Types of Material Losses With Accounting Treatment

Spoilage occurs due to some defect in operations or materials. Sometimes the entire production in a batch may have to be rejected or a part of it may be rejected. It is a residue which is measurable and has a minor value.

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The type of materials that will result in the minimum wastage, scrap, defectives and spoilage are decided at the designing stage. Better quality of equipment should be used to get better return, so type and shape of equipments to be used for manufacturing process should be decided at the designing stage. Spoilage refers to production that does not meet with dimensional or quality standards in such a way that it cannot be rectified economically and is junked and sold for a disposal value. So it occurs when goods are so damaged in course of manufacturing process as to become not rectifiable with some additional cost. Therefore, defectives are that portion which can be rectified at some extra cost of re-operation. In this paper, a novel lean approach to address material losses in production processes is presented.

Material Flow Cost Accounting: Significance and Practical Approach∗

Similarly, there is the possibility of the demand for dormant materials increasing with the increase in demand for the finished product in which they are used. In the case of obsolete materials, however, the finished product itself having gone out of production, the materials in question are no longer needed. (d) Mischief on account of delibrate destruction and spoilage of materials. Spoilage refers to goods damaged beyond rectification and which are to be sold suitably without further processing.

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The defective units are then rectified and put in good order at a cost of Rs 50 per unit. If the defective production is identified with a specific job or department, the cost of rectification is charged to that specific job or department. The cost of defective scraps after deduction there-from where is my stimulus payment the sale a proceeds of such scrap is transferred to Costing Profit and Loss Account because it is an abnormal loss. The former type of waste (i.e., waste due to drying, evaporation etc.) is invisible whereas the latter type of waste (i.e., gas, smoke, slag etc.) is visible.

• The valuation of excess scrap is done in the same way as the valuation of abnormal waste is done.
• This method of recording scrap value is quite simple and can be employed very successfully where the quantum of scrap is negligible.
• Scrap, is the residue from certain manufacturing activities usually having disposable value.
• This method has an advantage of identifying scrap with each operation, process or job.

When several production orders are taken, the net sales proceed from sale of scrap is deducted from factory overheads or material cost. Thus the overall cost of material or overheads is reduced. Cost of abnormal waste is not a part of cost of production, so it is charged to costing profit or loss account. For normal waste arising from breakage, evaporation, deterioration, shrinkage in production, the total cost incurred is distributed over the good output. The treatment is based on the principle that normal losses should be borne by good output. Material losses do occur in every type of manufacturing organization.

Material absorption arises due to the presence of several impurities inside the core medium. The major impurity constituent is the presence of hydroxyl ions. These hydroxyl ions are absorbed by the silica material during the manufacturing process.

No further processing is required to realise its saleable value. This is defined as – “the incidental residue from certain types of manufacture usually of small amount and low value, recoverable without further processing”. Waste cannot be realised whereas scrap can be realised.

Loss of materials which is in excess of normal wastage is known as abnormal wastage. Such losses may be caused by any of the following factors – Pilferage, defective storage, careless handling of materials, obsolescence, natural calamities, theft etc. Spoilage consists of goods that do not meet production standards and are either sold for their salvage value or discarded without further processing. Spoilage cost is the difference between costs incurred up to the point of rejection less the disposal or salvage value. When spoiled goods are discovered, they are taken out of production and no further work is performed on them.