Chapter Three

Costing Methods: The Costing of Resource Outputs

Costing System
Costing system can be defined as a system used to assign costs to cost objects (products or
services). The main purpose of costing system is to enable cost assignment.
Building – Block concepts of Costing Systems
 Cost Object (cost objective) – anything for which a measurement of cost is desired
E.g. product, department, branch, a service, a job, a customer etc.
 Cost Accumulation
 The collection of cost data in some organized way by means of an accounting system.
 We may collect costs by some natural classification such as materials or labor or by
activities performed such as order processing or machine processing costs.
 Cost Pool
 Cost pool is a group of individual indirect costs items.
 Cost pools can range from broad, such as all costs of all manufacturing plant, to
narrow, such as the cost of operating metal-cutting machine.
 Cost Allocation
 The assignment of indirect costs to a cost object.
 Cost Allocation Base
 Indirect mfg costs are assigned to cost objects by allocation. Cost allocation base is the
factor that links in a systematic way an indirect cost or group of indirect costs to a cost
object.
 Companies often use the cost driver of indirect costs because of the existence of cause and
effect link.
 A cost allocation base can be financial (DL cost) or nonfinancial (number of machine
hours, DL hours, units of production). But, it has to be one that can easily be measured for
each cost object.
 For example, if indirect costs of operating metal-cutting machines is $500,000 based on
running these machines for 10,000 hours, the cost allocation rate is $500,000 ÷ 10,000
hours = $50 per machine-hour, where machine-hours is the cost allocation base. If a
product uses 800 machine-hours, it will be allocated $40,000, $50 per machine-hour x 800
machine-hours.
Job order and batch costing methods
Job Costing
Job costing may be defined as a system of costing in which the elements of cost are
accumulated separately for each job or work order undertaken by an organization. Industries
which manufacture products or render services against specific orders use job costing or job

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 order method of cost accounting. In the job costing system, an order or a unit, lot or batch of
product may be taken as a cost object, i.e. a job.
Job costing is a method of costing in which cost objects can be separately identified and need
to be separately costed.
The primary purpose of job costing is to bring together all the costs incurred for completing a
job.
In job-costing system, the cost object is a unit or multiple units of a distinct product or
service called a job. Each job generally uses different amounts of resources.

Features of Job costing system

 This method of costing is used in Job Order Industries where the production is as per the
requirements of the customer.
 In Job Order industries, the production is not on continuous basis; rather it is only when order
from customers is received and that too as per the specifications of the customers.
Consequently, each job can be different from the other one.
 Companies that are likely to use a job costing system have a wide variety of products or
services. These companies include printing jobs at a printing company. Ship-builders, and
Custom furniture manufactures, Construction companies, Film-producing companies,
accounting and law firms, advertising agencies, Medical clinics, etc.
 Job cost information is used (a) to determine the profitability of individual jobs, (b) to assist
in bidding on future jobs, and (c) to evaluate professionals who are in charge of managing
individual jobs.

Job Costing in Manufacturing Firms

Job-cost sheet
 It is document that records and accumulates all costs assigned to a specific job, starting
when work begins. The job may be a product, service, or batch of products.
 The job-cost sheet can be in paper or electronic form. A simplified job-cost sheet follows:
ABC Co. Job Cost Record
Job No 160 Customer: X Co.
Date Started: May 5, 09 Date Finished: May 9, 09
Description: Office Equipment.
Machining Assembly Total
DM Xx Xx Xxx
DL Xx Xx Xxx
FOH Xx Xx Xxx
Total Xxx Xxx Xxx

 DM and DL costs are traced to the job, and FOH costs are allocated to the job.
 A file of job sheets for partially completed jobs makes up the subsidiary ledger for the WIP
control.

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 Costs entered onto the job cost sheet are obtained from:
a. Materials Requisition:
 It is a form which enables each department to take the material they want from stores and is
the basis for recording the amount of material used by each department for a job.
 This form identifies the job to which the materials are to be charged. Care must be taken
when charging materials to distinguish between direct and indirect materials. An example of
a materials requisition form is shown below.
b. Time Cards & Time Tickets
 Time cards collects data on how many hours have been worked by each hourly rate
employee. Manual system requires a time card for each individual, who would manually
record time. Electronic system uses magnetic cards, swiped through a card reader.
 Each employee records the amount of time he or she spends on each job and each task on a
time ticket (time sheet).
 Periodically (e.g. every week) an analysis (summary) of the time tickets is prepared. The
time spend on a particular job is considered direct labor and its cost is traced to that job. The
cost of time spent on other tasks, not traceable to any particular job, is usually considered
part of manufacturing overhead. Any time spent in nonmanufacturing areas is charged to
marketing or administrative Expense. An example of an employee time ticket is shown
below.

Time ticket DMs Requisition No. _____

Job No. 160

Job No. 160 Date ______

Name __________
Dept _____
Department ______
Wage rate _______
Time started _____ Description Quantity Unit Amount
cost
Time finished_____

c. Departmental Overhead Analysis Sheet

 FOH cost is accumulated, without distinction as to job, for each department in departmental
OH analysis sheet. Then, departmental OH costs are allocated to each job using a cost
allocating base.
Departmental Overhead Analysis Sheet
Department

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Date Ind. Ind. Prop. Depr. Rep. & Utilities Insurance Others Total
Material labor Tax maint

 Departmentalizing FOH allows departments to have different FOH rate resulting in improved
product costing. It also facilities responsibility accounting and control of OH costs in a
department.
General Approaches to Job Costing
 There are seven steps to assigning costs to an individual job. They are equally applicable to
assigning costs to a job in manufacturing, merchandising and service sectors.
Step1. Identify the cost object which is a job.
Step2. Identify the direct costs. DMs & DLs can be traced to each job using materials
requisition and time Tickets respectively and entered on the job-cost sheet.
Step3. Identify the indirect cost pools
 Overhead costs are accumulated in one or more cost pools. Accountants use judgment in
choosing the number and type of overhead cost pools for a given organization.
 Some organizations use a single cost pool for all fixed and variable overhead costs. Other
organizations use separate cost pools for fixed and variable overhead costs.
 If work is performed in separate departments or work areas, separate overhead cost pools
may be designated for each department or activity. All FOH are determined for each
department using departmental overhead analysis sheet.
Step4. Select the cost allocation base
 The crucial quality of an allocation base is that it be a cost driver of the costs in the pool to be
allocated. The base must be easily measurable for each job.
 Direct labor costs and hours are the two most popular allocation bases because this
information is already captured by the payroll system.
 In a job order cost system, the units produced cannot serve as the allocation base because
each unit, or group of units, tends to be different (i.e., there is lack cause-and-effect
relationship)
Step5. Compute allocation rate
 The overhead allocation rate expresses the relationship between overhead costs and some
activity base that can be traced directly to specific cost objects (job)

Actual costing: Actual indirect cost rate = Actual OH

Actual allocation base

Normal costing: Budgeted indirect cost rate = Budgeted OH

(Predetermined OH rate) Budgeted allocation base

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Some companies use separate rate for fixed and variable FOH. Variable factory overhead per
unit of the allocation base is assumed to be constant within the relevant range of activity.
However, fixed factory overhead is assumed to be constant in total over the relevant range.

