Spoilage

Question 1

Spoilage

Answer 1

• Unacceptable units that are discarded or sold for disposal costs
• Output that does not meet the quality standards for salability
• In process costing, sometimes called shrinkage
• Refers to the costs incurred in producing these units; that is the DM, DL and applied OH

Question 2

Normal spoilage (not job specific)

Answer 2

• Arises under normal operating conditions and is treated as a product cost (absorbed into COGO)
• Included in POHR
• Not a job cost

Question 3

Abnormal spoilage

Answer 3

• Is not part of normal operations and is treated as a period cost (loss) in period which it occurs
• Not a job cost

Question 4

Rework

Answer 4

cost of units that do not meet standards of salability but can be brought to salable condition with extra effort

Question 5

Scrap

Answer 5

leftover RM from production cycle that is either salable or usable for some other purpose

Question 6

Journal entry for normal spoilage (non-job specific) if CANNOT be resold

Answer 6

debited to Overhead - Control; credited to WIP Inventory

Question 7

Normal spoilage (job specific)

Answer 7

• Normal spoilage arising from the requirements of a specific job
• No entry necessary b/c all costs (MLO) are already inc. in WIP as product costs
• costs are not removed from WIP
• increases job manufacturing cost per unit
• Costs are charged to specific job responsible

Question 8

Abnormal spoilage that coincidentally occurred on the job and was not due to job specifications

Answer 8

• debited to Loss from abnormal spoilage
• credited to WIP
• Does not change job costs
• not included in POHR

Question 9

Why are spoilage costs important?

Answer 9

If spoilage costs are ignored, management has no incentive to control these costs

Question 10

If company has zero defect policy

Answer 10

all spoilage is considered abnormal; the loss on the income statement may force managers to control spoilage

Question 11

If rework costs are not accounted for separately

Answer 11

managers may rework units that should be scrapped

Question 12

Journal entry for normal spoilage (non-job specific) if CAN be resold

Answer 12

debited to Spoilage inventory; credited to WIP Inventory

Question 13

Journal entry for abnormal spoilage that CANNOT be resold

Answer 13

debit Loss from abnormal spoilage (Costs (MLO) up to inspection point)
credit WIP

Question 14

Journal entry for abnormal spoilage that CAN be resold

Answer 14

debit Spoilage inventory (amount can be resold as)
debit Loss from abnormal spoilage (Costs (MLO) up to inspection point)
credit WIP

Question 15

Journal entry when spoiled units are subsequently sold

Answer 15

debit cash

credit spoilage inventory

Question 16

Waste

Answer 16

RM leftover from the production cycle which cannot be resold and must be discarded because there is not further use for it

Question 17

How are the costs of rework accounted for?

Answer 17

Same as spoilage, essentially. Charged to job if job specific, charged to OH Control if non job specific, charged loss from abnormal rework account is abnormal

Question 18

How are the costs of scrap accounted for?

Answer 18

debited to scrap inventory account

credited to OH control is non-job specific or WIP for that job if job specific