CHAPTER 18

SPOILAGE, REWORK, AND SCRAP

TRUE/FALSE

1. Reducing defects helps to reduce costs, but it does not make the business more
competitive.

2. Scrap and rework are considered to be the same thing by managerial accountants.

3. Spoilage can be considered either normal or abnormal.

4. Counting spoiled units as part of output units in a process-costing system usually

results in a higher cost per unit.

5. Under the FIFO method, all spoilage costs are assumed to be related to the units
completed during this period using the unit costs of the current period.

6. Under standard costing, there is no need to calculate a cost per equivalent unit.

7. Abnormal spoilage costs are not considered inventoriable costs under a job-costing
system.

8. Costs are assigned to scrap only if it is normal scrap.

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MULTIPLE CHOICE

1. Managers often cite reductions in the costs of spoilage as a(n):

a. major justification for implementing a just-in-time production system
b. measurement of improved output quality
c. immaterial item that is not to be tracked
d. indication of improvement in the accounting system

2. Material left over when making a product is referred to as:

a. reworked units
b. spoilage
c. scrap
d. defective units

3. Costs of normal spoilage are usually accounted for as:

a. part of the cost of goods sold
b. part of the cost of goods manufactured
c. a separate line item in the income statement
d. an asset in the balance sheet

4. Companies that attempt to achieve zero defects in the manufacturing process treat
spoilage as:
a. scrap
b. reworked units
c. abnormal spoilage
d. normal spoilage

5. Recognition of spoiled units when computing output units:

a. highlights the costs of normal spoilage to management
b. distorts the accounting data
c. focuses management's attention on reducing spoilage
d. Both a and c are correct.

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 6 THROUGH 7:
Craft Concept manufactures small tables in its Processing Department. Direct materials
are added at the initiation of the production cycle and must be bundled in single kits for
each unit. Conversion costs are incurred evenly throughout the production cycle. Before
inspection, some units are spoiled due to nondetectible materials defects. Inspection
occurs when units are 50% converted. Spoiled units generally constitute 5% of the good
units. Data for December 20X5 are as follows:
WIP, beginning inventory 12/1/20X5 10,000 units
Direct materials (100% complete)
Conversion costs (75% complete)
Started during December 40,000 units
Completed and transferred out 12/31/20X5 38,400 units
WIP, ending inventory 12/31/20X5 8,000 units
Direct materials (100% complete)
Conversion costs (65% complete)
Costs for December:
WIP, beginning Inventory:
Direct materials $ 50,000
Conversion costs 30,000
Direct materials added 100,000
Conversion costs added 140,000
6. What is the number of total spoiled units?
a. 1,600 units
b. 2,000 units
c. 2,700 units
d. 3,600 units

7. Abnormal spoilage totals:

a. 1,600 units
b. 2,000 units
c. 1,680 units
d. 1,920 units

8. The cost per good unit in the weighted-average method is equal to the:
a. total cost of direct materials and conversion costs per equivalent unit, plus a
share of normal spoilage
b. sum of the costs per equivalent unit of direct materials, and conversion costs
c. total costs divided by total equivalent units
d. None of these answers is correct.

9. The standard-costing method:

a. adds a layer of complexity to the calculation of equivalent-unit costs in a
process-costing environment
b. makes calculating equivalent-unit costs unnecessary

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 c. requires an analysis of the spoilage costs in beginning inventory
d. requires an analysis of the spoilage costs in ending inventory

10. The Harleysville Manufacturing Shop produces motorcycle parts. Typically, 10

pieces out of a job lot of 1,000 parts are spoiled. Costs are assigned at the inspection
point, $50.00 per unit. Spoiled pieces may be disposed at $10.00 per unit. The
spoiled goods must be inventoried appropriately when the normal spoilage is
detected. The current job requires the production of 2,500 good parts.

