Chapter 9:

Completing the Cost

Cycle and Accounting
for Production and
Losses
The last two steps in the job order cost
accounting cycle:

1. Accounting for the completion of goods and

accounting for the sale of goods
2. Accounting for production losses such as
scrap, spoiled goods, and defective goods
These production losses are an unavoidable
part of ordinary manufacturing operations.
COMPLETING THE COST CYCLE

▪ When jobs are completed, the finished goods

are moved from the factory to the warehouse.
▪ Since the flow of costs must follow the flow of
the goods, the cost of completed jobs is
transferred to the Finished Goods Inventory
account from the Work in Process Inventory
account.
▪ When finished goods are sold, their cost is
transferred to the Cost of Goods Sold account.
RECORDING JOBS COMPLETED
When a job is completed, the final entries covering materials, labor and
overhead are recorded in the job cost sheet (Document 13). The following
procedures are performed:
1. All columns of the job cost sheet are totaled and entered in the summary
section.
2. The total cost of the job completed is computed.
3. The unit cost is determined.
The cost of the jobs completed is recorded by the following entry”
Finished Goods Inventory xx
Work in Process xx
To record cost of completed job.
RECORDING SALES OF FINISHED GOODS

▪ As goods are sold, they are shipped to the

customers from the warehouse.
▪ The cost of the completed jobs must be transferred
from Finished Goods Inventory account to Cost of
Goods Sold account.
Sales from Stock
▪ When finished goods in stock are sold to customer, the warehouse clerk
receives a copy of the sales invoice. The sale is recorded on the stock ledger
card and in the sales journal.
▪ At the end of the month, the total of the sales journal is taken to determine the
selling price and the cost of goods sold. These are recorded in the general
journal by the following entry:
Accounts Receivable xx
Sales xx
To record sales

Cost of Goods Sold xx

Finished Goods Inventory xx
To record cost of goods sold.
ACCOUNTING FOR PRODUCTION LOSSES IN A
JOB ORDER COSTING SYSTEM
▪ In a job order costing system, production losses that
happens in the manufacturing process includes cost of
scrap materials, spoiled goods (spoilage) and reworking
defective goods.
▪ In most cases, these losses originated from lack of quality
control and should be prevented if not eliminated at all.
▪ A cost accounting system must be designed to record these
losses, so that the unit cost figures will be as accurate as
possible.
▪ The accounting technique varies according to the type of
loss involved.
 ACCOUNTING FOR SCRAP
▪ Scrap is the residue of manufacturing process.
▪ These are materials left over when making a product.
▪ Examples are sawdust and discarded end pieces in a sawmill operations.
▪ Others scrap materials are paper, wood, or metal shavings, and cloth
remnants.
▪ Scrap material often has a value.
▪ It is usually stored until it is sold to scrap dealers, other individuals, or
other industries.
▪ The cost accountant determines the value of the scrap materials, how fast
it accumulates and other factors in selecting the procedure for recording
it.
The accounting procedures for scrap will
depend on the following:

1. When should the value of scrap be recognized in

the accounting records-at the time scrap is
produced or at the time scrap is sold?
2. How should revenues from scrap be accounted
for?

To illustrate the procedures, assume that Tan Lumber

Company accumulates sawdust and that the scrap
from a job has a net sales value of P2,000.
Recognizing scrap at the Time of Its
Sale
▪ If the value of scrap is low or immaterial, the simplest accounting is to make
a notation of the quantity of scrap returned to the storeroom and to record
the scrap sales by the following entry:
Cash or Accounts Receivable 2,000
Scrap Revenues 2,000
To record the sale of scrap.
▪ The Scrap Revenues is presented in the income statement as a separate line
item of other revenues.
▪ When the value of the scrap is material and the scrap is sold quickly after it is
produced, the accounting depends on whether the scrap is attributable to a
specific job or common to all jobs.
Scrap Attributable to a Specific Job
▪ Sometimes it is possible to determine the specific job from which the scrap
accumulated. If so, the proceeds from the sale are deducted from the cost of
materials that have been charged to that job.
▪ The debit is to Cash or Accounts Receivable as before, but the credit is to
Work in Process, as shown below:
Cash or Accounts Receivable 2,000
Work in Process Inventory 2,000
T0 record sale of scrap
▪ The credit amount is also recorded in the job cost sheet under the Materials
column in parenthesis to indicate that the cost reduction is an offset against
previous charges.
Scrap Common to All Jobs
▪ If the scrap cannot be identified with a specific job, the
proceeds from the sale is credited to Manufacturing
Overhead Control to reduce product costs as shown below:
Cash or Accounts Receivable 2,000
Manufacturing Overhead Control
2,000
To record sale of scrap.
▪ The credit to Manufacturing Overhead Control Account is
also recorded in the overhead analysis sheet as an entry in
parenthesis.
Recognizing scrap at the time of its
production
▪ In the preceding example, the scrap materials returned to storeroom is
assumed to have been sold quickly and hence is not assigned an
inventory cost figure.
▪ Sometimes, the value of scrap is material, and the time between
storing it and selling or reusing it can be long.
▪ In these situations, the company inventories scrap at a conservative
estimate of its realizable value so that production cost and related
scrap revenues are recognized in the same accounting period.
▪ Some companies delay sales of scrap until its market price is
attractive.
▪ At the time of its production, scrap materials returned to storeroom is
recorded as follows:
Scrap Attributable to a Specific Job
The journal entry is:

Scrap Inventory 2,000

Work in Process Inventory 2,000
To record scrap returned to storeroom.

