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Spoilage, Rework, and Scrap

Spoilage, Rework, and Scrap. Chapter 18. Learning Objective 1. Distinguish among spoilage, rework, and scrap. Terminology. Spoilage refers to unacceptable units discarded or sold for reduced prices. Rework is units that are repaired. Scrap is material left over. Learning Objective 2.

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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

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