OH allocation rate:
Plant-wide OH rate: the simplest form of OH allocation is to use a single OH rate throughout
all departments of a company. Here, we treat all annual OH for the company as a single costs
pool, and allocate is based on one allocation base.
Departmental OH Rate: after OH costs have been departmentalized, a different OH allocation
rate for each department may be used to have a more accurate OH cost allocation to each cost
object in each department.
Step 6. Compute indirect costs allocated to the job
Actual costing = Actual indirect cost rate x Actual quantity of the cost allocation base used
Normal costing =Budgeted indirect cost rate x Actual quantity of the cost allocation base used
Step 7. Compute total cost of the job
Actual costing = DM +DL+OH (actual)
Normal costing = DM+DL+OH (applied)
Example 1 (Actual Job Costing Systems in Manufacturing Firms)
Robinson Company uses a job costing system with two direct cost categories (DMs and Direct
manufacturing labor cost) and one manufacturing cost OH pool. The company allocates
manufacturing OH costs using direct manufacturing labor hours. The year 2015 budget and
actual results are given below.
Budget for Year 3 Actual results for Year3
Mfg OH $1,120,000 $1,215,000
DL cost 500,000 550,000
DL hrs 28,000 27,000
Machine hrs 10,000 11,000
Robinson co. received an order from western pulp and paper factory to participate in producing
paper producer machine; and the job of producing this in Robinson Company is termed as job
wpp298. The company wants to know the cost of the job and send assurance letter of its
participation to western pulp and paper factory. The job-cost sheet for job WPP 298 lists the
following:
DMs used ------------- $4,606
DL cost ------------- 1,579
DL hrs ------------- 88
Required: Determine the cost of Job WPP 298 using actual costing.
Solution: The real part of the computation starts from step 5.
Step 5. FOH allocation rate?
Actual FOH rate = Actual cost = $1,215,000 = $45 per DL hr

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 Actual allocation base 27,000
Step 6. Compute OH cost allocated to the Job
FOH allocated to Job WPP 298 = Actual rate x Actual quantity
= $45 x 88 DL hrs = $3,960
Step 7. Compute total cost of the job
Cost of Job WPP 298:
DMs -------------------------- $4,606
DL cost ---------------------- 1,579
FOH ------------------------- 3,960
Total cost of the Job $10,145
Normal Job Costing Systems in Manufacturing Firms
 Now you know an annual OH rate is preferable to OH rates calculated on a weekly or
monthly basis for the above reasons. What does this mean to a company that uses actual
costing? This means to know the actual cost of its product (job), the company will have to
wait until the end of the year.
 However, mgt cannot wait until the end of the year, or even until the end of the month, to
find out how much a particular job costs. Cost data are most useful when they are
immediately (timely) available.
 The cost accountant is usually expected to report the total cost of a job as soon as it is
finished. At this time the actual total OH costs are not available, as they would be at the end
of a fiscal period. As a solution predetermined (POR) or budgeted OH rates are calculated
for each cost pool at the beginning of a fiscal year, and OH costs are allocated to jobs as
work progresses.
 A POR is an estimate of the amount of OH expense that a company will incur for every unit
of some activity (called a cost driver) that is consumed.
 Using the budgeted OH (OH application) rate gives rise to Normal costing.
Example 2 Refer to example 1 and compute the cost of job WPP 298 using normal costing
Solution
The real part of the computation starts from step 5
Step 5. FOH allocation rate?
Budgeted FOH rate = Budgeted OH = $ 1,120,000 = $40/DL hr
Budgeted alloc. base 28,000 hrs
Step 6. FOH allocated (applied) to Job WPP 298?
FOH allocated = budgeted FOH rate x Actual quantity
= $40 x 88 hrs = $3,520
Step 7. Cost of Job WPP 298?
DM 4,606
DL 1,579
FOH 3,520
Total $9,705

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 Example Exercise
Donna Corporation manufactures custom cabinets for kitchens. It uses a normal-costing system with two
direct-cost categories—direct materials and direct manufacturing labor—and one indirect-cost pool,
manufacturing overhead costs. It allocates FOH costs using manufacturing labor hour. It provides the
following information for 2017.
Budgeted manufacturing overhead costs $960,000
Budgeted direct manufacturing labor-hours 32,000 hours
Actual manufacturing overhead costs $992,000
Actual direct manufacturing labor-hours 31,000 hours
Calculate the total manufacturing costs of the 32 Berndale Drive job using actual and normal costing
based on the following information:
Actual direct materials costs $3,500
Actual direct manufacturing labor 160 hours
Actual direct manufacturing labor rate $20 per hour

Explanation of Transactions (Cost Flows) – Perpetual System Assumed

 One of the jobs started and completed by Robinson Company during the month of February,
Year 3 was job WPP 298. But other jobs were also being made during the same month even
if we were concerned with job WPP 298. All the transactions relating to manufacturing and
nonmanufacturing activities in February, year 3 for several jobs is given below:
a) Purchases of materials (direct and indirect) on credit $89,000
Journal entry: Materials control --------------------89,000
Accounts payable control ----------------- 89,000
Both have the word control because they are general ledger accounts
b) Materials sent to the manufacturing plant floor: DMs $81,000 and Indirect Materials
$4,000
Journal entry: WIP control ------------------ 81,000
Mfg OH control -------------- 4,000
Materials control -------------------85,000
The cost of RMs sent to the mfg plant and remaining in store can be determined using the
different cost flow assumptions – SI, FIFO, LIFO, WA. The LCM method should also be
applied to value RM inventory.
c) Total mfg payroll for February: direct $39,000 ; indirect $15,000
Journal entry: WIP control ------------------ 39,000
Mfg OH control -------------------- 15,000
Wages/salary payable -------------------- 54,000