Scrap Common to All Jobs

The journal entry in this case is:

Scrap Inventory 2,000

Manufacturing Overhead Control 2,000
To record scrap returned to storeroom.
Entries must also be made on the job cost sheet if Work
in Process is credited or on the overhead analysis sheet if
Manufacturing Overhead Control is credited.

When the scrap is sold, the journal entry is:

Cash or Accounts Receivable 2,000

Scrap Inventory 2,000
To record sale of scrap.
• Sometimes scrap is sold for more or for less than the value
at which it is recorded.
• Any difference between the sales price and the recorded
value is treated as an adjustment to the account that was
originally credited (Work in Process or Manufacturing
Overhead Control).
• For example, if the scrap in our illustration is sold at P1,500,
the entry to record the sale would be as follows:

Cash or Accounts Receivable 1,500

Work in Process Inventory 500
Scrap Inventory 2,000
To record the sale of scrap at less than its recorded value.
• Scrap is sometimes reused as direct materials rather than sold as scrap.
• In this case, Materials account is debited at its estimated net realizable value
when returned to storeroom and then credited when the scrap is reused.
• For example, the entries when the scrap generated is common to all jobs are:

Materials 2,000
Manufacturing Overhead Control 2,000
To record scrap returned to storeroom.

Work in Process Inventory 2,000

Materials 2,000
To record reuse of scrap.

• Waste as distinguished from scrap materials refers to the amounts of raw

materials left over from a production process for which there is no further use.
• Waste is not usually salable at any price and must be discarded.
 ACCOUNTING FOR SPOILED GOODS
▪ Goods that have been damaged through imperfect machining or processing, are called
spoiled goods.
▪ Spoiling usually occurs in batches or in unusual cases, while scrap is unavoidable and
recurs constantly in specific manufacturing process.
▪ Spoiled goods cannot be corrected either because it is not technically possible or
economical to correct them.
▪ For example, a spoiled glass molded with different design cannot be corrected because
changing the design to its original form would cost more than the benefit to be derived.
▪ The basic accounting problem in accounting for spoiled goods is how the loss due to
spoilage should be charged. The loss may be charged to a particular job from which the
spoiled goods were recovered. Or the loss may be charged to all the jobs worked on
during the period.
Illustration 9-1

Assume that job 888 calls for the production of 200 painted office tables.
These tables were put into production and costs accumulated to date are as
follows:
Materials P 456,000
Direct Labor 240,000
Applied Overhead (150% of DL 360,000
cost)

Total cost charged to Job 888 P1,056,000

Unit Cost (P1,056,000 ÷ 200) P 5,280

Suppose that ten tables are spoiled because the lumber used was improperly
cured. These spoiled tables may be sold as seconds at its net disposal value of
P3,000 each (a loss of P2,280 per table).
The journal entries under the two assumptions:
Spoilage Attributable to a Specific Job (Due to Customers Specification)

If spoilage occurs because of some actions made by customers to change the

specifications of a particular job, that job bears the cost of the spoilage
reduced by the disposal value of the spoilage.
The loss on spoiled goods is left as part of the total cost of a specific job. The
journal entries are as follows:

(1) Spoiled Goods Inventory 30,000

Work in Process Inventory 30,000
To removed estimated disposal value of spoiled goods form Work in Process
(10 x P30,000).

(2) Finished Goods Inventory 1,026,000

Work in Process Inventory 1,026,000
To record the cost of the 190 completed tables (P1,056,000 – P30,000)
If Job 888 is sold with a 30% mark up on cost. The entry to record the sale
to the customers would be:

(3) Cash or Accounts Receivable 1,333,800

Sales 1,333,800
To record sales (P1,026,000 x 130%)

(4) Cost of Goods Sold 1,026,000

Finished Goods Inventory 1,026,000
To record cost of goods sold.

When the spoiled goods are subsequently sold, the entry would be:

(5) Cash or Accounts Receivable 30,000

Spoiled Goods Inventory 30,000
To record sales of spoiled goods at net disposal value.
Spoilage Common to All Jobs (Due to Internal Failure)
If spoilage occurs during the production cycle due to internal failure such as employees’
error or worn-out machinery, the estimated disposal or sales value of the spoiled goods is
debited to Spoiled Goods Inventory and any loss should be charge to Manufacturing
Overhead Control.

