CONTINUATION – COST ACCTG. – ACCTG.

FOR MATERIALS SPOILED UNITS , DEFECTIVE UNITS , SCRAP MATERIAL AND WASTE MATERIAL
IN A JOB ORDER COST SYSTEM
FREIGHT IN
DIRECT CHARGING – the freight incurred on the purchase of raw materials is The term spoiled units , defective , scrap material and waste material are not
added to the invoice price. The account debited for the freight is materials. synonymous , and they should not be used interchangeably.
The effect is an increase in the unit cost. If two or more materials are
purchased and delivered in the same time , the freight must be allocated Spoiled units – are units that do not meet production standards and are
using the following methods; either sold for their salvage value or discarded. When spoiled units are
a. Relative peso value method – freight is allocated on the basis of discovered, they are taken out of production and no further work is
the peso value of the items purchased. This is used for materials performed on them.
purchased and expressed in different terms of measurement.
b. Relative weight method – freight is allocated on the basis of the Defective units – are units that do not meet production standards and must
weight of the items purchased . be processed further in order to be salable as good units or as irregulars
INDIRECT CHARGING – the freight incurred on the purchase of raw materials
Scrap material – are left over from the production process that cannot be put
is charged to factory overhead control account .
back into production for the same purpose , but may be usable for a different
Illustration ;
purpose or production process or which may be sold to outsiders for a
An invoice for raw materials A,B,C is received from David Corporation . The
minimal amount
invoice totals are A 25,000 B 15,000 C 10,000 . The freight charge on this
shipment weighing 10,000 lbs. is 1,500 . Shipping weights for the respective
Waste materials – are left over from the production process that has no
materials are 5,000, 2,000 and 1,000 respectively .
further use or resale value and may require cost for their disposal

1. Entry to record the purchase of materials and freight using

TWO METHODS OF ACCOUNTING FOR SPOILED MATERIALS
a. Direct charging method
Materials 51,500 The method to account for spoiled materials depends on the reason for such
spoilage
Accounts payable 51,500
1. Charged to the specific job – this method is used if the reason for
2. Indirect charging method
the spoilage the job itself, because it requires specifications , or a
Materials 50,000
difficult , intricate or complicated manufacturing process. The
effect of this method is that it will increase the unit cost of the
Factory overhead control 1,500
remaining perfect finished articles in the job.
Accounts payable 51,500 Spoiled goods xxx

3. The cost per pound in the materials ledger cards A, B, C if freight Work in process xxx
is allocated using
The amount debited to spoiled goods and credited to work in process is
a. Relative peso value method
equal to the number of units spoiled multiplied by the estimated sales value
b. Relative weight method
per unit
a. Relative peso value method

2. Charged to all production – this method is used if the reason for

Material Invoice Percentag Share in Total cost Cost per
the spoilage is considered normal to the process and the number
e freight pound
does not exceed the limit set by the company. With this method,
A 25,000 3% 750 25,750 5.15
B 15,000 3% 450 15,450 7.725 all units manufactured during the period are charged with an
C 10,000 3% 300 10,300 10.30 additional cost which is added to the factory overhead rate. The
50,000 1,500 51,500 unit cost originally charged will not increase anymore even if
Percentage 1,500/50000 = .03 there are spoiled units discovered later on.
Entry ;
25750/5000 = 5.15
Spoiled goods xxx
b. Relative weight method
Factory overhead control xxx

