CHAPTER FOUR

SPOILAGE, REWORK AND SCRAP

AIMS AND OBJECTIVES

After completing this chapter, you will be able to:
 Distinguish among Spoilage, Rework and Scrap
 Distinguished between normal and abnormal spoilage
 Describe the accounting procedures for spoilage in process costing
 Describe the accounting procedures for spoilage, Rework and Scrap under job-order
costing

INTRODUCTION

Improving quality and minimizing defects are the major aim of management. To attain this
objective, management needs to get accurate information about the costs of these defects on
time, which will help it to make cost related informed decisions such as cost control; product
costing, valuing Inventory, valuing cost of goods sold.
In the previous units on product costing systems, the whole discussion was in the absence of
defects, but in any manufacturing process having defects is obvious. In this unit we will discuss
about the three types of defects and the procedures to account for them spoilage defective and
scrap.

Spoilage, rework and scraps in general

While the terms used in this chapter may seem familiar, be sure you understand them in the
context of management accounting.
Spoilage is units of production whether fully or partially completed that do not meet the
specifications required by customers for good units and that are discarded or sold at reduced
prices. Some examples of spoilage are defective shirts, jeans, shoes, and carpeting sold as
“seconds,” or defective aluminum cans sold to aluminum manufacturers for remitting to produce
other aluminum products.

Rework is units of production that do not meet the specifications required by customers but that
are subsequently repaired and sold as good finished units. For example, defective units of

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products (such as pagers , computers, and telephones) detected during or after the production
process but before units are shipped to customers can sometimes be reworked and sold as good
products.

Scrap is residual material that results from manufacturing a product. Examples are short lengths
from woodworking operations, edges from plastic molding operations, and frayed cloth and end
cuts from suit-making operations. Scrap can sometimes be sold for relatively small amounts.
Accounting for Spoilage

Different Types of Spoilage

The accounting for spoilage is assumed at determining the size of the spoilage and differentiating
between normal and abnormal spoilage.
The costs of spoilage should be identified as normal and abnormal and the costs of normal
spoilage should include as part of the costs of goods or units manufactured so that management
can use this information to determine the costs of products and to control and reduce costs by
spoilage taking measures to minimize spoilage.

Normal Spoilage፡ Normal spoilage is a spoilage that arises under efficient operating conditions;
it is an inherent result of the particular process and is thus uncontrollable in the short run.
Management must establish the rate of spoilage that is to be regarded as normal within its
selected set of production conditions.
The costs of normal spoilage are typically viewed as part of the costs of good units (products)
because the production of good units necessitates the simultaneous presence of spoiled units. In
other words normal spoilage is planned spoilage, in the sense that the choice of a given
combination of factors of production entails a spoilage rate that management is willing to accept.
Normal spoilage is computed by using total good units as a base, not total units started in
production, since these units include any abnormal spoilage in addition to the normal spoilage.

Abnormal Spoilage: Abnormal spoilage is a spoilage that is not expected to arise under efficient
operating conditions. It is not an inherent part of the manufacturing process. Most of this
spoilage is usually regarded as controllable in the sense that the first line supervision can exert
influence over inefficiency such causes as machine breakdowns, accidents, and inferior materials

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are typically regarded as being subject to some management’s influence costs of abnormal
spoilage are the cost of inferior products that should be written off directly as losses for the
period using a separate account known as loss from abnormal spoilage.

Process Costing and Spoilage

In the accounting treatment for spoilage in process costing is first to know the spoiled units and
then to identify them into normal and abnormal spoilage.
The units of normal spoilage can be determined by either counting or without counting. To
determine the equivalent units the 1 st approach, i.e., counting the normal spoiled units results
with accurate data because it spreads spoiled units to good units only. If the other approach is
used it will spread the normal spoilage not only to good units but also to all units produced as
well as to those units not completed. The problem with this approach is it results in spreading
spoilage to the incomplete goods twice, first in the current period and second in the following
period when these units are completed.

Inspection points and Allocating Costs of normal spoilage

Inspection for quality of the units can be made at one or more specific points usually; inspection
is made at the point of completion. If this is true all spoiled units are part of the goods completed
and transferred out, no spoilage is assigned to the units in process /ending work in process
inventory
[[

The unit cost of normal and abnormal spoilage is general if both are detected at the same point of
inspection. But if they are identified at different stages in the manufacturing process, each will
have different unit cost.
Costs of normal spoilage are included to the costs of good units net of their salvage value of
anywhere as the costs of abnormal spoilage is reported as loss of the period in which it is
detected.

