ADDITIONS, SPOILAGE, KELVIN JALUAG CULAJARA, CPA

Assistant Instructor, Accountancy Dep’t

REWORK, AND SCRAP School of Management of Accountancy
INPUT PROC
ESS OUTP
1,000 units
started in the
UT
1,000 units
produced
process
INPUT PROC
ESS OUTP
1,000 units
started in the
UT
800 units
produced
process
200 units lost
INPUT PROC
ESS OUTP
1,000 units
started in the
UT 1,300 units
produced
process
300 units added
WHAT’S WITH THE 200 UNITS LOST?

 There can be inventory pilferage by operations personnel;

 There can be production loss or pilferage;
 Other causes
WHAT’S WITH THE 300 UNITS ADDED?

 There might be miscalculation by the management as to the actual units brought

into production;
 Additional units that normally arise in production;
 Other causes
Any discrepancy between the units to account and the actual units accounted for
enables the management to investigate its cause and plan measures to address
operational problems. To a certain extent, said discrepancy may be a red flag for
theft or the inability of management to effectively foresee or predict its production
process.
ADDITION OF MATERIAL
This normally happens when there is an addition of material that may increase the
number of units that must be accounted for.
 A 100-gallon chemical mixture received from a preceding department is now
diluted by adding 50 gallons of water or other fluid. This increases the units to be
accounted for to 150 gallons (and not 100 gallons only). Since the liquids will be
mixed and cannot be distinguished, the cost from the preceding department must
be spread over the entire 150 gallons.
Caveat: This discussion does not contemplate a situation where the addition of
materials does not result to an increase in the total units to account for. For example, in
manufacturing shirts, the fabric is issued at the beginning of manufacturing operations.
Sewing of buttons (as a direct material in the finishing department) has only the effect
of increasing the unit cost of the fabric, but not increasing the total units to account for.
 SAMPLE PROBLEM
Units data Department 1 Department 2
Beginning inventory - 500
Received from the previous department - 6,500
Increase in units due to addition of materials - 1,000
Units started in process 7,200
Total units to account for 7,200 8,000

Transferred to next process 6,500 7,400

Ending work in process 700 600
Total units accounted for 7,200 8,000

Costs data Department 1 Department 2

Work in process - beginning inventory:
Costs from preceding department ₱ 2,000.00
Materials 80.00
Conversion costs 43.00
Total beginning WIP 2,123.00

Current costs:
Costs from preceding department ?
Materials ₱ 13,280.00 6,380.00
Conversion costs 20,100.00 6,865.00
Notes:
 Materials are added at the start of the process.
 The following are the percentages of completion for conversion costs:
 Beginning work in process
 Department 1 – not applicable
 Department 2 – 10%
 Ending work in process
 Department 1 – 2/7
 Department 2 – 3/4
 DEPARTMENT 1 (WEIGHTED AVERAGE)
LINDA COMPANY
Cost of Production Report - Department 1
For the Month Ended December 31, 20XX

Units to account for Materials Conversion

Beginning WIP inventory - -

Units started in process during the month 7,200 7,200
Total units to account for 7,200 7,200

Units accounted for Materials Conversion

Units transferred out 6,500 6,500

Ending WIP inventory 700 700
Total units accounted for 7,200 7,200

Units transferred out 6,500 6,500

Equivalent units of production for ending WIP 700 200
Equivalent units of production 7,200 6,700
Production costs to account for Materials Conversion Total

Beginning WIP inventory ₱ - ₱ - ₱ -

Current costs 13,280.00 20,100.00 33,380.00
Total costs to account for ₱ 13,280.00 ₱ 20,100.00 ₱ 33,380.00

Total costs to account for ₱ 13,280.00 ₱ 20,100.00

Divide by EUP 7,200.00 6,700.00
Cost per EUP ₱ 1.84 ₱ 3.00

Production costs accounted for Materials Conversion Total

Cost of units transferred out ₱ 11,988.89 ₱ 19,500.00 ₱ 31,488.89

Cost of ending WIP inventory 1,291.11 600.00 1,891.11
Total costs to account for ₱ 13,280.00 ₱ 20,100.00 ₱ 33,380.00
JOURNAL ENTRIES
Date Account Titles Debit Credit

January 31, 20XX WIP inventory- Department 1 ₱ 33,380.00

Materials inventory ₱ 13,280.00
Salaries and wages payable/payroll 20,100.00
This entry is for current costs.