Material weight Freight/ Share in Total cost Cost per Work in process xxx
lb. freight lb.
A 5,000 0.1875 937.50 25,937.50 5.1875 The amount debited to spoiled goods is equal to the number of units spoiled
B 2,000 0.1875 375.00 15,375.00 7.6875 multiplied by the estimated sales value per unit. The amount credited to
C 1,000 0.1875 187.50 10,187.50 10.1875 work in process is equal to the total cost incurred / charged to the spoiled
8,000 1,500.00 51,500.00 units. The loss is charged to factory overhead control .
Freight per pound 1500/8000 = 0.1875
If the number of units spoiled exceed the limit set by the company , or if the
5000 x .1875 = 937.50
reason is not considered normal to the process, the loss on the spoiled units
is charged to a loss account .
25937.50/5000 – 5.1875
Illustrative problem
 even those jobs without spoiled units , will absorb the additional
1. 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.
Job 3044 called for the making of 4,000 with these unit costs On the other hand under the method loss charged to specific job,
it will be noted that the factory overhead rate was recorded at the
Direct materials 15 original amount 11 , allowance of 1 for spoiled work was not
added. The remaining perfect units in the job will absorb the loss
Direct labor 13
on the spoiled resulting the increase in the unit cost.
152400/3800 units = 40.105 /unit
Factory overhead includes a 1
The increase in the unit cost 40.105 -39 = 1.105 may be
computed as follows
Allowance for spoiled work 12
Cost of spoiled 200 x 39 7,800
Total 40 Less ; amount recovered from sale 200x18 3,600
Los on spoiled goods 4,200
When the order was completed , 200 rejected units, a normal number, were The loss on spoiled goods will be absorbed by the remaining good
sold for 18 each units 4200/3800 units = 1.105 per unit

Required TWO METHODS OF ACCOUNTING FOR DEFECTIVE MATERIALS

The accounting problem for defective units is the additional costs
1. Entries if the loss is charged to all production to be incurred in reprocessing the units to convert them into
2. Entries if the loss is charged to specific production perfect articles. There are two methods available

1. Charged to the specific job- same for spoiled units, if the

1. Loss is charged to all production reason for the defect is the job itself, the additional costs
a. Work in process 160,000 incurred materials, labor and overhead will be charged to all
Materials 60,000 units in the job
Payroll 52,000 Entry
Factory overhead applied 48,000
Work in process xxx
Materials - 4,000 x 15
Labor 4,000 x 13 Materials xxx
Overhead 4,000 x 12
Payroll xxx
b. Spoiled goods 3,600
Factory overhead control 4,400 Factory overhead applied xxx
Work in process 8,000
2. Charged to all production – if the reason is normal to the
Spoiled 200 x 18
process and the number of defective units does not exceed
Wp 200 x 40
the normal limit , then the additional costs incurred will be
charged to all units being processed during the period
c. Finished goods 152,000
Entry ;
Work in process 152,000
Factory overhead control xxx
Materials xxx
2. Loss is charged to the specific job
Payroll xxx
a. Work in process 156,000
Factory overhead applied xxx
Materials 60,000
Payroll 52,000
Illustrative problem
Factory overhead applied 44,000

Job 3044 called for the making of 4,000 units with these unit
Materials 4,000 x 15
costs
Labor 4,000 x 13
Direct materials 15
Overhead 4,000 x 11
Direct labor 13
Factory overhead , includes
b. Spoiled goods 3,600
A 1 allow for def. units 12
Work in process 3,600
Total 40
c. Finished goods 152,400
During processing 300 units were found to be defective and
Work in process 152,400
required the following total additional costs ; materials
2,000 labor 4,000 and overhead 2,000
Under the method, loss is charged to all production , the unit cost
Required ;
of the completed units remains at 40. In spite of the spoiled units ,
1. Entries of the additional cost is charged to all
the unit cost remained the same because the increase was made
production
at the start when 1 was added to the factory overhead rate as
allowance for spoiled work. All units processed during the period
 2. Entries if the additional cost is charged to the specific
job

1. Additional cost is charged to all production

a. Work in process 160,000
Materials 60,000
Payroll 52,000
Factory overhead applied 48,000

b. Factory overhead control 8,000

Materials 2,000
Payroll 4,000
Factory overhead applied 2,000

c. 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 160,000/4000 units = 40

Additional cost is charged to the specific job

a. Work in process 156,000

Materials 60,000
Payroll 32,000
Factory overhead applied 44,000

b. Work in process 8,000

Materials 2,000
Payroll 4,000
Factory overhead applied 2,000

c. Finished goods 164,000

Work in process 164,000

The unit cost of the completed units increased from the

original 39 to 41 164000/4000 . all units in the job will share
in the cost incurred to reprocess the defective units .