Cost Accounting Chapter 18 PDF

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Cost Accounting Chapter 18: 1. Understand the definitions of spoilage, rework and scrap 

Spoilage: fully or partially completed, are discarded or sold for reduced prices o More related to final products (normal vs. abnormal)



Rework: subsequently repaired and sold as good finished goods



Scrap: residual material that results from manufacturing a product o All are related to materials

2. Identify the differences between normal and abnormal spoilage 

The features of different types of spoilage o Normal spoilage: 

Inherent in a particular production process that arises even under efficient operating conditions



Normal spoilage rates =



Accounting treatment:

units of normal spoilage total good units completed

a. Cost of normal spoilage is treated as part of the cost to product good units b. Goes to B/S o Abnormal spoilage: 

Not inherent in a particular production process and would not arise under efficient operating conditions a. Avoidable and controllable



Accounting treatment: a. Costs of abnormal spoilage recorded in the loss from abnormal spoilage account b. Goes to I/S

3. Account for spoilage in job costing 

Journal entries and impact on financial statements for different scenarios

o Job costing & normal spoilage attributable to a specific job 

Job abc bears the cost



Which account has the normal spoilage cost? a. JE: Materials Control

xxx (disposal value)

WIP Control – Job #abc

xxx (residual cost of spoiled

units) WIP Control – Job #abc

xxx (cost associated with

spoiled units) o Job costing & normal spoilage common to all jobs 

All jobs bear the cost



Which account has the normal spoilage cost? a. JE: Materials Control

xxx (disposal value)

MOH Control units)

xxx (residual cost of spoiled

WIP Control – Job #abc



xxx (cost associated with spoiled units)

Example: o Job #301 includes 400 bikes. It costs materials $3,600, labor $1,600, MOH $2,000. The costs assigned to each bike before the inspection are $18.  JE to record the production of Job #301 (i.e., the 400 bikes) WIP Control – Job #301 7,200 Materials Control 3,600 Wages Payable Control 1,600 MOH Allocated 2,000

o Specific to a Job: Job #301 inspection reveals 30 faulty bikes out of 400 units. The costs assigned to each bike before the inspection are $18. The net disposal value is $5 for each faulty bike. The spoilage is related to job #301 only. 

Normal spoilage rate? a. 30/370 = 8.1%



JE to record the normal spoilage? a. Materials Control

150

WIP Control – Job#301

390

WIP Control – Job #301 

540

Cost per good unit? a. (7200 – 150) / 370 = $19.05

o Common to all Jobs: Job #301 inspection reveals 30 faulty bikes out of 400 units. The costs assigned to each bike before the inspection are $18. The net disposal value is $5 for each faulty bike. The spoilage is common to all jobs. 

JE to record the normal spoilage? Materials Control

150

MOH Control

390

WIP Control – Job #301

540

o Abnormal Spoilage: Job #301 inspection reveals 30 faulty bikes out of 400 units. The costs assigned to each bike before the inspection are $18. The net disposal value is $5 for each faulty bike. Faulty bikes are unusual (i.e., abnormal spoilage). 

JE to record the abnormal spoilage: Materials Control

150

Loss from spoilage

390

WIP Control

540



Cost per good unit? $18

4. Account for rework in job costing 

Rework: units of production that are inspected, determined to be unacceptable, repaired, and sold as acceptable finished goods o 3 types:





Normal rework attributed to a specific job



Normal rework common to all jobs



Abnormal rework

Journal entries and impact on financial statements o Normal rework for a specific job: WIP Control – Job #abc Materials Control Wages Payable Control MOH Allocated o Normal rework common to all jobs: MOH Controls Materials Control Wages Payable Control MOH Allocated o Abnormal Rework Loss from abnormal rework Materials control Wages payable control MOH Allocated



Example

o Job #301 inspection reveals 30 faulty bikes out of 400 units. The costs assigned to each bike before the inspection are $18. The net disposal value is $5 for each faulty bike. o The rework on these 30 faulty bikes costs $20 for materials, $50 for direct labor, and $30 for manufacturing overhead. 

The rework is specific to Job #301 WIP Control – Job #301



Materials Control

20

Wages Payable Control

50

MOH Allocated

30

Rework is common to all jobs. MOH Control



100

Materials Control

20

Wages Payable Control

50

MOH Allocated

30

The rework is a rare case. Loss from Abnormal Rework



100

100

Materials Control

20

Wages Payable Control

50

MOH Allocated

30

Why record rework costs? o Some companies treat all rework as a cost of the current period, i.e., abnormal

5. Account for scrap 

Scrap is residual material that results from manufacturing a product; it has low total sales value.



Why care about scrap? o Help measure efficiency o Help keep track of scrap o Reduce the chances of theft



Scenarios: o Scrap returned to storeroom and sold quickly a. Recognized at the time of sale

 

Cash or A/R Scrap revenue Immaterial amount Material amount: a. Attributed to a specific job; or i. Done only when the tracing can be done in an economically feasible way ii. Scrap returned to storeroom: No journal entry, but note in the inventory record iii. Sale of scrap: Cash or A/R WIP – Job #abc b. Common to all jobs i. Scrap returned to storeroom: No journal entry, but note in the inventory record ii. Sale of scrap: Cash or A/R MOH Control

o Scrap waited to be sold a. Recognized at production & sale 

Attributed to a specific job; or

a. Scrap returned to storeroom Materials Control WIP – Job #abc b. Sale of scrap Cash or A/R Materials Control 

Common to all jobs a. Scrap returned to storeroom: Materials Control MOH Control b. Sale of scrap Cash or A/R Materials Control



Scrap reused as direct material a. Scrap returned to storeroom: Materials Control MOH Control b. Reuse of scrap WIP Control Materials Control



Example: Juicy Juice processes orange juice. The orange waste (peel, pulp, and seeds) can be sold at $2,000 (a material amount). How to account for this transaction? o Sold immediately or returned to storeroom? o Assume it’s related to order #86 Cash or A/R

2000

WIP – Job #86

2000

o Assume it’s related to no specific order Cash or A/R 2000 MOH Control 2000 o Assume $2,000 is an immaterial amount Cash or A/R

2000

Scrap Revenue

2000

o Assume the $2,000 is for orange peel oil from the general production, which will be stored and then sold to a hand soap producer 

When stored: Materials

2000

MOH 

2000

When sold: Cash or A/R Materials

2000 2000...