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 d) Payment of total mfg payroll for February $54,000
Journal entry: Wages payable control --------- 54,000
Cash control --------------------------- 54,000
e) Additional mfg OH costs incurred during February, $75,000. These costs consist of
engineering and supervisory salaries, $44,000; plant utilities and repairs, $11,000; plant
depreciation, $18,000; and plant issuance, $2,000.
Journal entry: Mfg OH control ------------------- 75,000
Salaries payable control ------------------ 44,000
A/P control ---------------------------------- 11,000
Accumulated depreciation control----- 18,000
Prepaid insurance control --------------- 2,000
f) Allocation of manufacturing OH to Jobs, $80,000
We assume 2,000 actual DL hrs were used for all jobs in February year 3
$40 x 2,000 hrs = $80,000
From the 2,000 hours job WPP 298 used 88 hours only. So OH cost allocated to it will be
88 Hrs x $40 = $3,520
Overhead cost computed is entered in the manufacturing overhead applied section of the
individual job cost sheet. Manufacturing overhead is applied to work-in-process using the
predetermined rate. The offsetting credit entry is to the manufacturing overhead allocated
account.
Journal entry: WIP control -------------- 80,000
Mfg Oh allocated ---------------80,000
FOH can be recorded either in a separate accounts for actual and applied OH or in a single
account. If actual and applied accounts are separate, the applied account is a contra account to
the actual OH account and is closed against it at year-end. Both are temporary accounts.
g) Completion and transfer to finished goods of 12 individual jobs, $188,800. Job no> 298
was one of the jobs completed in February at a cost of $9,705
Journal entry: Finished goods control ---------188,800
WIP control ----------------------------- 188,800
Job order-cost sheet for completed jobs are removed from the WIP subsidiary ledger and become
the subsidiary ledger for the finished goods inventory control account.
h) Cost of goods sold, $180,000. Job 298 was one of the jobs sold and delivered to
customer in February.
Journal entry: COGS ----------------180,000
Finished goods ----------180,000
i) Marketing and customer service payroll and adverting costs accrued for February:
Mktg dept. Salaries ---------$35,000
Advertising costs ------------ 10,000
Customer-service costs ------15,000
$60,000
Journal entries:
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 Mktg & Customer service costs ------ 50,000
Advertising costs ------------------------ 10,000
Salaries payable ------------------------- 50,000
A/P control ------------------------------ 10,000

Batch Costing
This is another form of job costing which is adopted in case of manufacturing of a large number
of components of machines or of other articles. Since a large number of them are manufactured
together and pass through the same process of manufacture, it is convenient to collect their cost
of manufacture together. Separate job cost sheets are maintained for each batch of products. Each
batch is allotted a number. Material requisitions are prepared batch wise, the direct labour is
engaged batch wise and the overheads are also recovered batch wise. Cost of each component in
the batch is then determined by dividing the total cost by the number of articles manufactured.

Feature of Batch Costing

Features of batch costing system are as under:
• Batch costing is applied in industries where identical products are produced.
• A batch is a cost unit which consists of a separate, readily identifiable group of product units
which maintains its separate identity throughout the production process.
• The output of batch consists of a number of units and it is not economical to ascertain cost of
every unit of output independently
• The procedure is very similar to job costing: (a) each batch is treated a job and costs are
calculated for total batch. (b) on completion of production cost per unit is found as
Total batch cost
cost per unit =
Total units ∈batch

Process Costing Method

 Process costing is one of the two widely used costing methods that are used when identical
products are manufactured under conditions of continuous processing or under mass
production methods.
 Process costing is a method for assigning product costs to units of product when all units of
product are virtually the same.
 In a process-costing system, the unit cost of a product or service is obtained by assigning
total costs to many identical or similar units of output. In other words, unit costs are
calculated by dividing total costs incurred by the number of units of output from the
production process.

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 In a manufacturing process-costing setting, each unit receives the same or similar amounts
of direct material costs, direct manufacturing labor costs, and indirect manufacturing costs.
 These conditions exist in industries that produce such products as plastics, textiles,
petroleum, steel, sugar, drugs, etc.
 For products in a process costing environment, all costs must be assigned using a cost-driver
approach. They key difference is that the only cost-driver is the actual number of units
produced.
In general, process costing is used;
 In homogeneous products
 In continuous processing
 In mass production techniques
 Process costing is most commonly used in industries that produce essentially homogeneous
(e.g. uniform) products on a continuous basis.
 Firms producing distinct and unique products use job order costing whereas firms
producing similar or identical units use process-costing system.
 Process costing system accumulate costs by department for a period of time, just as a
job order costing system accumulate costs by job, and the total cost then will be
assigned to the units produced during that period.

Illustrating Process Costing

Consider the following illustration of process costing: Suppose that Pacific Electronics
manufactures a variety of cell phone models. These models are assembled in the assembly
department. Upon completion, units are transferred to the testing department. We focus on the
assembly department process for one model, SG-40. All units of SG-40 are identical and must
meet a set of demanding performance specifications. The process-costing system for SG-40 in
the assembly department has a single direct-cost category, direct materials and a single indirect-
cost category conversion costs. Conversion costs are all manufacturing costs other than direct
material costs, including manufacturing labor, energy, plant depreciation, and so on. Direct
materials are added at the beginning of the assembly process. Conversion costs are added evenly
during assembly.

We will use the production of the SG-40 component in the assembly department to illustrate
process costing in three cases, starting with the simplest case and introducing additional
complexities in subsequent cases:

Case 1: Process costing with zero beginning and zero ending work-in-process inventory of SG-
40. (That is, all units are started and fully completed within the accounting period.) This case
presents the most basic concepts of process costing and illustrates the feature of averaging of
costs.

Case 2: Process costing with zero beginning work-in-process inventory and some ending work
in-process inventory of SG-40. (That is, some units of SG-40 started during the accounting

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period are incomplete at the end of the period.) This case introduces the five steps of process
costing and the concept of equivalent units.

Case 3: Process costing with both some beginning and some ending work-in-process inventory
of SG-40. This case adds more complexity and illustrates the effect of weighted-average and
first-in, first-out (FIFO) cost flow assumptions on cost of units completed and cost of work-in-
process inventory.

