Question

1. Differentiate between spoilage, rework, and scrap, giving examples of each from a well-known company.
2. How does accounting for spoilage and rework differ in process costing versus job costing? Explain, using specific companies as examples.

Answer 1

Spoilage, rework and scrap though sound similarly are different terms.

Spoilage means that during the process of manufacture it happens that very small quantity of raw material would be spoiled because of undergoing through processes. For example while moulding steel, it would be heated to high temperature some of the steel will be lost as a spoilage because of various chemical reactions and etc.

Coming to rework, it is possible that some manufacturing processes create certain type of material which is neither output not scrap but it can be reworked and converted to output. For example, a process failure which stuck material in the middle of a process, the material can be converted again to raw material and used for the same purpose or different purposes.

Scrap as you all know, it is generated during some processes which cannot be reused or used for any purpose. For example, while cuttings some small particles will be thrown away which is the scrap itself.

Accounting differences of spoilage and rework in process and job costing. Going with simple explanation, in process costing it is included with the normal cost of the process and in the job costing spoilage will be credited to the particular job account charging such cost to that job itself.