Since the 10 units are deemed spoiled after 80% of the work is complete, there are 8 equivalent units of spoilage (80% × 10 units).
If the company expects that for every 100 units manufactured there is one spoiled unit, then 1 of the 10 spoiled units would be considered normal spoilage, and the remaining 9 of the 10 spoiled units would be considered abnormal spoilage.
There are 0.8 unit of normal spoilage (80% × 1) and 7.2 equivalent units of abnormal spoilage (80% × 9) for a total of 8 (0.8 + 7.2) equivalent units of spoilage.
The computation of the cost of spoilage matters because spoilage is a waste of company resources. Managers should carefully monitor spoilage and strive to reduce all spoilage to zero, sometimes referred to as zero defects.
Normal spoilage is considered the cost of doing business. Every manufacturing process has some waste (spoilage). However, abnormal spoilage is waste beyond what is expected and, thus, not a cost of doing business. Abnormal spoilage costs are considered a loss (expense) and are deducted from operating income.