Accounting for Spoilage, Rework and Scrap

1. Terminology
Spoilage is unacceptable units of production that are discarded or are sold for reduced
prices. Both partially completed or fully completed units of output can be spoiled.
Rework is unacceptable units of production that are subsequently repaired and sold as
acceptable finished goods. For example, defective units of products such as computers
detected during production or immediately after production but before units are shipped
to customers can sometimes be reworked and sold as good products.
Scrap is material left over when making a product(s). It has low sales value compared
with the sales value of the product(s).

2. Types of Spoilage
The key objectives in accounting for spoilage are determining the magnitude of the costs
of spoilage and distinguishing between the costs of normal and abnormal spoilage.

Normal Spoilage
Normal Spoilage is spoilage that is an inherent result of the particular production process
and arises even under efficient operating conditions. For a given production process,
management must decide the rate of spoilage it is willing to accept as normal. Costs of
normal spoilage are typically treated as component of the costs of good unit
manufactured because good units cannot be made without the simultaneous appearance
of spoiled units. Normal spoilage rates should be computed using total units completed as
the base, not total actual units started in production. Because total units started also
include any abnormal spoilage in addition normal spoilage. More over, the normal
spoilage is the amount of expected spoilage associated or related to the goods units
produced.

Abnormal Spoilage
Abnormal Spoilage is spoilage that should not arise under efficient operating conditions.
It is not an inherent result of the particular production process. Abnormal spoilage is
regarded as avoidable and controllable. Line operators and other plant personnel can
generally decrease abnormal spoilage by minimizing machine break downs, accidents
and the like. Abnormal spoilage costs are written off as losses of the accounting period in
which detection of the spoiled units occurs.

1
Job Costing and Spoilage
The concepts of normal and abnormal spoilage also apply to job-costing systems.
Abnormal spoilage is usually regarded as controllable by the manager. Costs of abnormal
spoilage are not considered as inventor able costs and are written off as costs of the
period in which detection occurs.
Normal Spoilage costs in job-costing systems just as in process costing systems are
inventor able costs, although managements are tolerating only small amounts of spoilage
as normal. When assigning costs, job-costing systems generally distinguish between
normal spoilage attributable to a specific job and normal spoilage common to all jobs.
Normal spoilage attributable to a specific job is assigned to that job, a step unnecessary in
process costing since masses of identical or similar units are manufactured.
Example: In a Machine Shop 5 aircraft parts out of a job lot of 50 aircrafts parts are
spoiled. Costs assigned prior to inspection point are $2,000 per part. The current disposal
price of the spoiled parts is estimated to be $600 per part. When the spoilage is detected,
the spoiled goods are inventoried at $600 per part.
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 reduced by the
current disposal value of the normal spoilage is:
Materials Control (5*$600) 30001
Work-in Process Control (specific job) (5*$600) 3000
Note that the Work-in Process Control (specific job) has already been debited $10,000
for the spoiled parts (5 spoiled parts * $2,000 per part). The effect of the $3,000 entry is
that the net cost of the normal spoilage, $7,000 ($10,000-$3,000) becomes an additional
cost of the 45(50-5) good units produced. The total cost of the 45 good units is $97,000.
$90,000 (45units*$2,000 per unit) incurred to produce the good units plus the $7,000 net
cost of normal spoilage.
Normal Spoilage common to all jobs: In some cases, spoilage may be considered a
normal characteristics of a given production cycle. The spoilage inherent in production
only coincidently occurs when a specific job is being worked on. The spoilage is not then
attributable, and hence is not charged, to the specific job. Instead it is considered as
manufacturing overhead. The journal entry is:
Materials Control (spoiled goods at disposal value 5*$600) 3000
MOH Control (normal spoilage $10,000-$3,000) 7000
Work-in Process Control (specific job 5*$2,000) 10000
When normal spoilage is common to all jobs, the budgeted MOH rate includes a
provision for normal spoilage cost. Therefore, normal spoilage cost is spread, through
overhead allocation, over all jobs rather than loaded on particular jobs only. The total cost
of the 45 good units is $90,000 (45 units*$2,000 per unit) plus a prorated share of the
$7,000 of normal spoilage overhead costs.

