What is spoilage in accounting

DECISION POINT

How do job-costing systems account for rework?

Normal Rework Attributable to a Specific Job

If the rework is normal but occurs because of the requirements of a specific job, the rework costs are charged to that job. The journal entry is as follows:

Work-in-Process Control (specific job) 3,800 Materials Control 800 Wages Payable Control 2,000 Manufacturing Overhead Allocated 1,000

Normal Rework Common to All Jobs

The costs of the rework when it is normal and not attributable to a specific job are charged to manufacturing overhead and are spread, through overhead allocation, over all jobs.

Manufacturing Overhead Control (rework costs) 3,800 Materials Control 800 Wages Payable Control 2,000 Manufacturing Overhead Allocated 1,000

Abnormal Rework

If the rework is abnormal, it is charged to a loss account.

Loss from Abnormal Rework 3,800 Materials Control 800 Wages Payable Control 2,000 Manufacturing Overhead Allocated 1,000

Accounting for rework in a process-costing system also requires abnormal rework to be dis- tinguished from normal rework. Process costing accounts for abnormal rework in the same way as job costing. Accounting for normal rework follows the accounting described for nor- mal rework common to all jobs (units) because masses of identical or similar units are being manufactured.

Costing rework focuses managers' attention on the resources wasted on activities that would not have to be undertaken if the product had been made correctly. The cost of rework prompts managers to seek ways to reduce rework, for example, by designing new products or processes, training workers, or investing in new machines. To eliminate rework and to sim- plify the accounting, some companies set a standard of zero rework. All rework is then treated as abnormal and is written off as a cost of the current period.

Avid Corporation manufactures a sophisticated controller that is compatible with a

TRY' rry 184+ variety of gaming consoles. Excluding rework costs, the cost of manufacturing one controller is $220. This consists of $120 in direct materials, $24 in direct manufac-

turing labor, and $76 in manufacturing overhead. Maintaining a reputation for quality is critical to Avid. Any defective units identified at the inspection point are sent back for rework. It costs Avid $72 to rework each defective controller, including $24 in direct materials, $18 in direct manufacturing labor, and $30 in manufacturing overhead.

In August 2017, Avid manufactured 1,000 controllers, 80 of which required rework. Of these 80 controllers, 50 were considered normal rework common to all jobs and the other 30 were considered abnormal rework.

a. Prepare journal entries to record the accounting for both the normal and abnormal rework.

b. What were the total rework costs of controllers in August 2017? c. Suppose instead that the normal rework is attributable entirely to Job #9, for 200

controllers intended for Australia. In this case, what are the total and unit costs of the good units produced for that job in August 2017? Prepare journal entries for the manufacture of the 200 controllers, as well as the normal rework costs.

726 CHAPTER 18 SPOILAGE, REWORK, AND SCRAP

1-Rir IT! 18-1 Azure Textiles Company makes silk banners and uses the weighted-average method

of process costing. Direct materials are added at the beginning of the process, and conversion costs are added evenly during the process. Spoilage is detected upon in-

spection at the completion of the process. Spoiled units are disposed of at zero net disposal value.

Physical Units (Banners)

Direct Materials

Conversion Costs

Work in process, July 1' 1,000 $ 1,423 $ 1,110 Started in July 2017

Good units completed and transferred out in July 9,000

Normal spoilage 100 Abnormal spoilage 50 Work in process, July 31b 2,000 Total costs added during July 2017 $12,180 $27,750

'Degree of completion: direct materials, 100%; conversion costs, 50%. hDegree of completion: direct materials, 100%; conversion costs, 30%.

Determine the equivalent units of work done in July, and calculate the cost of units com- pleted and transferred out (including normal spoilage), the cost of abnormal spoilage, and the cost of units in ending inventory.

