In cost accounting, job costing assigns costs based on a specific job or customer. You use job costing when each customer sale incurs a different level of costs. People who work in “the trades” (plumbers, carpenters, and roofers, for example) use job costing.
Say you own a plumbing company and work with homeowners and small commercial buildings. You’re reviewing your plumbing supply costs for the week, and you notice that some brackets you used on pipes were defective. You have several decisions to make about the defective part. You need to decide whether the spoilage is normal or abnormal. You also need to decide whether the cost should be assigned to a specific job or to all jobs.
Here’s how to handle spoilage costs in a job costing environment.
Normal spoilage is expected under the best of circumstances. The cost is included in cost of manufacturing, and it’s part of job costing. On the other hand, abnormal spoilage produces more defects than you would expect from normal production. Those costs are posted to a loss account. Abnormal costs aren’t part of the cost of manufacturing or completing a customer job. They are a loss you take.
Assume that the defective brackets are normal spoilage. You have a good supplier for your plumbing supplies (a good supplier being a critical issue for anyone in the trades). You know from industry experience that 2 percent of the brackets you purchase may be defective because after all, they’re only cheap stampings. The trouble is, you use a lot of them.
At this point, maybe you’re asking, why not just go back to the supplier for a refund? Maybe that’s not a good idea, because maybe you asked too much from the brackets. Specifically, you’ve used the brackets in such a way that they sometimes fail.
It might simply be that your plumbers are putting too much stress on them (such as bending them more than the cheap metal can take). So a 2 percent failure rate isn’t really based on the bracket maker’s faulty production. It’s based on how your plumbers use the part.
Adjustments are accounting entries posted to make corrections. Spoilage accounting entries may require adjustments. For example, you may have already moved the bracket cost (material) into work in process. When you inspect and find the abnormal spoilage, you may need to remove the cost from work in process and move the costs into a loss account. That entry is an adjustment.