18-
1
CHAPTER 18
SPOILAGE, REWORK, AND SCRAP
18-1 Managers have found that improved quality and intolerance for high spoilage have lowered
overall costs and increased sales.
18-2 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
that 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.
18-3 Yes. 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.
18-4 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.
18-5 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.
18-6 Normal 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.
18-7 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.
18-8 Yes. 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.
18-9 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.
18-10 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.
18-11 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.
18-
2
18-13 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.
18-14 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.
18-15 Companies measure scrap to measure efficiency and to also control a tempting source of
theft. Managers 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.
18-16 (5–10 min.) Normal and abnormal spoilage in units.
The following data, in physical units, describe a grinding process for January:
Inspection occurs at the 100% completion stage. Normal spoilage is 4% of the good units passing
inspection.
Required:
1. Compute the normal and abnormal spoilage in units.
2. Assume that the equivalent-unit cost of a spoiled unit is $11. Compute the amount of potential
savings if all spoilage were eliminated, assuming that all other costs would be unaffected.
Comment on your answer.
SOLUTION
1. Total spoiled units 12,600
Normal spoilage in units, 4% 170,000 6,800
18-
3
Abnormal spoilage in units 5,800
2. Abnormal spoilage, 5,800 $11 $ 63,800
Normal spoilage, 6,800 $11 74,800
Potential savings, 12,600 $11 $138,600
Regardless of the targeted normal spoilage, abnormal spoilage is nonrecurring 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.
18-17 (20 min.) Weighted-average method, spoilage, equivalent units.
(CMA, adapted) Consider the following data for November 2014 from Gray 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. Gray Manufacturing Company uses the weighted-average method of
process costing.
aDegree of completion: direct materials, 100%; conversion costs, 50%.
bDegree of completion: direct materials, 100%; conversion costs, 30%.
Required:
Compute equivalent units for direct materials and conversion costs. Show physical units in the first
column of your schedule.
SOLUTION
Solution Exhibit 18-17 calculates equivalent units of work done to date for direct materials and
conversion costs.
SOLUTION EXHIBIT 18-17
Summarize the Flow of Physical Units and Compute Output in Equivalent Units;
Weighted-Average Method of Process Costing with Spoilage,
Gray Manufacturing Company for November 2014.
(Step 1)
(Step 2)
Equivalent Units
Flow of Production
Physical
Units
Direct
Materials
Conversion
Costs
Work in process, beginning (given)
Started during current period
To account for
Good units completed and transferred out
during current period:
Normal spoilage*
100 100%; 100 100%
Abnormal spoilage†
50 100%; 50 100%
Work in process, ending‡ (given)
2,000 100%; 2,000 30%
Accounted for
Equivalent units of work done to date
1,000
10,150a
11,150
9,000
100
50
2,000
11,150
9,000
100
50
2,000
11,150
9,000
100
50
600
9,750
a From below, 11,150 total units are accounted for. Therefore, units started during current period must be = 11,150 – 1,000 = 10,150.
*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.
†Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.
‡Degree of completion in this department: direct materials, 100%; conversion costs, 30%.
18-18 (20−25 min.) Weighted-average method, assigning costs (continuation of 18-17).
Required:
For the data in Exercise 18-17, 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 inventory.
SOLUTION
Solution Exhibit 18-18 summarizes total costs to account for, calculates the costs per equivalent
unit for direct materials and conversion costs, and assigns total costs to units completed and
transferred out (including normal spoilage), to abnormal spoilage, and to ending work in process.
Solution Exhibit 18–18 summarizes total costs to account for,
SOLUTION EXHIBIT 18-18
Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign
Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in–Process Inventory;
Weighted-Average Method of Process Costing,
Gray Manufacturing Company, November 2014.
Total
Production
Costs
Direct
Materials
Conversion
Costs
$ 2,533
39,930
$42,463
$ 1,423
12,180
$13,603
$13,603
11,150
$ 1.22
$ 1,110
27,750
$28,860
$28,860
9,750
$ 2.96
$37,620
418
38,038
209
4,216
$42,463
(9,000# $1.22) + (9,000# $2.96)
(100# $1.22) + (100# $2.96)
(50# $1.22) + (50# $2.96)
(2,000# $1.22) + (600# $2.96)
$13,603 + $28,860
#Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-17.