January 31, 20XX WIP inventory- Department 2 ₱ 31,488.89

WIP inventory - Department 1 ₱ 31,488.89
This entry is for the transferred out units to finishing
department.
 DEPARTMENT 2 (WEIGHTED AVERAGE)
LINDA COMPANY
Cost of Production Report - Department 2
For the Month Ended December 31, 20XX

Units to account for Transferred in Materials Conversion

Beginning WIP inventory 500 500 500

Units received from preceding department 6,500 6,500 6,500
Increase in units 1,000 1,000 1,000
Total units to account for 8,000 8,000 8,000

Units accounted for Transferred in Materials Conversion

Units transferred out 7,400 7,400 7,400

Ending WIP inventory 600 600 600
Total units accounted for 8,000 8,000 8,000

Units transferred out 7,400 7,400 7,400

Equivalent units of production for ending WIP 600 600 450
Equivalent units of production 8,000 8,000 7,850
Production costs to account for Transferred in Materials Conversion Total

Beginning WIP inventory ₱ 2,000.00 ₱ 80.00 ₱ 43.00 ₱ 2,123.00

Current costs 31,488.89 6,380.00 6,865.00 44,733.89
Total costs to account for ₱ 33,488.89 ₱ 6,460.00 ₱ 6,908.00 ₱ 46,856.89

Total costs to account for ₱ 33,488.89 ₱ 6,460.00 ₱ 6,908.00

Divide by EUP 8,000.00 8,000.00 7,850.00
Cost per EUP 4.19 0.81 0.88

Production costs accounted for Transferred in Materials Conversion Total

Cost of units transferred out ₱ 30,977.22 ₱ 5,975.50 ₱ 6,512.00 ₱ 43,464.72

Cost of ending WIP inventory 2,511.67 484.50 396.00 3,392.17
Total costs to account for ₱ 33,488.89 ₱ 6,460.00 ₱ 6,908.00 ₱ 46,856.89
JOURNAL ENTRIES
Date Account Titles Debit Credit

January 31, 20XX WIP inventory- Department 2 ₱ 13,245.00

Materials inventory ₱ 6,380.00
Salaries and wages payable/payroll 6,865.00
This entry is for current costs.

January 31, 20XX Finished goods inventory ₱ 43,464.72

WIP inventory - Department 2 ₱ 43,464.72
This entry is for the transferred out units to finishing
department.
LOSS OF UNITS
Units are frequently lost in the manufacturing process through spoilage, evaporation,
and shrinkage. And even though the company wishes to avoid all possible losses,
some spoilage and evaporation may have to be accepted as an inherent part of the
production process.
Meanwhile, some of these losses may be defective or spoiled goods. Some can be
considered defective or spoiled, but they can be resold or reworked.
LOSS OF UNITS
Spoilage is units of production – whether fully or partially completed – that do not
meet the specifications required by customers for good units and that are discarded
or sold at reduced prices.
Rework is units of production that do not meet the specifications required by
customers but which are subsequently repaired and sold as good finished units.
Scrap is residual material that results from manufacturing a product. It has low sales
value compared with the total sales value of the product. Examples are short lengths
from woodworking operations, edges from plastic molding operations, and frayed
cloth and end cuts from suit-making operations.
NORMAL VERSUS ABNORMAL
Some of the losses may either be necessary or unavoidable in the production process.
Shrinkage, for example, in the production of dry-aged meat or dried goods (like
dried fish, or dried fruits) are necessary in the production. This type of loss is
classified as normal loss.
Some losses like spillage, burning of certain mixtures, or other forms which result from
human error may not be necessary but are unavoidable in the production process.
Said losses within the normal tolerance limit is considered normal loss. Any losses
beyond the limit are considered abnormal losses.
Normal tolerance limit – percentage of the good units that pass the inspection point
of the operations.
SPOILAGE
Spoilage is units of production – whether fully or partially completed – that do not
meet the specifications required by customers for good units and that are discarded
or sold at reduced prices.
Spoilage may either be classified as:
 Continuous spoilage – losses in a production process that occur continuously or at
a specific point (Ex. weight loss in roasting coffee beans);
 Discrete spoilage – losses that is assumed to occur at a specific point and is
detectable only when a quality check is performed (Ex. Cans of sardines in
process with holes and does not meet quality control standards).
CONTINUOUS SPOILAGE
Features of continuous spoilage:
 It is incurred uniformly throughout the process;
 Normal continuous spoilage is absorbed by all units in ending inventory and
transferred out units on an EUP basis;
 Abnormal continuous spoilage is written off as a loss.
 Continuous spoilage is accounted for using the method of neglect.
The method of neglect excludes the spoiled units in the equivalent units of production.
 Jars

