CHAPTER 18
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-2
Basic Terminology
 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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-3
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-4
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-5
Types of Spoilage
 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 on the income
statement
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-6
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-7
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-8
The Five-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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-9
The Five-Step Procedure for Process
Costing with Spoilage

Step 3: Compute Cost per Equivalent Unit
 Step 4: Summarize Total Costs to Account
For
 Step 5: Assign Total Costs to:
1.
2.
3.
Units Completed
Spoiled Units
Units in Ending Work in Process
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-10
Steps 1 - 5
Weighted-Average Method
Step 1: Summarize Physical Units Step
2: Compute Equivalent Units
Flow of Production
STEP 1
STEP 2
Physical
Units
Equivalent Units
Direct
Conversion
Materials
Costs
Beginning Work in Process
Units Started during the current period
Total Units to Account For
Units Completed and Transferred Out During the Current Period: 100%
Normal Spoilage
100% complete as to materials
100% complete as to conversion costs
Abnormal Spoilage
100% complete as to materials
100% complete as to conversion costs
Ending Work in Process
Ending WIP is: 100% complete as to materials
10% complete as to conversion costs
Units Accounted For
Work Done in Current Period Only
25
75
100
80
7
80
80
7
7
3
3
3
10
10
1
100
100
91
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-12
Step 3: Cost per Equivalent Unit
Step 4: Summarize Total Costs
STEP 4
Beginning Work in Process
Current Period Costs Added
Total Costs to Account For
Divide by Equivalent Units from Step 2
Cost per Equivalent Unit
STEP 3
Total
Direct
Conversion
Product
Materials
Costs
Costs
3,000
$
4,000 $ 1,000 $
4,000
10,000
14,000
5,000
13,000
$
18,000
100
91
$ 50.00 $
142.86
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-13
Step 5: Assign Total Costs
Cost Assignment:
Multiply Equivalent Units from Step 2
by Cost per Unit from Step 3
Direct
Materials
Conversion
Costs
Total
Costs
Good Units Completed and Transferred Out:
Costs Before Adding Normal Spoilage
Direct Materials: 90 X $50.00
Conversion Costs: 90 X $142.86
Normal Spoilage:
Direct Materials: 7 X $50.00
Conversion Costs: 7 X $142.86
$
4,000
$
$
11,429
$
15,429
1,000
$
1,350
350
$$
Total Cost of Good Units Completed & Transferred Out
16,779
16,779
Abnormal Spoilage
Direct Materials: 3 X $50.00
Conversion Costs: 3 X $142.86
150
429
579
143
643
579
Ending Work in Process
Direct Materials: 10 X $50.00
Conversion Costs: 1 X $142.86
500
643
Total Cost Accounted For
(Ties to Step 4, rounded to nearest $)
$
$
18,000
18,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-14
Steps 1 - 5
First-in, First-out Method
Step 1: Summarize Physical Units Step
2: Compute Equivalent Units
Flow of Production
Beginning Work in Process
Units Started during the current period
Total Units to Account For
Good Units Completed and Transferred Out During the Current Period
From Beginning Work in Process:
Direct Materials (added at the start of the process): 25 X 0% this month
Conversion Costs (60 % completed last month): 25 X 40% this month
From Units Started & Completed This Month:
Direct Materials:
55 X 100% this month
Conversion Costs: 55 X 100% this month
Normal Spoilage:
Direct Materials:
7 X 100% this month
Conversion Costs: 7 X 100% this month
Abnormal Spoilage:
Direct Materials:
3 X 100% this month
Conversion Costs: 3 X 100% this month
Ending Work in Process
Ending WIP is: 100% complete as to materials
10% complete as to conversion costs
Units Accounted For
Work Done in Current Period Only
STEP 1
STEP 2
Physical
Units
Equivalent Units
Direct
Conversion
Materials
Costs
25
75
100
25
0
10
55
55
55
7
7
7
3
3
3
10
10
1
100
75
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
76
18-16
Step 3: Cost per Equivalent Unit
Step 4: Summarize Total Costs
STEP 4
Beginning Work in Process
Current Period Costs Added
Total Costs to Account For
Divide by Equivalent Units from Step 2
Cost per Equivalent Unit
STEP 3
Total
Product
Direct Conversion
Costs
Materials
Costs
$
4,000
14,000
4,000
10,000
$
18,000
4,000
10,000
75
76
$ 53.33 $ 131.58
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-17
Step 5: Assign Total Costs
Cost Assignment:
Multiply Equivalent Units from Step 2
by Cost per Unit from Step 3
Good Units Completed and Transferred Out:
Beginning Work in Process
Balance at start of period (work done in prior period)
Add: Cost to finish beginning WIP
Direct Materials:
0 X $53.33
Conversion Costs: 10 X $131.58
Total from Beginning Inventory before normal spoilage
Units Started & Completed (all work done this period)
Direct Materials: 55 X $53.33
Conversion Costs: 55 X $131.58
Total Cost of Units Started & Completed before nomal spoilage
Normal Spoilage:
Direct Materials: 7 X $53.33
Conversion Costs: 7 X $131.58
Total Cost of Normal Spoilage
Total Cost of Good Units Completed & Transferred Out
Abnormal Spoilage:
Direct Materials: 3 X $53.33
Conversion Costs: 3 X $131.58
Total Cost of Normal Spoilage
Ending Work in Process (work done to-date)
Direct Materials: 10 X $53.33
Conversion Costs: 1 X $131.58
Total Cost Accounted For
Direct
Materials
$
1,000
Conversion
Costs
$
Total
Costs
3,000
1,316
$
5,316
2,933
7,237
10,170
373
921
1,294
16,780
16,780
160
395
555
555
533
665
665
132
$
18,000
18,000
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-18
Standard Costing
 Either method may be modified by the
replacement of actual costs with
predetermined Standard Costs
 Simplifies methods since cost per equivalent
unit is not recalculated. Cost per equivalent
unit is simply the standard costs per unit.
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-19
Job Costing and Spoilage
 Job-costing systems generally distinguish
between normal spoilage attributable to a
specific job from normal spoilage common to
all jobs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-20
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-21
Job Costing and
Accounting for 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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-22
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-23
Job Costing and Rework

Three types of rework:
1.
2.
3.
Normal rework attributable to a specific job –
the rework costs are charged to that job
Normal rework common to all jobs – the
costs are charged to manufacturing
overhead and spread, through overhead
allocation, over all jobs
Abnormal rework – is charged to the Loss
from Abnormal Rework account that appears
on the income statement
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-24
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-25
Aspects of Accounting for Scrap
Planning and Control, including physical
tracking
2. Inventory costing, including when and how it
affects operating income
1.
NOTE: Many firms maintain a distinct
account for scrap costs
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-26
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
economically feasible way
No cost assigned to scrap
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-27
Accounting for 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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-28
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
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
18-29