18-19 (15 min.) FIFO method, spoilage, equivalent units.
Refer to the information in Exercise 18-17. Suppose Gray Manufacturing Company uses the FIFO
method of process costing instead of the weighted-average method.
Required:
Compute equivalent units for direct materials and conversion costs. Show physical units in the first
column of your schedule.
SOLUTION
Solution Exhibit 18–19 calculates equivalent units of work done in the current period for direct
materials and conversion costs.
SOLUTION EXHIBIT 18-19
Summarize the Flow of Physical Units and Compute Output in Equivalent Units;
First-in, First-out (FIFO) Method of Process Costing with Spoilage,
Gray Manufacturing Company for November 2014.
(Step 1)
(Step 2)
Equivalent Units
Flow of Production
Physical
Units
Direct
Materials
Conversion
Costs
Work in process, beginning (given)
Started during current period
To account for
Good units completed and transferred out during current period:
From beginning work in process||
1,000 (100% −100%); 1,000 (100% − 50%)
1,000
10,150a
11,150
1,000
0
500
Started and completed
8,000 100%; 8,000 100%
Normal spoilage*
100 100%; 100 100%
Abnormal spoilage†
50 100%; 50 100%
Work in process, ending‡
2,000 100%; 2,000 30%
Accounted for
Equivalent units of work done in current period
8,000#
100
50
2,000
____
11,150
8,000
100
50
2,000
10,150
8,000
100
50
600
9,250
a From below, 11,150 total units are accounted for. Therefore, units started during current period must be 11,150 –
1,000 = 10,150.
||Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
#9,000 physical units completed and transferred out minus 1,000 physical units completed and transferred out from
beginning work-in-process inventory.
*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.
†Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.
‡Degree of completion in this department: direct materials, 100%; conversion costs, 30%.
18-20 (20−25 min.) FIFO method, assigning costs (continuation of 18-19).
Required:
For the data in Exercise 18-17, 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.
SOLUTION
Solution Exhibit 18-20 summarizes total costs to account for, calculates the costs per equivalent
unit for direct materials and conversion costs, and assigns total costs to units completed and
transferred out (including normal spoilage), to abnormal spoilage, and to ending work in process.
SOLUTION EXHIBIT 18-20
Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and Assign
Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in–Process Inventory;
FIFO Method of Process Costing,
Gray Manufacturing Company, November 2014.
Total
Production
Costs
Direct
Materials
Conversion
Costs
(Step 3) Work in process, beginning (given)
Costs added in current period (given)
Total costs to account for
(Step 4) Costs added in current period
Divided by equivalent units of work done in current period
Cost per equivalent unit
$ 2,533
39,930
$42,463
$ 1,423
12,180
$13,603
$12,180
10,150
$ 1.20
$ 1,110
27,750
$28,860
$27,750
9,250
$ 3
18-
7
(Step 5) Assignment of costs:
Good units completed and transferred out (9,000 units)
Work in process, beginning (1,000 units)
Costs added to beg. work in process in current period
Total from beginning inventory before normal
spoilage
Started and completed before normal spoilage (8,000 units)
Normal spoilage (100 units)
(A) Total costs of good units completed and transferred out
(B) Abnormal spoilage (50 units)
(C) Work in process, ending (2,000 units)
(A)+(B)+(C) Total costs accounted for
$ 2,533
1,500
4,033
33,600
420
38,053
210
4,200
$42,463
$1,423 + $1,110
(0a $1.20) + (500a $3)
(8,000a $1.20) + (8,000a $3)
(100a $1.20) + (100a $3)
(50a $1.20) + (50a $3)
(2,000a $1.20) + (600a $3)
$13,603 + $28,860
a Equivalent units of direct materials and conversion costs calculated in Step 2 in Solution Exhibit 18-19.
18-21 (35 min.) Weighted-average method, spoilage.
LaCroix Company produces handbags from leather of moderate quality. It distributes the product
through outlet stores and department store chains. At LaCroix’s facility in northeast Ohio, direct
materials (primarily leather hides) are added at the beginning of the process, while conversion
costs are added evenly during the process. Given the importance of minimizing product returns,
spoiled units are detected upon inspection at the end of the process and are discarded at a net
disposal value of zero.
