Spoilage in Process Costing Using Weighted-Average and FIFO

Learning objective 3 Account for spoilage in process costing using the weighted-average method and the first-in, first-out (FIFO) method

spoilage cost based on total costs and equivalent units completed to date
spoilage cost based on costs of current period and equivalent units of work done in current period

We first consider normal spoilage. The following example illustrates how to count normal spoilage units when computing physical and equivalent output units in a process-costing system.

Count All Spoilage

Spreadsheet screenshot shows the physical units and direct materials of Chipmakers, Inc.

The details are as follows:

Work in process, beginning inventory (May 1)
- Physical units: 0
Started during May
- Physical units: 10,000
Good units completed and transferred out during May
- Physical units: 5,000
Units spoiled (all normal spoilage)
- Physical units: 1,000
Work in process, ending inventory (May 31)
- Physical units: 4,000
Direct materials costs added in May
- Direct materials: $270,000.

Spoilage is detected upon completion of the process and has zero net disposal value.

An inspection point is the stage of the production process at which products are examined to determine whether they are acceptable or unacceptable units. Spoilage is assumed to occur at the stage of completion where inspection occurs. In our example, spoiled units are 100% complete with respect to direct materials.

Exhibit 19-1 calculates and assigns the cost of direct materials used to produce both good units and normal spoilage units. Overall, Chipmakers generated 10,000 equivalent units of output: 5,000 equivalent units in good units completed $begin inline style left parenthesis text 5,000 end text ? text physical units end text ? ? cross times ? 100 straight percent sign right parenthesis straight comma end style$ 4,000 units in ending work in process $begin inline style left parenthesis text 4,000 end text ? text physical units end text ? ? cross times ? 100 straight percent sign right parenthesis straight comma end style$ and 1,000 equivalent units in normal spoilage $begin inline style left parenthesis text 1,000 end text ? text physical units end text ? ? cross times ? 100 percent sign right parenthesis. end style$ Equivalent-unit cost is $27 (total direct materials costs, $begin inline style $ text 270,000 end text ? ÷? text 10,000 end text end style$ equivalent units). The total cost of good units completed and transferred out, which includes the cost of normal spoilage, is $$ 162,000 (6,000 equivalent units \times $27).$ The ending work in process is $$ 108,000 (4,000 equivalent units \times $27) .$

Spreadsheet screenshot shows the Direct Materials Costs in terms of approach counting spoiled units when computing output in equivalent units for Chipmakers, Inc., for the month of May 2017.

Details of the costs are as follows:

Costs to account for: $270,000
Divide by equivalent units of output: cost to account for divided by 10,000
Cost per equivalent unit of output: $27
Assignment of costs
- Good units completed (5,000 units multiplied by $27 per unit): $135,000
- Add normal spoilage (1,000 units multiplied by $27 per unit): 27,000
- Total costs of good units completed and transferred out: 162,000
- Work in process, ending (4,000 units multiplied by $27 per unit): 108,000
- Costs accounted for: $270,000.

Notice that the 4,000 units in ending work in process are not assigned any costs of normal spoilage because they have not yet been inspected. Undoubtedly some units in ending work in process will be found to be spoiled after they are completed and inspected in the next accounting period. At that time, their costs will be assigned to the good units completed in that period. Note that Exhibit 19-1 identifies normal spoilage costs of $27,000 to highlight and focus attention on the potential economic benefits of reducing spoilage.