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Spoilage, Rework, and Scrap

Spoilage, Rework, and Scrap

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Spoilage, Rework, and Scrap

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  1. Spoilage, Rework,and Scrap Chapter 18

  2. Learning Objective 1 Distinguish among spoilage, rework, and scrap.

  3. Terminology Spoilage refers to unacceptable units discarded or sold for reduced prices. Rework is units that are repaired. Scrap is material left over.

  4. Learning Objective 2 Describe the accounting procedures for normal and abnormal spoilage.

  5. Normal Spoilage Normal spoilage is spoilage that is an inherent result of the particular production process and arises even under efficient operating conditions. Normal spoilage rates should be computed using total good units completed as the base, not total actual units started in production.

  6. Abnormal Spoilage Abnormal spoilage is spoilage that should not arise under efficient operating conditions. Companies record the units of abnormal spoilage and keep a separate Loss from Abnormal Spoilage account.

  7. Process Costing andSpoilage Example Big Mountain, Inc., manufactures skiing accessories. All direct materials are added at the beginning of the production process. In October, $95,200 in direct materials were introduced into production. Assume that 35,000 units were started, 30,000 good units were completed, and 1,000 units were spoiled (all normal spoilage).

  8. Process Costing andSpoilage Example Ending work in process was 4,000 units (each 100% complete as to direct material costs). Spoilage is detected upon completion of the process. Spoilage is typically assumed to occur at the stage of completion where inspection takes place.

  9. Process Costing andSpoilage Example Approach A recognizes spoiled units when computing output in equivalent units. Approach B does not count spoiled units when computing output in equivalent units.

  10. Approach A Example Costs to account for $95,200 Divide by equivalent units 35,000 Cost per equivalent unit $ 2.72 Good units completed: 30,000 × $2.72 $81,600 Add normal spoilage: 1,000 × $2.72 2,720 Costs of good units transferred out $84,320 Work in process: 4,000 × $2.72 10,880 Costs accounted for $95,200

  11. Approach B Example Costs to account for $95,200 Divide by equivalent units 34,000 Cost per equivalent unit $ 2.80 Good units completed: 30,000 × $2.80 $84,000 Costs of good units transferred out $84,000 Work in process, ending: 4,000 × $2.80 11,200 Costs accounted for $95,200

  12. Learning Objective 3 Account for spoilage in process costing using the weighted-average method.

  13. Weighted-Average: Spoilage The following example is for the month of November and relates to Big Mountain, Inc. Direct materials are introduced at the beginning of the production cycle. Conversion costs are added evenly during the cycle.

  14. Weighted-Average: Spoilage Normally the spoiled units are 2% of the output. Assume that Big Mountain, Inc., had 1,000 units in the beginning work in process inventory, 100% complete for materials ($9,700), and 60% complete for conversion ($10,000).

  15. Weighted-Average: Spoilage Ending work in process inventory was 4,000 units (100% materials and 20% conversion). Costs added during the month were $87,500 for materials and $72,000 for conversion. What are the costs assigned to the units completed, spoiled, and in ending work in process inventory?

  16. Physical Units (Step 1) Work in process, beginning (November 1) 100% material, 60% conversion costs 1,000 Started during November: 35,000 36,000 Good units completed and transferred out: 31,000 Work in process, ending inventory: 100% material 20% conversion costs 4,000 35,000

  17. Physical Units (Step 1) What is the number of spoiled units? 36,000 – 35,000 = 1,000 What is the normal spoilage? 31,000 × 2% = 620 What is the abnormal spoilage? 1,000 – 620 = 380

  18. Compute EquivalentUnits (Step 2) MaterialsConversion Completed and transferred 31,000 31,000 Normal spoilage 620 620 Abnormal spoilage 380 380 Ending inventory 4,000 800 Equivalent units 36,000 32,800 100% 20%

  19. Compute EquivalentUnit Costs (Step 3) MaterialsConversion Beginning inventory $ 9,700 $10,000 Current costs 87,500 72,000 Total $97,200 $82,000 Equivalent units 36,000 32,800 Cost per unit $2.70 $2.50

  20. Summarize Total Costs (Step 4) Work in process beginning inventory: Materials $ 9,700 Conversion 10,000 Total beginning inventory $ 19,700 • Current costs: • Materials $87,500 • Conversion 72,000 • Costs to account for $179,200

  21. Assign Total Costs (Step 5) Good units completed and transferred out (31,000 units): Costs before adding normal spoilage: 31,000 × ($2.70 + $2.50) $161,200 Normal spoilage: 620 × ($2.70 + $2.50) 3,224 Total $164,424

  22. Assign Total Costs (Step 5) Abnormal spoilage: 380 × ($2.70 + $2.50) $ 1,976 Work in process, ending (4,000 units): Direct materials (4,000 × $2.70) $10,800 Conversion (800 × $2.50) 2,000 Total $12,800

  23. Assign Total Costs (Step 5) Costs of units completed and transferred out (including normal spoilage) $164,424 Cost of abnormal spoilage 1,976 Costs in ending inventory 12,800 Total costs accounted for $179,200 The $1,976 cost of abnormal spoilage is assigned to the Loss from Abnormal Spoilage account.

