CHAPTER THREE

Costing methods: The costing of resource outputs

3.1. Costing system
There are two main types of product costing systems. Companies select a method that best
matches the flow of work in their business. These methods are used to allocate all production
costs: direct materials, direct labor and factory overhead. Each costing system gathers and
reports on the same information. The method used depends on the needs of the business. These
product costing systems are: 1) Job-order costing system 2) Process costing system
Similarities between job-Order and Process Costing
1. The same basic purposes exist in both systems, which are to assign material, labor, and
overhead cost to products and to provide a mechanism for computing unit costs.
2. Both systems maintain and use the same basic manufacturing accounts, including MO,
Raw Materials, Work in Process, and Finished Goods.
3. The flow of costs through the manufacturing accounts is basically the same in both
systems.
Differences between Job-Order and Process Costing
Job-Order Costing Process Costing
1. Many different jobs are worked on 1. A single product is produced either on a
during each period, with each job having continuous basis for long periods of time.
different production requirements. All units of product are identical.
2. Costs are accumulated by identical job. 2. Costs are accumulated by department.
3. The job cost sheet is the key document 3. The department production report is the
controlling the accumulation of costs by a key document showing the accumulation
job. and disposition of costs by a department.
4. Unit costs are computed by job on the 4. Unit costs are computed by department
job cost sheet. on the department production report.

 In manufacturing process costing setting, each unit is assumed to receive the same
amount of direct materials cost, direct manufacturing labor costs, and indirect
manufacturing costs. Units are computed by dividing total costs by the number of units.

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  The principal difference between process costing and job costing is the extent of
averaging used to compute unit costs of products or services. In job-costing system,
individual jobs use different quantities of production resources. Thus, it would be
incorrect to cost each job at the same average production cost.
 In contrast, when identical or similar units of products or services are mass produced, and
not processed as individual jobs, process costing averages production costs over all units
produced.
The difference between job order and process costing system is, thus, the extent of the averaging
used to compute unit cost. In job order costing each job differs in terms of material used, labor
incurred, and manufacturing overhead. Hence, it is impossible to assign the same cost for
different jobs. On the contrary, identical units produced in mass took equal amount of direct
material, direct labor, and manufacturing overhead. Thus, the unit cost can be found by dividing
total cost by the number of units produced.
3.2 Job order costing system and its features Job-costing is used when different types of
products, jobs, or batches are produced. It is the method of allocating B of products that are
readily identified by individual units or bathes, each of which to requires varying degree of
attention and skill. The cost unit (object) is the jobs, the work order or contract; the records will
show the cost of each. Industries that commonly use job- order method include construction,
furniture, manufacturing of tailor made or unique goods, ship builders, and etc. The cost
accounting procedures are designed to assign costs to each job. The costs assigned to each job
are averaged over the units of production in the job to obtain average cost per unit.
A job-order costing is used in situations where many different products are produced each
period.
1. Measurement of direct raw materials cost
This is a custom product that is being made for the first time, but if this were one of the
company’s standard products, it would have an established bill of materials. A bill of materials
is a document that lists the type and quantity of each type of direct material needed to complete a
unit of product. When an agreement has been reached with the customer concerning the
quantities, prices, and shipment date for the order, a production order is issued. The Production
Department then prepares a materials requisition form. The materials requisition form is a
document that specifies the type and quantity of materials to be drawn from the storeroom and

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identifies the job that will be charged for the cost of the materials. The form is used to control the
flow of materials into production and also for making entries in the accounting records.
Job Cost Sheet
 The key source document in a job costing system is a job cost record, also called a job cost
sheet, a document that records and accumulates all the costs assigned to a specific job. The
job cost record is started as soon as work begins in a particular job.
 After being notified that the production order had been issued, the Accounting Department
prepares a job cost sheet. A job cost sheet is a form prepared for each separate job that
records the materials, labor, and overhead costs charged to the job.
The following is a sample job cost sheet:
Job Cost sheet
Job No. 365 Date started: Jan. 29, 2017
Date completed: March 20, 2017
Item 4152 – coffee tables
For stock
Direct material Direct labor Manufacturing overhead
Date Req. Amoun Date Hours Amount Date DLH Rate Amount
No. t
Jan. 28 906 -
2017
Cost summary
Cost item Amount
Total direct material
Total direct labor
Total manufacturing overhead applied
Shipping summary
Date Number of units shipped Cost balance

