Case STUDY: ACCOUNTING FOR SPOILED UNITS:

The House Hold Products Company assembles clip clothespins in three sections, and uses process costing. Under normal operating conditions, each section has a spoilage rate of 4%. However, spoilage can go as high as 7% and is usually discovered when a faulty pin enters process or on final completion by a section.

The spring mechanism is the only material which can be saved from a spoiled unit. The production supervisor assigns a worker once or twice a week to remove the springs from spoiled units. The salvaged springs are placed in bins at the assembly tables in section No1 to be used again. No accounting entry is made of this salvage operation.

In the past, the controller has made no attempt to account for spoilage separately. Lost unit costs have been absorbed by the units transferred out of the section and those remaining in the process. However, because spoilage is increasing, a different method is needed.

Describe the method that can be used for accounting for spoiled units?