Spoilage, Rework, and Scrap
Managers have found that improved quality and intolerance for high spoilage have lowered overall costs and increased sales. Spoilage—units of production that do not meet the standards required by customers for good units and that are discarded or sold at reduced prices. Rework—units of production that do not meet the specifications required by customers but which are subsequently repaired and sold as good finished units. Scrap—residual material that results from manufacturing a product. It has low total sales value compared to the total sales value of the product.
Normal spoilage is spoilage inherent in a particular production process that arises even under efficient operating conditions. Management decides the spoilage rate it considers normal depending on the production process. Abnormal spoilage is spoilage that is not inherent in a particular production process and would not arise under efficient operating conditions. Costs of abnormal spoilage are “lost costs,” measures of inefficiency that should be written off directly as losses for the accounting period. Management effort can affect the spoilage rate.Many companies are relentlessly reducing their rates of normal spoilage, spurred on by competitors who, likewise, are continuously reducing costs. 18-6Normal spoilage typically is expressed as a percentage of good units passing the inspection point.
Given actual spoiled units, we infer abnormal spoilage as follows: Abnormal spoilage = Actual spoilage – Normal spoilage Accounting for spoiled goods deals with cost assignment, rather than with cost incurrence, because the existence of spoiled goods does not involve any additional cost beyond the amount already incurred. Normal spoilage rates should be computed from the good output or from the normal input, not the total input. Normal spoilage is a given percentage of a certain output base. This base should never include abnormal spoilage, which is included in total input. Abnormal spoilage does not vary in direct proportion to units produced, and to include it would cause the normal spoilage count to fluctuate irregularly and not vary in direct proportion to the output base. Yes, the point of inspection is the key to the assignment of spoilage costs.
Normal spoilage costs do not attach solely to units transferred out.Thus, if units in ending work in process have passed inspection, they should have normal spoilage costs added to them. No. If abnormal spoilage is detected at a different point in the production cycle than normal spoilage, then unit costs would differ. If, however normal and abnormal spoilage are detected at the same point in the production cycle, their unit costs would be the same. No. Spoilage may be considered a normal characteristic of a given production cycle.
The costs of normal spoilage caused by a random malfunction of a machine would be charged as a part of the manufacturing overhead allocated to all jobs.Normal spoilage attributable to a specific job is charged to that job. 18-12 No. Unless there are special reasons for charging normal rework to jobs that contained the bad units, the costs of extra materials, labor, and so on are usually charged to manufacturing overhead and allocated to all jobs. Yes. Abnormal rework is a loss just like abnormal spoilage. By charging it to manufacturing overhead, the abnormal rework costs are spread over other jobs and also included in inventory to the extent a job is not complete.
Abnormal rework is rework over and above what is expected during a period, and is recognized as a loss for that period. A company is justified in inventorying scrap when its estimated net realizable value is significant and the time between storing it and selling or reusing it is quite long. Company managements measure scrap to measure efficiency and to also control a tempting source of theft. Managements of companies that report high levels of scrap focus attention on ways to reduce scrap and to use the scrap the company generates more profitably. Some companies, for example, might redesign products and processes to reduce scrap. Others may also examine if the scrap can be reused to save substantial input costs.
Normal and abnormal spoilage in units. 1. Total spoiled units12,000 Normal spoilage in units, 5% ( 132,000 6,600 Abnormal spoilage in units 5,400 2. Abnormal spoilage, 5,400 ( $10$ 54,000 Normal spoilage, 6,600 ( $10 66,000 Potential savings, 12,000 ( $10$120,000 Regardless of the targeted normal spoilage, abnormal spoilage is non-recurring and avoidable. The targeted normal spoilage rate is subject to change. Many companies have reduced their spoilage to almost zero, which would realize all potential savings.Of course, zero spoilage usually means higher-quality products, more customer satisfaction, more employee satisfaction, and various beneficial effects on nonmanufacturing (for example, purchasing) costs of direct materials. Weighted-average method, spoilage, equivalent units.
The direct materials cost per equivalent unit of beginning work in process and of work done in September 2006 is the standard cost of $210 given in the problem.
The conversion cost per equivalent unit of beginning work in process and of work done in September 2006 is the standard cost of $80 given in the problem.
The unit costs in 2a and 2b are different because in 2a the normal spoilage cost is charged as a cost of the job which has exacting job specifications. In 2b however, normal spoilage is due to the production process, not the particular attributes of this specific job.These costs are, therefore, charged as part of manufacturing overhead and the manufacturing overhead cost of $1 per case already includes a provision for normal spoilage. 3. a. Work-in-Process Control 200 Materials Control, Wages Payable Control, Manufacturing Overhead Allocated 200 The cost of the good cases = [($6.
00 ( 2,500) + $200] = $15,200 The unit cost of a good case is $15,200 ( 2,500 = $6. 08 b. Manufacturing Department Overhead Control 200 Materials Control, Wages Payable Control, Manufacturing Overhead Allocated200 The unit cost of a good case = $6. 00 per case c. The unit costs in 3a and 3b are different because in 3a the normal rework cost is charged as a cost of the job which has exacting job specifications.In 3b however, normal rework is due to the production process, not the particular attributes of this specific job. These costs are, therefore, charged as part of manufacturing overhead and the manufacturing overhead cost of $1 per case already includes a provision for this normal rework.
Reworked units, costs of rework
The two alternative approaches to account for the materials costs of reworked units are:
- To charge the costs of rework to the current period as a separate expense item as abnormal rework. This approach would highlight to White Goods the costs of the supplier problem.
- To charge the costs of the rework to manufacturing overhead as normal rework.
The $50 tumbler cost is the cost of the actual tumblers included in the washing machines. The $44 tumbler units from the new supplier were eventually never used in any washing machine and that supplier is now bankrupt. The units must now be disposed of at zero disposal value.
The total costs of rework due to the defective tumbler units include the following:
- the labor and other conversion costs spent on substituting the new tumbler units;
- the costs of any extra negotiations to obtain the replacement tumbler units;
- any higher price the existing supplier may have charged to do a rush order for the replacement tumbler units;
- ordering costs for the replacement tumbler units.
Normal spoilage is 7,000 [0. 10 ( (50,000 + 20,000)]. The 3,000 remainder is abnormal spoilage (10,000 – 7,000). Solution Exhibit 18-38, Panel A, calculates the equivalent units of work done for each cost category. We comment on several points in this calculation:
- Ending work in process includes an element of normal spoilage since all the ending WIP have passed the point of inspection––inspection occurs when production is 80% complete, while the units in ending WIP are 95% complete.
- Spoilage includes no direct materials units because spoiled units are detected and removed from the finishing activity when inspection occurs at the time production is 80% complete. Direct materials are added only later when production is 90% complete.
- •Direct materials units are included for ending work in process, which is 95% complete, but not for beginning work in process, which is 25% complete. The reason is that direct materials are added when production is 90% complete. The ending work in process, therefore, contains direct materials units; the beginning work in process does not.