Two Types of Spoilage

Learning Obejctive 2 Identify the differences between normal spoilage and abnormal spoilage

Accounting for spoilage includes determining the magnitude of spoilage costs and distinguishing between the costs of normal and abnormal spoilage.* To manage, control, and reduce spoilage costs, companies need to highlight them, not bury them as an unidentified part of the costs of good units manufactured.

To illustrate normal and abnormal spoilage, consider Mendoza Plastics, which uses plastic injection molding to make casings for the iMac desktop computer. In January 2020, Mendoza incurs costs of $3,075,000 to produce 20,500 units. Of these 20,500 units, 20,000 are good units and 500 are spoiled units. Mendoza has no beginning inventory and no ending inventory that month. Of the 500 spoiled units, 400 units are spoiled because injection molding machines cannot manufacture good casings 100% of the time. These units are spoiled despite machines being run carefully and efficiently. The remaining 100 units are spoiled as a result of machine breakdowns and operator errors.

Normal Spoilage

Normal spoilage is spoilage inherent in a particular production process. In particular, it arises even when the process is carried out in an efficient manner. The costs of normal spoilage are included as a component of the costs of good units manufactured because good units cannot be made without also making some defective units. For this reason, normal spoilage costs are inventoried and included in the cost of the good units completed. Mendoza Plastics accounts for the cost of the 400 units of normal spoilage as follows:

<p>A table shows the cost of the 400 units of normal spoilage for Mendoza Plastic</p>

The table depicts the cost of the 400 units of normal spoilage for Mendoza Plastic. The details of the table are as follows:

  1. Manufacturing cost per unit, 3,075,000 dollars divided by 20,500 units equals 150 dollars
  2. Manufacturing costs of good units alone, 150 dollars per unit times 20,000 units: 3,000,000 dollars
  3. Normal spoilage costs, 150 dollars per unit times 400 units: 60,000
  4. Manufacturing costs of good units completed (includes normal spoilage): 3,060,000 dollars

Normal spoilage rates are computed by dividing the units of normal spoilage by total good units completed, not total actual units started in production. At Mendoza Plastics, the normal spoilage rate is 400÷20,000=2%. There is often a tradeoff between speed of production and normal spoilage rate. Managers choose how many units to produce per hour with the understanding that, at the chosen rate, a certain level of spoilage is unavoidable.