Case 1: Process Costing with No Beginning and Ending Work-in-Process Inventory

On January 1, 2012, there was no beginning inventory of SG-40 units in the assembly
department. During the month of January, Pacific Electronics started, completely assembled, and
transferred out to the testing department 400 units.
Data for the assembly department for January 2012 are as follows:

Physical Units for January 2012

Work in process, beginning inventory (January 1) 0 units
Started during January 400 units
Completed and transferred out during January 400 units
Work in process, ending inventory (January 31) 0 units
Physical units refer to the number of output units, whether complete or incomplete. In
January 2012, all 400 physical units started were completed.

Total Costs for January 2012

Direct material costs added during January $32,000
Conversion costs added during January 24,000
Total assembly department costs added during January $56,000

Pacific Electronics records direct material costs and conversion costs in the assembly department
as these costs are incurred. By averaging, assembly cost of SG-40 is $56,000 ÷ 400 units = $140
per unit, itemized as follows:

Direct material cost per unit ($32,000 / 400 units) $80

Conversion cost per unit ($24,000 / 400 units) 60
Assembly department cost per unit $140

Case 2: Process Costing with Zero Beginning and Some Ending Work-in-Process Inventory
In February 2012, Pacific Electronics places another 400 units of SG-40 into production.
Because all units placed into production in January were completely assembled, there is no
beginning inventory of partially completed units in the assembly department on February 1.
Some customers order late, so not all units started in February are completed by the end of the
month. Only 175 units are completed and transferred to the testing department.

Data for the assembly department for February 2012 are as follows:

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Work in process, beginning inventory (February 1) 0 units
Started during the current period (February) 400 units
Completed and transferred out during February 175 units
Work in process, ending inventory (February 29) 225 units
Degree of completion of ending work in process (DMS =100%, CC =60%)
Total costs added during February = $50,600 (DMC =$32,000, CC = $18,600)

The 225 partially assembled units as of February 29, 2012, are fully processed with respect to
direct materials, because all direct materials in the assembly department are added at the
beginning of the assembly process. Conversion costs, however, are added evenly during
assembly. Based on the work completed relative to the total work required to complete the SG-
40 units still in process at the end of February, an assembly department supervisor estimates that
the partially assembled units are, on average, 60% complete with respect to conversion costs.

The point to understand here is that a partially assembled unit is not the same as a fully
assembled unit. So to express some partially assembled units with fully assembled units we
require a common metric. The concept we will use in this regard is that of equivalent units. We
will explain this notion in greater detail next as part of the set of five steps required to calculate
(1) the cost of fully assembled units in February 2012 and (2) the cost of partially assembled
units still in process at the end of that month, for Pacific Electronics.

How should the company calculate the cost of fully assembled units in and the cost of partially assembled
units still in process at the end of February?
Steps:
Step 1: summarize the flow of physical units of output (quantity schedule)
This schedule shows the physical flow of units into and out of departments. The total units to account for
most equal to the total units accounted for.
Step 2: Compute output in terms of Equivalent Units (EUs) Schedule:
Equivalent units are the number of units for which periodic manufacturing cost is incurred. Equivalent
units equal the total units completed plus incomplete unit restated in terms of completed units.
Step 3: Summarize total Cost to Account for Schedule:
This schedule shows which costs are charged to or accumulated by the department. Unit costs broken
down by the cost elements are also presented in this section.
Step 4: Compute Equivalent unit costs
This is computed by dividing costs incurred by the related equivalent units.
Step 5: Assign total costs to units completed and to units in ending work in process
This schedule shows the distribution of accumulated costs to units completed & transferred and to units
still in process. The total cost to account for must equal to the total cost accounted for.

Physical Units and Equivalent Units (Steps 1 and 2)

Step 1 Step 2 (equivalent units)
Physical Direct Conversion
Units Materials Costs

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Work in process, beginning 0
Started during the current period 400
Total units to account for 400
Completed and transferred out during current period 175 175 175
Work in process, ending 225 225 135
Total units accounted for 400
Equivalent units of work done in current period 400 310

Calculation of Product Costs (Steps 3, 4, and 5)

Production cost report Total Production Direct Conversion
Costs Materials Costs
WIP beginning 0
Costs added during February $50,600 $32,000 $18,600
(Step 3) Total cost to account for $50,600 $32,000 $18,600
Equivalent units of work done in 400 310
current period
(step 4) Equivalent unit cost 80 60
(Step 5) Assignment of costs:
To completed and transferred out $24,500 175 x $80 175 x 60
To Work in process ending 26,100 225 x $80 135 x $60
Total cost accounted for $50,600 $32,000 $18,600

Journal Entries
Journal entries in process-costing systems are similar to the entries made in job-costing systems
with respect to direct materials and conversion costs. The main difference is that, in process
costing, there is one Work in Process account for each process. In our example, there are
accounts for Work in Process Assembly and Work in Process Testing. Summary journal entries
for February are as follows:
1. Work in Process—Assembly 32,000
Accounts Payable Control 32,000
To record direct materials purchased and used in production during February.
2. Work in Process—Assembly 18,600
Various accounts such as W/ P Control &
Accumulated Depreciation 18,600
To record conversion costs for February; examples include energy, manufacturing supplies, all
manufacturing labor, and plant depreciation.
3. Work in Process—Testing 24,500
Work in Process—Assembly 24,500
To record cost of goods completed and transferred from assembly to testing during February.

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Case 3:Process Costing with Some Beginning and Some Ending Work-in-Process Inventory
At the beginning of March 2012, Pacific Electronics had 225 partially assembled SG-40 units in
the assembly department. It started production of another 275 units in March.
Data for the assembly department for March are as follows:

Work in process, beginning inventory (March 1) 225

Degree of completion of beginning work in process
(DMS=100%, CC =60%)
Started during March 275
Completed and transferred out during March 400
Work in process, ending inventory (March 31) 100
Degree of completion of ending work in process
(DMS=100%, CC =50%)
Total costs added during March =$36,180 (DMC=$19,800, CC=$16,380)

Weighted-Average Method
The weighted-average process-costing method calculates cost per equivalent unit of all work
done to date (regardless of the accounting period in which it was done) and assigns this cost to
equivalent units completed and transferred out of the process and to equivalent units in ending
work-in-process inventory.

