Spoilage and Scrap - Material Cost, Cost Accounting Video Lecture - B Com

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great article The Wall Street Journal
about Ford Motor and it's called
recycling twist cuts Ford's truck costs
it is a great cost accounting concept
explained right here in the news it says
same trucks that deliver aluminum takes
scrap for reprocessing so what we are
talking about is the Ford 150 which is
an extremely popular truck and this is
the 2015 version of the truck and it
says maybe the most important sentence
of the article by the time a new truck
exits the factory and heads for the
showroom and black it will let have left
behind three hundred dollars worth of
scrap aluminum on the plant floor and
what for talks about is a closed loop
which means they are able to collect
identify separate and send back to the
aluminum manufacturer virtually all the
aluminum that they don't use in
production then they call it a closed
loop every single scrap of aluminum is
reused they go on to say that the same
trucks that delivered the aluminum they
use to make trucks actually return the
aluminum scrap because only 60 to 65
percent of a roll of aluminum is used to
make a truck because you could imagine
they're stamping out parts of big
aluminum sheets to make a truck so that
scrap is a way of reducing the cost to
make that truck and it's a natural
creates a natural transition into
4:17 in my cost accounting book where I
talk about spoilage and scrap finding a
use for a material and there's different
ways of handling this spoilage and scrap
issue let's talk about definitions first
spoilage is a term that describes units
you produce that don't meet your
production standards that is units you
can't sell as opposed to scrap which is
leftover material with a low sales value
now ironically if you look at the Ford
Motor article what you find out is is
that they are able to resell the scrap
for close to the same dollar amount that
they bought it for in fact ninety
percent ninety percent of the price of
the original material is what they
collect for most companies though
selling scrap has a low sales value
there's a third area with spoilers just
scrap which is called units that you can
rework that is units that you can fix
spend some money on and fix and sell
them as good units so what the chapter
goes into after that initial description
it's understanding the matching
principle which is you have to match
revenue with expenses to the extent that
you can which means you have to match
the cost incurred to produce a product
with the revenue gel you generate from
selling it the problem is for most
businesses spoilage and scramp can't be
directly traced to a product that you
sold you have to allocate that cost now
you can make the case in the Ford Motor
example that they can look at the
factory floor and at least know if we
just made ten trucks and there's
aluminium on the floor that of aluminum
applies to those ten trucks but they
can't exactly trace it okay another
important paragraph here spoils will
scrap are the costs of not making a
finished unit spoiled unit can't sell it
scrap is separate from the unit you're
selling justice
the units you sell must absorb the cost
which goes on in to the point that you
you have to include all costs you incur
to make a product in that product cost
in order to correctly price the product
so part of the cost accounting book is
all about making sure you collect and
identify and add up all the costs you
really incur to make a product because
if you don't know your total costs you
can't price your product correctly and
come up with the private margin you want
so that was the next big thing here we
talk about normal and abnormal spoilage
normal spoilage is what occurs even in
the best of production environments in
other words it's not avoidable so in
this Ford factory when they're stamping
aluminum out of sheets of aluminum
there's only so much aluminum they can
efficiently use they're always going to
have some normal expected spoilage
abnormal spoilage is different it's
beyond what you would normally expect
another way of saying it is accountants
also define the term as spoilage that
wouldn't happen if you operated
effectively efficiently it's avoidable
so the chapter goes on to talk about
normal and abnormal costing obviously
and grocery stores being the best
example we have products that expire
food at the grocery store is a great
example where you have to deal with
spoilage I use the example of milk
expiring at the grocery store goes into
the impact of reworking where you have
to take a look at how much will it cost
to rework the product and if I incur the
cost to rework it and add that cost of
the product will it still be profitable
to sell the unit chapter goes
to process costing which if you remember
is process costing is the concept that
all the units you produce are identical
the example I use in the book is if you
manufacture those small black plastic
combs I used to carry one in my pocket
when I was a kid they're all the same so
therefore every unit is identical so we
track costs as they move from one
production department to another am I
talking about process costing is
described and explained more in chapter
16
so in this scenario you want to break
out your abnormal spoilers spoilers you
didn't expect gotta break that out and
with normal spoilers what you would
expect you're probably just going to tag
on that normal spoilage onto the cost of
the units as they move through
production the cost book also goes into
equivalent units of production which is
explained in another chapter in the book
that those equivalent units and the cost
of those units will include the cost of
spoilage
go on we go on and talk about how do we
account for normal spoilage
and I do a pretty involved example of
accounting for equivalent units with
spoilage included the spoiled units
included in the calculation which means
those units are actually counted as
produced you see right here 200 units
are produced at a cost of $5,000 that's
one way of doing it
another way of doing it is excluding the
spoiled units and assuming that they
aren't produced at all so you can see
here in ad spoiled units the units are
zero and the question is well how do
they differ they differ because you're
going to end up with a different number
of equivalent units of production
depending on whether you count the 200
spoiled units as produced units or not
there's going to be a 200 dollar
difference in your equivalent units but
it's important to know that your
material costs weight remain the same
you've still spent the same amount of
money to make the unit's the difference
is with that with one method you're
coming up with fewer units same total
cost one methodists fewer units which
means your cost per equivalent unit is
going to differ depending on which unit
you choose scroll down farther and talk
about scrap there's really two ways to
handle scrap more on spoilage there
scrap is toward the end of the chapter
going to job costing and how we handle
job costing for spoilage rework how do
you allocate it to a specific job or
just generally to your old business you
finally get to reworking scrap
recognizing scrap costs scrap is defined
as material that's left over after
production that gets us back to the Ford
Motor example that aluminum is scrap to
Ford Motor scrap has
if it has any value at all the Ford
examples a little bit different in that
the scrap has a value that's close to
the value you pay for the aluminum to
begin with but in most cases scrap is
something that you've manufactured and
changed somehow that's going to have a
low value to a potential buyer it says
you sell scrap as is you don't add any
cost to it unlike rework costs where
you're spending money to change a
product with scrap you're not making any
changes and the chapter goes into how
you can account for scrap if you get
sales proceeds from scrap you can
account for that by lowering the cost of
the unit's you produce so the same thing
with Ford
they're lowering the cost of those s1
50s they make by taking that amount of
aluminum per truck and sending that back
to the factory in fact the factory reap
constitutes that aluminum into more
sheets of aluminum that Ford can use so
they are collecting and recovering that
cost and that cost is going to go into
another unit and it's $300 they don't
have to pay for more aluminum that's as
far as we'll get on this section
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