Every company experiences spoilage. Spoilage is any material, labor, and manufacturing costs as a result of product either rejected by your own company or by the customer. When spoilage occurs, replacement product must be produced or rerun. The labor and manufacturing costs is already accounted for in your hourly cost rates, but the paper and other material costs is not recovered in your rates. Therefore, it is a good practice to add the material spoilage cost into your Budgeted Hourly Cost Rates (BHRs) in attempt to recover the costs.
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