Cost Accounting Scrap/Spoilage/Defective

Notes on Scrap:
Scrap includes:
1. the filings or excessive trimmings of materials after the
manufacturing operations.
2. defective materials that cannot be returned to vendor or not
suitable for manufacturing operations, and
3. broken parts as a result of an employee error or machine
breakdowns that causes the product in a poor quality condition.
Furthermore, scrap should be treated as:
1. If the scrap has a salvage value, it should be collected and
placed in the storage and available for sale to scrap dealers or
anybody who are willing to buy.
2. If the scrap is the result if filings, excessive trimmings or
materials residue, and the costs of scrap cannot be determinable
then, the scrap, notwithstanding that they cannot be eliminated in
the production, a record of quality of scrap should be maintained.
The purpose is to keep track and periodically analyze to determine
if some of the waste is due to inefficient use of materials and if
not eliminated, at least minimize.
Waste as distinguish to scrap materials refers to any amount of raw
materials left-over from a production process or production cycle for
which there is no further use. Waste is not usually salable at any
price and must be discarded.
I – Accounting for Scrap
The KCO Metal Fabricators, Inc. accumulates a fairly large quantities of
metal shavings and trimmings from the products their produce. At least,
once a month, the scrap metal is sold to a local jobber for further
processing. This month’s scrap sales on account total P10,000.
Required: Give the appropriate entry to record the sale of the scrap for
each of the following alternatives:
1. The scrap sales are viewed as additional revenue.
2. The scrap sales are viewed as a reduction of the cost of goods
sold during the month.
3. The scrap sales are viewed as a reduction of factory overhead
control.
4. The scrap sales are traceable to individual jobs and are
recorded as a reduction of cost of the materials on the jobs.
Notes on Spoiled Goods/Spoilage in Job-Order Costing:
Spoiled goods or spoilage differ from scrap, in the manner that
they are either partially or fully completed unit. For reason of being
spoilage, they cannot be corrected either because it is not technically
possible to correct them or it is not economical to correct them. For
instance, a glass molded with different design cannot be correctable
since it will not be technically feasible because by changing it would
distort the original form or by changing the design to its original form
would cost more than the benefit to be derived.
II – Accounting for Spoilage Goods in Job Order
ROM Company had a production run of 8,000 pairs of shoes during the last
week of June, at the following costs per pair:
Materials P 500
Labor 400
Factory overhead (includes P70 allowance for spoiled ___300
work)
Total P1,200
Final inspection revealed that 600 pairs not meeting quality standards,
can be sold as seconds at P400 a pair.
Required:
1. If the spoilage loss is the result of an internal failure
(charged to factory overhead)
a. Prepare journal entries to record the above transaction.
b. Determine the cost for each pair of shoes.
2. If the spoilage loss is the result of a change in design imposed
by the customer or due to exacting specifications (charged to
production run).
a. Prepare journal entries to record the above transaction.
b. Determine the cost for each pair of shoes.
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Notes on Rework in Job Order Costing (Process of Reworking):

Rework is the process of correcting defective goods in order to
bring them into a salable condition. A defective unit normally arises
when the product itself lacks materials, labor and factory overhead.

III – Accounting for Rework Units in Job Order

Grace Company manufactures picture frames of all sizes and shapes
and uses a job-order costing system. There is always some spoilage in
each production run. The following costs relate to the current run:
Estimated overhead (exclusive of spoilage) P160,000
Spoilage (estimated) P 25,000
Sales value of spoiled frames P 11,500
Labor hours 100,000

The actual cost of a spoiled picture frame is P7.00. During the year 170
frames are considered spoiled. Each spoiled frame can be sold for P4. The
spoilage is considered a part of all jobs (factory overhead).
a. Labor hours are used to determine the predetermined overhead rate.
What is the predetermined overhead rate per direct labor hour?
b. Prepare the journal entry needed to record the spoilage (factory
overhead or to all production.
c. Prepare the journal entry if the spoilage relates only to Job #12
(particular job or exacting specifications) rather than being a part
of all production runs.
Answers:
a. Budgeted overhead………………………………………………………………………………………………………P 160,000
Budgeted labor……………………………………………………………………………………………………………… 25,000
Sales value of spoiled frames………………………………………………………………………( 11,500)
Budgeted costs………………………………………………………………………………………………………………P 173,500
Divided by: Budgeted labor hours……………………………………………………………… 100,000
Predetermined/Budgeted Direct Labor rate…………………………………………P 1.735/DLH
b. Spoiled Goods Inventory (P4 x 170)……………………………………………… 680
Factory Overhead Control (unrecoverable amount)…………… 510
Work-in-Process Inventory (P7 x 170)………………… 1,190
c. Spoiled Goods Inventory (P4 x 170)……………………………………………… 680
Work-in-Process Inventory……………………………………………… 680
Notes on Rework in Job Order Costing (Process of Reworking):
Rework is the process of correcting defective goods in order to
bring them into a salable condition. A defective unit normally arises
when the product itself lacks materials, labor and factory overhead.

IV – Accounting for Defective Goods (Rework)

During March, Loryvi Company incurred the following costs on Job 109 for
the manufacture of 200 motors:

Original cost accumulation:

Direct materials………………………………………………………………………P 660
Direct labor………………………………………………………………………………… 800
Factory overhead (150% of direct labor)………… 1,200
Total costs……………………………………………………………………………………P 2,660
Direct costs of reworking 10 motors:
Direct materials………………………………………………………………………P 100
Direct labor………………………………………………………………………………… 160
Total costs……………………………………………………………………………………P 260

1. The rework costs were attributable to internal failure (to all

production) or charged to factory overhead, what is the cost per
finished unit of Job 109?
A. P15.80 P14.60 C. P14.00 D. P13.30

2. The rework costs were attributable to the exacting specifications of

Job 109 (or production run) and the full rework costs were charged to
this specific job. What is the cost per finished unit of Job 109?
A. P15.80 C. P14.00
B. P14.60 n D. P13.30