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Spoilage, Rework, and Scrap

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1 Spoilage, Rework, and Scrap
Chapter 18

2 Distinguish among spoilage,
Learning Objective 1 Distinguish among spoilage, rework, and scrap.

3 Terminology Spoilage refers to unacceptable units
discarded or sold for reduced prices. Rework is units that are repaired. Scrap is material left over.

4 Describe the accounting procedures for normal and
Learning Objective 2 Describe the accounting procedures for normal and abnormal spoilage.

5 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.

6 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.

7 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).

8 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.

9 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.

10 Approach A Example Costs to account for $95,200
Divide by equivalent units ,000 Cost per equivalent unit $ Good units completed: 30,000 × $2.72 $81,600 Add normal spoilage: 1,000 × $ ,720 Costs of good units transferred out $84,320 Work in process: 4,000 × $ ,880 Costs accounted for $95,200

11 Approach B Example Costs to account for $95,200
Divide by equivalent units ,000 Cost per equivalent unit $ Good units completed: 30,000 × $2.80 $84,000 Costs of good units transferred out $84,000 Work in process, ending: 4,000 × $ ,200 Costs accounted for $95,200

12 Account for spoilage in process costing using the
Learning Objective 3 Account for spoilage in process costing using the weighted-average method.

13 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.

14 Weighted-Average: Spoilage
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).

15 Weighted-Average: Spoilage
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?

16 Physical Units (Step 1) Work in process, beginning (November 1)
100% material, 60% conversion costs ,000 Started during November: ,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

17 Physical Units (Step 1) 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

18 Compute Equivalent Units (Step 2)
Materials Conversion Completed and transferred 31, ,000 Normal spoilage Abnormal spoilage Ending inventory , Equivalent units , ,800 100% 20%

19 Compute Equivalent Unit Costs (Step 3)
Materials Conversion Beginning inventory $ 9,700 $10,000 Current costs , ,000 Total $97,200 $82,000 Equivalent units , ,800 Cost per unit $ $2.50

20 Summarize Total Costs (Step 4)
Work in process beginning inventory: Materials $ 9,700 Conversion ,000 Total beginning inventory $ 19,700 Current costs: Materials $87,500 Conversion ,000 Costs to account for $179,200

21 Assign Total Costs (Step 5)
Good units completed and transferred out (31,000 units): Costs before adding normal spoilage: 31,000 × ($ $2.50) $161,200 Normal spoilage: 620 × ($ $2.50) ,224 Total $164,424

22 Assign Total Costs (Step 5)
Abnormal spoilage: 380 × ($ $2.50) $ 1,976 Work in process, ending (4,000 units): Direct materials (4,000 × $2.70) $10,800 Conversion (800 × $2.50) ,000 Total $12,800

23 Assign Total Costs (Step 5)
Costs of units completed and transferred out (including normal spoilage) $164,424 Cost of abnormal spoilage ,976 Costs in ending inventory ,800 Total costs accounted for $179,200 The $1,976 cost of abnormal spoilage is assigned to the Loss from Abnormal Spoilage account.

24 Account for spoilage in the first-in, first-out
Learning Objective 4 Account for spoilage in process costing using the first-in, first-out (FIFO) method.

25 Physical Units (Step 1) Work in process, beginning (November 1):
100% material, 60% conversion costs 1,000 Started during November ,000 36,000 Good units completed and transferred out: From beginning inventory ,000 Started and completed ,000 31,000

26 Physical Units (Step 1) Work in process, ending inventory:
100% material, 20% conversion costs 4,000 Normal spoilage Abnormal spoilage

27 Compute Equivalent Units (Step 2)
Materials Conversion Good units completed and transferred out: From beginning inventory Started and completed 30, ,000 Normal spoilage Abnormal spoilage Ending inventory , Equivalent units , ,200

28 Compute Equivalent Unit Costs (Step 3)
Materials Conversion Current costs $87,500 $72,000 Divided by equivalent units 35, ,200 Cost per unit $ $2.236* *$2.236 (rounded)

29 Summarize Total Costs (Step 4)
Work in process beginning inventory: Materials $ 9,700 Conversion ,000 Total beginning inventory $ 19,700 Current costs: Materials $ 87,500 Conversion ,000 Costs to account for: $179,200

