Chapter 19 Flashcards
Spoilage (Normal and abnormal), Rework, Scrap, inspection point
Spoilage: Units not meeting quality standards—discarded or sold at a discount (e.g., defective parts, outlet items).
Normal spoilage: Expected under efficient operations; part of regular process.
Abnormal spoilage: Avoidable, not inherent; due to inefficiencies or preventable issues.
—-Costs written off as losses in the period detected and shown separately on the income statement.
—-Preventable with proper maintenance and controls.
Rework: Defective units repaired and sold as finished goods (same/lower quality); e.g., meat trimmings, damaged motherboards.
Scrap: Low-value residual material from production; may be reused or require disposal.
Inspection point: Stage where products are checked for quality—spoilage usually assumed to occur just before this point.
Inputs paid for that cannot be converted into a saleable product represent costs that will not be recovered
Minimizing costs may require:
- Redesign of the production process
2.New/Updated Machinery - Increased frequency of quality inspections
4.Retaining of workers - Purhcase of new types of materials
Reducing spoilage & scrap: Lowers non-value-added costs not recovered from sales.
Classification: Spoilage, rework, and scrap must be separately classified under ASPE/IFRS.
Simpler processes: Less prone to spoilage and defects.
Efficiency gains: Eliminating unrecoverable spoilage costs by improving production effectiveness.
Two approaches to calculate actual or equiaveltn units of spoilage:
- Approach R (Recognize)
- Makes visible the cost associated with spoilage - Approach U (Uncounted)
-Spreads spoilage cost over good units
Spreading spoilage costs: Allocating spoilage over good units reduces accuracy in product costs; customers won’t pay for spoilage.
Normal spoilage: Excluding normal spoilage from the EU count reduces the denominator, leading to a higher cost rate per EU.
Do Approach U exercise
Please and thank you. But prioritize R
Weighted-Average & Spoilage
Process costing method: Assigns equivalent-unit cost of work to completed units and ending WIP.
All good and spoiled units are treated as 100% complete.
Ending WIP: Conversion costs assigned based on % completion (converted to EU).
Abnormal spoilage: Cost charged to Loss from Abnormal Spoilage, not included in cost of good units.
Do weighted Average spoilage exercise
Thank you
Do Fifo Spoliage exercise
please and thank you
Standard costing and spoilage
Standard costing: Uses predetermined average cost per input or per unit of output.
Actual costs are recorded, but standard (pro forma) costs are assigned.
Variances are calculated and labeled as favourable or unfavourable.
Helps highlight impacts on gross margin and operating income.
Simplifies cost allocation for normal and abnormal spoilage.
Normal spoilage is included in cost of good units transferred
Do standard costing exercise please
thank you
Job Costing and Normal Spoilage
Job costing and abnormal spoilage
Job costing system: Assigns costs to specific units or batches (jobs).
Normal spoilage:
-if job-specific, that job bears the spoilage cost (net of disposal value).
-If common to all jobs, treated as manufacturing overhead.
-Manufacturing overhead rate includes allowance for normal spoilage.
-Spoilage may be an expected part of the production process.
Abnormal spoilage:
—Net loss charged to Loss from Abnormal Spoilage account.
–Not included in cost of good units—written off in the period detected.
—Considered controllable and separately identified to support efforts to eliminate it.
4 Account types: increase, decrease, normal balance
Income: Credit, Debit, Credit
Expenses: Debit, Credit, Debit
Assets: Debit, Credit, Debit
Liabilities: Credit, Debit, Credit
Journal Entries:
Normal Spoilage common to all jobs:
Normal spoilage to a specific job:
Abnormal spoilage:
Material Control- Debit Expense
Manufacturing overhead control - Debit expense
Work in process control- Credit Asset
Material control - Debit Expense
Work in process- Credit the asset
Materials Control- Debit Expense
Loss from abnormal spoilage- Debit Income and debit expense?
Work in process contro- credit asset
Re worked units:
Reworked units: Initially unacceptable, then repaired into sellable goods.
Rework costs are often material and included in COGM.
Rework can be:
-Common to all jobs (treated as overhead), or
-Specific to a job (charged to that job).
Rework costing reveals wasted resources, encouraging management to reduce it through:
-Product/process redesign
-Worker training
-Investment in better machinery
Journal Entries:
Normal Rework common to all jobs-
Norma rework to specific job:
Abnormal Rework:
Manufacturing department overhead control: Debit Expense
Material Control: Credit Expense
Wages Payable: Debit Liability
Manufacturing overhead allocated: Credit Expense
Work in process control: Debit expense
Material control: Credit Expense
Wages payable: Debit liability
Manufacturing overhead allocated: Credit Expenses
Loss from abnormal rework: income debit
Material control: credit Expense
Wages payable= debit liability
Manufacutring overhead allocated= credit exp
Do rework exercise
Thank you