Steps 1 and 2: Summarize Output in Physical Units and Compute Output in Equivalent Units
Flow of production Step (1) Step (2) equivalent units
Physical Direct Conversion
units materials cost
Work in process beginning 225
Started during current period 275
Total units to account for 500
Completed and transferred out during current period 400 400 400
Work in process, ending 100 100 50
Total units accounted for 500
Equivalent units of work done to date 500 450

Steps 3, 4, and 5: summarize total costs to account for, compute cost per equivalent unit, and
assign total costs to units completed and to units in ending work in process.
Production cost report Total Direct Conversi
Production Materials on Costs
Costs
Work in process beginning $26,100 $18,000 $8,100
Costs added in current period 36,180 19,800 16,380
(Step 3) Total costs to account for $62,280 $27,800 $24,480
Costs incurred to date $62,280 $27,800 $24,480

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 Equivalent units of work done to date 500 450
(Step 4) Cost per equivalent units of work done to date $75.6 $54.4
(Step 5) Assignment of costs:
To completed & transfer out 400 units $52,000 400x75.6 400x54.4
To work in process ending 100 units 10,280 100x75.6 50x54.4
Total costs accounted for $62,280 $27,800 $24,480
Step 4; shows the computation of weighted-average cost per equivalent unit for direct materials
and conversion costs. Weighted-average cost per equivalent unit is obtained by dividing the sum
of costs for beginning work in process plus costs for work done in the current period by total
equivalent units of work done to date.
Step 5: Assign Total Costs to Units Completed and to Units in Ending Work in Process.
Direct materials:
100 equivalent units × weighted-average cost per equivalent unit of $75.60 $ 7,560
Conversion costs:
50 equivalent units × weighted-average cost per equivalent unit of $54.40 2,720
Total costs of ending work in process $10,280
Using amounts from Table 3.6, the summary journal entries under the weighted-average method
for the March at Pacific Electronics are as follows:
1. Work in Process—Assembly 19,800
Accounts Payable Control 19,800
To record direct materials purchased and used in production during March
2. Work in Process Assembly 16,380
Various accounts such as Wages Payable
Control and Accumulated Depreciation 16,380
To record conversion costs for March; examples include energy, manufacturing supplies, all
manufacturing labor, and plant depreciation.
3. Work in Process Testing 52,000
Work in Process Assembly 52,000
To record cost of goods completed and transferred from assembly to testing during March.

First-In, First-Out Method

The first-in, first-out (FIFO) process-costing method (1) assigns the cost of the previous
accounting period’s equivalent units in beginning work-in-process inventory to the first units
completed and transferred out of the process, and (2) assigns the cost of equivalent units worked

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on during the current period first to complete beginning inventory, next to start and complete
new units, and finally to units in ending work-in-process inventory. The FIFO method assumes
that the earliest equivalent units in work in process are completed first.

A distinctive feature of the FIFO process-costing method is that work done on beginning
inventory before the current period is kept separate from work done in the current period.

Steps 1 and 2: summarize output in physical units and compute output in equivalent units
Flow of production Physical Equivalent units
units Direct Conversion
materials cost
Work in process beginning 225 (work done before
current period)
Started during current period 275
Total units to account for 500
Completed and transferred out during current period
From beginning work in process 225 0 90
Started and completed 175 175 175
Work in process, ending 100 100 50
Total units accounted for 500
Equivalent units of work done to date 275 315

Steps 3, 4, and 5: Summarize Total Costs To Account For, Compute Cost Per Equivalent Unit,
And Assign Total Costs To Units Completed And To Units In Ending Work In Process
Production cost report Total Production Direct Conversion
Costs Materials Costs
Work in process beginning $26,100 $18,000 $8,100
Costs added in current period 36,180 19,800 16,380
(Step 3) Total costs to account for $62,280 $27,800 $24,480
Costs incurred in current period 19,800 16,380
Equivalent units of work done to date 275 315
(Step 4) Cost per equivalent units of work done $72 $52
to date
(Step 5) Assignment of costs:
Completed & transfer out 400 units
Work in process; beginning (225 $26,100 $18,000 $8,100
units)
Costs added to beginning work in 4,680 0 x72 90 x52
process in current period
Total from beginning inventory 30,780
Started and completed during current 21,700 175x72 175x52
period (175 units)
Total costs of units completed and 52,480

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 transferred out
Work in process ending 100 units 9,800 100 x72 50 x52
Total costs accounted for $62,280 $37,800 $24,480
The journal entries under the FIFO method are identical to the journal entries under the
weighted-average method except for one difference. The entry to record the cost of goods
completed and transferred out would be $52,480 under the FIFO method instead of $52,000
under the weighted-average method.

Accounting for normal and abnormal losses: Spoilage, Rework, And Scrap

Spoilage, rework and scrap in general

Managers are focusing increasingly on improving the quality of and reducing the defects in their
products, services and activities. Managers know that reducing defects reduces costs and makes
their company more competitive. In this chapter we focus on three types of costs that arise as a
result of defects, spoilage, rework and scrap, and ways to account for them.
Spoilage is units of production – whether fully or partially completed - that do not meet the
standards required by customers for good unit and that are discarded as waste or sold for reduced
prices.
 Rework (Defective units)are units of production that do not meet the standards required by
customers for finished units that are subsequently repaired and sold as acceptable finished
units.
Spoiled units can be reworked to meet standards, but only at a considerable cost known as
rework costs.
 Scrap – residual material that results from manufacturing a product. Scrap has low total
sales value compared with the total sales value of the product.
Note that while scrap is limited to a loss of materials, spoilage involves a loss of labour and
overhead as well as materials.
 Waste – is often used to refer to the portion of material inputs either disappears in the
production process or the part of raw materials left over after production that has no further
use or resale value. A cost of disposal may be incurred for waste materials.

