Damaged and Defective Products in the Cost of Production System

Spoilage can occur at any stage of the production process. Rework is unacceptable units of production that are subsequently repaired and sold as acceptable finished goods. Scrap is material left over when making a product. The key objectives in accounting for spoilage are determining the magnitude of the costs of spoilage and distinguishing between the costs of normal and abnormal spoilage. Reducing spoilage, rework, and scrap are important for reducing cost and they are part of production process quality improvement effort. The cost of normal spoilage is added to the cost of the product so that estimate cost of product includes allowance for normal cost for subsequent cost estimations. Rework is done on finished products or components, that did not meet specifications and after rework they become acceptable finished goods of components. There can be an estimated or accepted as normal rework. Any rework above this normal rework is abnormal rework. When the dollar amount of the scrap is immaterial. When the dollar amount of the scrap is insignificant, scrap is returned to the store or scrap store with documentary proof. Periodically, the scrap is sold and income is recorded as income from scrap. If it is material, then the income can be credited to the overhead account and thus overhead cost will become less to that extent