SAMPLE PROBLEM Beginning WIP inventory (60% complete)

Started during the month
12,000
90,000
Jars completed and transferred 79,200
Hanks produces glass jars in a single Ending WIP inventory (75% complete) 15,000
department; the jars are then sold to
candle manufacturers. All materials are
added at the start of the process, and
conversion costs are applied uniformly Costs
throughout the production process. Beginning WIP inventory
Breakage commonly occurs at the end
of the production process when a Materials ₱ 16,230
machine pushes air into the jars to form
their openings. Hanks expects a Conversion 3,459 ₱ 19,689
minimum of 5 percent of the units Current period
started into production to be “lost”
during processing. The company uses Materials 101,745
weighted average method of
calculating equivalent units. Conversion 19,041 19,689
Total costs to be accounted for ₱ 39,378
Beginning WIP inventory (60% complete) 12,000
Started during the month 90,000
Units to be accounted for 102,000
Jars completed and transferred 79,200
Ending WIP inventory (75% complete) 15,000

Units accounted for 94,200

Total units spoiled 7,800
Normal spoilage (5% x 90,000) - 4,500
Abnormal spoilage 3,300
Units data Materials Conversion
Units transferred out 79,200 79,200
Abnormal spoilage 3,300 3,300
Ending WIP inventory 15,000 11,250
Equivalent units of production 97,500 93,750

Costs data Materials Conversion Total

Beginning WIP inventory ₱ 16,230.00 ₱ 3,459.00 ₱ 19,689.00
Current costs 101,745.00 19,041.00 120,786.00
Total costs to account for ₱ 117,975.00 ₱ 22,500.00 ₱ 140,475.00

Cost per unit ₱ 1.21 ₱ 0.24 ₱ 1.45

Units transferred out ₱ 95,832.00 ₱ 19,008.00 ₱ 114,840.00

Abnormal spoilage 3,993.00 792.00 4,785.00
Ending WIP inventory 18,150.00 2,700.00 20,850.00
Total costs accounted ₱ 117,975.00 ₱ 22,500.00 ₱ 140,475.00
JOURNAL ENTRIES
June 30, 20XX WIP inventory ₱ 120,786.00
Materials inventory ₱ 101,745.00
Cash/accounts payable/payroll 19,041.00
To account for current costs.

June 30, 20XX Finished goods inventory ₱ 114,840.00

WIP inventory ₱ 114,840.00
To account for finished goods.