Accounting for Spoilage

 Accounting for spoilage aims:
1) To determine the magnitude of spoilage costs, and
2) To distinguish between costs of normal and abnormal spoilage
Types of Spoilage
1. Normal spoilage
2. Abnormal Spoilage
Normal Spoilage

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 It is spoilage inherent in a particular production process that arises even under efficient
operating conditions.
 It is acceptable (unavoidable), planned for and can be estimated as a percentage of total good
units that pass the inspection point of the operations.
 Costs of normal spoilage are typically included as a component of the costs of good units
manufactured because good units cannot be made without also making some units that are
spoiled (i.e., normal spoilage is a product cost)

Abnormal Spoilage
 Spoilage in excess of what is considered normal for a particular production process is called
abnormal spoilage. Abnormal spoilage, unlike normal spoilage, cannot be anticipated
/estimated.
 It is not inherent in a particular production process and would not arise under efficient
operating conditions. They arise for unusual or abnormal reasons such as: machine
breakdown and operator errors, when production line equipment is not adjusted properly,
when inferior raw materials are purchased, or by fire, explosion, or other unusual events.
 Usually regarded as avoidable and controllable – by identifying the reasons for machine
breakdowns and accidents and the like, and taking a remedial action, giving proper training
to line operations and other plant personnel
 Not inventor able (not included in the cost of good units) rather they are reported as “loss
from abnormal spoilage” account.
Process Costing & Spoilage
 The cost of spoiled units depends on when the units are removed from the production process
rather than on when spoilage actually occurs, i.e. cost of spoiled units is assumed to be all
costs incurred on them prior to inspection point.
 An inspection point is the stage of the production cycle at which products are examined to
determine whether they are acceptable or unacceptable units.
 Spoilage is typically assumed to occur at the stage or completion where inspection takes
place.
 How do process-costing systems account for spoiled units? The way spoilage cost is handled
depends on whether the spoilage is considered normal or abnormal.

The Five-Step Procedure for Process Costing with Spoilage

Example: Anzio Company manufactures a wooden recycling container in its forming
department. Direct materials for this product are added at the beginning of the production cycle.
Conversion costs are added evenly during production. Some units of this product are spoiled as
a result of defects, which are detectable only upon inspection of finished units. Normally,
spoiled units are 10% of the finished output of good units. That is, for every 10 good units
produced, there is 1 units of normal spoilage. Summary data for July 2003 are:
Physical Units for July 2003

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 Work in process, beginning inventory (July 1) 1,500 units
DM (100% complete), CC (60% complete)
Started during July 8,500 units
Completed & transferred out in July 7,000 good units
Work in process, ending inventory (July 31) 2,000 units
DM (100% complete) CC (50% complete)

Total costs for July 2003

Work in process, beginning inventory:
DMs ----- (1,500 equivalent units x $8/units) $12,000
CC -------- (900 equivalent units x $10/units) $ 9000 $21,000
DM costs added during July ---------------------------------------------- 76,500
CC costs added during July ----------------------------------------------- 89,100
Total costs to account for ------------------------------------------------- $186,600
(WIP beg. + Units started) = (Goods completed + WIP end. + spoiled Units)
Total spoilage = (WIP beg. + Units started) – (Goods units completed + WIP ending)
= (1,500 + 8,500) – (7,000 + 2,000)
= 10,000 – 9,000 = 1,000 units
Normal spoilage is 10% of the 7,000 units of good output, or 700 units.
Abnormal spoilage = Total spoilage – Normal spoilage
= 1,000 – 700 = 300 Units.
We illustrate the five steps of process costing for each inventory costing method:
Weighted Average and FIFO Methods
Weighted Average Methods
Step – 1 Step – 2 Equivalent units
Flow of production Physical units Direct material Conversion costs
Beginning work in process 1,500 - -
Started during the month 8,500 - -
Total units to account for 10,000 - -
Completed during the month 7,000 7,000 7,000
Normal spoilage 700 700 700
Abnormal spoilage 300 300 300
Work in process ending 2,000 2,000 1,000
Total units accounted for 10,000 - -
Equivalent units of work done to
- 10,000 9,000
date

Production cost report Total production cost Direct material cost Conversion cost
Beginning W/P Br. 21,000 Br. 12,000 Br. 9,000
Cost added during the month 165,600 76,500 89,100
Total cost to account for (st-3) 186,600 88,500 98,100

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Cost incurred to date 186,600 88,500 98,100
Equivalent units - 10,000 9,000
Equivalent unit cost ( step – 4) 8.85 10.9
Assignment of costs(step-5) - - -
To good units 138,250 7000*8.85 =61,950 7000*10.9 =76,300
Add normal spoilage 13,825 700*8.85= 6,195 700*10.9= 7,630
Total good units 152,075 68,145 83,930
To abnormal spoilage 5,925 300*8.85=2,655 300*10.9=3,270
To W/P ending 28,600 2000*8.85 =17,700 1000*10.9 =10,900
Total cost accounted for 186,600
Note that for simplicity we assume all spoilage (normal and abnormal) has zero net disposal
value. If, instead, the spoiled units have positive disposal value, the costs of normal and
abnormal spoilage would be reduced by this amount and spoilage is set up in an inventory
account at the disposal value. (i.e., disposal value represents recovery of costs)

Journal entries
To transfer good units completed
Finished goods --------------- 152,075
WIP – forming ---------------------- 152,075
If, instead, the spoiled units have estimated disposal value of $2,000, the good units completed
would bear only $11,825 ($13,825 - $2,000) due to normal spoilage of units. The journal entry
is as follows:
Spoiled goods or scrap material inventory ---- 2,000
WIP – forming ------------------------------------ 2,000
Finished goods ------------------------------------ 150,075
WIP – forming -------------------------------------- 150,075
To record loss from abnormal spoilage
Loss from abnormal spoilage ------------------ 5,925
WIP – forming ---------------------------------------- 5,925
If the abnormal spoiled units are estimated to have sales value of $500, we would pass the
following entry:
Spoiled goods or scrap material inventory ----- 500
Loss from abnormal spoilage --------------------- 5,425
WIP – forming ----------------------------------------- 5,925
NB. Because the cost of the normal spoilage less any salvage value of the spoiled units is treated
as a necessary cost to obtain the good units of output, it is included in the pre-determined
overhead rate, and is, therefore, added to the FOH account to offset the applied overhead.
But sometimes in practice it is not included in the POR, and, therefore, the cost of the normal
spoilage less any salvage value of the spoiled units is added to the cost of the good units of
output that have passed the inspection point as in the above illustration. If it was included in the
POR, we would have the following journal entry assuming zero sales value for spoiled units:
Finished goods --------------------- 138,250

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 Factory Oh control ---------------- 13,825
Loss from abnormal spoilage --- 5,925
WIP – forming -------------------------- 158,000

FIFO Method
 When the FIFO cost flow assumption is used, a complicating problem arises. This involves
determining which category of completed units the spoilage came from.
 If the spoiled or lost units or lost are added to the denominator in the unit cost calculation.
Note, that this is the same way spoilage is handled in the weighted average method.
 It is the usual treatment because it is not practical to identify the source of each spoiled or
lost unit.
 The equivalent work performed on them during the period is included in the denominator.
 To simplify, we will assume that any spoiled or lost units come from the units started during
the period.
FIFO Method
Step – 1 Step – 2 Equivalent units
Flow of production Physical units Direct material Conversion costs
Beginning work in process 1,500 - -
Started during the month 8,500 - -
Total units to account for 10,000 - -
Completed during the month/good
units
From WIP beginning 1,500 0 600
from Started 5,500 5,500 5,500
Normal spoilage 700 700 700
Abnormal spoilage 300 300 300
Work in process ending 2,000 2,000 1,000
Total units accounted for 10,000 - -
Equivalent units of work done only
8,500 8,100
current period

