Cost Accounting Procedure for Defective Work:

In the manufacturing processes, imperfections may arise because of faults in materials, labor, or machines. 
If the unit can be reprocessed on one or more stages and made into a standard saleable product, it is often profitable to rework the defective units. Although spoiled work cannot usually be made into a first class finished unit without uneconomical expenditures, defective work can be corrected to meet specified standards by adding materials, labor, and factory overhead. Two methods of accounting for the added cost to upgrade the defective work are appropriate, depending upon circumstances:
If defective work is experienced in regular manufacturing, the additional cost to correct defective units (based on previous experience) is included in the predetermined factory over head and in the resulting factory overhead rate. Actual rework cost is charged to factory overhead control.
For example, assume that a company has an order for 500 units of a product that has direct production costs of $5 for materials and $3 for labor, with factory overhead charged to production at 200% of labor cost, 50 units are found to be defective and are to be reworked at a total cost of $30 for materials, $60 for labor, and overhead at 200% of direct labor cost. The journal entries are:

Work in process Materials Work in process Labor Work in process Factory overhead	Dr. 2,500 1,500 3,000	Cr.
Materials     Labor     Applied Factory overhead		2,500 1,500 3,000
Factory overhead control	210
Materials     Labor     Applied Factory overhead		30 60 120
Finished Goods	7,000
Work in process Materials     Work in process Labor     Work in process Factory overhead		2,5000 1,500 3,000
The unit cost of the completed unit is $14 ($7,000 / 500 units)

Suppose, however, that the same company received a special order for 500 units with the agreement stating that any defective work is charge able to the contract. During production, 50 units are improperly assembled. The total cost to correct these defective units is $30 for materials, $60 for labor, and 200% of the direct labor cost for factory overhead. The entries in this case are:

Work in process Materials Work in process Labor Work in process Factory overhead	Dr. 2,500 1,500 3,000	Cr.
Materials     Labor     Applied Factory overhead		2,500 1,500 3,000
Work in process Materials Work in process Labor Work in process Factory overhead	30 60 120
Materials     Labor     Applied Factory overhead		30 60 120
Finished Goods	7,210
Work in process Materials     Work in process Labor     Work in process Factory overhead		2,530 1,560 3,120
The unit cost in this case is$14.42 instead of $14

Whenever the defective work cost is charged directly to the job, a slight overcharge of factory overhead results because of the inclusion of rework cost in the factory overhead rate. One remedy to correct this discrepancy would be either to create a new independent overhead rate or to separate costs for the special job.