To understand exactly what we mean by "spoilage" To understand the differences between "normal" spoilage and "abnormal" spoilage To understand HOW spoilage is COMPUTED To understand HOW spoilage is ACCOUNTED FOR GEORGIA CORPORATION REQUIRED: 1. What is spoilage? 2. What is normal spoilage? A. How is the amount determined? B. How SHOULD THIS BE accounted for before the period? Let's say we anticipated normal spoilage of $100,000 - what would we do with it. C. How SHOULD it be accounted for during the period? (this is what the book shows you) D. What if they didn't do what you said above but instead, stuck all the cost in the WIP for the job. What has to be done now in order to correct it? 3. What is abnormal sooilage? A. How is the amount determined? B. How SHOULD THIS BE accounted for before the period? Let's say we anticipated normal spoilage of $100,000 - what would we do with it. C. How SHOULD it be accounted for during the period? (this is what the book shows you) D. What if they didn't do what you said above but instead, stuck all the cost in the WIP for the job. What has to be done now in order to correct it? 4. In #2 and #3 above, how are your answers different if spoilage product is salable? In other words, say the amount of spoilage is determined to be $100,000, but can be resold for $5,000 ? How much is really "spoilage"? What happens with the $5,000 then?? 5. Okay ... let's avoid going into UNECESSARY levels of detail. Let's say we are doing JOB123 and some wood snaps. We have to take new wood, and use more labor .... Or .... We make the chair and it fails inspection and we need to go back and fix it ... this is called REWORK. When we do the rework, we incur more costs for the additional materials and labor AND overhead, if it's applied on the basis of labor hours. So let's say all of this is $50 in costs. 6. If this happens normally a certain amount of time, and could happen to ANY job, what happens with this cost? 7. What if we could sell the stuff for $10. How much is the actual spoilage. Right way to handle it is? 8. How do you think we should deal with these costs if they are caused by the specifications of the job as specified by the customer? 9. NOW ASSUME that the extra materials and time noted above were caused by a totally unexpected event - one that we have not anticipated at all. Zero...say lightning struck the building while JOB 123 was in process. Now what do we do? 10. What if this stuff could be sold for $10. Now what should we do? OKAY .... ONE MORE ... HERE'S WHAT HAPPENS IN REAL LIFE. THEY DON'T DO IT RIGHT. THEY JUST FINISH THE WORK AND ANY MATERIALS AND LABOR GET SHOVED INTO THE COST OF THE JOB .... WIP. SO THEREFORE, WHAT WE END UP NEEDING TO DO IS TO CORRECT IT BY MAKING AN ENTRY TO TAKE IT OUT OF WIP AND PUT IT WHERE IT IS SUPPOSED TO BE. CONSIDER THE 3 DIFFERENT CASES ABOVE: Randomly occurring normal spoilage Customer specific normal spoilage Abnormal spoilage What entries need to be made to correct the error in the typical handling