Production cost report Total production cost Direct material cost Conversion cost
W/P beginning Br. 21,000 Br. 12,000 Br. 9,200
Current period cost 165,600 76,500 89,100
Total cost to account for (st-3) 186,600
Equivalent units only current period 8,500 8,100
Equivalent unit cost (step – 4) - 9 11
Assignment of cost (step -5)
To good units
From WIP beginning 21,000
Work done to complete beg. WIP
6,600 0*9 =0 600*11 = 6,600
Total cost from beginning WIP
27,600
before spoilage
Started and completed 110,000 5,500*9 = 5,500*11 =
Good units completed before normal
137,600
spoilage
Add normal spoilage 14,000 700*9=6,300 700*11=7,700
Total from good units completed 151,600

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To abnormal spoilage 6,000 300*9= 2,700 300*11= 3,300
To W/P ending 29,000 2,000*9 =18,000 1,000*11 =11,000
Total cost accounted for 186,600 - -
Journal entries are identical to the entries under WA method except differences in dollar
amounts.
Journal Entries

Finished goods -------------------- 151,600

WIP – forming ---------------------------- 151,600

Loss from Abnormal spoilage --- 6,000

WIP – forming -------------------------- 6,000

Job Costing &Spoilage

 The concepts of normal and abnormal spoilage also apply to job-costing systems.
 Normal spoilage is inventoriable but abnormal spoilage is treated as period cost.
 When assigning cost, job-costing systems generally distinguish normal spoilage attributable
to a specific job from normal spoilage common to all jobs.
Example: In the Hull Machine Shop. 5 aircraft parts out of a job batch of 50 aircraft parts are
spoiled (say it is job No.160). Costs assigned prior to the inspection point are $2,000 per part.
Our presentation here and in subsequent section focuses on how the $2,000 cost per part is
accounted for. When the spoilage is detected, the spoiled goods are inventoried at $600 per part,
the net disposal value.
1. Normal Spoilage Attributable to a Specific Job
 When normal spoilage occurs because of the specifications of a particular job, that job bears
the cost of the spoilage reduced by the disposal value of the spoilage.
 In this case normal spoilage is ignored in the computation of the FOH application rate to be
applied to jobs.
 The journal entry to recognize disposal value (items in parentheses indicate subsidiary ledger
posting) is:
Material control (spoiled goods at current net disposal value) (5 units x $600/unit) ------- 3,000
Work-in-process control (specific job) (5 units x 600/unit) ----------------------------- 3,000
 Note, the work-in-process control (specific job) has already been debited (charged) by
$10,000 for the spoiled parts (5spoiled parts x $2,000 per part). The effect of the $3,000
entry is to make the net cost of normal spoilage, $7,000 ($10,000 - $3,000), an additional
cost of the 45 (50-5) good units produced. The total cost of the 45 units is $97,000,
comprising $90,000 (45 units x $ 2,000 per unit) incurred to produced the good units plus the
$7,000 net cost of normal spoilage. The cost per good unit is $2,155.56 ($97,000÷45 good
units).
2. Normal Spoilage Common to All Jobs
 When spoilage is common to all jobs, i.e., when it is just as likely to occur on one job as
another, spoilage costs are treated like any other overhead costs.

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 The estimated disposal value is charged to an account for spoilage inventory.
 The entry to record the spoilage is:
Materials control (spoiled goods at current disposal value) (5 units x 600/unit) ---- 3,000
Manufacturing overhead control (normal spoilage) ($10,000 - $3,000) ------------- 7,000
Work-in-process control (specific job) (5 units x $ 2,000/units) ------------------------ 10,000
 When the spoilage is sold, an entry is made to debit cash and credit spoilage inventory for the
$3,000 disposal value. If accurate estimates of the disposal value cannot be made at the time
the spoilage is detected, the following entries will accomplish the same purpose.

 The entry when the spoilage is detected is:

Manufacturing overhead control (normal spoilage) --------------- 10, 0000
Work-in-process control (specific job) (5 units x $2000) ----------------- 10,000
The entry when the spoilage is sold is:
Cash ---------------------------------------------------------------------- 3,000
Manufacturing overhead control (normal spoilage) ------------------ 3,000
3. Abnormal Spoilage
 The total cost of the abnormal spoiled units should be removed from the WIP inventory
account and any salvage (disposal) value should be recorded in a spoiled unit’s inventory
account, with the difference between the total cost of abnormal spoilage and the salvage
value being charged to a loss from abnormal spoilage account.
Materials controls (spoiled goods at current disposal value: 5 units x 600) --- 3,000
Loss from abnormal spoilage (10,000 – 3,000) ------------------------------------ 7,000
Work-in-process control (specific job) (5 units x 2,000) ------------------------------ 10,000
The total cost of the 45 good units = $90,000 (45 units x 2,000 per unit)
The unit cost of the good units is not affected by this technique:
Cost per good unit = $90,000/45 units = $2,000
Rework (Defective Units)
 The difference between spoiled units and defective units is that defective units are reworked
to put them into condition to be sold with good units or to be sold as irregulars, whereas
spoiled units are sold (at salvage value) without additional work being performed on them.
 For example if a TV set doesn’t produce any sound, it can be reworked to correct the
problem and sold as good units.
 We again distinguish:
1. Normal rework attributable to a specific job,
2. Normal rework common to all jobs, and
3. Abnormal rework.
 The two methods of accounting for normal rework are based on the same logic used to
account for spoilage.
 Normal rework that is common to all jobs is treated like any other factory overhead cost.
 Rework caused by a customer’s specifications is charged to that particular customer’s job.
Example:

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Consider the Hull Machine Shop data given earlier. Assume the five spoiled parts are reworked.
The journal entry for the $10,000 of total costs (the details of these costs are assumed) assigned
to the five spoiled units before considering rework costs is:
Work-in-process control (specific job) ------------10,000
Material control ---------------------------------------- 4,000
Wages payable control -------------------------------- 4,000
Manufacturing overhead allocated ------------------ 2,000
Assume the rework costs equal $3,800 (comprising $800 direct materials, $2,000 direct
manufacturing labor, and $1,000 manufacturing overhead)

