HDF18_Spoilage - Spoilage, Rework, and Scrap Basic...

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Spoilage, Rework, and Scrap
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Basic Terminology • Spoilage – units of production, either fully or partially completed, that do not meet the specifications required by customers for good units and that are discarded or sold for reduced prices
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Basic Terminology • Rework – units of production that do not meet the specifications required by customers but which are subsequently repaired and sold as good finished goods • Scrap – residual material that results from manufacturing a product. Scrap has low total sales value compared with the total sales value of the product
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Accounting for Spoilage • Accounting for spoilage aims to determine the magnitude of spoilage costs and to distinguish between costs of normal and abnormal spoilage • To manage, control and reduce spoilage costs, they should be highlighted, not simply folded into production costs
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Types of Spoilage • Normal Spoilage – is spoilage inherent in a particular production process that arises under efficient operating conditions – Management determines the normal spoilage rate – Costs of normal spoilage are typically included as a component of the costs of good units manufactured because good units cannot be made without also making some units that are spoiled
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Types of Spoilage Abnormal Spoilage – is spoilage that is not inherent in a particular production process and would not arise under normal operating conditions – Abnormal spoilage is considered avoidable and controllable – Units of abnormal spoilage are calculated and recorded in the Loss from Abnormal Spoilage account, which appears as a separate line item not the income statement
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Process Costing and Spoilage • Units of Normal Spoilage can be counted or not counted when computing output units (physical or equivalent) in a process costing system • Counting all spoilage is considered preferable
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Inspection Points and Spoilage • Inspection Point – the stage of the production process at which products are examined to determine whether they are acceptable or unacceptable units • Spoilage is typically assumed to occur at the stage of completion where inspection takes place
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HDF18_Spoilage - Spoilage, Rework, and Scrap Basic...

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