Abnormal rework:
Debit Loss from Abnormal Rework.
Account for scrap.
Recognizing Scrap
Scrap is recognized in the accounting
records either at the time of its sale or
at the time of its production.
Sale of scrap, if immaterial, is often
recognized as other revenues.
Recognizing Scrap Example
Assume that Job #10 of Whitefish Machine
Shop generates normal scrap with a total
sales value of $300 (it is assumed that the
scrap returned to the storeroom is sold quickly).
Recognizing scrap at the time of its sale:
Cash or Accounts Receivable 300
Sales of Scrap 300
To record other revenue sale of scrap
Scrap attributable to a specific job:
Job-costing systems sometimes trace the sale
of scrap to the jobs that yielded the scrap.
Assume that the scrap can be traced
specifically to Job #10.
Work in Process (Job #10) 300
To record sale of scrap
Scrap common to all jobs:
Manufacturing Overhead Control 300
Assume that the scrap is inventoriable.
What is the journal entry when scrap is attributable
to Job #10 and it is returned to the storeroom?
Materials Control 300
Work in Process (Job #10) 300
To record scrap returned to stores
What is the journal entry when scrap is common
to all jobs and it is returned to the storeroom?
Manufacturing Overhead Control 300
To record scrap returned to stores
What is the journal entry when scrap is sold?
What is the journal entry when scrap is reused?
Work in Process Control 300
To record use of scrap
End of Chapter 18

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18 - 1 2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

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