1
Spoiled goods at current disposal value.

2
Abnormal Spoilage: if the spoilage is abnormal, the net loss highlighted and always
charged to an abnormal loss account. Unlike normal spoilage costs, abnormal spoilage
costs are not included as apart of the cost of goods unit produced. The total cost of the 45
good units is $90,000 (45 units*$2,000 per unit).
Materials Control (spoiled goods at current disposal value: 3000
Loss from Abnormal Spoilage 7000
Work-in Process Control (specific job) 10000
Rework
Rework is unacceptable units of production that are subsequently repaired and sold as
acceptable finished goods.
Example: Consider Hull Machine Shop; assume that the 5 spoiled parts used in the
illustration are reworked. The journal entry for the $10,000 of total cost assigned to the 5
spoiled units before considering rework costs are as follows:
Work-in Process Control (Specific Job) 10000
Materials Control 4000
Wage payable Control 4000
MOH Allocated 2000
Normal Rework common to all jobs: When rework is normal and not attributable to any
specific job, the costs of rework are charged to MOH and spread through overhead
allocation, over all jobs.
MOH Control (rework costs) 3800
Materials Control 800
Wage payable control 2000
MOH Allocated 1000

Abnormal rework: if the work is abnormal, it is recorded by charging abnormal rework

to a separate loss account.
Loss from Abnormal Rework 3800
Materials Control 800
Wage Payable Control 2000
MOH Allocated 1000
Accounting for rework in a process costing system also requires abnormal rework to be
distinguished from normal rework. A process costing system accounts for abnormal
rework in the same way as a job-costing system. Accounting for normal rework follows
the accounting described for normal rework common to all jobs because masses of
identical or similar units are manufactured in process costing systems.

3
Accounting for Scrap
Scrap is a material left over when making a product(s); it has low sales value compared
with the sales value of the product(s). There are no distinctions of normal and abnormal
scrap, but scrap attributable to a specific job is distinguished from scrap common to all
jobs.
There are two major aspects of accounting for scrap:
1. Planning and control, including physical tracking.
2. Inventory costing, including when and how to affect operating income
The question here is:
 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?
 How should revenue from scrap be accounted for?
To illustrate: In Hull co. assuming that the manufacturer of aircraft parts generates scrap.
We further assume that the scrap from a job has a total sales value $900.
Recognizing Scrap at the Time of its Sale: When the dollar amount of scrap is
immaterial, the simplest accounting is to make a memo of the quantity of scrap returned
to the storeroom and to regard scrap sales as a separate line item of other revenues. The
only journal entry is:
Cash or A/R 900
Sales of Scrap 900
(Sale of Scrap)
When the dollar amount of scrap is material and the scrap is sold quickly after it is
produced, the accounting depends on whether the scrap is attributable to a specific job or
common to all jobs.
 Scrap attributable to a specific job: Job costing system sometimes trace the
sales of scrap to the jobs that yielded the scrap. This method is used only when
the tracing can be done in an economical feasible way. The journal entry is:
For scrap returned to storeroom: No journal entry2
Sale of Scrap: Cash or A/R 900
Work-in Process Control 900
Unlike spoilage and rework, there is no cost attached to the scrap, and hence no
distinction is made between normal and abnormal scrap. All scarp sales, whatever the
amount, are credited to the specific job. Scrap sales reduce the costs of the job.
 Scrap common to all jobs: The journal entry in this case is:
Scrap returned to storeroom: No journal entry.

