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
performance necessary 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 40,000 Dr

Work in process Labor 50,000 Dr
Work in process Factory overhead. 75,000 Dr
Materials 40,000 Cr
Payroll 50,000 Cr
Applied Factory overhead 75,000 Cr

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 2,000 Dr

Factory Overhead Control 4,600 Dr
Work in process Materials 1,600 Cr.
Work in process Labor 2,000 Cr.
Work in process Factory overhead 3,000 Cr.
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 158,400 Dr

Work in process Materials 38,400 Cr
Work in process Labor 48,000 Cr
Work in process Factory overhead 72,000Cr

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 6,600 Dr
Work in process Labor 5,500 Dr
Work in process Factory overhead 7,700 Dr
Materials 6,600 Cr
Payroll 5,500 Cr
Applied Factory overhead 7,700 Cr

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 450 Dr

Work in process Materials 150 Cr
Work in process Labor 125 Cr
Work in process Factory overhead 175 Cr

$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 $19,350 Dr

Work in process Materials $6,450 Cr
Work in process Labor $5,375 Cr
Work in process Factory overhead $7,525 Cr

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.