Scrap and Job Order Costing
What Is Scrap?
Scrap is the waste that arises while manufacturing goods. It may arise because the unit being manufactured has been irreparably damaged during production. Alternatively it can arise because too much direct material is being used for production. In either case, it signifies that there are problems with the manufacturing process that need to be addressed. If left unaddressed, these can be the cause of major costs and reduce the profitability of the company.
Value May Not Be Immaterial:
Now, when the term scrap is used, the mind automatically conjures up images of waste materials. The term scrap is associated with warehouse full of junk that may not have much value for the company. Disposing them without harming the environment is often supposed to be the only priority. But, this may not always be the case.
In many cases, scrap may have significant value. This makes it necessary to ensure that the job order costing system can account for scrap.
Added To Inventory:
Once the material is declared to be scrap, its value needs to be ascertained and it is added back in the inventory of the organization. This inventory account is usually the direct materials account of the relevant job.
In some cases, companies also tend to use scrap from one job as a part of direct material for another job. This may be done directly or sometimes material may have to be processed. For instance, metal scrap can be molted and reshaped and it becomes as useful as a new piece of metal. Therefore it can be directly used in the production process.
Job Costing and Scrap:
Here are the costing conventions that are related to the treatment of scrap in job order costing. They have been mentioned in this article:
- Scrap - Specific Job:No amount of scrap is considered to be normal. Therefore all the scrap that arises in the operations of a firm is considered to be abnormal.
No distinction needs to be made between normal and abnormal like it is made in the case of rework and spoilage. Hence if a scrap can be traced to a particular job, its value is adjusted to the material inventory that has been used for that particular job.
- Scrap – General: However, if scrap cannot be attributed to a specific job, it becomes a part of general overheads. This ensures that it gets distributed amongst jobs in the proportion that is decided by the allocation base. This distribution may be uneven and misleading.
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