Spoilage and Rework in Job Order Costing System
What Is Rework?
Rework is that part of the final produce which has not been accepted by the client because it does not meet the required specifications. However, those specifications can be met by working on the item once again. Hence the name rework.
What Is Spoilage?
Spoilage is also that part of the final produce that does not adhere to the specifications given by the client and is therefore not accepted by them.
The difference between rework and spoilage is that, rework will be reworked on and sold at full price whereas spoilage is considered to be defective goods and is discarded at throw away prices in the market.
Rework and spoilage are closely linked concepts. If firms have a high percentage of rework, they will also have a lot of items in their spoilage.
Why Should We Focus On Rework And Spoilage?
Rework and spoilage are additional cost for the company. Since the company is in the business to make a profit, this gets passed on to the customer in the form of additional costs. This makes the company uncompetitive in comparison to its competitors.
The company with the lowest amount of rework and spoilage costs will have the least loss and hence they will be able to provide the best deal to the customer. Reducing rework and spoilage is therefore strategic in nature and must be paid careful attention to.
Job Costing and Rework
Job costing has created a system wherein rework and spoilage costs are allocated to the respective job where the loss is supposed to have occurred. This helps the company find out the types of jobs it is efficient and not efficient in and therefore work on reducing costs:
- Normal Rework- Specific Job: The first type of rework and spoilage cost is the one that can be attributed to a specific job. The treatment in this case is simple. It is charged to the specific job account. However, distinction must be made between normal and abnormal loss. Normal loss occurs when production is efficient. If it goes beyond a certain level, it becomes abnormal rework and spoilage which is treated differently.
- Normal Rework- General: The second category is rework and spoilage costs that cannot be allocated to a specific job. These costs must therefore be spread out amongst all the jobs that were performed in that period. These costs therefore get added to non manufacturing overheads.
- Abnormal Rework: Abnormal rework and spoilage costs which were over and above the estimation of the company are charged to a separate loss account. This helps focus management attention on them
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- What is Job Order Costing ?
- Relationship Between Types of Costs and Inventory
- Types of Costs to be Allocated in Job Order Costing
- Allocating Overheads in Job Order Costing
- Pre-Determined Allocation Rate
- Paper-Work in Job Order Costing
- Job Costing and Service Firms
- Advantages of Job order Costing
- Disadvantages of Job Order Costing System
- Procedure of Job Order Costing
- Spoilage and Rework in Job Order Costing System
- Scrap and Job Order Costing
- Contribution Margin
- Multiproduct Contribution Margin
- Constraints and Contribution Margin Analysis
- Consequences of Incorrect Job Order Costing