The following are the required journal entries:

(1) Spoiled Goods Inventory 30,000

Manufacturing Overhead Control 22,800
Work in Process Inventory 52,800
To record estimated sales value of spoiled goods and charged loss to Manufacturing
Overhead Control.

(2) Finished Goods Inventory 1,003,200

Work In Process Inventory 1,003,200
To record cost of good tables completed (P1,056,000 – P52,800)
Assume that the good units are delivered to customers at 130% of cost.
The entry to record the sale is:

(3) Cash or Accounts Receivable 1,304,160

Sales 1,304,160
To record sale of 190 good tables. (P1,003,200 x 130%)

(4) Cost of Goods Sold 1,003,200

Finished Goods Inventory 1,003,200
To record cost of goods sold.

Observe that when spoilage is the result of internal failure, sales and
profit are lesser when the spoilage results from a customer’s fault due to
change in specifications.

The comparison of the accounting treatment of spoilage on Job 888 is

presented in the Illustration 9-2
Illustration 9-2

Spoilage Cost Charged to

Particular Job All Production
(Job No. 888) (Mfg. Overhead)
Total cost of 200 P 1,056,000 P 1,056,000
tables
Less: Scrap value of 30,000
Job 888
All production 52,800
(P5,280 x 10)
Cost of good tables 1,026,000 1,003,200
Divided by good ÷ 190 ÷ 190
tables
Cost of good tables P 5,400 P 5,280
ACCOUNTING FOR DEFECTIVE GOODS

▪ Units of production that fail to meet production

standards but that can be brought up to standard
by adding more materials, labor, and overhead are
generally referred to us defective goods.
▪ The additional cost required to bring these goods
up to standard are called rework costs.
▪ Rework costs may either be charged to a specific
job or to all the jobs.
Illustration 9-3

Consider the data in Illustration 9-1. Assume the ten spoiled tables are
reworked. The Journal entry to record the total costs of the ten spoiled
goods before considering rework costs is:

Work in Process Inventory 52,800

Materials 22,800
Payroll 12,000
Applied Mfg. overhead 18,000
To record cost of 10 tables.

Assume that the ten spoiled tables are reworked. The additional costs of
reworking the tables equal P9,500 (Comprising P2,000 direct materials,
P3,000 direct labor, and P4,500 manufacturing overhead).
Rework cost charged to a Specific Job
If the rework is normal and occurs because of the requirements of a
specific job, the rework costs are charged in the usual manner to the
rework job.
The journal entry is:

Work in Process Inventory (specific job) 9,500

Materials 2,000
Factory Payroll 3,000
Applied Manufacturing Overhead 4,500
To record rework costs of 10 tables

The additional costs of materials, labor and overhead are entered on the
job cost sheet for that job. The final unit costs will reflect both regular and
rework costs.
The ten tables reworked are now good tables. The entry to record the transfer to
the warehouse is:

Finished Goods Inventory 62,300

Work in Process Inventory 62,300
To record cost of ten tables transferred to finished goods (P52,800 + P9,500).

Assume that the ten tables are sold at 130% of cost. The entries to record the sale
are:

Cash or Accounts Receivable 80,990

Sales 80,990
To record sales of ten tables (P62,300 x 130%)

Cost of Goods sold 62,300

Finished Goods Inventory 62,300
To record cost ten tables sold
Rework Cost Charged to All Jobs
When rework is not attributable to a specific job, the costs of the rework are charged to
manufacturing overhead and spread through overhead allocation, over all the jobs .

Manufacturing Overhead Control 9,500

Materials 2,000
Factory Payroll 3,000
Applied Mfg. Overhead 4,500
To transfer cost of reworked defective units to Manufacturing Overhead.

Since the rework costs was charged to Manufacturing Overhead Control, the total cost of Job
888 does not increase, the cost remains at P1,056,000.

The entry to record the total costs of Job 888 is:

Finished Goods Inventory 1,056,000

Work in Process Inventory 1,056,000
To record total costs of Job 888.
If the 200 tables are sold after the reworking of the 10 tables at 130% of cost,
the entry is:

Cash or Accounts Receivable 1,372,800

Sales 1,372,800
To record sales of 200 tables (P1,056,000 x 130%)

Cost of Goods Sold 1,056,000

Finished Goods Inventory 1,056,000
To record cost of 200 tables sold.

Treating the rework operation as a separate job permits entries for materials,
labor, and overhead to be made in the usual manner. It also allows the total
costs of rework to be accumulated and reported.

As a matter of comparison on the treatment or rework cost, see (Illustration

9-4).
Illustration 9-4
Rework Cost Charged to
Specific Job All Jobs
(Job 888) (Mfg. Overhead)
Total cost of 200 P 1,056,000 P 1,056,000
tables
Add: Rework costs 9,500 -

Total costs of Job P 1,065,500 P 1,056,000

888
Divided by No. of ÷ 200 ÷ 200
tables
Unit cost P 5,327.50 P 5,280