Spoilage, Rework,
and Scrap
Chapter 18
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Learning Objective 1
Distinguish among spoilage,
rework, and scrap.
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Terminology
Spoilage refers to unacceptable units
discarded or sold for reduced prices.
Rework is units that are repaired.
Scrap is material left over.
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Learning Objective 2
Describe the accounting
procedures for normal and
abnormal spoilage.
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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.
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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.
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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).
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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.
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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.
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Approach A Example
Costs to account for
Divide by equivalent units
Cost per equivalent unit
Good units completed: 30,000 × $2.72
Add normal spoilage: 1,000 × $2.72
Costs of good units transferred out
Work in process: 4,000 × $2.72
Costs accounted for
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$95,200
35,000
$ 2.72
$81,600
2,720
$84,320
10,880
$95,200
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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
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Learning Objective 3
Account for spoilage in
process costing using the
weighted-average method.
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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.
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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).
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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?
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Physical Units (Step 1)
Work in process, beginning (November 1)
100% material, 60% conversion costs
Started during November:
1,000
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
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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
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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%
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Compute Equivalent
Unit Costs (Step 3)
Beginning inventory
Current costs
Total
Equivalent units
Cost per unit
Materials
$ 9,700
87,500
$97,200
36,000
$2.70
Conversion
$10,000
72,000
$82,000
32,800
$2.50
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Summarize Total Costs (Step 4)
Work in process beginning inventory:
Materials
$ 9,700
Conversion
10,000
Total beginning inventory $ 19,700
+ Current costs:
Materials
Conversion
= Costs to account for
$87,500
72,000
$179,200
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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)
Normal spoilage: 620 × ($2.70 + $2.50)
Total
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$161,200
3,224
$164,424
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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
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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.
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Learning Objective 4
Account for spoilage in
process costing using
the first-in, first-out
(FIFO) method.
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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:
From beginning inventory
1,000
Started and completed
30,000
31,000
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Physical Units (Step 1)
Work in process, ending inventory:
100% material, 20% conversion costs 4,000
Normal spoilage
620
Abnormal spoilage
380
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Compute Equivalent
Units (Step 2)
Good units completed
and transferred out:
From beginning inventory
Started and completed
Normal spoilage
Abnormal spoilage
Ending inventory
Equivalent units
Materials
Conversion
0
30,000
620
380
4,000
35,000
400
30,000
620
380
800
32,200
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Compute Equivalent
Unit Costs (Step 3)
Materials
Current costs
$87,500
Divided by equivalent units
35,000
Cost per unit
$2.50
*$2.236 (rounded)
Conversion
$72,000
32,200
$2.236*
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Summarize Total Costs (Step 4)
Work in process beginning inventory:
Materials
$ 9,700
Conversion
10,000
Total beginning inventory
$ 19,700
+ Current costs:
Materials
Conversion
= Costs to account for:
$ 87,500
72,000
$179,200
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Assign Total Costs (Step 5)
Good units completed and transferred out:
From beginning inventory:
Work in process
Conversion costs added in
current period (400 × $2.236)
Total
Started and completed:
30,000 × ($2.50 + $2.236)
$ 19,700.00
894.40
$ 20,594.40
$142,080.00
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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
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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
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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.
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Learning Objective 5
Account for spoilage in
process costing using the
standard-costing method.
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Standard-Costing: Spoilage
The standard-costing method makes
calculating equivalent unit costs
unnecessary and so simplifies
process costing.
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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
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Journal Entries
Loss from Abnormal Spoilage XXX
Work in Process
XXX
To recognize abnormal spoilage detected in
November
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End of Chapter 18
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