2
Memo of quantity received and related job is entered in the inventory record.

4
 Sale of scrap: Cash or A/R 900
MOH Control 900
This method does not link scrap with any particular job or product. Instead, all products
bear regular production costs without any credit for scrap sales except in an indirect
manner. The expected sales are considered when setting he budgeted MOH rate. Thus,
the budgeted OH rate is lower than it would be if the OH budget had not been reduced by
the expected sales of scrap. This accounting for scrap is both in process costing and job
costing systems.
Recognizing Scrap at the Time of its Production
In the preceding illustration the assumption is that scrap returned to the storeroom is sold
quickly and hence not assigned an inventory cost figure. Sometimes however, the value
of scrap is not immaterial, and the time between storing it and selling or reusing it can be
quite long.
Under conditions, the company is justified in inventory scrap at a conservative estimate
conditions of net realizable value so that production costs and related scrap recovery are
recognized in the same accounting period. Some companies tend to delay sales of scrap
until the market price is most attractive.
 Scrap attributable to a specific job: The journal entry in the example is:
Scrap returned to storeroom: Materials Control 900
Work-in Process Control 900
 Scrap common to all jobs: The journal entry in this case is
Scrap returned to storeroom: Materials Control 900
MOH Control 900
Observe that Materials Control account is debited in place of Cash/A/R. When the scarp
is sold, the journal entry is:
Sale of Scrap: Cash or A/R 900
Materials Control 900
Scrap is sometimes reused as direct materials rather than sold as scrap. In this case, it should be
debited to Materials Control as a type of direct materials and carried at its estimated net realizable
value. For example, the entries when the scarp generated is common to all jobs are:
Scrap returned to storeroom: Materials Control 900
MOH Control 900
Reuse of Scrap: Work-in Process Control 900
Materials Control 900
The accounting for scrap under process costing is like the accounting under jobs costing when
scrap is common to all jobs because process costing applies to the manufacture of masses of
identical or similar units. The high cost of scrap focuses manager’s attention on ways to reduce
scrap and to use it more profitably.

5
Process Costing and Spoilage
A key issue in accounting for spoilage in process-costing systems is how to count spoiled
units. Units of abnormal spoilage should be counted and recorded separately. But what
units of abnormal spoilage should be counted and recoded? Theses units can either be
counted (Approach A) or not counted (Approach B).
Approach A leads to more accurate product costs because it makes visible the costs
associated with normal spoilage and spreads it over good units.
Approach B is less accurate because it spreads the costs of normal spoilage over all units.
Example: Anzio Co. manufactures a wooden recycling container in its Forming
Department. Direct materials for this product are introduced at the beginning of the
production cycle. At the start of production, all direct materials required to make one
output unit are bundled in a single kit. Conversion costs are added evenly during the
cycle. Some units of this product are spoiled as a result defects only detectable at
inspection of finished units. Normally spoiled units are 10% of the goods output.
Summary of data for July 2004 are:
Physical Units for July 2004
Work in Process, beginning inventory (July 1) 1,500 units
Direct Materials (100% complete)
Conversion costs (60% complete)
Started during July 8,500 units
Completed and transferred out during July 7,000 good units
Work in Process, ending inventory (July 31) 2,000 units
Direct Materials (100% complete)
Conversion costs (50% complete)
Total Costs for July 2004
Work in process, beginning inventory
Direct materials (1,500 equivalent units * Br. 8) Br. 12,000
Conversion costs (900 equivalent units * Br.10) 9,000 Br. 21,000
Direct materials costs added during July 76,500
Conversion costs added during July 89,100
Total costs to account for Br.186, 600
Step 1: Summarize the Flow of Physical Units of Output. Identify units of both
normal and abnormal spoilage.

Spoiled Units= (Beginning units + Units started)-(Goods units transferred out+ending units)
= (1,500+8,500) – (7,000 + 2,000)
= 1,000 units

Normal Spoilage is 10% of the 7,000 units of good output, or 700 units. Thus,
Abnormal Spoilage = Total Spoilage – Normal Spoilage
= 1,000-700 = 300units