The five step procedure for process costing with spoilage:

Step 1: Summarize the flow of physical units of output
The normal and abnormal spoilage should be separately identified in this step using the
following formula.

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Spoiled Unit = (Units at the beginning + Units currently started) – (Good units at the end)
After determining the spoiled units, the normal spoilage is determined by multiplying the
accepted rate by the cost of good units. Then the abnormal spoilage is equal to the total spoilage
less the normal spoilage as shown below:
Normal spoilage = Accepted Rate X Cost of good units
Abnormal Spoilage = Total Spoilage – Normal Spoilage
Step 2: compute output in terms of equivalent units
Spoilage is identified at the inspection point which can be made only once or more times during
a period.

The equivalent unit for both spoiled and good units is determined at the inspection point. The
work done for good and spoiled units is the same to that point of inspection. The spoiled and
good units are 100% completed for both direct material and conversion cost at the point of
inspection.
Step 3: compute equivalent unit costs.
To compute the equivalent unit cost for each cost element, divide the total costs of each cost
element by the equivalent units of each cost element.
Step 4: summarize total costs to account for
The total costs to account for represents the direct material and conversion costs which are
debited to work in process inventory account of the related department or process at the end of a
given period.
Step 5: Assign total costs to units completed to spoiled units and to units in the ending work
in process inventory.
To assign costs the assignment should be made to good units, normal spoilage, abnormal
spoilage and ending work in process inventory separately.
To go through the last three steps, we should know the inventory costing method used: weighted
average or First-In, First-Out.

Weighted-Average Method

The equivalent unit cost is computed by dividing the total cost to date (beg. WiP Inventory +
Costs incurred currently) by the equivalent units of each cost element as shown below:

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The computation of physical units (step 2) and equivalent units (step 2) are the same except that
normal and abnormal spoilage are include
Equivalent unit cost of D.M = Total Direct materials Cost to date ([Link] + current period
costs) Equivalent units for Direct material
Equivalent unit cost of conversion Costs = Total Conversion Costs to date (Beg. + current
costs)  Equivalent Unit costs for Conversion costs
Based on the equivalent unit costs computed as shown above, the total direct material costs and
conversion costs are assigned to good units, normal spoilage abnormal spoilage and units in the
ending inventory.
Cost assigned to good units = (Good units X Beg. Unit cost Direct M) + Good units X
Equivalent Unit costs for Conversion costs + Normal Spoiled Units X the total Equivalents units
cost of direct material and conversion costs
Costs Assigned to abnormal spoilage = Abnormal spoiled units + The total Equivalent unit
costs of direct material and conversion costs.

A cost assigned to units in the ending inventory is done as usual.

WIP
Ending D.m costs = Units at the end X Equivalent unit cost of Dm
Conv. costs = Units at the end X Equivalent unit cost of Conversion costs

Example: Consider the following data for November 30, 2011 For Global Company
Manufacturing Company, which makes chemical products and operates a process costing system
– All direct materials are added at the beginning of the process and conversion costs are added
evenly during the process. Spoilage is detected upon inspection at the completion of the process.
Spoiled units are disposed at zero net disposal prices. Global Company Manufacturing Company
uses the weighted average method for inventory valuation.

