Cost Accounting Procedure for Spoiled Goods:

Cost accounting should provide product costs and cost control information. In the case of
spoilage, the first requirement is to know the nature and cause of the spoiled units.
The second requirement, the accounting problem is to record the cost of spoiled units and to
accumulate spoilage costs and report them to responsible personnel for corrective actions.
Attaining the degree of materials and machine precision and the perfection of
labor performancenecessary to eliminate spoiled units entirely would involve costs far in
excess of a normal or tolerable level of spoilage. If spoilage is normal and happens at any
time and at any stage of the productive process, its cost should be treated as factory
overhead, included in the predetermined factory overhead rate, and prorated
overall production of a period. If, on the other hand, normal spoilage is caused by exacting
specifications, difficult processing, or other unusual and unexpected factors, the spoilage
cost should be charged to that order. In either cause, the cost of abnormal spoilage should
be charged to factory overhead.
EXAMPLE:
Spoiled materials charged to total production: The Nevada Products company has a
monthly capacity to manufacture 125,000 three inch coil springs for use in mechanical
brakes. Production is scheduled in response to orders received. Spoilage is caused by a
variety of unpredictable factors and averages $0.05 per spring. During November, 100,000
springs were produced with a materials cost of $40 per unit, a labor cost of $50 per unit,
and factory overhead charged to production at a rate of 150% of the direct labor cost. This
rate is based an estimate that includes $0.05 per spring for spoilage. The entry to record
work put into production during the month is:
Work in process Materials
Work in process Labor
Work in process Factory overhead
Materials
Payroll
Applied Factory overhead
On the last working day of the month, the entry days production of 4000 units are spoiled
due to improper heat treatment; however, theses units can be sold for $50 each in the
second hand market. To record this normal loss on spoiled goods and the possible resale
value, the entry that charges all production during the period with proportionate share of
the spoilage is:
Spoiled Goods
Factory Overhead Control
Work in process Materials
Work in process Labor
Work in process Factory overhead
The materials, labor, and factory overhead in the spoiled units reduced by the recovery or
sales value of these units ($1,600 materials+ $2000 labor + $3,000 factory overhead
$2000 cost recovery = $4,600 spoilage loss) is relocated or transferred from work in
process to factory overhead control. Each of the 96,000 good units produced during the
month has a charged in cost of $0.05 for spoilage (96,000 $0.05 = $4,800); the actual
spoilage during the period is $4,600.
The good units produced during the week are on the order where spoilage did occur carry a
cost of $0.40 for materials, $0.5 for labor, and $0.75 for overhead because spoilage is
charged to all production--not to the lot or order which happens to be in process at the
time of spoilage. In other words, the $165,000 monthly production cost less the $6,600
credit resulting from spoiled units levels $158,400 to be divide by the 996,000 good units

manufactured during the month at a cost of $1.65 per good unit. The entry transferring the
good units to finished goods is:
Finished Goods
Work in process Materials
Work in process Labor
Work in process Factory overhead
During the month, the amounts charged to factory overhead control represent the
depreciation, insurance, taxes, indirect materials and indirect labor actually experienced,
along with the $4,600 spoilage cost. All production during the month is charged with
overhead of $0.75 per unit. Over head analysis reveals a $200 favorable variance ($4,600
actual minus $4,800 applied) attributable to the spoilage units. Any difference between the
price when the inventory was recorded and the price realized at the time of sale would be a
plus or minus adjustment to factory overhead control (loss on spoiled goods).
For effective cost control normal spoilage rates and amounts should be established for each
department and for each type of class of materials. Weakly or monthly spoilage reports
similar to the scrap report illustrated on scrap and waste page.
Spoiled materials charged to a particular job: The Nevada Products Company has
contract to manufacture 10,000 heavy duty coil springs for the Tri-state Supply Company.
This order requires a steel wire that is harder and slightly heavier than stock normally used,
but the production process, as well as labor time and overhead factors, is identical with the
standard product. Materials cost for each of these springs is $0.60 this special order
requires exacting specifications, and normal spoilage is to be charged to the order. The
$0.050 per unit spoilage factor is now eliminated from the overhead rate, and 140% of
direct labor cost, and $0.70 per unit, is the rate used on this job. The order is put into
production the first day of December, and sampling during the first hour of production
indicates that eleven units of production are required to secure ten good springs. Entries to
record costs placed into production for 11,000 units are:
Work in process Materials
Work in process Labor
Work in process Factory overhead
Materials
Payroll
Applied Factory overhead
One thousand units did not meet specifications and are spoiled but can be sold as seconds
for $0.45 per unit. The entry to record the spoilage is:
Spoiled Goods
Work in process Materials
Work in process Labor
Work in process Factory overhead
$450 / $1,800 cost of 1,000 units
= 25%
($6,600 Materials / $19,800 Total job cost) $450 Sales recovery
($5,500 Labor / $19,800 Total job cost) $450 Sales recovery
($7,700 Overhead / $19,800 Total job cost) $450 Sales recovery
The entry transferring the completed order to Finished Goods would be:
Finished Goods
Work in process Materials
Work in process Labor
Work in process Factory overhead
The net result of this treatment is to charge the spoilage loss of $1,350 ($1,800 less $450
cost recovery) to 10,000 good units that are delivered at the original contract price. The unit

cost of completed springs is $1,935 ($19,350 / 10000 units).

Any difference between the price when the inventory was recorded and the price realized at
the time of sale should be an adjustment to work in process, finished goods, or cost of
goods sold, depending on the completion status of the particular job order. as an expedient,
the difference might be closed to factory overhead control.