The following terms used in this chapter may seem familiar to you, but be sure you understand them in the context of management accounting.
Spoilage refers to units of production—whether fully or partially completed—that do not meet the specifications required by customers for good units and are discarded or sold at reduced prices. Some examples of spoilage are defective shirts, jeans, shoes, and carpeting sold as “seconds” and defective aluminum cans sold to aluminum manufacturers for remelting to produce other aluminum products.
Rework refers to units of production that do not meet the specifications required by customers but that are subsequently repaired and sold as good finished units. For example, defective units of products (such as smartphones, tablets, and laptops) detected during or after the production process but before the units are shipped to customers can sometimes be reworked and sold as good products.
Scrap is residual material that results from manufacturing a product. Examples are short lengths from woodworking operations, edges from plastic molding operations or from cutting sheet metals, and frayed cloth and end cuts from suit-making operations. Scrap can sometimes be sold for relatively small amounts. In that sense, scrap is similar to byproducts, which we studied in Chapter 17. The difference is that scrap arises as a residual from the manufacturing process and is not a product targeted for manufacture or sale by the firm.
A certain amount of spoilage, rework, or scrap is inherent in many production processes. For example, semiconductor manufacturing is so complex and delicate that some spoiled units are inevitable due to dust adhering to wafers in the wafer production process and crystal defects in the silicon substrate. Usually, spoiled units cannot be reworked. In the manufacture of high-precision machine tools, spoiled units can be reworked to meet standards, but only at considerable cost. And in the mining industry, companies process ore that contains varying amounts of valuable metals and rock. Some amount of rock, which is scrap, is inevitable.