BA

 116  –  Cost  Accounting                              First  Semester,  AY  2014-­‐2015  

Job  Order  Costing  –  Spoilage,  Rework,  Scrap                                            Handout  4  
 
 
Production  Losses  
 
• 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.  When  spoiled  units  are  discovered,  they  are  taken  out  of  production  and  no  further  work  
is  performed  on  them.  
• Rework   –   Units   of   production   that   do   not   meet   the   specifications   required   by   customers   but  
which  are  subsequently  repaired  and  sold  as  good  or  irregulars.  
• Scrap   –   Raw   materials   left   over   from   the   production   process   that   cannot   be   put   back   into  
production   for   the   same   purpose   but   may   be   useable   for   different   purpose   or   different  
production  process  or  which  may  be  sold  to  outsiders  for  a  nominal  amount.  
• Waste  Materials  –  The  part  of  raw  materials  left  over  from  production  that  has  no  further  use  or  
resale  value.    A  cost  of  disposal  may  be  incurred  for  waste  materials.  
 
 
Normal  Spoilage  
• Normal   Spoilage   –   is   spoilage   inherent   in   a   particular   production   process   that   arises   under  
efficient  operating  conditions  
o Management  determines  the  normal  spoilage  rate  
o 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  
 
Abnormal  Spoilage  
• Abnormal   Spoilage   –   is   spoilage   that   is   not   inherent   in   a   particular   production   process   and  
would  not  arise  under  normal  operating  conditions  
o Abnormal  spoilage  is  considered  avoidable  and  controllable  
o 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  
 
• Job-­‐costing  systems  generally  distinguish  between  normal  spoilage  attributable  to  a  specific  job  
from  normal  spoilage  common  to  all  jobs  
 
• 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  
o This  method  is  appropriate  when  management  expects  spoilage  to  develop  only  on  
special  jobs  that  may  require,  for  example,  more  stringent  specifications.  
 
• Normal  Spoilage  Common  to  All  Jobs:  In  some  cases,  spoilage  may  be  considered  a  normal  
characteristic  of  the  production  process    

*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
 o The  spoilage  is  costed  as  manufacturing  overhead  because  it  is  common  to  all  jobs  
o The  Budgeted  Manufacturing  Overhead  Rate  includes  a  provision  for  normal  spoilage  
 
• Abnormal  Spoilage:  If  the  spoilage  is  abnormal,  the  net  loss  is  charged  to  the  Loss  from  
Abnormal  Spoilage  account  
o Abnormal  spoilage  costs  are  not  included  as  a  part  of  the  cost  of  good  units  produced  
 
ACCOUNTING  FOR  SPOILED  UNITS  
 
NORMAL  SPOILAGE  
 
1.  Allocated  to  specific  job  
• Normal  spoilage  is  ignored  in  the  computation  of  MOH  application  rate  to  be  applied  to  jobs.  
• When  normal  spoiled  units  develop  from  a  specific  job,  only  the  salvage  value  is  removed  from  
WIP  inventory,  leaving  in  the  unsalvageable  cost  (thus  increasing  only  the  unit  cost  of  the  jobs  
where  spoilage  resulted)  
 
Materials  Control  (Spoiled  units)         xxx     (SV)  
    Work-­‐in  process  Control  (Job  #  ___)     xxx  
 
 
2.  Allocated  to  all  Jobs.  
• An  estimate  of  the  cost  of  net  normal  spoilage  (normal  spoilage  cost  less  any  estimated  salvage  
value)  is  made  and  included  in  the  factory  overhead  application  rate  to  be  applied  to  all  jobs.  
• When   normal   spoilage   occurs,   the   total   cost   of   the   spoiled   units   is   removed   from   the   WIP  
inventory  because  it  has  already  been  accounted  for  in  WIP  inventory  as  part  of  applied  MOH.  
 
