Cost Accounting Procedure for Defective Work:

In the manufacturing processes, imperfections may arise because of faults in materials, labor, or machines.

If the unit can be reprocessed on one or more stages and made into a standard saleable product, it is often profitable to rework the defective units. Although spoiled work cannot usually be made into a first class finished unit without uneconomical expenditures, defective work can be corrected to meet specified standards by adding materials, labor, and factory overhead. Two methods of accounting for the added cost to upgrade the defective work are appropriate, depending upon circumstances:

If defective work is experienced in regular manufacturing, the additional cost to correct defective units (based on previous experience) is included in the predetermined factory over head and in the resulting factory overhead rate. Actual rework cost is charged to factory overhead control.

For example, assume that a company has an order for 500 units of a product that has direct production costs of $5 for materials and $3 for labor, with factory overhead charged to production at 200% of labor cost, 50 units are found to be defective and are to be reworked at a total cost of $30 for materials, $60 for labor, and overhead at 200% of direct labor cost. The journal entries are:

Suppose, however, that the same company received a special order for 500 units with the agreement stating that any defective work is charge able to the contract. During production, 50 units are improperly assembled. The total cost to correct these defective units is $30 for materials, $60 for labor, and 200% of the direct labor cost for factory overhead. The entries in this case are:

Whenever the defective work cost is charged directly to the job, a slight overcharge of factory overhead results because of the inclusion of rework cost in the factory overhead rate. One remedy to correct this discrepancy would be either to create a new independent overhead rate or to separate costs for the special job.

You may also be interested in other useful articles from “controlling and costing materials” chapter:

1. Purchases of productive material
2. Purchases of supplies, services, and repairs
3. Materials purchasing forms
4. Receiving materials
5. Invoice approval and data processing
6. Correcting invoices
7. Electronic data processing (EDP)  for materials received and issued
8. Cost of acquiring materials
9. Storage and use of materials
10. Issuing and costing materials into production
11. Materials ledger card – perpetual inventory
12. First-in-First-Out (FIFO) Costing Method
13. Average Costing Method
14. Last-in-First-Out (LIFO) Costing Method
15. Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
16. Inventory valuation at cost or market whichever is lower
17. American Institute of Certified Public Accountant (AICPA) cost or market rules
18. Adjustments for departures from the costing method used
19. Inventory pricing and interim financial reporting
20. Transfer of materials cost to finished production
21. Physical inventory
22. Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
23. Scrap and waste
24. Spoiled goods
25. Defective work
26. Discussion Questions and Answers about Controlling and Costing Materials

Other Related Accounting Articles:

• Job Order Costing Questions and Answers
• Equivalent Units of Production
• Similarities between Job Order and Process Costing System
• Flow of Costs
• Back Flush Costing
• Difference between Job Costing and Process Costing
• Full Costing Definition
• Impact of Just In Time (JIT) Inventory Methods on Variable and Absorption Costing System
• Over-applied Overhead Definition
• Under-Applied Overhead Definition