6
Step 2: Compute output interims of Equivalent Units.
Step 3: Compute Equivalent unit costs.
Step 4: summarize Total Costs to Account for.
Step 5: Assign Total Costs to units completed, to spoiled units, and to units in ending
work-in process.
A. Weighted Average
Physical units and Equivalent units (Step 1&2)
Equivalent Units
Flow of Production Physical Direct Conversio
Units Materials n costs
Work in process, beginning 1,500
Started during current period 8,500
To account for 10,000
Goods units completed and transferred out
during current period: 7,000 7,000 7,000
Normal Spoilage 700 700 700
700*100%; 700*100%
Abnormal Spoilage 300 300 300
300*100%; 300*100%
Work in process, ending 2,000 2,000 1,000
2,000*100%; 2,000*50%
Accounted for 10,000
Work done in current period 10,000 9,000
Calculation of Product Costs (Steps 3, 4, and 5)
Total Direct Conversion
Productio Materials costs
n Costs
(Step 3) Work in process, beginning Br.21,000 Br.12,000 Br.9,000
Costs added during the current period 165,600 76,500 89,100
Costs incurred to date divided by Br. 88,500/ Br. 98,100/
Equivalent units of work done to date 10000 9000
Cost per equivalent unit of work Br.8.85 Br.10.90
done
(Step 4) Total costs to account for Br.186,600
(Step 5) Assignment of Costs
Goods units completed and transferred
out (7,000 units)
Costs before adding normal spoilage 138,250 (7,000*8.85) (7,000*10.9)
Normal Spoilage (700 units) 13,825 700*8.85 700*10.9
Total cost of goods completed and 152, 075
transferred out
Abnormal Spoilage(300 units) 5,925 300*8.85 300*10.90

Work in process, ending (2,000 units) 17,700 2,000*8.85

7
 Direct Materials 10,900 1,000*10.90
Conversion costs 28,600
Total work in process Br186,600
Total costs accounted for

B. FIFO Method
Equivalent Units
Flow of Production Physical Direct Conversio
Units Materials n costs
Work in process, beginning 1,500
Started during current period 8,500
To account for 10,000
Good units completed and transferred out
during current period
From beginning work in process 1,500
1,500*(100%-100%); 1,500*(100%-60%) 0 600
Started and Completed 5,500
5,500*100%, 5,500*100% 5,500 5,500
Normal Spoilage 700
700*100%;700*100% 700 700
Abnormal Spoilage 300
300*100%; 300*100% 300 300
Work in process, ending 2,000
2,000*100%; 2,000*50% 10,000 2,000 1,000
Accounted for 8,500 8,100
Work done in current period

Calculation of Product Costs (Steps 3, 4, and 5)

Total Direct Conversion
Productio Materials costs
n Costs
(Step 3) Work in process, beginning Br.21,000
Costs added current period 165,600 76,500/ 89,100/
Divided by equivalent units of work 8,500 8,100
done in current period
Costs per equivalent unit of work done in the Br. 9 Br. 11
current period
(Step 4) Total costs to account for Br.186,600
(Step 5) Assignment of Costs
Good units completed and transferred out
(7,000 units)
Work in process, beginning (1,500 units) Br. 21,000
Direct Materials added in current period 0 0*9
Conversion costs added in current period 6,600 600*11

8
 Total from beginning inventory before 27,600
spoilage
Started and completed BNS(5,500units) 110,000 5,500*9 5,500*11
Normal Spoilage (700 units) 14,000 700*9 700*11
Total costs of goods units transferred out 151,600
Abnormal Spoilage (300 units) 6,000 300*9 300*11
Work in process, ending (2000 units)
Direct Materials 18,000 2000*9
Conversion costs 11,000 1,000*11
Total work in process, ending 29,000
Total costs accounted for Br.186,600
Journal Entries
Weighted Average FIFO
Finished Goods 152,075 151,600
Work-in Process-Forming 152,075
151,600
(To transfer good units completed in July)
Loss from Abnormal Spoilage 5,925 6,000
Work-in Process-Forming 5,925 6,000
(To recognize abnormal spoilage detected in July)

Inspection Points and Allocating Costs of Normal Spoilage

The above illustration assumes inspection upon completion. Spoilage might actually
occur at various stages of the production cycle, but it typically detected only at one or
more specific inspection points.
An inspection point is the stage of the production cycle where products are checked to
determine whether they are acceptable or unacceptable units. The cost of spoiled units is
assumed to be all costs incurred by spoiled units prior to inspection. When spoiled units
have a disposal value, the net cost spoilage is computed by deducting disposal value from
the costs of the spoiled goods accumulated to the inspection point