Exercise 3-1 Identification. Identify whether it is scrap, spoilage or reworked units.

1. Complex defective products such as semiconductors.

2. Rock extracted resulting from mining operations.
3. Carpets sold as seconds
4. Edges from plastic moldings
5. Defective jeans sold at discounted prices
6. Trimmings of paper
7. Shavings
8. Precision tools that are not built successfully to the necessary tolerance but can be converted to
salable products.

Exercise 3-2(TRUE/FALSE)

1. Normal spoilage is considered period cost.

2. Abnormal spoilage is considered period cost.
3. The journal entry to record the normal spoilage specifically traceable to a particular job is a
debit to Work in Process.
4. Spoilage occurring on specific jobs should be considered in computing predetermined factory
overhead rate.
5. If a substandard product can be reworked, it is known as defect
6. If a substandard product cannot be reworked, it is known as spoilage.
7. Reducing the defects helps to reduce costs, but does not make the business more competitive.
8. Normal spoilage adds to the cost of the job to which it is attributed to job order costing system.
9. Abnormal spoilage is a spoilage that should rise under efficient operating conditions.
10. A company whose goal is zero defect would usually treat spoilage as abnormal.
11. When spoiled goods have a disposal value, the net cost of spoilage is computed by adding the
disposal value to the cost of the spoiled goods accumulated to the inspection point.
12. When rework is normal and not attributable to any specific job, the costs of rework are charged
to manufacturing overhead, and spread through overhead allocation over all jobs.
13. Scrap is usually divided to normal and abnormal scrap.
14. If scrap is returned to the company’s storeroom and thus, inventoried, it should not have any
value in the accounting records,
15. Scrap can be sold and be part of another revenue item.

Exercise 3-3 (Multiple Choice) Encircle the letter of the best answer

1. The amount of raw materials left over from a production process or production cycle for which
there is no further use is:
a. Defects
b. Spoilage
c. Waste
d. Scrap

1
2. Net normal spoilage costs that are common to all jobs would be
a. Charged to WIP
b. Charged to Factory Overhead
c. Charged to a loss account
d. Charged to Cost of Goods Sold

3. Abnormal spoilage
a. Represents loss and is controllable
b. Represents loss and is uncontrollable
c. Represents product cost and controllable
d. Represents product cost and uncontrollable

4. Unacceptable units of production that are discarded or are sold for reduced prices are
a. Reworked units
b. Spoiled units
c. Scrap
d. Defective units

5. Unacceptable units of production that are subsequently repaired and sold as acceptable finished
goods are
a. Reworked units
b. Spoiled units
c. Scrap
d. Defective units

6. Cost of normal spoilage are usually accounted for as

a. Part of the Cost of Goods Sold statement
b. Part of the Cost of Goods Sold Manufactured
c. A separate item in the income statement
d. An asset in the balance sheet

7. Cost of abnormal spoilage are usually accounted for as

a. Part of the Cost of Goods Sold
b. Part of the Cost of Goods Manufactured
c. A separate tem in the income statement
d. An asset in the statement of financial position

8. In a job order costing system, the net cost of normal spoilage is equal to
a. Estimated disposal value plus the cost of spoiled work
b. The cost of spoiled work minus estimated spoilage cost
c. The units of spoiled work times the predetermined overhead rate
d. The cost of spoiled work minus the estimated disposal value

2
9. If abnormal spoilage occurs in a job order costing system, and a material peso value, and is related
to a specific job, the recovery value of the spoiled gods should be
a. Debited to a Scrap Inventory account, credited to specific job in process
b. Debited to specific job in process, credited to overhead
c. Debited to Loss account, credited to specific job in process
d. Debited to overhead, credited to Sales

10. Shrinkage should be treated as

a. Defective units
b. Spoiled units
c. Miscellaneous expense
d. A reduction to overhead

Exercise 3-4 (Accounting for Scrap)

Archaeous Wood Designs accumulates fairly large quantities of saw dust from the products it
manufactures. At least once a month, the scrap dusts are sold to local customers for animal bedding or
fertilizer. The month’s scrap sales on account totaled P10,450.

Required: Give the appropriate journal entry to record the sale of the scrap for each of the following
alternatives:

1. The scrap sales are regarded as a separate line item under Other Revenues
2. The scrap sales are viewed as a reduction of Cost of Goods Sold for the month
3. The scrap sales are viewed as an offset against manufacturing overhead
4. The scrap sales are credited to the jobs that generated the scrap
5. If the scrap, which can be traced to a specific job is returned to the storeroom and is reused as
direct material on a subsequent job

Exercise 3-5 (Accounting for Spoilage)

Ananias Metal Co. uses a job order cost accounting system to account for its production cost. During the
current period, 400 steel chairs were molded and assembled as Job 678. The total cost incurred on the
job is:

Materials P4,800
Labor (200 hours x P10 per hour) 2,000
Factory overhead (P20 per labor hour) 4,000
Total Charged to Job 678 P10,800

Before being transferred to Finished Goods Inventory, the steel chairs were inspected by Quality
Assurance Officers and 40 were found to be spoiled. The spoiled items are too impractical and expensive
to rework as it needs to be molded again, however these items can be salvages for P10 each. The
company maintains a separate Spoiled Goods Inventory for defective products and chares the
unrecoverable cost of spoilage to Factory Overhead Control (FOC) account.

