SPOILAGE, REWORK, AND SCRAP
Spoilage—units of production that do not meet the standards required by
customers for good units and that are discarded or sold at reduced prices.
Rework—units of production that do not meet the specifications required by
customers but which are subsequently repaired and sold as good finished units.
Scrap—residual material that results from manufacturing a product. It has low
total sales value compared to the total sales value of the product.
Management effort can affect the spoilage rate. Many companies are relentlessly
reducing their rates of normal spoilage, spurred on by competitors who, likewise, are
continuously reducing costs.
Normal and abnormal spoilage in units.
Total spoiled units
Normal spoilage in units, 5%
Abnormal spoilage in units
Abnormal spoilage, 5,400
Normal spoilage, 6,600
Potential savings, 12,000
Regardless of the targeted normal spoilage, abnormal spoilage is non-recurring and
avoidable. The targeted normal spoilage rate is subject to change. Many companies have
reduced their spoilage to almost zero, which would realize all potential savings. Of
course, zero spoilage usually means higher-quality products, more customer satisfaction,
more employee satisfaction, and various beneficial effects on nonmanufacturing (for
example, purchasing) costs of direct materials.
Weighted-average method, spoilage.
Solution Exhibit 18-24, Panel A, calculates the equivalent units of work done to
date for each cost category in September 2008.
Solution Exhibit 18-24, Panel B, summarizes total costs to account for, calculates
the costs per equivalent unit for each cost category, and assigns total costs to units
completed (including normal spoilage), to abnormal spoilage, and to units in ending work
in process using the weighted-average method.