LaCroix uses the weighted-average method of process costing. Summary data for April 2014
are as follows:
Required:
1. For each cost category, calculate equivalent units. Show physical units in the first column of
your schedule.
2. Summarize the total costs to account for; calculate the cost per equivalent unit for each cost
category; and assign costs to units completed and transferred out (including normal spoilage),
to abnormal spoilage, and to units in ending work in process.
18-
8
SOLUTION
1. Solution Exhibit 18-21, Panel A calculates equivalent units of work done to date for direct
materials and conversion costs.
2. Solution Exhibit 18-21, Panel B summarizes total costs to account for, calculates the costs
per equivalent unit for direct materials and conversion costs, and assigns total costs to units
completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in
ending work in process, using the weighted–average method.
SOLUTION EXHIBIT 18-21
Weighted-Average Method of Process Costing with Spoilage,
La Croix Company for April 2014
PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units
(Step 1)
(Step 2)
Equivalent Units
Flow of Production
Physical
Units
Direct
Materials
Conversion
Costs
Work in process, beginning (given)
2,400
Started during current period (given)
12,000
To account for
14,400
Good units completed and tsfd. out during current period:
10,800
10,800
10,800
Normal spoilagea
1,080
(1,080
100%; 1,080
100%)
1,080
1,080
Abnormal spoilageb
360
(360
100%; 360
100%)
360
360
Work in process, endingc (given)
2,160
(2,160
100%; 2,160
75%)
______
2,160
1,620
Accounted for
14,400
______
______
Equivalent units of work done to date
14,400
13,860
aNormal spoilage is 10% of good units transferred out: 10% × 10,800 = 1,080 units.
Degree of completion of normal spoilage
in this department: direct materials, 100%; conversion costs, 100%.
bTotal spoilage = Beg. units + Units started – Good units transferred out – Ending units = 2,400 + 12,000 – 10,800 – 2,160 = 1,440;
Abnormal spoilage = Total spoilage – Normal spoilage = 1,440 – 1,080 = 360 units. Degree of completion of abnormal spoilage
in this department: direct materials, 100%; conversion costs, 100%.
cDegree of completion in this department: direct materials, 100%; conversion costs, 75%.
PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process
Inventory
Total
Production
Costs
Direct
Materials
Conversion
Costs
(Step 3)
Work in process, beginning (given)
$ 34,572
$21,240
$ 13,332
Costs added in current period (given)
208,968
97,560
111,408
Total costs to account for
$243,540
$118,800
$124,740
(Step 4)
Costs incurred to date
$118,800
$124,740
Divide by equivalent units of work done to date
14,400
÷13,860
Cost per equivalent unit
$ 8.25
$ 9.00
(Step 5)
Assignment of costs
Good units completed and transferred out (10,800 units)
Costs before adding normal spoilage
$186,300
(10,800d $8.25) + (10,800 d $9.00)
Normal spoilage (1,080 units)
18,630
(1,080d $8.25) + (1,080d $9.00)
(A)
Total costs of good units completed and transferred out
204,930
(B)
Abnormal spoilage (360 units)
6,210
(360d $8.25) + (360d $9.00)
(C)
Work in process, ending (2,160 units):
32,400
(2,160d $8.25) + (1,620d $9.00)
(A) + (B) + (C)
Total costs accounted for
$243,540
$118,800 + $124,680
dEquivalent units of direct materials and conversion costs calculated in step 2 of Solution Exhibit 18-21A.
18-22 (35 min.) FIFO method, spoilage.
Required:
1. Do Exercise 18-21 using the FIFO method.
2. What are the managerial issues involved in selecting or reviewing the percentage of spoilage
considered normal? How would your answer to requirement 1 differ if all spoilage were viewed
as normal?
SOLUTION
1. Solution Exhibit 18–22, Panel A calculates equivalent units of work done in the current
period for direct materials and conversion costs.
Solution Exhibit 18-22, Panel B summarizes total costs to account for, calculates the costs
per equivalent unit for direct materials and conversion costs, and assigns total costs to units
completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in
ending work in process, using the FIFO method.