Materials  Control  (Spoiled  units)         xx     (SV)  
Manufacturing  overhead  control         xxx     (cost  –  SV)    
Work-­‐in  process  Control  (Job  #  ___)     xxx  
 
 
ABNORMAL  SPOILAGE  
• The   total   cost   of   the   abnormal   spoiled   units   should   be   removed   from   the   WIP   inventory  
account.  
• Any  salvage  value  should  be  recorded  in  a  Spoiled  Units  Inventory  account.  
• Any  difference  between  total  cost  and  SV  should  be  charged  to  a  Loss  from  Abnormal  Spoilage  
account.  
 
Materials  Control  (Spoiled  units)         xxx     (SV)  
Loss  from  abnormal  spoilage     xxx     (cost  –  SV)  
  Work-­‐in  process  Control  (Job  #  ___)     xxx  
 
• Loss  from  abnormal  spoilage  appears  in  the  income  statement  as  a  period  cost.  
*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
• Unit  cost  of  good  units  is  not  affected.  
 
 
ACCOUNTING  FOR  SPOILED  UNITS:  EXAMPLE  
 
PANDA   COMPANY   is   a   manufacturer   of   ball   point   pens,   has   decided   to   enter   into   the  
production  of  pens  as  corporate  giveaways  on  a  job  order  basis.    The  pens  will  be  sold  for  P5  each  
and  the  cost  per  unit  of  pen  are  as  follows:  
  Direct  materials         P2.00  
  Direct  labor              1.30  
  Estimated  factory  overhead          0.50  
              P3.80  
CASE  I.  Normal  Spoilage  
Situation  A.  Charged  to  all  Jobs  
Spoilage  is  expected  to  occur  during  the  production  process,  thus  an  allowance  for  normal  
spoilage  of  P0.20  should  be  added  to  the  estimated  MOH  cost  per  unit.    Normal  spoilage  is  expected  
to  be  5%  of  total  units  placed  in  production.    Spoiled  units  may  be  sold  for  P0.45  each.  
For  Job  A,  21,000  units  were  placed  into  production  and  1,000  units  were  spoiled.  
 
 
Situation  B.    Charged  to  Specific  Job  
  Spoilage  is  due  to  the  differing  specifications  of  each  job  thus,  spoilage  is  charged  to  specific  
jobs.    All  spoilage  is  considered  normal  and  may  be  sold  for  P0.45  each.    Two  jobs  are  started:  
 
  Units  Started   Units  Spoiled  
Job  B   10,000   0  
Job  C   15,000   750  
 
CASE  II.    Normal  &  Abnormal  Spoilage  
Situation  A.    Spoilage  is  1,250  units  
Situation  B.    No  spoilage  was  anticipated.  
 
Requirement  for  each  situation:  
1. Prepare  the  necessary  journal  entries.  
2. Compute  the  unit  cost  per  job.  
 
 
ACCOUNTING  FOR  REGULAR  DEFECTIVE  UNITS  
§ THREE  TYPES  OF  REWORK:  
1. Normal  rework  attributable  to  a  specific  job  –  the  rework  costs  are  charged  to  that  job  
2. 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  
*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
  
 
ACCOUNTING  FOR  IRREGULAR  DEFECTIVE  UNITS  
• Production   cost   of   irregular   items   should   be   transferred   from   WIP   to   a   special   inventory  
account  and  not  commingled  with  the  production  costs  of  good  units.  
• Any  deficiency*  should  be  treated  as  part  of  the  production  cost  of  good  units  if  the  number  of  
defective  units  are  normal.  
• If  some  of  the  defective  units  were  considered  abnormal,  that  proportion  of  the  total  should  be  
calculated  and  that  same  proportion  of  the  deficiency  should  be  written  off  as  a  period  cost.  
 
*deficiency   is   the   difference   between   the   net   realizable   value   (selling   price   minus   cost   to  
rework  and  sell)  and  the  cost  when  cost  is  greater  than  NRV.  
 
