ACCT3203

Contemporary Managerial Accounting

Process Costing II
Accounting for Spoilage

Unit Coordinator & Lecturer

Dr Thanes Subraamanniam
UWA Business School
The University of Western Australia
 Process Costing (II)
Spoilage, Rework and Scrap

Learning Objective:
Distinguish spoilage, reworked units, and scrap
Identify the differences between normal and abnormal spoilage
Account for spoilage in process costing using:
◦ Weighted-average (WA) method
◦ First-in, first-out (FIFO) method
 Spoilage, Rework, & Scrap
Spoilage
◦ Units of production, whether fully or partially completed, that do not meet the
specifications required by customers for good units and that are discarded or
sold for 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 goods
Scrap
◦ Residual material that has low total sales value compared with the total sales value of the
product
◦ Scrap is similar to by-products but scrap arises as a residual from the manufacturing
process and is not a product targeted for manufacture or sale by the firm

18-3
 Weighted Average v FIFO (recap)

Weighted Average
Merges units (and costs ) of BWIP with those from the current period.

FIFO
Regards BWIP as if it were a batch of goods separate and distinct from
goods started during the current period.
(Keep BWIP costs completely separated from current period costs)

However, the calculation of spoiled units and treatment of the costs of

spoiled units are the same in both methods.
 Difference in accounting for BWIP
Weighted Average Method
Completed and Transferred out during 7,400 100 7,400 100% 7,400
current period (units): %

Cost of beginning work in process $ 1,800 $1,000 $ 800

Costs added during current period $17,000 $9,000 $8,000
$10,000 $8,800
Total costs
Total costs divided by equivalent units

FIFO Method
Completed and Transferred out during
current period (units):
From beginning work in process, 1,000 - 20% 200
Started and completed 6,400 100% 6,400 100% 6,400

Cost of beginning work in process $ 1,800

Costs added during current period $17,000 $9,000 $8,000
Total cost $9,000 $8,000
Total costs divided by equivalent units
 Types of Spoilage:
Normal and Abnormal Spoilage
Normal spoilage
◦ Inherent and expected loss that arises even under normal efficient operating
conditions - uncontrollable loss.

◦ Is related to the goods units produced (i.e., is a percentage of total good units
completed, not total actual units started in production).

◦ Spoilage can occur at any point in time of production process but is NOT
detected until inspection point.

◦ Cost of normal spoilage is included as part of cost of the product (i.e., the cost
of normal spoilage is added to the cost of goods completed and transferred out).
 Types of Spoilage:
Normal and Abnormal Spoilage (cont.)

Abnormal spoilage:
◦ A loss which is not expected under normal efficient operating conditions.

◦ Is considered avoidable and controllable.

◦ The cost of abnormal spoilage is recorded as a “Loss from abnormal spoilage” in

a separate line in the income statement.
 Accounting for spoilage

Normal spoilage
◦ is a necessary part of the production process
◦ treated as part of the cost of good units completed and transferred out

Abnormal spoilage
◦ should not occur under efficient operating conditions
◦ is expensed in the current period
 Accounting for Costs of Spoiled Units

Good units completed and transferred out:

Costs before adding normal spoilage x
Cost of normal spoilage x
Total cost of units completed & transferred out xx

Separate line in Income Statement:

Cost of abnormal spoilage (an expense) x
Weighted Average method
Good units completed and transferred out:
Costs before adding normal spoilage
Normal spoilage
Total cost of good units completed & transferred out
Abnormal spoilage
Work-in-process, ending:
Direct materials
Conversion costs
Total work-in-process
Total costs accounted for:
FIFO method
Good units completed and transferred out:
Work-in-process, beginning
Direct materials
Conversion costs
Total from beginning inventory before normal spoilage
Started and completed before normal spoilage
Normal spoilage
Total cost of good units completed & transferred out
Abnormal spoilage
Work-in-process, ending:
Direct materials
Conversion costs
Total work-in-process
Total costs accounted for:
ALL THE BEST