2. Measuring direct labor cost

Direct labor consists of labor charges that are easily traced to a particular job. Labor charges that
cannot be easily traced directly to any job are treated as part of manufacturing overhead. As

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discussed in the previous chapter, this latter category of labor costs is called indirect labor and
includes tasks such as maintenance, supervision, and cleanup. A job time ticket is used to record
how much time is spent on a particular job. When a particular job is started, the employee fills
the time the job is started on the job time ticket, and he punch out the card and fills the time he
stopped when he left the job.
3. Measuring manufacturing over head costs
Costs other than direct material and direct labor that are necessary to transform the raw materials
into finished goods are called manufacturing overhead.
 Such Manufacturing costs are common costs – costs shared by more than one cost object-
that should be apportioned among the cost objects sharing the cost.
 However, the total overhead costs cannot be known exactly until the end of the year.
Thus, organizations should wait up to the end of the year if they are to charge the actual
amount.
 Yet, many jobs are completed but the job cost sheet remains open waiting for the actual
overhead cost. Thus, interim financial statements are impossible which in turn affect
managerial decision purposes.
 A predetermined overhead rate is determined to allocate such costs to individual jobs,
which is found by dividing estimated overhead cost to the estimated amount of allocation
base.
 The allocation base is assumed to be a cost driver of manufacturing overhead costs.
 In other words, there has to be a cause and effect relationship between the allocation
base and manufacturing overhead costs. For instance, a labor intensive firm should use a
labor oriented base, and a machine base should use a machine oriented base since most
these overhead costs may respond to a change to the allocation base.
o Costs include factory rent, electricity, and depreciation on machinery. Most of these costs
are common to more than one batch of job and hence cannot be directly traced to a
specific job.
 Therefore, the only way to assign overhead costs to products is to use an allocation
process. This allocation overhead cost is accomplished by selecting an allocation base
that is common to all of the company’s products and services.

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  An allocation base is a measure such as direct labor hours (DLH) or machine hours (MH)
that is used to assign overhead costs to products and services. The allocation base is used
to compute the predetermined overhead rate:
Predetermined overhead rate = Estimated total manufacturing overhead cost
Estimated total hours in the allocation base
 The predetermined overhead rate is based on estimated rather than an actual figure. This
is because the predetermined overhead rate is computed before the period begins and is
used to apply overhead cost to jobs throughout the period. The process of assigning
overhead cost to jobs is called overhead application.
Overhead applied to a particular job = Predetermined * Actual hours worked
Overhead rate
o A predetermined overhead rate is calculated using the projected overhead cost and some
activity base that has a cause and effect relationship with manufacturing overhead costs.
For instance, assume that the projected overhead cost for the upcoming year is Birr
80,000.00, and the direct labor hour is estimated to be 4,000 hrs, the predetermined
overhead rate can thus be calculated as follows:
Predetermined overhead cost = Estimated overhead cost
Estimated hours

POR = 80,000 = 20 per direct labor hour.

4,000
If we assume that the direct labor hours spent on the job are 90, the manufacturing over head
applied will therefore be 90 X 20 =1800.
 The manufacturing overhead applied is a contra account to the actual manufacturing cost.
Actual Costing versus Normal costing
The use of an applied overhead instead of an actual overhead has the advantage of timeliness,
and hence relevance for timely decision making. However, the amount may not be as accurate as
the actual overhead cost. But the actual cost is known only at the end of the period, and thus
product costing is impossible before the year ends. Actual costing thus makes product costing
untimely, and this in turn affect decisions like product pricing, and controlling operations.