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FIFO Method and Spoilage Exhibit 18-3, Panel A, presents Steps 1 and 2 using the FIFO method, which focuses on equiva- lent units of work done in the current period. Exhibit 18-3, Panel B, presents Steps 3,4, and S. Note how when assigning costs, the FIFO method keeps the costs of the beginning work in process separate and distinct from the costs of the work done in the current period. All spoil- age costs are assumed to be related to units completed during the period, using the unit costs of the current period.4

• TRY IT! 18-

Consider Azure Textiles Company again. With the same information for July 2017 as provided in Try It 18-1, redo the problem assuming Azure uses FIFO costing instead.

Chapter 17 highlighted taxes, performance evaluation, and accounting-based covenants as some of the elements managers must take into account when choosing between the FIFO and weighted-average methods. It also stressed the importance of making careful estimates of degrees of completion in order to avoid misstating operating income. All of these consid- erations apply equally well to the material in this chapter. In addition, a new issue that arises with spoilage is that of estimating the normal spoilage percentage in an unbiased manner. A supervisor who wishes to show better performance might categorize more of the spoilage as normal, thereby reducing the amount that must be written off against income as the loss from abnormal spoilage. Managers must stress the value of consistent and unbiased estimates of completion and normal spoilage percentages and drive home the importance of pursuing ethical actions and reporting the correct income figures, regardless of the short-term conse- quences of doing so.

4 To simplify calculations under FIFO, spoiled units arc accounted for as if they were started in the current period. Although some of the beginning work in process probably did spoil, all spoilage is treated as if it came from current production.

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• ASSIGNMENT MATERIAL 741

Exercises MyAcco ntingLab

18-20 Normal and abnormal spoilage in units. The following data, in physical units, describe a grinding process for January:

Work in process, beginning 19,300

Started during current period 145,400 To account for 164,700

Spoiled units 12,000

Good units completed and transferred out 128,000

Work in process, ending 24,700

Accounted for 164,700

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Inspection occurs atthe 100% completion stage. Normal spoilage is 5% of the good units passing inspection.

1. Compute the normal and abnormal spoilage in units. 2. Assume that the equivalent-unit cost of a spoiled unit is $8. Compute the amount of potential savings if all

spoilage were eliminated, assuming that all other costs would be unaffected. Comment on your answer.

18-21 Weighted-average method, spoilage, equivalent units. (CMA, adapted) Consider the following data for November 2017 from MacLean Manufacturing Company, which makes silk pennants and uses a process-costing system. All direct materials are added at the beginning of the process, and conversion costs are added evenly during the process. Spoilage is detected upon inspection at the completion of the process. Spoiled units are disposed of at zero net disposal value. MacLean Manufacturing Company uses the weighted-average method of process costing.

Physical Units (Pennants)

Direct Materials

Conversion Costs

Work in process, November 1b 1,350 $ 966 $ 711 Started in November 2017

Good units completed and transferred

out during November 2017 8,800

Normal spoilage 80

Abnormal spoilage 50

Work in process, November 30b 1,700

Total costs added during November 2017 $10,302 $30,055

'Degree of completion: direct materials, 100%; conversion costs, 45%. b Degree of completion: direct materials, 100%; conversion costs, 35%.

Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule.

.\/ 18-22 Weighted-average method, assigning costs (continuation of 18-21).

For the data in Exercise 18-21, summarize the total costs to account for; calculate the cost per equivalent unit for direct materials and conversion costs; and assign costs to units completed and transferred out (in- cluding normal spoilage), to abnormal spoilage, and to units in ending work-in-process inventory.

N j 18-23 FIFO method, spoilage, equivalent units. Refer to the information in Exercise 18-21. Suppose MacLean Manufacturing Company uses the FIFO method of process costing instead of the weighted- average method.

Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule.

j 18-24 FIFO method, assigning costs (continuation of 18-23).

For the data in Exercise 18-21, use the FIFO method to summarize the total costs to account for; calculate the cost per equivalent unit for direct materials and conversion costs; and assign costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.

18-25 Weighted-average method, spoilage. LaCroix Company produces handbags from leather of mod- erate quality. It distributes the product through outlet stores and department store chains. At LaCroix's facil- ity in northeast Ohio, direct materials (primarily leather hides) are added at the beginning of the process,

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