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Physical Direct Conv.
Flow of production . Units Material Costs
Work-in process, Nov. 1. 1,000 Birr 1,423 Birr 1,110
Started in Nov. 2011 10150
Good units Com. &trans
Out during Nov. 2011 9000
Normal spoilage 100
Abnormal spoilage 50
Work-in process, Nov. 30 2000
Costs added during Nov. Birr12,180 Birr27,750
Note: - Degree of completion:
Beg. Work –in process
Direct materials ------ 100%
Conversion Costs ----- 50%
Ending work-in process:
Direct materials -----100%
Conversion costs ------30%
Required:
 Compute equivalent units for direct materials and conversion costs.
 Summarize total costs to be accounted for
 Compute the cost per equivalent unit for direct materials and conversion costs
Assign the costs in (2) to
 Units completed and transferred and (including normal spoilage)
 Abnormal spoilage
 Units in ending work-in process
Solution:
Global Company
Cost of production Report - Average costing
For the month of Nov, 30,2013
Quantity schedule:
Units in process at beginning (all materials,
½ labor and factory overhead) 1,000
Units started in process 10,150 11,150
Units transferred to next department 9,000
Units still in process (all materials, 30% labor & FOH) 2,000
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 Units lost in process (100+50) 150 11,150
Cost charged to the department:
Cost added by the department: Total cost unit cost
Work in process-beginning inventory:
Materials Birr 1,423
Conversion Cost 1,110= 2,533
Cost added during the period:
Materials Br12, 180 Birr 1.22
Conversion Cost 27,750 2.96
Total cost to be accounted for Br 42,463 Birr 4.18
Cost accounted for as follows:
Transferred to next department (9,100 X Birr 4.18) Birr 38,038
Transferred to FOH (50 X Birr 4.18) 209 Birr38,249
Work in process-ending inventory:
Materials (2,000 X Birr1.22) Birr 2,440
Conversion Cost (2,000 x 30% x Birr 2.96) 1,776 4,216
Total cost Accounted for br 42,463
Additional computations:
Equivalent units of production:
Materials =9,000 + 2,000 + 150 = 11,150 units
Conversion Cost = 9,000 + (2,000 X 30%) +150 = 9,750 units
Unit costs:
Materials = Birr 1,423 + Birr 12,180= Birr 13,603, Birr 13,603¿ 11,150 = Birr 1.22 per unit
Conversion Cost = Birr 1,110 + Birr 27,750= Birr 28,860, Birr 28,860¿ 9,750 = Birr 2.96 per
unit

Adjustment for lost units:

Normal Lost: 100 X 4.18 = Birr 418; 418/9,000 = Birr 0.464 per unit
Abnormal Lost: 50 X 4.18 = Birr 209; Birr 209/9,000 = Birr 0.232 per unit

FIFO method and spoilage

The FIFO method that focuses on equivalent units of work done in the current period is the same
as before except that here it includes spoiled units. The spoiled units are identified after the
inspection point and these spoiled units are related only to the current work done and are
included in determining equivalent units and equivalent unit cost. The same data used for

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Weighted Average Method will be used again here: Let’s see the answer for each of the
requirements below:
Global Company
Cost of production Report – FIFO COSTING
For the month of Nov., 30, 2013
Quantity schedule:
Units in process at beginning (all materials,
½ labor and factory overhead) 1,000
Units started in process 10,150 11,150
Units transferred to next department 9,000
Units still in process (all materials, 30% labor & FOH) 2,000
Units lost in process (100+50) 150 11,150
Cost charged to the Department: Total cost unit cost
Cost added by the department:
Work in process-beginning inventory
Materials Birr 1,423
Conversion Cost 1,110
Cost added during the period:
Materials Birr 12,180 Birr 1.20
Conversion Cost 27,750 3.00
Total cost to be accounted for Birr 42,463 Birr 4.20
Cost accounted for as follows:
Transferred to next department:

From beginning inventory:

Inventory cost Birr 2,533
Conversion Cost (1,000 X 50% X Birr 3) 1,500 Birr 4,033
From current production:
Units started and finished (8,100x Birr 4.2) 34,020
From Factory Overhead (50 X Birr 4.2) 210 Birr 38,263
Work in process-ending inventory:
Materials (2,000 X Birr1.2) Birr 2,440
Conversion Cost (2,000 x 30% x Birr 3) 1,800 4,200
Total cost Accounted for $42,463

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Additional computation:
Equivalent production Materials Conversion Cost
Transferred out 9,000 9,000
Less:Beginning inventory (all units) 1,000 1,000
Started and finished this period 8,000 8,000
Add:Beginning inventory (Worked in this period) 0 500
Add:Ending inventory:
Still in process (worked in this period) 2,000 600
Lost units 150 150
10,150units 9,250 units
Unit cost:
Materials = Birr 12,180= Birr 1.2 per unit
10,150
Conversion Cost = Birr 27,750= Birr 3 per unit
9,250

Job Costing and Spoilage

There are normal and abnormal spoilages in job order costing as in process costing the main
concepts discussed in process costing to these units’ remains the same except that the accounting
treatment differs. Costs of normal spoilage are inventorable whereas abnormal spoilage is not
inventorable and are written off as losses of the period in which they are identified. In Job order
costing system abnormal spoilage are regarded as controllable by the first stage supervisor.
Normal spoilage in Job order costing are two types – attributable to specific job and common to
all jobs - Normal spoilage attributable to all Jobs. Normal spoilage attributable to a specific Job
is assigned to that specific job this step is not related to process costing because in process
costing all products are identical normal spoiler common to all jobs is allocated to jobs with the
other indirect manufacturing costs at the end of the month.