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Therefore, most firms use an applied overhead cost than actual cost for indirect manufacturing
costs.
 Normal costing is a costing system where the actual direct material and direct labor are
added to the work in process inventory at the actual amount, and overhead costs are
applied to the work in process inventory using a predetermined overhead rate. The term
normal comes from the idea that the rate is normalized over a long period of time.
 Actual costing is a costing system where direct material and direct labor costs are traced
to the job at their actual amounts, and overhead costs are allocated using actual overhead.
Since manufacturing overhead costs cannot be directly traced to each job in an
economically feasible way, still the amount charged to each job is simply an allocated
amount. The difference is simply the use of an actual overhead than an estimated
overhead.
Disposition of over and under applied overhead
Under normal costing, the actual amount of manufacturing overhead costs at the end of the
period rarely matches with the applied manufacturing overhead costs during that same period.
Often the applied amount may either be less or more than the actual amount.
 If the amount of manufacturing overhead is less than the actual amount, the difference is
said under applied overhead or under absorbed overhead. When the reverse is true, the
difference is said over applied overhead or over absorbed overhead.
 Under and over applied overhead at the end of one fiscal year should not be carried to
the upcoming periods; rather they should be disposed off in the year the difference
occurs. The disposition of under and over applied overhead costs can take one of the
following two ways.
 Closed out to Cost of Goods Sold.
 Allocated between Work in Process, Finished Goods, and Cost of Goods Sold in
proportion to the overhead applied during the current period in the ending
balances of these accounts.
Closed out to Cost of Goods Sold
Cost of Goods Sold xxx
Manufacturing Overhead xxx
(If the actual cost  overhead applied = under applied)

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Manufacturing Overhead xxx
Cost of Goods Sold xxx
 (If the actual cost  overhead applied = Over applied
Example. ABC Company is a manufacturing firm that uses job-order costing. At the beginning
of the year, the company's inventory balances were as follows:
Raw materials................................ $16,000
Work in process............................. $10,000
Finished goods ............................... $30,000
The company applies overhead to jobs using a predetermined overhead rate based on machine-
hours. At the beginning of the year, the company estimated that it would work 36,000 machine-
hours and incur $153,000 in manufacturing overhead cost. The following transactions were
recorded for the year:
a. Raw materials were purchased on account, $200,000.
b. Raw materials were requisitioned for use in production, $190,000 ($152,000 direct and
$38,000 indirect).
c. The following employee costs were incurred: direct labor, $160,000; indirect labor, $27,000;
sales commission expense $ 36,000 and administrative salaries, $80,000.
d. Factory utility costs incurred, $ 42,000
e. Insurance premium total $10,000 of which 9000 related with factory operation and 1,000
related with selling and administrative costs.
f. Adverting costs incurred, $ 50,000
g. Depreciation for the year was $60,000 of which $51,000 is related to factory operations and
$9,000 is related to selling and administrative activities.
h. Manufacturing overhead was applied to jobs. The actual level of activity for the year was
40,000 machine-hours.
i. The cost of goods manufactured for the year was $480,000.
j. Sales for the year on account totaled $ 700,000 and the costs on the job cost sheets of the
goods that were sold totaled $ 475,000.
Required:
1. Prepare necessary journal entries and post by using T-account
2. Prepare a schedule of cost of goods manufactured in good form.

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 3. was the overhead under- or over applied? By how much?
4. Prepare an income statement for the year in good form. The company closes any under- or
over applied overhead to Cost of Goods Sold.
Solution 1 Journal entries
A. Raw Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

B. Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,000

Manufacturing Overhead-actual . . . . . . . . . . . . . . . . . . . . . . . . 38,000
Raw Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190, 0000
C. Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Manufacturing Overhead-actual . . . . . . . . . . . . . . . . . . . . . . 27,000
Sales commission expense ………………………………………36,000
Administration salary expense…………………………………… 80,000
Salaries and Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . 303,000
D. Manufacturing Overhead-actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
E. Manufacturing Overhead . . . . . . . . . . . . . . . . . . . 9,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
F. Adverting expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Account payable . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
G. Manufacturing Overhead -actual . . . . . . . . . . . . . . . . . . . . . . 51,000
Depreciation expense…………………………………………. 9,000
Accumulated depreciation …………………………………………… 60,000
H. Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000
Manufacturing over head applied . . . . . . . . . . . . . . . . . . . . ……170,000
I. Finished goods inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,000
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . 480,000
J. Account receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
Sales………………………………………………………… 700,000
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475,000
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475,000