  24. Learning Objective 4 Account for spoilage in process costing using the first-in, first-out (FIFO) method.

  25. Physical Units (Step 1) Work in process, beginning (November 1): 100% material, 60% conversion costs 1,000 Started during November 35,000 36,000 Good units completed and transferred out: From beginning inventory 1,000 Started and completed 30,000 31,000

  26. Physical Units (Step 1) Work in process, ending inventory: 100% material, 20% conversion costs 4,000 Normal spoilage 620 Abnormal spoilage 380

  27. Compute EquivalentUnits (Step 2) MaterialsConversion Good units completed and transferred out: From beginning inventory 0 400 Started and completed 30,000 30,000 Normal spoilage 620 620 Abnormal spoilage 380 380 Ending inventory 4,000 800 Equivalent units 35,000 32,200

  28. Compute EquivalentUnit Costs (Step 3) MaterialsConversion Current costs $87,500 $72,000 Divided by equivalent units 35,000 32,200 Cost per unit $2.50 $2.236* *$2.236 (rounded)

  29. Summarize Total Costs (Step 4) Work in process beginning inventory: Materials $ 9,700 Conversion 10,000 Total beginning inventory $ 19,700 • Current costs: • Materials $ 87,500 • Conversion 72,000 • Costs to account for: $179,200

  30. Assign Total Costs (Step 5) Good units completed and transferred out: From beginning inventory: Work in process $ 19,700.00 Conversion costs added in current period (400 × $2.236) 894.40 Total $ 20,594.40 Started and completed: 30,000 × ($2.50 + $2.236) $142,080.00

  31. Assign Total Costs (Step 5) Costs before adding normal spoilage: ($20,594.40 + $142,080.00) $162,674.40 Normal spoilage: 620 × ($2.50 + $2.236) 2,936.32 Total $165,610.72

  32. Assign Total Costs (Step 5) Abnormal spoilage: 380 × ($2.50 + $2.236) $1,799.68 Work in process, ending (4,000 units): Direct materials (4,000 × $2.50) $10,000 Conversion (800 × $2.236) 1,789 Total $11,789

  33. Assign Total Costs (Step 5) Costs of units completed and transferred out (including normal spoilage) $165,610.72 Cost of abnormal spoilage 1,799.68 Costs in ending inventory 11,789.00 Total costs accounted for $179,200.00 The $1,799.68 costs of abnormal spoilage are assigned to the Loss from Abnormal Spoilage account.

  34. Learning Objective 5 Account for spoilage in process costing using the standard-costing method.

  35. Standard-Costing: Spoilage The standard-costing method makes calculating equivalent unit costs unnecessary and so simplifies process costing.

  36. Journal Entries Assume that the completed units are transferred to Finished Goods. What are the journal entries? Finished Goods XXX Work in Process XXX To transfer good units completed in November

  37. Journal Entries Loss from Abnormal Spoilage XXX Work in Process XXX To recognize abnormal spoilage detected in November

  38. Learning Objective 6 Account for spoilage in job costing.

  39. Job Costing: Spoilage With a job-costing system, companies can decide to assign normal spoilage to specific jobs. Alternatively, they can allocate normal spoilage to all jobs as part of manufacturing overhead. Loss from abnormal spoilage is recorded as a cost of the period.

  40. Job Costing: Spoilage Assume that 5 parts out of 40 parts of Whitefish Machine Shop’s Job #10 are spoiled (normal). Costs assigned prior to the inspection point are $1,000 per part. The current disposal price of the spoiled parts is $200 per part. When the spoilage is detected, the spoiled goods are inventoried at $200 per part.

  41. Job Costing: 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 reduced by the current disposal value of that spoilage. What is the journal entry?

  42. Job Costing: Spoilage Materials Control (spoiled goods at current disposal value): 5 × $200 1,000 Work in Process Control (Job #10) 1,000 To recognize disposal value of spoiled parts

  43. Job Costing: Spoilage Work in Process (Job # 10) Parts 40,000 Parts 1,000 (40 × $1,000) (5 × $200) Balance 39,000 What is the total cost of the 35 good units? (35 × $1,000) + (5 × $800) = $39,000

  44. Job Costing: Spoilage Normal spoilage common to all jobs: In some cases, spoilage may be considered a normal characteristic of a given production cycle. The spoilage is not charged to a specific job. What is the journal entry?

  45. Job Costing: Spoilage Materials Control (spoiled goods at current disposal value): 5 × $200 1,000 Manufacturing Overhead Control (normal spoilage) 4,000 Work in Process Control (Job #10) 5,000 To recognize spoiled parts

  46. Job Costing: Spoilage Abnormal spoilage: If the spoilage is abnormal, the net loss is highlighted and always charged to an abnormal loss account. Assume that the 5 parts of Whitefish Machine Shop’s Job #10 are considered abnormal spoilage. What is the journal entry?

  47. Job Costing: Spoilage Materials Control (spoiled goods at current disposal value): 5 × $200 1,000 Loss from Abnormal Spoilage 4,000 Work in Process Control (Job #10) 5,000 To recognize spoiled parts

  48. Learning Objective 7 Account for rework in job costing.

  49. Rework Units Example Normal rework attributable to a specific job: Assume that the 5 parts of Whitefish Machine Shop’s Job #10 can be reworked for a total cost of $1,800. $5,000 of costs associated with these parts have already been assigned to Job #10 before rework. What is the journal entry?

  50. Rework Units Example Work in Process (Job #10) 1,800 Various Accounts 1,800 To charge rework costs to the job Normal rework common to all jobs: Debit Manufacturing Overhead Control (rework costs). Abnormal rework: Debit Loss from Abnormal Rework.