Normal spoilage attributable to a specific Job

When the spoilage is caused due to the specification related to a particular Job, that job should
absorb this cost of the spoilage by net of the salvage value of the spoiled units, if soluble. To
recognize the estimated selling price (disposal value) of the spoilage, Journal entry should be
recorded
Materials control------------------------------Disposal Value
Work in process ---------------------Disposal Value

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After posting the above journal entry the work in process inventory account balance represents
the costs of good units (including normal spoilage).

Example: In Ruhama machine shop, 10 machine parts out of a job lot of 100 machine parts are
spoiled. Costs assigned prior to the inspection point are Br. 4,000 per part. The company
calculates these costs on the basis of its inventory costing assumptions weighted average or
FIFO. But the Company does not consider the cost flow assumptions. The current disposal price
of the spoiled parts is estimated to be Br. 1,200 per part.

Required: Prepare the necessary Journal entry at the time the spoiled parts are identified and
given:
That they are related to the particular job
Materials control ($1,200 X 10) ----------------------- 12,000
Work –in process --------------------------------------- 12,000
The cost of the spoiled units = (10 parts X Br 4,000)- Br 12,000)
= Br. 40,000 – Br. 12,000
= Br 28,000
The cost of good units = (90 units X Br.4,000) + Br 28,000
= Br. 360,000 + Br. 28,000
= Br. 388, 000
Normal spoilage common to all jobs
Normal spoilage may coincidentally occur due to the inherent problem in the manufacturing
process where a given job is being worked on. Under this condition, the costs of the spoilage
cannot be assigned to that particular job but to all jobs manufacturing overhead the journal entry
based on the above examples is recorded as follows:

Materials Control --------------------------------- 12,000

Manufacturing overhead control ------------ 28,000
Work in process ------------------------------------- 40,000

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When normal spoilage is common to all jobs, the budgeted manufacturing overhead application
rate spoilage cost. Therefore, the normal spoilage is allocated, to all jobs based on the
application rate under this condition;
The costs of goods units = 90 parts X Br 4,000 = Br. 360,000
Plus the allocated share of the Br. 28,000 =388,000

Example 2: In the Hull Machine Shop, 5 aircraft parts out of a job lot of 50 air-craft parts are
spoiled. Costs assigned prior to the inspection point are $2,000per part. When the spoilage is
detected, the spoiled goods are inventoried at $600 per part, the net disposal value.
The journal entry to recognize disposal value (items in parentheses indicate subsidiary ledger
postings) is as follows:
Materials Control --------------------------------- 3000(600 * 5)
Manufacturing overhead control ------------ 7000
Work in process ------------------------------------- 10,000

Note, the Work-in-Process Control (specific job) has already been debited (charged) $10,000 for
the spoiled parts (5 spoiled parts $2,000 per part). The net cost of normal spoilage $7,000
($10,000 $3,000), which is an additional cost of the 45 (50- 5) good units produced. Therefore,
total cost of the 45 good units is $97,000: $90,000 (45 units $2,000 per unit) incurred to produce
the good units plus the $7,000 net cost of normal spoilage. Cost per good unit is $2,155.56
($97,000 45 good units).

When normal spoilage is common to all jobs, the budgeted manufacturing overhead rate includes
a provision for normal spoilage cost. Normal spoilage cost is spread, through overhead
allocation, over all jobs rather than allocated to a specific job.

For example, if Hull produced 140 good units from all jobs in a given month, the $7,000 of
normal spoilage overhead costs would be allocated at the rate of $50 per good unit ($7,000/ 140
good units). Normal spoilage overhead costs allocated to the 45 good units in the job would be
$2,250 ($50- 45 good units). Total cost of the 45 good units is $92,250. $90,000 (45 units
$2,000 per unit) incurred to produce the good units plus $2,250 of normal spoilage
overhead costs. Cost per good unit is $2,050 ($92,250/ 45 good units).
Overhead costs of the normal spoilage.