June 30, 20XX Loss on abnormal spoilage ₱ 4,785.00

WIP inventory ₱ 4,785.00
To account for abnormal spoilage.
Ignoring the spoilage results in smaller number of EUP and dividing the production
costs by a smaller EUP raises the cost per equivalent unit. Thus, the cost of the lost
units is spread proportionately over the good units transferred out and those
remaining in WIP inventory.
DISCRETE SPOILAGE
Features of continuous spoilage:
 It is assumed to occur at a specific point and is detectable only when a quality
check is performed.
 Normal discrete spoilage is absorbed by all units in ending inventory and
transferred out units on an EUP basis;
 Abnormal discrete spoilage is written off as a loss.
 Discrete spoilage is not accounted using the method of neglect.
An inspection point is the stage of the production process at which products are
examined to determine whether they are acceptable or unacceptable units.
SAMPLE PROBLEM
Anzio Company manufactures a recycling container in its Forming Department. Direct
materials are added at the beginning of the production process. Conversion costs are added
evenly during the production process. Some units of this product are spoiled as a result of
defects, which are detectable only upon inspection of finished units. Normally, spoiled units
are 10% of the finished output of good units. That is, for every 10 good units produced
there is 1 unit of normal spoilage.
Materials are added at the start of the process. The inspection point is at 100% of the
process.
 Physical Direct Conversion Total
Units Materials Costs Costs

Work in process, beginning inventory (July 1) 1,500 ₱ 12,000 ₱ 9,000 ₱ 21,000

Degree of completion of beginning work in
process 100% 60%

Started during July 8,500

Good units completed and transferred out
during July 7,000

Work in process, ending inventory (July 31) 2,000

Degree of completion of ending work in
process 100% 50%

Total costs added during July ₱ 76,500 ₱ 89,100 ₱165,600

Normal spoilage as percentage of good units 10%
COMPUTATION OF NORMAL AND ABNORMAL
SPOILAGE (USING WEIGHTED AVERAGE)
Total units to account for (1,500 + 8,500) 10,000
Total units accounted for (7,000 + 2,000) - 9,000
Total spoilage 1,000
Normal spoilage (7,000 x 10%) - 700
Abnormal spoilage 300
 Direct Materials Conversion

Good units transferred out 7,000 7,000

Normal spoilage 700 700

Abnormal spoilage 300 300

Ending WIP inventory 2,000 1,000

Equivalent units of production 10,000 9,000

Costs data Direct Materials Conversion Total
Beginning WIP inventory ₱ 12,000 ₱ 9,000 ₱ 21,000
Current costs 76,500 89,100 165,600
Total costs to be accounted for ₱ 88,500 ₱ 98,100 ₱ 186,600

Costs per EUP ₱ 8.85 ₱ 10.90

Direct Materials Conversion Total

Good units transferred out ₱ 61,950 ₱ 76,300 ₱ 138,250
Normal spoilage 6,195 7,630 13,825
Total costs of units transferred out 68,145 83,930 152,075
Abnormal spoilage 2,655 3,270 5,925
Ending WIP inventory 17,700 10,900 28,600
Total costs accounted for 88,500 98,100 186,600
JOURNAL ENTRIES
July 31, 20XX WIP inventory ₱ 165,600
Materials inventory ₱ 76,500
Cash/accounts payable/payroll 89,100
To account for current costs.

July 31, 20XX Finished goods inventory ₱ 152,075

WIP inventory ₱ 152,075
To account for costs transferred out.

July 31, 20XX Loss on abnormal spoilage ₱ 5,925

WIP inventory ₱ 5,925
To account for loss on abnormal spoilage.
SAMPLE PROBLEM
Anzio Company manufactures a recycling container in its Forming Department. Direct
materials are added at the beginning of the production process. Conversion costs are added
evenly during the production process. Some units of this product are spoiled as a result of
defects, which are detectable only upon inspection of finished units. Normally, spoiled units
are 10% of the finished output of good units. That is, for every 10 good units produced
there is 1 unit of normal spoilage.
The materials are added at the start of the process. The inspection point is at 100% of the
process.
 Physical Direct Conversion Total
Units Materials Costs Costs

Work in process, beginning inventory (July 1) 1,500 ₱ 12,000 ₱ 9,000 ₱ 21,000

Degree of completion of beginning work in
process 100% 60%

Started during July 8,500

Good units completed and transferred out
during July 7,000

Work in process, ending inventory (July 31) 2,000

Degree of completion of ending work in
process 100% 50%

Total costs added during July ₱ 76,500 ₱ 89,100 ₱165,600

Normal spoilage as percentage of good units 10%