The Cost of Quality, and
Accounting for
Production Losses
ACCTG 312n
1st Semester, AY 2021-2022
Three Broad Classifications of Quality Costs:
The Cost of Quality 1) PREVENTION COSTS
- the costs of designing high-quality products and production
system, including the costs of implementing and maintaining such
To survive in a systems.
competitive business 2) APPRAISAL COSTS (DETECTIVE)
environment, a company - are costs incurred to detect product failure. It is the cost of
must provide a quality inspecting and testing materials, inspecting products during and
after production, and obtaining information from customers about
product at a reasonable product satisfaction.
price. 3) FAILURE COSTS
- are costs incurred when a product fails (defective)
The cost of quality is not INTERNAL FAILURE – during production, like scrap, spoilage,
rework, downtime, machine failure, etc.
only of obtaining quality EXTERNAL FAILURE – after sales, like warranty repairs,
but also the cost incurred replacements, handling customer complains,
lost sales, etc.
from a lack of quality.
Continuous Quality
Measuring and Improvement
Reporting the Cost of
Quality A continuous process of little improvements at
all levels of the business, all processes, by
*provides a way of everyone in a company – both management
identifying quality and labor – working together.
problems to be
addressed
…while quality will improve over time, the
*provides direction process of continual improvement never ends
by and never becomes easier.
indicating
opportunities …the ideal is not an absolute that can be
for substantial known, but that it evolves as a result of the
improvement continual efforts of individuals working
together to improve the product.
• Production losses originated from lack
of quality control and should be
prevented if not eliminated at all.
• In a job order costing system,
PRODUCTI production losses that happen in the
O N LO SS E S manufacturing process include:
Scrap materials
Spoiled Goods (Spoilage)
Rework (Reworking Defective
Goods)
Accounting for Scrap
SCRAP is the residue of a manufacturing process. These are
materials left over when making a product.
(1) the filings or trimmings remaining after processing
materials,
(2) defective materials that cannot be used or returned to the
vendor
(3) broken parts resulting from employee or machine failures
Recognizing Scrap at the time
of its Sale
EXAMPLE
Woodpecker Company 1) Cash (or Accounts Receivable) 500
accumulates wood Scrap Revenue (or Other Income) 500
trimmings from the shop To record the sale of scrap.
floor and sells it to the
nearby paper mill 2) Cash (or Accounts Receivable) 500
company. Cost of Goods Sold 500
For August 2021, scrap 3) Cash (or Accounts Receivable) 500
sales amounted to ₱500. Factory Overhead Control 500
…if common to ALL jobs
If immaterial…..
4) Cash (or Accounts Receivable) 500
EXAMPLE Work in Process Inventory - Job 500
Woodpecker Company If material….
accumulates wood 5) Scrap Inventory (@ MV) xxx
trimmings from the shop FOH Control xxx
Work in Process (@ cost) - Job xxx
floor and sells to its nearby
paper mill company. Cash (or Accounts Receivable) 500
Scrap Inventory 500
For August 2021, scrap OR (directly):
sales amounted to ₱500. Cash (or Accounts Receivable) 500
Work in Process - Job 500
…if traceable to a Specific Job
Zeebee Company completed Job AA and accumulated scrap materials worth ₱7,500.
A. Immaterial and sold: D. Attributable to a job and returned to storeroom:
Cash (or Accounts Receivable) ₱7,500 Materials Inventory ₱7,500
Scrap Revenue ₱7,500 Work in Process Inventory - Job ₱7,500
B. Attributable to a job and sold: E. Common to all jobs and returned to storeroom:
Cash (or Accounts Receivable) ₱7,500 Materials Inventory ₱7,500
Work in Process Inventory - Job ₱7,500 Factory Overhead Control ₱7,500
C. Common to all jobs and sold: F. Reusing scrap:
Cash (or Accounts Receivable) ₱7,500 Work in Process ₱7,500
Factory Overhead Control ₱7,500 Materials Inventory ₱7,500
ACCOUNTING FOR SPOILED GOODS
SPOILED GOODS are partially or fully completed units that are defective in some way.
• are goods that have been damaged through imperfect machining or processing.
• are not correctable because it is not possible or economical to correct them.