1. Normal Reworks Attributable to a Specific Job

 If the defective units result from unusual job requirements, the additional rework costs should
be treated as direct costs of that job order.
 The journal entry is:
Work-in-process control (specific job) ---------- 3,800
Material control ----------------------------------- 800
Wages payable control --------------------------- 2,000
Manufacturing overhead allocated ------------- 1,000
 The cost of all units in job No.160 has increased because of the rework costs.
2. Normal Rework Common to All Jobs
 If the defective units occur irregularly and are not the result of the job specifications, the
costs should be treated as a departmental overhead costs.
 The specific job which happened to be reworked does not bear any rework costs.
 Then, each job is charged with some rework cost when overhead is applied.
 Actual rework cost is charged to factory overhead because rework costs have already been
charged to WIP inventory as part of applied FOH.
Manufacturing overhead control (rework costs) --------- --3,800
Materials control ---------------------------------------------- 800
Wages payable control ----------------------------------------2,000
Manufacturing overhead allocated --------------------------1,000
3. Abnormal rework
 The total cost of reworking abnormal defective units should be charged to a loss from
abnormal defective units account instead of the WIP inventory account because it is the result
of inefficient operations and should not become part of the product cost.
 Conceptually, the approach is the same as that used for abnormal spoilage.
Loss from abnormal rework ------------------3,800
Materials control ------------------------------800
Wages payable control ------------------------2,000
Manufacturing overhead allocated ----------1,000
 Accounting for rework in a process-costing system also requires abnormal rework to be
distinguished from normal rework.
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 A process-costing system accounts for abnormal rework in the same way as a job-costing
system.
 Accounting for normal rework follows the accounting described for normal rework common
to all jobs (units).
 There is no need to distinguish between specific and common because masses of identical or
similar units are being manufactured. So all normal reworks are treated as common to all
jobs.

Manufacturing overhead control ---------------xx

Materials control -------------------------------- xx
Wages payable control ------------------------- xx
Manufacturing overhead allocated ----------- xx
 Note that to eliminate rework and to simplify the accounting, some companies set a standard
of zero rework. All rework is then treated as abnormal and written off as a cost of the
current period.
Accounting for Scrap
 Scrap is material left over when making a product. Scraps are inevitable and recur constantly
in specific manufacturing processes.
 No distinction is made between normal and abnormal scrap because no cost is attached to
scrap. The only distinction made is between scrap attributable to a specific job and scrap
common to all jobs.
 Scrap may or may not have a market value. If scrap materials have sales value, companies
need to control them. Otherwise, if workers see that a company is not properly accounting
for scrap, they may be tempted to steal it.
 If scraps have sales value we will be faced with two issues:
1. When should the value of scrap be recognized in the accounting records – at the time
scrap is produced or at the time scrap is sold?
2. How should revenues from scrap be accounted for? Two methods: other revenue and
cost reduction.
To illustrate, we extend our Hull example. Assume the manufacture of aircraft parts
generates scrap and that the scrap from a job has a net sales value of $900.

Recognizing Scrap at the Time of its Sale

1. Scrap recognized as Other Revenue
 This method is generally used when the dollar amount of scrap is immaterial, and if it is sold
at irregular intervals. No entry is made in the accounts until the scrap is sold.
 The simplest accounting system is to make a notation of the quantity of scrap returned to the
storeroom and to regard scrap sales as a separate line item of other revenues in the income
statement.
 The only journal entry is:

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 Sales of scrap: Cash or Account Receivable ---- 900
Scrap Revenues ------------------------- 900
 Note that no entry is made on the books when scrap is returned to materials inventory.
 While crediting other income lacks theoretical merit, accountants justify it when more
accurate accounting is costly and burdensome, the scrap sales price is uncertain, or the scrap
value is relatively small.

2. Scrap Recognized as a Cost reduction (Cost reduction approach)

 This method is generally used when the dollar amount of scrap is material and the scrap is
sold quickly after it is produced. It regards scrap sales as a reduction of the cost of
producing the product.
 To apply the sales value to the cost of producing the product rather than to other income we
should distinguish whether the scrap is attributable to a specific job or is common to all jobs.
i) Scrap Attributable To a Specific Job
 Job-costing systems sometimes trace the scrap revenues to the jobs that yielded the
scrap. This method is used only when the tracing can be done in an economically
feasible way.
 The estimated proceeds from the sale of scrap are not considered in the computation
of the FOH application rate.
 The entry to record the sale of scrap would reduce the WIP inventory of the specific
job in which the scrap originated leaving the net cost in the job or department (in
process costing).
 When overhead is applied to the job involved, the estimate of scrap revenue that was
subtracted in the overhead rate calculation should be added back to the rate.
 This avoids giving the customer an extra cost reduction for scrap.
 The journal entry is:
Scrap returned to storeroom: No journal entry (Notation of quantity received
and related job is entered in the inventory record)
Sale of scrap: Cash or A/R ------------------------900
Work-in-process control -------- 900
(Posting made to specific job cost record to reduce the cost of a specific job)
 All scrap revenues, whatever the amount, are credited to the specific job. Scrap
reduces the costs of the job.
ii) Scrap Common to All Jobs
 If the scrap is not significant for each job, it may not be feasible to associate scrap
with a particular job or department.
 When scrap is common to all jobs produced, an estimate of the revenue expected
from the sale of normal scrap is subtracted from the numerator in the overhead rate
calculation.
Page 26
  This causes the overhead rate to be lower than it would be otherwise. Then overhead
applied to work in process is somewhat less than it would be without the benefit of
this cost reduction.
 All products bear a portion of the scrap loss under this approach.
 Thus, we do not subtract the scrap sale from the cost of the job or department.
Instead, the actual account received when the scrap is sold is treated as an actual
overhead cost reduction.

 The journal entry in this case is:

Scrap returned to storeroom: No journal entry (Notation of quantity received and
related job is entered in the inventory record)
Sale of scrap: Cash or Account Receivable -------------- 900
Manufacturing overhead control ------- 900
Posting made to subsidiary ledger; ales of scrap” column on department cost record.
 This method does not link scrap with any particular job or product. Instead, all
products bear production costs without any credit for scrap revenues except in an
indirect manner through lower budgeted mfg OH rate.

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