Job Order Costing-Defects, Spoilage and Scrap

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JOB ORDER COST SYSTEM
(Accounting for Defective, Spoiled Goods and Scrap)

Learning Objectives:

1. Review of Cost Accounting Cycle
2. Accounting for Defective Goods
3. Accounting for Spoiled Goods
4. Accounting for Scrap

Learning Objective # 1 - Cost Accounting Cycle

Cost Accumulation Method:

- Product or Manufacturing Cost

o Actual Cost System

o Normal Cost System

▪ Physical Output = Cost per unit
▪ Direct Material Cost = Percentage of Material Cost ▪ Direct Labor Cost = Percentage of Labor Cost ▪ Direct Labor Hours = Cost per Labor Hour ▪ Machine Hours = Cost per Machine Hour

o Standard Cost System (Special Topic)

Note: Under Normal cost system problem arises on disposition on overhead variances: - Normally, it is closed to “COGS” if immaterial otherwise, it should be allocated to WIP, FG and COGS.

Transactions to Remember:

1. Recording the Purchase of Raw Materials – Direct 2. Recording the Purchase of Raw Materials – Indirect 3. Recording the Issuance of Raw Materials – Direct 4. Recording the Issuance of Raw Materials – Indirect 5. Recording of Incurred Labor – Direct

6. Recording of Incurred Labor – Indirect
7. Recording of Other Indirect Expenses
8. Recording of Overhead as Applied to Production
9. To record completion of goods put into process (Finished Goods) 10. To record COGS (under perpetual method)
11. Adjustment of Actual vs. Applied Overhead (Over/Under applied Overhead)

12. Recording the return of excess materials already issued to production 13. Recording the return of Raw Materials to supplier 14. To record Sales of Goods on Account

Learning Objective # 2 – Accounting for Defective Goods

Defective Units are units that do not meet production standards and must be processed further in order to be salable as good units or as irregulars.

Example:
If an ordered fried chicken is not fully cooked. It can be refried to qualify with the set standards.

Cost of Defective Goods

- During the process of production, we may encounter some defective goods that need additional reworking. Recording of additional “cost of rework” is the same as the normal production process as stated above.

Transactions to Remember:

1. Recording the Issuance of Raw Materials – Direct 2. Recording the Issuance of Raw Materials – Indirect 3. Recording of Incurred Labor – Direct
4. Recording of Incurred Labor – Indirect
5. Recording of Other Indirect Expenses

Cost of Rework (Defective Goods)

i. Charged to all production (Normal Rework).
• Included in the determination of predetermined factory overhead rate. • Maybe due to internal error / management error.

Journal Entry:

Factory Overhead Controlxxx
Raw Materialsxxx
Accrued Expensesxxx
Factory Overhead - Appliedxxx

ii. Charge to Specific Jobs.
• Not included in the determination of predetermined factory overhead rate. • Maybe due to customer specification.

Journal Entry:

Work in Processxxx
Raw Materialsxxx
Accrued Expensesxxx
Factory Overhead - Appliedxxx

Learning Objective # 3 – Accounting for Spoiled Goods

Spoiled Units are units that do not meet production standards and are either sold for their salvage value or discarded. When spoiled units are discovered, they are taken out of production and no further work is performed.

Example:...
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