3 costs arise as result of defects or inefficiencies: spoilage, rework, scrap. I(cid:374)puts paid for that (cid:272)a(cid:374)"t (cid:271)e (cid:272)o(cid:374)(cid:448)erted i(cid:374)to salea(cid:271)le produ(cid:272)t represe(cid:374)t (cid:272)osts that (cid:449)o(cid:374)"t (cid:271)e re(cid:272)o(cid:448)ered. Reduced spoilage and scrap lowers non-value-added costs. Defining & actg for spoilage, rework, & scrap. Costs must be classified differently: some permitted to be included in cogm then cogs (ex. normal spoilage, others classified as loss and expensed in period of occurrence (ex. abnormal spoilage) Different transactions give rise to each type of cost. Some amount of spoilage, rework, and scrap is inherent part of production processes. Spoilage: the output that fails to attain either a specified performance level or standard of composition. Ex. defective aluminum cans, t-shirts sold as (cid:862)se(cid:272)o(cid:374)ds(cid:863) et(cid:272). Can be either fully or partially completed. Are discarded or sold for reduced price. Rework: conversion of production rejects into reusable products of the same or lower quality. Ex. cooked sausage ends reprocessed into pizza toppings.