30 Assign Total Costs (Step 5)
Good units completed and transferred out: From beginning inventory: Work in process $ 19,700.00 Conversion costs added in current period (400 × $2.236) Total $ 20,594.40 Started and completed: 30,000 × ($ $2.236) $142,080.00

31 Assign Total Costs (Step 5)
Costs before adding normal spoilage: ($20, $142,080.00) $162,674.40 Normal spoilage: 620 × ($ $2.236) ,936.32 Total $165,610.72

32 Assign Total Costs (Step 5)
Abnormal spoilage: 380 × ($ $2.236) $1,799.68 Work in process, ending (4,000 units): Direct materials (4,000 × $2.50) $10,000 Conversion (800 × $2.236) ,789 Total $11,789

33 Assign Total Costs (Step 5)
Costs of units completed and transferred out (including normal spoilage) $165,610.72 Cost of abnormal spoilage ,799.68 Costs in ending inventory ,789.00 Total costs accounted for $179,200.00 The $1, costs of abnormal spoilage are assigned to the Loss from Abnormal Spoilage account.

34 Account for spoilage in process costing using the
Learning Objective 5 Account for spoilage in process costing using the standard-costing method.

35 Standard-Costing: Spoilage
The standard-costing method makes calculating equivalent unit costs unnecessary and so simplifies process costing.

36 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

37 Journal Entries Loss from Abnormal Spoilage XXX Work in Process XXX
To recognize abnormal spoilage detected in November

38 Account for spoilage in job costing.
Learning Objective 6 Account for spoilage in job costing.

39 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.

40 Job Costing: Spoilage Assume that 5 parts out of 40 parts of Whitefish
Machine Shop’s 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.

41 Job Costing: 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 reduced by the current disposal value of that spoilage. What is the journal entry?

42 Job Costing: Spoilage Materials Control (spoiled goods at current
disposal value): 5 × $ ,000 Work in Process Control (Job #10) 1,000 To recognize disposal value of spoiled parts

43 What is the total cost of the 35 good units?
Job Costing: Spoilage 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

44 Job Costing: Spoilage 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. What is the journal entry?

45 Job Costing: Spoilage Materials Control (spoiled goods at current
disposal value): 5 × $ ,000 Manufacturing Overhead Control (normal spoilage) 4,000 Work in Process Control (Job #10) 5,000 To recognize spoiled parts

46 Job Costing: Spoilage 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 Shop’s Job #10 are considered abnormal spoilage. What is the journal entry?

47 Job Costing: Spoilage Materials Control (spoiled goods at current
disposal value): 5 × $ ,000 Loss from Abnormal Spoilage 4,000 Work in Process Control (Job #10) 5,000 To recognize spoiled parts

48 Account for rework in job costing.
Learning Objective 7 Account for rework in job costing.

49 Rework Units Example Normal rework attributable to a specific job:
Assume that the 5 parts of Whitefish Machine Shop’s 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. What is the journal entry?

50 Rework Units Example Work in Process (Job #10) 1,800
Various Accounts ,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.

51 Learning Objective 8 Account for scrap.

52 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.

53 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: What is the journal entry?

54 Recognizing Scrap Example
Cash or Accounts Receivable 300 Sales of Scrap 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.

55 Recognizing Scrap Example
What is the journal entry? Cash or Accounts Receivable Work in Process (Job #10) To record sale of scrap Scrap common to all jobs: Cash or Accounts Receivable Manufacturing Overhead Control To record other revenue sale of scrap

56 Recognizing Scrap Example
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 Work in Process (Job #10) To record scrap returned to stores

57 Recognizing Scrap Example
What is the journal entry when scrap is common to all jobs and it is returned to the storeroom? Materials Control Manufacturing Overhead Control To record scrap returned to stores

58 Recognizing Scrap Example
What is the journal entry when scrap is sold? Cash or Accounts Receivable 300 Materials Control To record other revenue sale of scrap

59 Recognizing Scrap Example
What is the journal entry when scrap is reused? Work in Process Control Materials Control To record use of scrap

60 End of Chapter 18


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