Process Costing - Spoilage

Things You Must Know

Cost Accounting

Lost units when combining material through evaporation, leakage, oxidation or a bad manufacturing process

Normal Loss:
Falls within the tolerance level expected during production Management determines the expected level of spoilage

Abnormal Loss:
Any loss in excess of the normal loss

Continuous Spoilage:
Occurs fairly uniformly throughout the production process
No inspection point to discover the spoilage

Discrete Spoilage:
Occurs at a specific inspection point:
The loss is discovered at the inspection point

Change to Equivalent Units Schedule:

Add two rows below ending inventory:
Normal spoilage and
Abnormal spoilage

Normal Spoilage – Continuous:
Put 0 units in equivalent unit schedule
Increases the cost per unit and spreads the cost of spoilage over all good units

Normal Spoilage – Discrete:
Units in schedule = units x % complete at inspection point

Abnormal spoilage (continuous or discrete):
Units in schedule = units x % complete at inspection point.

If continuous or inspection is at the end:
Use 100% for equivalent units for abnormal spoilage

Abnormal spoilage computed:

   Total spoiled units (given or plug in equivalent units schedule)
– Normal spoiled units (compute based on given information)
= Abnormal spoiled units (plug for difference)

The affect of spoilage on inventory costs:

Abnormal spoilage
Costs are expensed in the period incurred (added to CGS)

Total $ expensed = equivalent units x $ cost per equivalent units for each type

Normal spoilage continuous
0 in equivalent units

Lower equivalent units will increase the cost per unit and spread the cost over all
units in FG and WIP. It is an expected cost of inventory.

Normal spoilage discrete
The cost of equivalent units must be added to inventory

Equivalent units x $ cost per unit for each = $ amount

Added to finished goods and expensed when sold as cost of goods sold

Journal Entries:

Record Costs added this period (WIP = total added):
           Raw Materials
           Cash, A/P, or wages pay

Record Finished Goods (amount calculated for FG):

Record Abnormal spoilage (equivalent units x $cost per)
Loss on Abnormal Spoilage

No entry is made to record work in process.

The other entries increases and decrease work in process which gives the balance in the account.