AE 22: Cost Accounting & Control

Accounting for Spoilages, Defects, Scraps, and Wastages

Spoiled Units

• units that do not meet production standards and are either sold for their salvage value or
discarded

• when spoiled units are discovered, they are taken out of production and no further work is
performed on them

Defective Units

• units that do not meet production standards and must be processed further in order to be
salable as good units or as irregulars

Scrap Materials

• left over from the production process that cannot be put back into production for the same
purpose, but may be usable for a different purpose or production process or which may be sold
to outsiders for a nominal amount

Waste Materials

• left over from the production process that has no further use or resale value and may require
cost for their disposal
TWO (2) METHODS OF ACCOUNTING FOR SPOILAGE

• the method will depend on the reason for such spoilage

1. Charged to the specific job

o used if the reason for the spoilage is the job itself

o requires exacting specifications, or a difficult, intricate or complicated manufacturing
process
o increases the unit cost of the remaining perfectly finished jobs
o The amount debited to spoiled goods and credited to work in process is equal to the
number of units spoiled multiplied by the estimated sales value per unit.

Illustration:

Job 3044 called for the making of 4,000 with these unit costs:

Direct materials Php 15.00

Direct labor 13.00
MOH (includes Php 1.00 spoilage allowance) 12.00

Total Php 40.00

Work in Process 156,000

Materials (4,000 x 15) 60,000
Payroll (4,000 x 13) 52,000
MOH – Applied (4,000 x 11) 44,000

When the order was completed, 200 rejected units, a normal number, were sold for Php 18.00
each.

Spoiled Goods (200 x 18) 3,600

Work in Process 3,600

Finished Goods 152,400

Work in Process 152,400

Under this method, the MOH was recorded at the original amount of Php 11 (the Php 1 allowance
for spoilage was not included). The remaining perfect units in the job will absorb the loss on the
spoilage, resulting in an increase in unit cost.

Php 152,400 / 3,800 units = Php 40.105 / unit

 The increase in unit cost (40.105 – 39 = 1.105) may be computed as follows:

Spoilage Cost (200 x 39) 7,800

Less: Amount recovered from sale (200 x 18) 3,600
Loss on spoiled goods 4,200

The loss on spoiled goods will be absorbed by the remaining good units.

Php 4,200 / 3,800 units = Php 1.105 / unit

2. Charged to all production

o used if the reason for the spoilage is considered normal to the process and the number
does not exceed the limit set by the company

o With this method, all units manufactured during the period are charged with additional
cost which is added to the MOH rate.

o The unit cost originally charged will not increase anymore even if there are spoiled units
discovered later on.

o The amount debited to spoiled goods is equal to the number of units spoiled multiplied
by the estimated sales value per unit.

o The amount credited to work in process is equal to the total costs incurred/charged to
the spoiled units.

o The loss is charged to MOH – control.

o If the number of units spoiled exceed the limit set by the company, or if the reason is
not considered normal to the process, the loss on the spoiled units is charged to a loss
account.
Illustration:

Job 3044 called for the making of 4,000 with these unit costs:
Direct materials Php 15.00
Direct labor 13.00
MOH (includes Php 1.00 spoilage allowance) 12.00
Total Php 40.00

Work in Process 160,000

Materials (4,000 x 15) 60,000
Payroll (4,000 x 13) 52,000
MOH – Applied (4,000 x 12) 48,000

When the order was completed, 200 rejected units, a normal number were sold for Php
18.00 each.

Spoiled Goods 3,600

MOH – Control 4,400
Work in Process 8,000
(Spoiled = 200 x 40)

Finished Goods 152,000

Work in Process 152,000

Under this method, the unit cost of the completed units remains at Php 40.00. Because
the increase was made at the start (Php 1.00 spoilage allowance in MOH).

All units processed during the period, even those jobs without spoiled units, will absorb
the additional Php 1.00.

Upon completion of the job, even if there were spoiled units, the unit cost will be the
same as the amount originally charged to the job.
TWO (2) METHODS OF ACCOUNTING FOR DEFECTS

• The accounting problem for defective units is the additional costs to be incurred in reprocessing
the units to convert them into perfect articles.

1. Charged to specific job

o Same for spoiled units, if the reason for the defect is the job itself, the additional costs
incurred will be charged to all units in the job.

Illustration:

Job 3044 called for the making of 4,000 with these unit costs:
Direct materials Php 15.00
Direct labor 13.00
MOH (includes Php 1.00 defects allowance) 12.00
Total Php 40.00

Work in Process 156,000

Materials (4,000 x 15) 60,000
Payroll (4,000 x 13) 52,000
MOH - Applied (4,000 x 11) 44,000

During processing 300 units were found to be defective and required the following total
additional costs: materials – Php 2,000; labor – Php 4,000; and overhead – Php 2,000.

Work in Process 8,000

Materials 2,000
Payroll 4,000
MOH – Applied 2,000

Finished Goods 164,000

Work in Process 164,000

The unit cost of the completed units increased from the original Php 39 to Php 41 (Php
164,000 / 4,000 units). All units in the job will share in the cost incurred to re-process the
defective units.
2. Charged to all production

o If the reason is normal to the process and the number of defective units do not exceed
the normal limit, then the additional costs incurred will be charged to all units being
processed during the period.

Illustration:

Job 3044 called for the making of 4,000 with these unit costs:
Direct materials Php 15.00
Direct labor 13.00
MOH (includes Php 1.00 defects allowance) 12.00
Total Php 40.00

Work in Process 160,000

Materials (4,000 x 15) 60,000
Payroll (4,000 x 13) 52,000
MOH – Applied (4,000 x 12) 48,000

During processing 300 units were found to be defective and required the following total
additional costs: materials – Php 2,000; labor – Php 4,000; and overhead – Php 2,000.

MOH – Control 8,000

Materials 2,000
Payroll 4,000
MOH – Applied 2,000

Finished Goods 160,000

Work in Process 160,000

The cost of the finished goods will remain at the original amount charged to the job
(Php 160,000 / 4,000 units = Php 40 / unit).
ACCOUNTING FOR SCRAPS

1. If the scrap recovered can be traced to a specific job

Scrap Materials xxxx

Work in Process xxxx

2. If the scrap recovered are not traceable to a specific job

Scrap Materials xxxx

Miscellaneous Income xxxx

3. If the scrap recovered are from factory supplies

Scrap Materials xxxx

MOH – Control xxxx

ACCOUNTING FOR WASTAGES

• The cost of disposing waste materials may be allocated either to all jobs or to specific jobs.

1. If the cost of disposing waste materials is allocated to all jobs

MOH – Control xxxx

Accounts Payable xxxx

2. If the cost of disposing waste materials is allocated to a specific job

Work in Process – (Job Number) xxxx

Accounts Payable xxxx