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Abnormal spoilage
If the spoilage is abnormal, the cost of the abnormal spoilage net of any disposal value is debited
to an account titled loss from abnormal spoilage. Abnormal spoilage is not part of the cost of
good units. If the spoilage in the above example was abnormal, the Journal entry would be:
Material control --------------------------- 12,000
Loss from abnormal spoilage --------- 28,000
Work – in process --------------------------------40,000
Abnormal spoilage is reported as the loss of the period in which it is identified.

Accounting for Rework

Job Costing and Rework
As it has been defined before is the cost of unacceptable units of production that are
subsequently repaired and sold as normal finished goods. Rework is distinguished
As (1) normal rework attributable to specific job
(2) Normal rework common to all jobs
(3) Abnormal rework

Example: Assume that rework costs equal Br. 7,600 (direct materials Br. 1,600. direct labor Br
4,000; manufacturing overhead, Br 2,000).

Required: prepare the necessary journal entry when:

Normal rework attributable to a specific job

If the rework is normal and if it is related to the specification of a particular job, the costs of the
rework should be assigned to that particular job.
Work – in process---------------------------------- 7,600
Materials control ------------------------------ 1,600
Wages payable -------------------------------- 4,000
Manufacturing overhead control-------- 2,000

Normal rework common to all jobs

When rework is normal and is caused to the inherent problem of the manufacturing process the
costs of the rework are charged to manufacturing process the costs of the rework are charged to

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manufacturing overhead control account and allocated to all jobs like the other overhead costs
and the journal entry recorded the rework costs is as follows:
Manufacturing overhead control ---------------------------------- 7,600
Materials control ----------------------------------------------------------- 1,600
Wages payable -------------------------------------------------------------- 4,000
Manufacturing overhead control-------------------------------------- 2,000
Or
Manufacturing overhead Control ---------------------------------- 5,600
Materials control -----------------------------------------------------1,600
Wages payable -------------------------------------------------------- 4,000

Abnormal Rework
If the rework is abnormal, it is charged to loss from abnormal rework account. The accounting
treatment for abnormal rework is the same in both job costing and process costing if the rework
cost in the previous example is abnormal; the Journal entry is recorded as follows:
Loss from abnormal rework -----------------------------------7,600
Materials control ------------------------------------------------ 1,600
Wages payable --------------------------------------------------- 4,000
Manufacturing overhead control -------------------------- 2,000
Accounting for scraps
A scrap has been defined before represents remains of materials left over from the manufacturing
process. They have low sales value as compared with the sales value of the products.
The accounting issue related to scrap is (1) when should the value of scrap be recognized in the
accounting records- at the time scrap is produced or at the time scrap is sold? (2) How should
revenue from scrap be accounted for?
Recognizing scrap at the time of sale
Scrap is recognized at the time of sale when its dollar amount is immaterial. The accounting
treatment is to make a memo of the quantity of the scrap returned to the store room and to record
the following Journal entry at the time of sale.

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Example: Assume the selling price of a given quantity of material is Br. 500.
Required: prepare the necessary journal entry?
Cash (A/R) ------------------------------------------------- 500
Sales of scrap --------------------------------------------------500
The sales of scrap are an account that represents the revenue generated from the selling of the
scrap. It is reported in the income statement as other income.
When the dollar amount of scrap is material and the scrap is sold quickly after it is known, the
accounting treatment depend on whether the scrap is attributable to a specific job or is common
to all jobs.

Scrap attributable to a specific job

If a scrap is feasible with the making of a specific job the selling price of the scrap reduces the
cost of the particular job. In the above example it is attributable to a specific job, the Journal
entry will be recorded as follows:
Cash/account receivable --------------------------------------- 500
WIP Control ------------------------------------------------------------ 500
Unlike spoilage and rework, there is no cost attached to the scrap, and hence no distinction is
made between normal and abnormal scrap.

