May 2, 2019

Costing for Spoilage, Rework and Scrap

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.

Reducing spoilage, rework, and scrap are important for reducing cost and they are part of production process quality improvement effort.

Concepts used in developing the theory of the topic

Spoilage: Spoilage is unacceptable units of production that are discarded or are sold for reduced prices. Spoilage can occur at any stage of the production process.

Rework: Rework is unacceptable units of production that are  subsequently repaired and sold as acceptable finished goods.

Scrap: Scrap is material left over when making a product. It has low sales value when compared with the sales value of the product or sales of value of the input material.

Cost accounting practice recommends normal spoilage is specified as part of production process specification. Its quantum can be evaluated or analyzed at various points of time it can be reduced further if possible by improving the process or technology. In routine accounting abnormal spoilage is reported to managers above the shop floor personnel.

Abnormal Spoilage: The spoilage that should not arise under efficient operating conditions.

Accounting for Spoilage in Job Costing.

Normal Spoilage

The cost of normal spoilage is added to the cost of the product so that estimate cost of product includes allowance for normal cost for subsequent cost estimations.

The disposal value of the spoilage is credited to work-in-progress control account and also to the specific job account. The materials control account and spoiled goods disposal value or income account are debited with the disposal value.

The effect will be that in specific job, it will be charged for all the expenses incurred for the job, but only good units are shown as output. The units which became spoilage are not included in the output and the disposal value of these units is deducted from the total expense. So the cost incurred due to the spoilage is included in the total cost and when one calculates the unit cost of the finished item, it includes a charge for the normal spoilage.

Abnormal Spoilage

In the case of abnormal spoilage, the total cost of the spoilage is removed from the specific job account by giving a credit to it and it is debited to  loss from abnormal spoilage account.

Journal entries

Spoiled good disposal value or income account    Debit
Loss from abnormal spoilage account                   Debit

Specific Job Account                                             Credit

Thus the company management and executives are made aware of abnormal losses so that actions are initiated to prevent them in the future. Accounting and reporting have the purpose of making managers aware of the need to act to prevent undesirable events.

Accounting for Rework in Job Costing

Rework is done on finished products or components, that did not meet specifications and after rework they become acceptable finished goods of components.  There can be an estimated or accepted as normal rework. Any rework above this normal rework is abnormal rework.

Normal Rework

The rework cost is charged to the specific job. Rework may involve some material use, labor use and also incurring of overhead cost. Hence the entry is

WIP account of a specific job    Debit

Material control A/C                                       Credit
Wages Payable A/C                                         Credit
Manufacturing Overhead Allocated A/C        Credit

Abnormal Rework

Abnormal rework is not charged to job so that it will not appear future estimates for similar jobs. It is recorded in a separate loss account.

Loss from Abnormal Rework A/C     Debit

Material control A/C                                   Credit
Wages Payable A/C                                    Credit
Manufacturing Overhead Allocated A/C   Credit

Accounting for Scrap

When the dollar amount of the scrap is immaterial

When the dollar amount of the scrap is insignificant, scrap is returned to the store or scrap store with documentary proof. Periodically, the scrap is sold and income is recorded as income from scrap. If it is material, then the income can be credited to the overhead account and thus overhead cost will become less to that extent.

When the dollar amount is substantial at Job Level

If the dollar amount of the scrap is substantial at the job level, then the scrap generated in the job is measured immediately, returned to the store and its value is ascertained based on the estimates sale value of the scrap. Then the entry for the return of scrap to stores will be:

Material Control A/C  Debit

Work in Process A/C role of the Job  Credit

Thus the cost accounting system helps in highlighting the abnormal costs of spoilage and rework so that remedial action is taken by the managers concerned. Also it provides the cost of the products manufactured by a firm as a true representation of the costs incurred by the firm and it helps the company to provide proper cost estimates for the future and price quotations based on these cost estimates.

Updated  3 May 2017,  6 May 2015
First published  8 Dec 2011

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