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Accounting for Production Losses
Accountancy (Wesleyan University-Philippines)
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Accounting for Production Losses
Introduction:
Accounting for production losses such as scrap, spoiled goods, and defective goods are also discussed
below. These production losses are an unavoidable part of ordinary manufacturing operations.
Body:
In a job order costing system, production losses that happens in the manufacturing process includes cost
of scrap materials, spoiled goods (spoilage) and reworking defective goods. A cost accounting system
must be designed to record these losses so that the unit cost will be as accurate as possible.
Accounting for Scrap
Scrap – residue of manufacturing process. These are materials left over when making a product. Scrap
materials often has a value and usually stored until it is sold to scrap dealers or other entity.
1. Recognizing scrap at the time of sale
a. If the value of scrap is low or immaterial
Cash or Accounts Receivable xxx
Scrap Revenues xxx
b. If the value of scrap is material
i. Scrap is attributable to a specific job – the proceeds from the sale are deducted
from the cost of materials that have been charged to that job.
Cash or Accounts Receivable xxx
Work in Process Inventory xxx
ii. Scrap is common to all jobs
Cash or Accounts Receivable xxx
Manufacturing Overhead Control xxx
2. Recognizing scrap at the time of production
a. Scrap is attributable to a specific job
Scrap Inventory xxx
Work in Process Inventory xxx
b. Scrap is common to all jobs
Scrap inventory xxx
Manufacturing Overhead Control xxx
When the scrap is sold:
Cash or Accounts Receivable xxx
Scrap Inventory xxx
When scrap is sold for less than the value at which it is recorded:
Cash or Accounts Receivable xxx
Work in Process Inventory xxx
Scrap Inventory xxx
Waste – raw materials left over from a production process for which there is no further use. It is not
usually salable at any price and must be discarded.
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Accounting for Spoiled Goods
Spoiled goods – goods that have been damaged through imperfect machining or processing.
Illustration
Assume that Job 888 calls for the production of 200 painted office tables. These tables were put into
production and costs accumulated to date are as follows:
Materials Php 456,000
Direct labor 240,000
Applied overhead (150% of DL) 360,000
Total cost charge to Job 888 Php 1,056,000
Unit cost (Php 1,056,000 / 200) Php 5,280
Suppose that ten tables are spoiled. These spoiled tables may be sold at its net disposal value of Php
3,000 each (a loss of Php 2,280 per table). Job 888 is sold with a 30% mark up on cost.
1. Spoilage is attributable to a specific job (Due to customers specifications)
Spoiled Goods Inventory 30,000
Work in Process Inventory 30,000
Finished Goods 1,026,000
Work in Process Inventory 1,026,000
Cash or Accounts Receivable 1,333,800
Sales 1,333,800
Cost of Goods Sold 1,026,000
Finished Goods 1,026,000
Cash or Accounts Receivable 30,000
Spoiled Goods Inventory 30,000
2. Spoilage is common to all jobs (Due to internal failure)
Spoiled Goods Inventory 30,000
Manufacturing Overhead Control 22,800
Work in Process Inventory 52,800
Finished Goods Inventory 1,003,200
Work in Process Inventory 1,003,200
Cash or Accounts Receivable 1,304,160
Sales 1,304,160
Cost of Goods Sold 1,003,200
Finished Goods Inventory 1,003,200
Spoilage cost charged to
Specific job All production
Total cost of 200 tables Php 1,056,000 Php 1,056,000
Less: Scrap value of Job 888 30,000
All production (Php 5,280 x 10) 52,800
Cost of goods tables 1,026,000 1,003,200
Divided by goods tables 190 190
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Cost of goods tables Php 5,400 Php 5,280
Accounting for Defective Goods
Defective goods – units of production that fail to meet production standards but that can be brought up
to standard by adding more materials, labor, and overhead. The additional cost required to bring these
goods up to standard are call rework costs.
Illustration
Assume that the ten spoiled tables are reworked. The additional costs of reworking the tables equal Php
9,500 (comprising of Php 2,000 direct materials, Php 3,000 direct labor, and Php 4,500 manufacturing
overhead). The journal entry to record the total costs of the ten spoiled goods before considering
rework costs is:
Work in Process Inventory 52,800
Materials 22,800
Payroll 12,000
Applied Manufacturing Overhead 18,000
1. Rework cost is charged to a specific job
Work in Process Inventory 9,500
Materials 2,000
Factory Payroll 3,000
Applied Manufacturing Overhead 4,500
Finished Goods Inventory 52,300
Work in Process Inventory 52,300
Cash or Accounts Receivable 67,990
Sales 67,990
Cost of Goods Sold 52,300
Finished Goods Inventory 52,300
2. Rework cost is charged to all jobs
Manufacturing Overhead Control 9,500
Materials 2,000
Factory Payroll 3,000
Applied Manufacturing Overhead 4,500
Finished Goods Inventory 1,056,000
Work in Process Inventory 1,056,000
Cash or Accounts Receivable 1,372,800
Sales 1,372,800
Cost of Goods Sold 1,056,000
Finished Goods Inventory 1,056,000
Summary:
These production losses usually originate from lack of quality control and should be prevented if not
eliminated at all.
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References:
Cost Accounting Principles and Procedural Applications by Pedro P. Guerrero, 2014-2015 edition
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