Which of the following journal entries properly reflects the recording of spoiled
goods?
a. Materials Control 200
Manufacturing Overhead Control 800
Work-in-Process Control 1,000
b. Materials Control 250
Manufacturing Overhead Control 1,000
Work-in-Process Control 1,250
c. Work-in-Process Control 1,250
Materials Control 250
Manufacturing Overhead Control 1,000
d. Manufacturing Overhead Control 1,000
Materials Control 200
Work-in-Process Control 800

11. Accounting for rework in a process-costing system:

a. accounts for normal rework in the same way as a job-costing system
b. requires abnormal rework to be distinguished from normal rework
c. if the rework is normal, then rework is accounted for in the same manner as
accounting for normal rework common to all jobs
d. All of these answers are correct.

12. If scrap, common to all jobs, is returned to the storeroom and the time between the
scrap being inventoried and its disposal is quite lengthy, the journal entry is:
a. Work-in-Process Control
Materials Control
b. Materials Control
Work-in-Process Control
c. Manufacturing Overhead Control
Materials Control
d. Materials Control
Manufacturing Overhead Control

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13. Which of the following INCORRECTLY reflects what units passed inspection this
period? Assume beginning work in process was completed and ending work in
process was started during the period.
Inspection Point at Completion Level
10% 50% 100%
a. Beginning work in process (30% complete) No Yes Yes
b. Started and completed Yes Yes Yes
c. Ending work in process (40% complete) Yes No No
d. Beginning work in process (5% complete) Yes No No

EXERCISES AND PROBLEMS

1. Distinguish among spoilage, reworked units, and scrap. Give an example of each.

2. Endicott Shoes manufactures shoes. All direct materials are included at the
inception of the production process. For March, there were 1,400 units in beginning
inventory with a direct material cost of $700. Direct materials totaled $15,000 for
the month. Work-in-process records revealed that 35,000 units were started in
March and that 30,000 were finished. Normal spoilage of 2% of units finished was
incurred. Ending work-in-process units are complete in respect to direct materials
costs. Spoilage is not detected until the process is complete. Endicott uses the
weighted-average method.

Required:
a. What are the direct materials costs assigned to completed good units when
spoilage units are recognized or when they are ignored?

b. What are the direct material amounts allocated to the work-in-process ending
inventory when spoilage units are recognized or ignored?

3. Valentine Florists operate a flower shop. Because most of their orders are via
telephone or fax, numerous orders have to be reworked. The average cost of the
reworked orders is $6: $3.75 for labor, $1.50 for more flowers, and $0.75 for
overhead. This ratio of costs holds for the average original order. On a recent day,
the shop reworked 48 orders out of 249. The original cost of the 48 orders totaled
$720. The average cost of all orders is $18.75, including rework, with an average
selling price of $30

Required:
Prepare the necessary journal entry to record the rework for the day if the shop
charges such activities to Arrangement Department Overhead Control. Prepare a
journal entry to transfer the finished goods to Finished Goods Inventory.

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CRITICAL THINKING

1. Busy Hands Craft Company is a small manufacturing company that specializes in

arts and crafts items. It recently bought an old textile mill that it has refurbished to
manufacture and dye special cloth to be sold in its craft shops. However, it
discovered something new for its accounting system. The company never before
had finished goods that did not meet standard, leftover materials from processing
runs, or unacceptable outputs.
Required:
As the business consultant for the company, explain how it can handle the items
mentioned. Include any potential problems with the accounting procedures.
2. Shazam Machines produces numerous types of money change machines. All
machines are made in the same production department and many use exactly the
same processes. Because customers have such different demands for the machine
characteristics, the company uses a job-costing system. Unfortunately, some of the
production managers have been upset for the last few months when their jobs were
charged with the spoilage that occurred over an entire processing run of several
types of machines. Some of the best managers have even threatened to quit unless
the accounting system is changed.

Required:
What recommendations can you suggest to improve the accounting for spoilage?

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