3
Required:

1. Determine the cost of spoilage attributable to Job 678 if the spoilage was due to internal failure.
2. Determine the unrecovered cost of spoilage of Job 678 if the spoilage was due to internal failure
3. Give the journal entries if the spoilage was due to internal failure
4. Journal entries if the spoilage was considered to be abnormal
5. Journal entries if the spoilage was due to sudden change of customer’s specification and not by
the inspection of the Quality Assurance officers

Exercise 3-6 (Accounting for Spoilage)

Maddox Metal World manufactures custom sheet metal products. During the current period, an order
for 1,250 custom sheets for trailers was begun as Job 450 for Norfolk Trains. After 250 units had been
completed, the customer decided to change the design specifications for the metal sheets. The design
change was successfully implemented on the 1,000 units that were not complete at the date of the
change order; however, the 250 completed units could not be reworked to meet the customer’s new
design. As a consequence, an additional 250 units had to be manufactured to meet the number of
orders. The customer does not want the 250 units but the company can sell it in the second market for
P100 each. Spoiled goods are kept in inventory account that is separate from Finished Goods. Total cost
charged to Job 450 for Norfolk Trains are:

Materials P125,000
Labor (3,000 hours x P15 per hour) 45,000
Factory overhead (P30 per labor hour) 90,000
Total cost charged to Job 450 P260,000

Required:

1. Compute the cost to be transferred to Spoiled Goods Inventory

2. Compute the cost of the job shipped to the customer
3. Provide the appropriate journal entry for the sold job
4. If the spoilage was due to internal failure, provide the appropriate journal entry
5. If the spoilage was considered abnormal, provide the appropriate journal entry

Exercise 3-7 (Accounting for Spoilage)

Edcynth Company manufactures picture frames of all sizes and shapes and uses job order costing
system. There is always some spoilage in each production run. The following costs relate to the current
run:

Estimated overhead (exclusive of spoilage) P400,000

Spoilage (estimated) 62,500
Sales value of spoiled frames 28,750
Labor hours 250,000

4
The actual cost of spoiled picture frame is P7.00. During the year, 425 frames are considered spoiled.
Each spoiled frame can be sold for P4. The spoilage is considered to be part of the job.

Required:

1. Compute the predetermined overhead rate if it is based on labor hours.

2. Prepare the journal entry to record the spoilage.
3. Prepare the journal entry if the spoilage relates only to Job #12 rather than being part of all
production runs.

Exercise 3-8 (Accounting for Rework Costs)

Afton Furniture Inc. manufactures several different designs of indoor furniture. Production costs are
accounted for using a job order cost system. During the current period, 250 metal tables were
manufactured on Job 897. Costs charged to the hob before inspection is: Materials – P8,250; Labor (375
hours x P10 per hour) – P3,750; Factory overhead (P12 per hour) – P4,500. Inspection revealed that steel
hand holder had not been attached to the furniture. The small part cost P0.50 for each furniture, and
the primer and paint cost P1.00 for each furniture. Each furniture required ¼ hour of labor.

Required:

1. Prepare the journal entries to record the rework and transfer to the Finished Goods Inventory.
2. If the rework was due to customer change rather than internal failure, what will be the journal
entries to record the rework and transfer to the Finished Goods Inventory.
3. If the rework was considered b the company as abnormal, what will be the necessary journal
entries to record the rework and transfer.

Exercise 3-9 (Accounting for Rework Costs)

Raghnall Electronics Inc manufactures gauges and instruments for aircraft. During the current year, an
order for P2,500 units of a custom design gauge was begun for the Suffolk Aircraft International. The
cost incurred on the job are: Materials – P50,000; Labor (2,500 hours x P15 per hour) – P37,500; Factory
Overhead (P30 pr direct labor hour) – P75,000. Before taking delivery of the gauges, engineers at Suffolk
Aircraft changed the design specification. The change requires the replacement of some parts. The
material cost was P1 and required 25 minutes for installation in each gauge. The change affected all
2,500 gauges manufactured on the job.

Required: Prepare the journal entries to record:

1. The rework costs and the shipment of the completed jobs to the customers.
2. The rework if it was due to internal failure.
3. The rework if it was considered abnormal.

5
Exercise 3-10 (Rework)

During March, Nikolai Co. incurred the following costs on Job #110 for the manufacture of 200 motors:

Original cost accumulation:

Direct materials P1,650
Direct labor P2,000
Factory overhead (150% of Direct Labor)
Direct cost of reworking 10 units:
Direct Materials P250
Direct Labor P400

Required: Compute the unit cost of Job #110 if the rework cost:

1. Is directly attributable to that job

2. Was a result of an internal failure due to the employee’s error