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Introduction:
Accounting for production losses such as scrap, spoiled goods, and defective goods are also discussed
below. These production losses are an unavoidable part of ordinary manufacturing operations.
Body:
In a job order costing system, production losses that happens in the manufacturing process includes cost
of scrap materials, spoiled goods (spoilage) and reworking defective goods. A cost accounting system
must be designed to record these losses so that the unit cost will be as accurate as possible.
Waste – raw materials left over from a production process for which there is no further use. It is not
usually salable at any price and must be discarded.
Illustration
Assume that Job 888 calls for the production of 200 painted office tables. These tables were put into
production and costs accumulated to date are as follows:
Materials Php 456,000
Direct labor 240,000
Applied overhead (150% of DL) 360,000
Total cost charge to Job 888 Php 1,056,000
Unit cost (Php 1,056,000 / 200) Php 5,280
Suppose that ten tables are spoiled. These spoiled tables may be sold at its net disposal value of Php
3,000 each (a loss of Php 2,280 per table). Job 888 is sold with a 30% mark up on cost.
Illustration
Assume that the ten spoiled tables are reworked. The additional costs of reworking the tables equal Php
9,500 (comprising of Php 2,000 direct materials, Php 3,000 direct labor, and Php 4,500 manufacturing
overhead). The journal entry to record the total costs of the ten spoiled goods before considering
rework costs is:
Summary:
These production losses usually originate from lack of quality control and should be prevented if not
eliminated at all.
References:
Cost Accounting Principles and Procedural Applications by Pedro P. Guerrero, 2014-2015 edition