Posting using t-account

Bal10,00 480,000
Raw materials W/P F/G A/P
0
Bal16,000 190,000 Bal30,0 475,000 200,000
152,000
200,00 8 | P a g e 0 142,000
160,000
Bal26,000 480,000 50,000
170,000
35,000 Bal
Bal12,00
0 292,0000
 Salary and wage/ p MOHC actual Sales
A/R
38,000 170,000 700,000
700,00 303,000
27,000 Bal
0 Bal
42,000 700,000
Bal 303,000
9,000
700,00 51,000
0 Bal167,000

Adminstrative exp Sales commission insurance exp

Bal3,000
adver.exp

80,00 36,000 1,000 50,000

0

CGS
Prepaid depn/exp Accom.depn 475,000
10,000 9000 60,000

ABC Company
Statement of Cost of Goods Manufactured
For the month ended Dec 30
Direct materials:
Raw materials inventory, beginning . . . . . . . . . . . . . . . $ 16,000
Add: Purchases of raw materials . . . . . . . . . . . . . . . . . 200,000
Total raw materials available . . . . . . . . . . . . . . . . . . . . 216,000
Deduct: Raw materials inventory, ending . . . . . . . . . . . 26,000
Raw materials used in production . . . . . . . . . . . . . . . . ……………………..190,000
Add: Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ………….160, 000

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Add: Manufacturing overhead applied…………………………………………170,000
Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . ………………………520,000
Add: Beginning work in process inventory . . . . . . . . . . . ……………………..10,000
Total cost of work in process ……………………………………………………530,000
Deduct: Ending work in process inventory . . . . . . . . . . . . …………………….12, 000
Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . ………………………. 518,000
ABC Company
Income statement
For the month ended Dec 30
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …………….$700,000
Finished goods inventory, beginning . . . . . . . . . . . . . . . . $ 30,000
Add: Cost of goods manufactured . . . . . . . . . . . . . . . . . . 518,000
Goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . 548,000
Deduct: Finished goods inventory, ending . . . . . . . . . . . . 35,000
Unadjusted cost of goods sold . . . . . . . . . . . . . . . . . . . . 513,000
Deduct: over applied overhead . . . . . . . . . . . . . . . . . . . . . . 3,000
Adjusted cost of goods sold . . . . . . . . . . . . . . . . . . . . . . ………………..$ 510,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ………………….190, 000
Selling and administrative expenses:
Sales commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,000
Administrative salary expense……………………………………..80,000
Insurance expense………………………………………………… 1,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . ………….9, 000
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . ………..50,000
Total operating expense 176,000
Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . ………………………14,000
3.3 Treatment of Spoilage, reworked units and scrap
Spoilages (Defective): are units of production whether fully or partially completed that don’t
meet the standard required by customers for good units and that are discarded or sold for reduced
price. Example, Defective shirts, shoes, electronic devices.

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Normal spoilage: is spoilage inherent in a particular production process that arises even under
efficient operating condition. Depending on the production process, management decides the
spoilage it considers normal. Cost of normal spoilage is typically included as a component of
cost of good unit’s manufactured because good units cannot be made without also making some
units that are spoiled.
Abnormal spoilage: is spoilage that would not arise under efficient operating condition. It is not
inherent in a particular production process. It arises because of machine break down and
operators’ error. Abnormal spoilage is usually avoidable or controllable. Abnormal spoilage cost
is recorded separately and treated as loss of the current year.
Reworks: are units of production that don’t meet the standard required by customers for finished
units that are subsequently repaired and sold as acceptable finished unit. In job order costing
system, like spoilage, they are divided as normal rework attributable to a specific job, normal
rework common to all jobs and abnormal rework.
Scrapes: are materials left over when making a product .They have low sales value compared
with the sales value of the main products. Example, short lengths from wood working operations,
frayed cloth etc.
3.4 Job order costing and spoilage
There are normal and abnormal spoilages in job order costing as in process costing the main
concepts discussed in process costing to these units’ remains the some except that the
accounting treatment differs. Costs of normal spoilage are inventor able whereas abnormal
spoilage is not inventor able and are written off as losses of the period in which they are
identified. In Job order costing system abnormal spoilage are regarded as controllable by the
first stage supervisor. Normal spoilage in Job order costing are two types – attributable to
specific job and common to all jobs. Normal spoilage attributable to all Jobs. Normal
spoilage attributable to a specific Job is assigned to that specific job this step is not related to
process costing because in process costing all products are identical normal spoiler common
to all jobs is allocated to jobs with the other indirect manufacturing costs at the end of the
month. Normal spoilage attributable to a specific Job When the spoilage is caused due to the
specification related to a particular Job, that job should absorb this cost of the spoilage by net
of the salvage value of the spoiled units, if soluble.