 
ACCOUNTING  FOR  DEFECTIVE  UNITS:  EXAMPLE  
 
Arimi  Shirt  Company  manufactures  men’s  shirts  that  normally  sell  for  P4,000.    During  June  2013,  
the   company   produced   14,800   good   shirts   and   200   defective   ones.   Total   costs   other   than   rework  
were   P12,000,000.     Rework   costs   were   P300   per   shirt.   All   rework   costs   are   assumed   to   be   direct  
labor  related.    What  are  the  journal  entries  to  record  defective  units  and  the  cost  per  shirt  under  the  
following  assumptions:  
 
1. Rework  is  normal;  cost  is  charged  to  specific  job;  reworked  units  may  be  sold  at  normal  selling  
price.  
2. Rework  is  normal;  predetermined  overhead  rate  is  used  (rework  is  estimated);  reworked  units  
may  be  sold  at  normal  selling  price.  
3. Rework  is  abnormal;  reworked  units  may  be  sold  at  normal  selling  price.  
4. Reworked  units  are  irregular  and  may  be  sold  for  P500  assuming:  
a. defects  are  normal  
b. defects  are  abnormal  
 
 
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  
• Scrap  Attributable  to  a  Specific  Job  –  job-­‐  costing  systems  sometime  trace  the  scrap  revenues  to  
the  jobs  that  yielded  the  scrap  
o Done  only  when  the  tracing  can  be  done  in  an  economically  feasible  way  
o 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  
*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
 o 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  
 
• Scrap  materials  are  normally  accounted  for  at  the  time  of  sale.  
 
  Cash           xxx  
               Scrap  sale           xxx  
 
  Cash           xxx  
               Manufacturing  overhead  control     xxx  
 
  Cash           xxx  
               Work-­‐in  process  control  (Job  #__)     xxx  
 
 
• 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  
 
If   the   peso   amount   of   scrap   is   material   and   there   is   a   significant   time   lag   before   it   can   be   sold,  
inventory  value  may  be  assigned  to  scrap.  
 
  Materials  control  (scrap)       xxx  
               Scrap  sales  (FOH  or  WIP)       xxx  
 
  Cash           xxx  
Materials  control  (scrap)       xxx  
 
 
ACCOUNTING  FOR  WASTE  MATERIALS  
 
Cost  of  disposing  waste  materials  may  be  allocated  in  two  ways.  
 
Waste  is  allocated  to  all  jobs:  
 
  Manufacturing  overhead  control     xxx  
Accounts  payable         xxx  
 
Waste  is  allocated  to  specific  job:  
 

*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
   Work-­‐in  process  control  (Job  #__)   xxx  
Accounts  payable         xxx  
 
 
Register,   Inc.,   had   both   defective   units   and   scrap   materials   from   job   186.     There   were   70  
defective   units,   20   of   which   are   abnormal.     The   scrap   materials   were   sold   for   P125   and   were   not  
considered  in  the  computation  of  the  predetermined  manufacturing  overhead  application  rate.  
 
Required:  
a. Prepare  journal  entries  for  the  defective  units,  assuming  the  following  rework  costs:  
 
Direct  materials       P105  
Direct  labor                70  
Factory  overhead              35  
Total           P210  
 
b.  Prepare  journal  entries  for  the  sale  of  the  scrap  materials.    Scrap  sale  is  charged  to  job  186.  
 
 
The  S.  Loppy  Manufacturing  Company  produces  items  made  to  order  and  uses  a  job  order  
cost   system   to   record   and   distribute   costs.     The   following   information   applies   to   job   105   for   30,000  
units:  
 
Cost  of  normal  spoilage  (500  units)     P20,000  
Cost  of  abnormal  spoilage       P    4,000  
Salvage  value  of  spoiled  units       P              10  per  unit  
Cost  of  reworking  defective  units  
             (labor  costs  only)           P                  5  per  unit  
Normal  defective  units                      140  
Abnormal  defective  units                        20  
Cash  received  from  sale  of  defective  units     P  6,400  
Cash  received  from  sale  of  scraps     P        300  
Cost  of  disposing  waste  materials     P            40  
 
Normal   spoilage   was   anticipated   on   all   jobs   and   included   in   the   manufacturing   overhead  
application  rate  while  defective  units,  scraps  and  wastes  were  ignored.    Scrap  sales  are  highlighted  
in  the  income  statement.  
 
Required:    Prepare  the  journal  entries  necessary  to  record  the  above  information.  
 
 
Source:  
Notes  from  S.  Rico,  UPCBA  
*Class  use  only.  Not  for  distribution  and/or  reproduction.