Scrap common to all jobs

When it is not possible to identify scrap with a specific job, the selling price of the scrap will be
prorated and deducted from the costs of all jobs. If the previous example is assumed to be
common to all jobs the Journal entry is:
Cash (A/R) -------------------------------------------------- 500
Manufacturing overhead control ------------------ 500

The expected disposal price of the scrap should be considered in setting the manufacturing
overhead application rate. Thus, the budgeted overhead application rate is lower than it would be
if the overhead budget had not been reduced by the expected sales of scrap. The accounting for
scrap is common to both job costing and process costing.

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Recognizing scrap at the time of its production
In this case, separate scrap inventory account is maintained or the scrap is recorded in the
materials control account like the other materials. At its expected net realizable value so that
production cost and related scrap recovery are recognized in the same accounting period. The
scrap is then stayed until sold or [Link] scrap may be attributable to specific job or may be
common to all jobs.

Scrap attributable to a specific job

When a scrap is identifiable with a specific job its expected net realizable value should be
deducted from the cost of that particular job’s and the scrap inventory should increase the
balance of the materials control account.
Example: assume that the estimated selling price of a given scrap is Br. 1,000 and its related
costs of selling (disposal, is estimated to be Br. 200, the net realizable value of the scrap is Br.
800 (Br 1,000 – Br 200).
Required: prepare the necessary journal entry for the sale of the scrap?

Cash (A/R) ----------------------------------- 800

Work - in process ----------------------------------- 800

Scrap common to all jobs

When scrap is not identified with a specific job but caused due to the inherent problem
associated in the prorated amount of manufacturing process, the expected net realizable value of
the scrap reduces the cost of all jobs. Let us use the previous example to record the Journal
entry at the time the scrap is resold:
Cash (A/R) ----------------------------------------------------------- 800
Manufacturing overhead control -------------------- 800
Later, when the scrap is sold, the actual selling price of the scrap may be different from its
expected net realizable value; the situation could be one of the following.
The selling price = net realizable value
The selling price < net realizable value
The selling price > net realizable value

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Because of the difference in the selling price and net realizable value of the scrap the Journal
entry that is recorded at the time of the sales also different. Let’s see the Journal entry assuming
the above example the selling price is Br. 800, Br.700 and Br. 900 is respectively.
If (i) the selling price = Net realizable value
Cash (A/R)------------------------------------------ 800
Material control ---------------------------------- 800
(ii) The selling price < Net realizable value
Cash (A/R) ----------------------------------------- 700
Work – in process (MOH) ---------- 100
Material control --------------------------- 800
(iii) The selling price > Net realizable value
Cash --------------------------------------------- 900
Material control ------------------------------- 800
Work – in process (MOH) -------100
Instead of selling sometimes the scrap is reused as direct materials. In this case, it should be
debited to materials control as other purchases of materials and recorded at its expected net
realizable value. The scrap may be attributable to a specific job or common to all jobs. The
accounting procedure to record the scrap returned to the storeroom will remain the same.

Materials control----------------------------------800
Work in process---------------------------------800 (If attributable to a specific Job)

Materials control -------------------------------- 800

Manufacturing overhead control-----------800(If common to all Jobs)
This Journal entry is similar to those entries that are recorded the issuance of materials to
production.
The accounting for scrap under process costing is like the accounting under job costing when
scrap is common to all jobs-because process costing appears to the manufacture of masses of
identical or similar units.
High cost of scrap is an indicator of inefficiency attracts manager’s attention. Even though scrap
is an inherent part of every manufacturing process and unavoidable, mechanisms should be
implemented to keep it to the possible minimum.

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Summary of accounting for spoilage, rework, or scrap:

Type of spoilage, rework, or scrap Accounting Treatment

Spoilage
Normal spoilage arising from the requirements of a Charge to the individual job
specific job
Normal spoilage occurring periodically as a regular Charge to overhead
part of all jobs
Abnormal spoilage Charge to separate loss account
Opportunity cost of spoilage Not measured
Rework
Rework for defect arising from the requirements of a Charge to individual job
specific job
Rework for defect occurring periodically during Charge to overhead
normal production
Rework for abnormal defect Charge to separate loss account
Scrap
Sale of scrap Record at time of production or at
time sold
If not material: Record as other
income
Scrap common to all jobs or difficult to trace to Credit to overhead
specific job
Scrap traced to individual jobs Credit to individual job

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