Spoilage, Rework and Scrap
National Chengchi University
2007.5.2

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Basic Concepts

In today’s manufacturing environment, firms adopt various quality improvement programs to reduce spoilage, rework units, and scrap: • Spoilage refers to unacceptable units (i.e., do not meet the specifications required by customers for good units) that are discarded or sold for disposal value (or sold at reduced prices).1 • Rework units are units produced that must be reworked into good units that can be sold in regular channels. • Scrap is the material left over from the manufacture of the product (i.e., residual materials); it has little or no value. The two types of spoilage are normal and abnormal. Normal spoilage occurs under normal operating conditions; it is uncontrollable in the short term and is considered a normal part of production and product cost. That is, the cost of normal spoilage unit is absorbed by the cost of good units produced. Abnormal spoilage is in excess over the amount of normal spoilage expected under normal operating conditions; it is charged as a loss to operations in the period detected. Example 1: In October 2005, Mendonza Co. incurs costs of $615,000 to produce 20,500 units. Of these 20,500 units, 20,000 are good units and 500 are spoiled units. Mendonza has no beginning inventory and no ending inventory that month. Of the 500 spoiled units, 400 units are spoiled because the injection molding machines are unable to manufacture good casing 100% of the time. That is, these units are spoiled even though the machines were run carefully and efficiently. The remaining 100 units are spoiled because of machine breakdowns and operator errors.
1 Some

examples of spoilage are defective shirts sold as “seconds.”

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Answer: Manufacturing cost per good unit
$612,000 $615,000 20,500

=

× (20, 000 + 400) 20, 000

=

$30 × 20, 400 = $30.60 20,