SOLUTION EXHIBIT 18-22
First-in, first-out (FIFO) Method of Process Costing with Spoilage,
La Croix Company for April 2014
PANEL A: Summarize the Flow of Physical Units and Compute Output in Equivalent Units
(Step 2)
(Step 1)
Equivalent Units
Flow of Production
Physical
Units
Direct
Materials
Conversion
Costs
Work in process, beginning (given)
Started during current period (given)
To account for
Good units completed and transferred out during current period:
From beginning work in process||
2,400 (100% −100%); 2,400 (100% − 50%)
Started and completed
8,400 100%; 8,400 100%
Normal spoilage*
1,080 100%; 1,080 100%
Abnormal spoilage†
360 100%; 360 100%
Work in process, ending‡
2,160 100%; 2,160 75%
Accounted for
Equivalent units of work done in current period
2,400
12,000
14,400
2,400
8,400#
1,080
360
2,160
____
14,400
0
8,400
1,080
360
2,160
12,000
1,200
8,400
1,080
360
1,620
___
12,660
||Degree of completion in this department: direct materials, 100%; conversion costs, 50%.
#10,800 physical units completed and transferred out minus 2,400 physical units completed and transferred out from
beginning work-in-process inventory.
*Degree of completion of normal spoilage in this department: direct materials, 100%; conversion costs, 100%.
†Degree of completion of abnormal spoilage in this department: direct materials, 100%; conversion costs, 100%.
‡Degree of completion in this department: direct materials, 100%; conversion costs, 75%.
PANEL B: Summarize the Total Costs to Account for, Compute the Cost per Equivalent Unit, and
Assign Costs to the Units Completed, Spoiled Units, and Units in Ending Work-in-Process
Inventory
Total
Production
Costs
Direct
Materials
Conversion
Costs
(Step 3) Work in process, beginning (given)
Costs added in current period (given)
Total costs to account for
(Step 4) Costs added in current period
Divided by equivalent units of work done in current period
Cost per equivalent unit
(Step 5) Assignment of costs:
Good units completed and transferred out (10,800 units)
$ 34,572
208,968
$243,540
$21,240
97,560
$118,800
$97,560
12,000
$ 8.13
$ 13,332
111,408
$124,740
$111,408
12,660
$ 8.80
Work in process, beginning (2,400 units)
Costs added to beg. work in process in current period
Total from beginning inventory before normal spoilage
Started and completed before normal spoilage (8,400 units)
Normal spoilage (1,080 units)
(A) Total costs of good units completed and transferred out
(B) Abnormal spoilage (360 units)
(C) Work in process, ending (2,160 units)
(A)+(B)+(C) Total costs accounted for
$ 34,572
10,560
45,132
142,212
18,284
205,628
6,095
31,817
$243,540
$21,240 + $13,332
(0a $8.13) + (1,200a $8.80)
(8,400a $8.13) + (8,400a $8.80)
(1,080a $8.13) + (1,080a $8.80)
(360a $8.13) + (360a $8.80)
(2,160a $8.13) + (1,620a $8.80)
$118,800 + $124,740
18-
11
a Equivalent units of direct materials and conversion costs calculated in Step 2 in Panel A.
2. The issues related to the determination of the percentage of spoilage considered normal
are similar to the factors discussed in Chapter 17 regarding the importance of verifying the
estimated completion percentages of ending work-in-process, especially with regard to
conversion costs. A supervisor who wants to show better operating income 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 normal spoilage percentages and drive home the importance of
pursuing ethical actions and reporting the correct income figures, regardless of the short-term
consequences of doing so.
In the above example, if all 1,440 units spoiled were considered normal spoilage, then
the cost of goods completed and transferred out would increase to $211,723 ($205,628 +
$6,095), while ending work-in–process would stay unchanged at $31,817. Of course, the $6,095
would no longer be written off as a period expense by the LaCroix facility in northeast Ohio.
18-23 (10 min.) Spoilage, journal entries.
Safeclear, Inc., is the leading manufacturer of automotive glass components such as windshields.
The company uses a process-costing system to account for its work–in–process inventories. When
Job 26, an order for windshields for the Chevy Malibu, was being processed, a piece of laminated
sheet glass was off-center in the cutting machine and two windshields were spoiled. Because this
problem occurs periodically, it is considered normal spoilage and is consequently recorded as an
overhead cost. Because this step comes first in the process of making the windshields, the only
costs incurred were $325 for direct materials. Assume the laminated glass cannot be sold, and its
cost has been recorded in work–in–process inventory.
Required:
Prepare the journal entries to record the spoilage incurred.