Spoilage Charged to ALL Production Spoilage Charged to a Specific Job
Entry to record estimated sales value of spoiled Entry to remove estimated disposal value of spoiled
goods: goods from Work in Process:
Spoiled Goods Inventory xx
Spoiled Goods Inventory xx
FOH Control xx
Work in Process Inventory xx Work in Process Inventory xx
= internal failure = = external failure =
EXAMPLE 1) Cost of the 1,100 units
Work in Process – Job 123 33,000
Hercules Company Materials 11,000
manufactures electric drills Payroll 8,800
FOH Applied 13,200
for various customers. During
April 2021, Job 123, for the 2) MV of spoiled units
production of 1,100 drills, Spoiled Goods Inventory 1,000
was completed at the Work in Process– Job 123 1,000
following costs per unit:
3) Cost of the completed job
Finished Goods Inventory 32,000
Direct material ₱10 Work in Process – Job 123 32,000
Direct labor 8
Applied FOH 12 4) Sale of spoiled units
Total ₱30 Cash (or Accounts Receivable) 1,000
Spoiled Goods Inventory 1,000
100 units were spoiled and
sold for ₱1,000. …if traceable to a Specific
Job
= external
failure =
EXAMPLE 1) Cost of the 1,100 units
Work in Process – Job 123 33,000
Hercules Company Materials 11,000
manufactures electric drills Payroll 8,800
for various customers. During FOH Applied 13,200
April 2021, Job 123, for the
2) MV of spoiled units charged to the company
production of 1,100 drills, Spoiled Goods Inventory 1,000
was completed at the FOH Control 2,000 @ cost
following costs per unit: Work in Process – Job 123 3,000
Direct material ₱10 3) Cost of the completed job
Direct labor 8 Finished Goods Inventory 30,000
Applied FOH 12 Work in Process – Job 123 30,000
Total ₱30
4) Sale of spoiled units
Cash (or Accounts Receivable) 1,000
100 units were spoiled and Spoiled Goods Inventory 1,000
sold for ₱1,000.
…if common to ALL jobs
= internal failure
=
ACCOUNTING FOR DEFECTIVE GOODS
(REWORK)
• Units for production that fail to meet production standards but can be brought up to standard by
adding more materials, labor, and overhead are generally referred to as defective goods.
• Rework costs are the additional cost required to bring these goods up to the standard. These may
either be charged to a specific job or to all the jobs.
Charged to ALL Jobs Charged to a Specific Job
Factory Overhead Control xx Work in Process Inventory - Job xx
Materials xx Materials xx
Payroll xx Payroll xx
MOH Applied xx FOH Applied xx
= internal failure = external
= failure =
Entry to record reworked units now in good condition and transferred to the warehouse:
Finished Goods Inventory xx
Work in Process Inventory - Job xx
EXAMPLE 1) Cost of 1,100 units
Work in Process – Job 123 33,000
Vulcan Company manufactures
Materials 11,000
electric drills for various customers.
During April 2021, Job 123, for the Payroll 8,800
production of 1,100 drills, was FOH Applied 13,200
completed at the following costs per
unit: 2) Cost of Rework
Work in Process – Job 123 500
Direct material ₱10 Materials 250
Direct labor 8
Payroll 100
Applied FOH 12
Total ₱30 FOH Applied 150
50 units were defective and 3) Cost of the completed Job 123
reworked for a cost of ₱500: Finished Goods Inventory 33,500
comprised of ₱250 direct materials, Work in Process 33,500
₱100 direct labor, and ₱150 factory
overhead.
…Rework charged to a Job
= external failure (e.g. due to customer
specification) =
EXAMPLE 1) Cost of 1,100 units
Work in Process 33,000
Vulcan Company manufactures Materials 11,000
electric drills for various customers. Payroll 8,800
During April 2021, Job 123, for the FOH Applied 13,200
production of 1,100 drills, was
completed at the following costs per
2) Cost of Rework
unit:
FOH Control 500
Direct material ₱10 Materials 250
Direct labor 8 Payroll 100
Applied FOH 12 FOH Applied 150
Total ₱30
3) Cost of the completed Job 123
50 units were defective and Finished Goods Inventory 33,000
reworked for a cost of ₱500: Work in Process 33,000
comprised of ₱250 direct materials,
₱100 direct labor, and ₱150 factory
overhead.
…Rework charged to ALL
jobs
= internal failure
=
Take aways:
charged
YES
to the customer
Is the loss due to
customer specification?
charged to the company
NO
YES record the MV• revenue
Is the loss salable? • cost reduction
(scrap, spoilage)
NO charge the cost to
appropriate account
thank
you!
