1. 18 - 1 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Spoilage, Rework, and Scrap Chapter 18

2. 18 - 2 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 1 Distinguish among spoilage, rework, and scrap.

3. 18 - 3 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Terminology Spoilage refers to unacceptable units discarded or sold for reduced prices. Rework is units that are repaired. Scrap is material left over.

4. 18 - 4 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Describe the accounting procedures for normal and abnormal spoilage.

5. 18 - 5 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 6 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 7 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 8 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 9 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 10 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

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

12. 18 - 12 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Account for spoilage in process costing using the weighted-average method.

13. 18 - 13 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 14 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 15 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 16 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

17. 18 - 17 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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. 18 - 18 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) Materials Conversion Completed and transferred31,00031,000 Normal spoilage 620 620 Abnormal spoilage 380 380 Ending inventory 4,000 800 Equivalent units36,00032,800 100%20%

19. 18 - 19 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) Materials Conversion Beginning inventory$ 9,700$10,000 Current costs 87,500 72,000 Total$97,200$82,000 Equivalent units 36,000 32,800 Cost per unit $2.70 $2.50

20. 18 - 20 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

21. 18 - 21 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

22. 18 - 22 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Assign Total Costs (Step 5) 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

23. 18 - 23 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Assign Total Costs (Step 5) 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.

24. 18 - 24 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Account for spoilage in process costing using the first-in, first-out (FIFO) method.

25. 18 - 25 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Physical Units (Step 1) Work in process, beginning (November 1): 100% material, 60% conversion costs 1,000 Started during November35,000 36,000 Good units completed and transferred out: From beginning inventory 1,000 Started and completed30,000 31,000

26. 18 - 26 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Physical Units (Step 1) Work in process, ending inventory: 100% material, 20% conversion costs4,000 Normal spoilage 620 Abnormal spoilage 380

27. 18 - 27 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Units (Step 2) Materials Conversion Good units completed and transferred out: From beginning inventory 0 400 Started and completed30,00030,000 Normal spoilage 620 620 Abnormal spoilage 380 380 Ending inventory 4,000 800 Equivalent units35,00032,200

28. 18 - 28 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Compute Equivalent Unit Costs (Step 3) Materials Conversion Current costs$87,500$72,000 Divided by equivalent units 35,000 32,200 Cost per unit $2.50 $2.236* *$2.236 (rounded)

29. 18 - 29 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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

30. 18 - 30 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 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 × $2.236) 894.40 Total$ 20,594.40 Started and completed: 30,000 × ($2.50 + $2.236)$142,080.00

31. 18 - 31 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Assign Total Costs (Step 5) 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

32. 18 - 32 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Assign Total Costs (Step 5) 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

33. 18 - 33 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Assign Total Costs (Step 5) 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.

34. 18 - 34 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Account for spoilage in process costing using the standard-costing method.

35. 18 - 35 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Standard-Costing: Spoilage The standard-costing method makes calculating equivalent unit costs unnecessary and so simplifies process costing.

36. 18 - 36 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Assume that the completed units are transferred to Finished Goods. What are the journal entries? Finished GoodsXXX Work in ProcessXXX To transfer good units completed in November

37. 18 - 37 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Journal Entries Loss from Abnormal SpoilageXXX Work in ProcessXXX To recognize abnormal spoilage detected in November

38. 18 - 38 ©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 18