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 To recognize the estimated selling price (disposal value) if the spoilage, J. entry should be
Nrecorded
Materials ------------------------------Disposal
Work in process --------------------- Value.
After posting the above entry the work in process inventory account balance represents the
costs of good units (including normal spoilage) Example: In fasica machine shop, 10machine
parts of a job lot of 100 machine parts are spoiled. Costs assigned period to the inspection
point are Br. 4000 per part. The current disposal price of the spoiled parts is estimated to be
Br. 1200 per past Required: Prepare the necessary J. entry at the time the spoiled parts are
identified and given That they are related to the particular job.
Materials -------------------------------- 12000
Work –in process --------------------- 12000
The cost of the spoiled units = (10 parts X Br 4000) - Br 12000) = Br. 40,000 – Br. 12,000 =
28,000 The cost of good units = = (90 units X Br.4000) + Br 28,000 = Br. 360,000 – Br.
28,000 = Br. 378,000
Normal spoilage common to all jobs Normal spoilage may coincidentally occurs due to the
inherent problem in the manufacturing. Process where a gover job is being worked on. Under
this condition, the costs of the spoilage cannot be assigned to that particular job but to all jobs
manufacturing overhead the j. entry based on the above examples is recorded as follows:
Manufacturing overhead control ------------ 28,000
Work in process ------------------------------------- 28,000
When normal spoilage is common to all jobs, the budgeted manufacturing overhead
application rate spoilage cost. Therefore, the normal spoilage is allocated, to all jobs based on
the application rate under this condition; The costs of goods units = 90 parts X Br 4000 = Br.
36000 Plus the allocated share of the Br. 28000 Overhead costs of the normal spoilage.
64,000 Abnormal spoilage If the spoilage is abnormal, the cost of the abnormal spoilage het
of any disposal value is debited to an account titled loss from abnormal spoilage. Abnormal
spoilage is not part of the cost of good units. If the spoilage in the above example was
abnormal, the J. entry would be:
Loss from abnormal spoilage --------- 28,000
Work – in process -----------------------28,000

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 Abnormal spoilage is reported as the loss of the period in which it is identified.
4.4
Reworked units As it has been defined before is the cost of unacceptable units of production
that are subsequently repaired and sold as normal finished goods. Rework is distinguished As
(1) Normal rework attributable to specific jog
(2) Normal rework common to all jobs
(3) Abnormal rework Assume the 10 spoiled machine parts in our previous illustration are
reworked at a total costs of Br 40,000 details of costs assumed) assigned to the 10 spoiled
parts before considering rework costs are as follows.
Work in process ----------------------------------- 40,000
Material ----------------------------------------------- 15000
Wages payable --------------------------------------- 15000
Manufacturing overhead control ------------------- 10000
Assume that rework costs equal Br. 7600 (direct materials Br. 1600. direct labor 4000;
manufacturing overhead, Br 2000 Normal rework attributable to a specific job If the rework
is normal and if it is related to the specification of a particular job, the costs of the rework
should be assigned to that particular job.
Work – in process----------------------- 7600
Materials control --------------- -------1600
Wages payable ------------------------ 4000
Manufacturing overhead control----- 2000
Normal rework common to all jobs When rework is normal and is caused to the inherent
problem of the manufacturing process the costs of the rework are charged to manufacturing
process the costs of the rework are charged to manufacturing overhead control account and
allocated to all jobs like the other overhead costs and the journal entry recorded the rework
costs is as follows – assume the rework costs in the previous example.
Manufacturing overhead control ---------------------------------- 7600
Materials control ------------------------------------------- -------1600
Wages payable ----------------------------------------------------- 4000
Manufacturing overhead control-------------------------------- 2000
Abnormal Rework If the rework is abnormal, it is charged to loss form abnormal rework
account. The accounting treatment for abnormal rework is the same in both job costing and

