Learning Objective 5 Account for spoilage in job costing
The concepts of normal and abnormal spoilage also apply to job-costing systems. Normal spoilage costs in job-costing systems—as in process-costing systems—are inventoriable costs, although increasingly companies are tolerating only small amounts of spoilage as normal. The costs of abnormal spoilage are not inventoriable costs and are written off as costs of the accounting period in which the abnormal spoilage is detected. When assigning costs, job-costing systems distinguish among normal spoilage attributable to a specific job, normal spoilage common to all jobs, and abnormal spoilage.
We describe accounting for spoilage in job costing using the following example.
When normal spoilage occurs because of the specifications of a particular job, that job bears the cost of spoilage minus the disposal value of the spoilage. The journal entry to recognize the disposal value follows (items in parentheses indicate subsidiary ledger postings):
The table depicts the journal entry to recognize the disposal value. The details of the table are as follows:
Note that the Work-in-Process Control (for the specific job) has already been debited (charged) $10,000 for the spoiled parts So, the net cost of normal spoilage is $7,000 which is an additional cost of the 45 good units produced. Therefore, total cost of the 45 good units is $97,000: $90,000 incurred to produce the good units plus the $7,000 net cost of normal spoilage. Cost per good unit is $2,155.56
In some cases, spoilage may be considered a normal characteristic of the production process. The spoilage inherent in production will, of course, occur when a specific job is being worked on. However, the spoilage is not attributable to, and hence is not charged directly to, the specific job. Instead, the spoilage is allocated indirectly to the job as manufacturing overhead because the spoilage is common to all jobs. The journal entry is as follows:
The table depicts the journal entry for normal spoilage. The details of the table are as follows:
1. Materials control, spoiled goods at current disposal value, 5 units times 600 dollars per unit: 3,000
2. Manufacturing overhead control (normal spoilage), 10,000 dollars minus 3,000 dollars: 7,000
3. Work-in-process control, specific job, 5 units times 2,000 dollars per unit: 10,000
When normal spoilage is common to all jobs, the budgeted manufacturing overhead rate includes a provision for normal spoilage cost. The normal spoilage cost is spread, through overhead allocation, over all jobs rather than being allocated to a specific job.* For example, if Hull produced 140 good units from all jobs in a given month, the $7,000 of normal spoilage overhead costs would be allocated at the rate of $50 per good unit Normal spoilage overhead costs allocated to the 45 good units in the current job would be $2,250 The total cost of the 45 good units is $92,250: $90,000 incurred to produce the good units plus $2,250 of normal spoilage overhead costs. The cost per good unit is $2,050
If the spoilage is abnormal, the net loss is charged to the Loss from Abnormal Spoilage account. Unlike normal spoilage costs, abnormal spoilage costs are not included as a part of the cost of good units produced. The total cost of the 45 good units is $90,000 The cost per good unit is $2,000
The table depicts the journal entry for abnormal spoilage. The details of the table are as follows:
Even though, for external reporting purposes, abnormal spoilage costs are written off in the accounting period and are not linked to specific jobs or units, companies often identify the particular reasons for abnormal spoilage and, when appropriate, link it with specific jobs or units for cost management purposes.
The accounting treatment described above highlights the potential impact of misclassifying the nature of the spoilage. Normal spoilage costs are inventoriable and are added to the cost of good units produced, while abnormal spoilage costs are expensed in the accounting period in which they occur. So, when inventories are present, classifying spoilage as normal rather than abnormal results in an increase in current operating income. In the above example, if the 45 parts remain unsold at the end of the period, such misclassification would boost income for that period by $7,000. As with our discussion of completion percentages, it is important for managers to verify that spoilage rates and spoilage categories are not manipulated by department supervisors for short-term benefits.