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If the rework is normal and actual costing is used, the rework cost is added to the current period’s work in process costs for good units and assigned to all units completed. In companies using predetermined overhead application rates, normal rework costs should be estimated and included as part of the estimated factory overhead cost used in computing the overhead application rates. In this way, the overhead application rate will be large enough to cover rework costs. When actual rework costs are incurred, they are assigned to the Manufacturing Overhead account.
If rework is abnormal, the costs should be accumulated and assigned to a loss account. The units are included in the EUP schedule for the period and only actual production (not rework) costs will be considered in determining unit cost.3 Reworked units may be irregular and have to be sold at less than the normal selling price. The production costs of irregular items should be transferred to a special inventory account and not commingled with the production costs of good units.
When the net realizable value (selling price minus cost to rework and sell) is less than total cost, the difference is referred to as a deficiency. If the number of defective units is normal, the deficiency should be treated as part of the production cost of good units. If some proportion of the defective units is considered an abnormal loss, that proportion of the deficiency should be written off as a period cost.
