Abstract
The current study proposes a new method to account for production spoilage in process costing system, not previously discussed in cost accounting literature and/or textbooks. It differs from traditional methods discussed in cost accounting textbooks in determining normal spoilage units and assignment of production cost. The study used data from a real factory that makes men’s suits for January 2018 to illustrate and explain the proposed method and its impact on cost reduction. The obtained results prove the study proposition that traditional methods to account for production spoilage overstate normal spoilage cost, and hides or understate actual abnormal spoilage. The proposed method reduced normal spoilage cost by 27%, compared to traditional methods. Thus, the significant reduction in normal spoilage resulted also in a cost reduction of good units manufactured. In addition, the abnormal spoilage cost under the proposed method increased by 35% thus, it would be noticeable by management to focus on, control and eliminate. The study recommends that manufacturing firms adopt the proposed method to account for production spoilage as it is more accurate and helps management focus on production spoilage and take corrective actions to control and eliminate.
Highlights
Given the developments in the manufacturing sector and its importance in the economy, and in the light of the challenges and competition this sector encounters, more innovative practices and methods are needed to enhance its competitiveness and contribution in the economy (Melendez, Davial & Melgar, 2019; Dereli, 2015; Hervas & Dalmau, 2006)
The current study proposes a new method to account for production spoilage in process costing system, not previously discussed in cost accounting literature and/or textbooks
The current study proposes a new method, not previously discussed in the literature, to overcome deficiencies in traditional methods and account for production spoilage in a reliable way that would reduce good units manufactured costs, enhance the competitiveness and growth of the manufacturing firms
Summary
Given the developments in the manufacturing sector and its importance in the economy, and in the light of the challenges and competition this sector encounters, more innovative practices and methods are needed to enhance its competitiveness and contribution in the economy (Melendez, Davial & Melgar, 2019; Dereli, 2015; Hervas & Dalmau, 2006). Its argued that contemporary changes and challenges in manufacturing environment have caused the traditional cost accounting systems to be less relevant and reliable and posed pressure on cost accounting to adapt or change traditional costing methods and develop innovative methods and systems in order to support manufacturers’ cost reduction efforts and competitiveness ( Johnson and Kaplan, 1987; Lukka & Granlund, 1996; Oker, 2002; Wang & Yuan, 2009; Gracanin et al, 2014; Abdusalomova, 2017) In this context, innovation refers to an idea, method, technique, system or practice that is perceived as new by individual or the adoption firm (Damanpur & Gopalakrishnan, 1998; Rogers, 2003; Askarani, 2015). Production spoilage cost, resulting from poor production quality, has become a major challenge facing manufacturing firms and hinders manufacturers’ ability to increase their competitiveness These costs range from 16.91% to 26.90% of company revenue, and normally remain hidden from management and buried in the accounting figures (Mahmood & Kureshi, 2015).
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