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 process costing if the rework cost in the previous example is abnormal; the J. entry is
recorded as follows:
Loss from abnormal rework -----------------------------------7600
Materials control -------------------------------------- ----------1600
Wages payable --------------------------------------------------- 4000
Manufacturing overhead control ------------------------------ 2000
Accounting for scrap: A scrap as has been defined before represents remains of materials
left over from the manufacturing process. They have low soles value as compared with the
soles value of the products. The accounting issue related to scrap is (1) when should the
value of screp be recognized in the accounting records- at the time scrap is produced or at the
line scrap is sold? (2) How should revenue from scrap be accounted for? Recognizing scrap
at the time of sole Scrap is recognized at the time of sole when its dollar amount is
immaterial. The accounting treatment is to make a memo of the quantity of the scrap returned
to the store room and to recorded the following J. entry the time of well Assume the selling
price of a given quantity of material is Br. 500
Cash (A/R) ------------------ 500
Sales of scrap ----------------------500
The sold of scrap are an account that represents the revenue generated from the selling of the
scrap. It is reported the income statement as other income. When the dollar amount of scrap
is material and the scrap is sold quickly after it is known, the accounting treatment depend in
whether the scrap is attributable to a specific job or is common to all jobs. Scrap attributable
to a specific job If a scrap is feasible with the making of a specific job the selling price of the
scrap reduces the cost of the particular job. In the above example is attributable to a specific
job, the J. entry will be recorded as follows:
Cash (A/R) ----------------------------------- 500
Material control ----- 500
Unlike spoilage and rework, there is no cost attached to the scrap, and hence no distinction is
made between normal and abnormal scrap. Scrap common to all jobs When it is not possible
to identify scrap with a specific job, the selling price of the scrap will be prorated and
deducted from the costs of all jobs. If the in the previous example is assumed to be common
to all jobs the J. entry is:
Cash (A/R) ----------------------------------- 500
Manufacturing overhead control ----- 500
The expected disposal price of the scrap should be considered in setting the manufacturing
overhead application rate. Thus, the budgeted overhead application rate is lower than it

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 would be if the overhead budget had not been reduced by the expected sales of scrap. The
accounting for scrap as common to both job costing and process costing. Recognizing scrap
at the time of its production the scrap is sold immediately as if is produced (identified) and
there may be a time interval between its production and it’s selling or remising it. In this
case, separate scrap inventory account is maintained or the scrap is recorded in the materials
control account like the other materials. At its expected net realizable value so that
production cost and related scrap recovery ate recognized in the same accounting period. The
scrap is than stirred until sold or reused. The scrap may be attributable to specific job or
many be common to all jobs. Scrap attributable to a specific job when a scrap is identifiable
with a specific job its expected net realizable value should be deducted from the cost of that
particular jobs and the scrap inventory should increase the balance of the materials control
account. let us assume that the estimate selling price of a given scrap is Br. 1000 and its
related costs of selling (disposal, is estimated to be Br. 200, the net realizable value of the
scrap is Br. 800 (Br 1000 – Br 200) and, the storage of the scrap is recorded as follows:
Cash (A/R) ------------------ 800
Work - in process ----- 800 Scrap common to all jobs when scrap is not identified with a
specific job but caused due to the inherent problem associated in the prorated amount of
manufacturing process, the expected net realizable value of the scrap reduces the cost of all
jobs. Let us use the previous example to recurred the J. entry the time the scrape is resulted
Cash (A/R) ----------------------------------- 800
Manufacturing overhead control ----- 800

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