chapter 18 spoilage, rework, and scrap. 18-2 to accompany cost accounting 12e, by...

CHAPTER 18

Spoilage, Rework, and Scrap

18-2To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.

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


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


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


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


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


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


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


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


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. Units Completed

2. Spoiled Units

3. Units in Ending Work in Process

Steps 1 - 5

Weighted-Average Method


Step 1: Summarize Physical Units Step 2: Compute Equivalent Units

Flow of ProductionBeginning Work in ProcessUnits Started during the current periodTotal 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 costsAbnormal Spoilage 100% complete as to materials 100% complete as to conversion costsEnding Work in Process Ending WIP is: 100% complete as to materials 10% complete as to conversion costsUnits Accounted ForWork Done in Current Period Only

STEP 1

PhysicalUnits

2575

100

807

3

10

100

Direct ConversionMaterials Costs

80 80

77

33

101

100 91

STEP 2Equivalent Units


Step 3: Cost per Equivalent UnitStep 4: Summarize Total Costs

Beginning Work in ProcessCurrent Period Costs AddedTotal Costs to Account ForDivide by Equivalent Units from Step 2Cost per Equivalent Unit

STEP 4Total

ProductCosts

4,000$ 14,000 18,000$


1,000$ 3,000$ 4,000 10,000 5,000 13,000

100 91 50.00$ 142.86$

STEP 3


Step 5: Assign Total Costs

Cost Assignment:Multiply Equivalent Units from Step 2 Direct Conversion Total by Cost per Unit from Step 3 Materials Costs Costs

Good Units Completed and Transferred Out:Costs Before Adding Normal Spoilage Direct Materials: 90 X $50.00 4,000$ Conversion Costs: 90 X $142.86 11,429$ 15,429$ Normal Spoilage: Direct Materials: 7 X $50.00 350$ Conversion Costs: 7 X $142.86 1,000 1,350$

Total Cost of Good Units Completed & Transferred Out 16,779$

Abnormal Spoilage Direct Materials: 3 X $50.00 150

Conversion Costs: 3 X $142.86 429 579

Ending Work in Process Direct Materials: 10 X $50.00 500

Conversion Costs: 1 X $142.86 143 643

Total Cost Accounted For 18,000$ (Ties to Step 4, rounded to nearest $)

16,779$

579

643

18,000$

Steps 1 - 5

First-in, First-out Method


Step 1: Summarize Physical Units Step 2: Compute Equivalent Units

Flow of ProductionBeginning Work in ProcessUnits Started during the current periodTotal 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 monthNormal Spoilage: Direct Materials: 7 X 100% this month Conversion Costs: 7 X 100% this monthAbnormal Spoilage: Direct Materials: 3 X 100% this month Conversion Costs: 3 X 100% this monthEnding Work in Process Ending WIP is: 100% complete as to materials 10% complete as to conversion costsUnits Accounted ForWork Done in Current Period Only

STEP 1

PhysicalUnits

2575

100

25

55

7

3

10

100


010

5555

77

33

101

75 76

STEP 2Equivalent Units


Step 3: Cost per Equivalent UnitStep 4: Summarize Total Costs

Beginning Work in ProcessCurrent Period Costs AddedTotal Costs to Account ForDivide by Equivalent Units from Step 2Cost per Equivalent Unit

STEP 4Total

ProductCosts

4,000$ 14,000 18,000$


4,000 10,000 4,000 10,000

75 76 53.33$ 131.58$

STEP 3


Step 5: Assign Total CostsCost Assignment:

Multiply Equivalent Units from Step 2 Direct Conversion Total by Cost per Unit from Step 3 Materials Costs Costs

Good Units Completed and Transferred Out:Beginning Work in Process Balance at start of period (work done in prior period) 1,000$ 3,000$ Add: Cost to finish beginning WIP Direct Materials: 0 X $53.33 - Conversion Costs: 10 X $131.58 1,316 Total from Beginning Inventory before normal spoilage 5,316$

Units Started & Completed (all work done this period) Direct Materials: 55 X $53.33 2,933 Conversion Costs: 55 X $131.58 7,237 Total Cost of Units Started & Completed before nomal spoilage 10,170

Normal Spoilage: Direct Materials: 7 X $53.33 373 Conversion Costs: 7 X $131.58 921 Total Cost of Normal Spoilage 1,294 Total Cost of Good Units Completed & Transferred Out 16,780

Abnormal Spoilage: Direct Materials: 3 X $53.33 160 Conversion Costs: 3 X $131.58 395 Total Cost of Normal Spoilage 555

Ending Work in Process (work done to-date) Direct Materials: 10 X $53.33 533 Conversion Costs: 1 X $131.58 132 665

Total Cost Accounted For 18,000$

16,780

555

665

18,000$


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.


Job Costing and Spoilage

Job-costing systems generally distinguish between normal spoilage attributable to a specific job from normal spoilage common to all jobs


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


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


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


Job Costing and Rework

Three types of rework:1. Normal rework attributable to a specific job –

the rework costs are charged to that job2. Normal rework common to all jobs – the

costs are charged to manufacturing overhead and spread, through overhead allocation, over all jobs

3. Abnormal rework – is charged to the Loss from Abnormal Rework account that appears on the income statement


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


Aspects of Accounting for Scrap

1. Planning and Control, including physical tracking

2. Inventory costing, including when and how it affects operating income

NOTE: Many firms maintain a distinct

account for scrap costs



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



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



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

chapter 18 spoilage, rework, and scrap. 18-2 to accompany cost accounting 12e, by...

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