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Material Accounting

Treatment of scrap , spoils ,

defective material also obsolete

In the process of procuring ,storing and

producing,the raw material is subjected to damages

As such quantum of input is not equal to the output
This quantum of loss involves cost
Losses can be quality losses also
Quality losses are difficult to measure and is
reflected on the quality of output which infect
damages the reputation , sales and market share of
the company
Losses may be out of Raw material and finished
products . accordingly the losses are classified

It is that part of raw material , which is

collectable residue and which has salvage

value or which can be re used
Ex: wood chips , saw dust , this can be sold
to fetch some value or can be reused in the
Scrap is material residue fro manufactureing
operations that has some value.
Scrap may have relatively minor value as in
case of steel or gold the value may be
significantly higher.


Scrap can be A) Normal scrap B) abnormal scrap

A normal scrap is reasonably expected in a manufacturing

process . this is expressed as a percentage of input

The normal scrap loss is recovered from the units by
adjusting the residual value and cost of disposal if any
Normal scrap value can be credited to costing P&L a/c
An abnormal scrap is the scrap over and above the
normal scrap
That is scrap which is more then expected
This may arise due to defective RM , bad workforce ,
negligence etc.
Abnormal scrap is not a part of cost and therefore are not
recovered by good units.

SCRAP Accounting treatment

A separate abnormal scrap account is

opened and the net scrap value is

transferred to costing P&L a/c
When the scrap cannot be identified with
the job , scrap value realised is credited to
manufacturing overhead a/c

Defective is that part of finished output which has

not come up to specification and the defect of

which can be rectified.
After the rectification the defective units become
good units.
The rectification process involves additional cost.
The rectification is viable only if the cost of
rectification is less than the difference between
the price of goods and defective units.(if sold in
the market)
The defective goods fetch low value and hence
rectification would be a good offer.

Defective units are those units on which an

addition of material cost , labour cost and

overhead are incurred. Unlike wastage and
Causes: poor quality of raw materials
Bad workmanship , defects in machines

Defectives Accounting treatment

Additional cost of rectification can be

charged to overheads.
However if it can be identified with he
product then the same may be charged to
the product directly.

Is that of finished output which has not come up to specification

and the defect of which could be rectified.

In other words the output which is so damaged that it is not
feasible to bring back to required specification is called spoilage
There are 2 types
1) Products which are completely damaged and so can be sold
at very low value
2) Products which are partly damaged and can be sold as
seconds at lesser price compared to good output
Spoilage refers to the deterioration of goods beyond
rectification and are sold out without any further processing.
Normal spoilage is due to inherited nature of the manufacturing
Abnormal wastage takes place due to some avoidable causes.

Accounting treatment

All the material , labour and expenses are incurred on a spoilage

like that of good units

Therefore total cost on spoilage is a loss to the concern , if
spoilage fetches some value then too that extent the loss
comes down
The concern process is credited with the cost of spoilage and
thus good units are not made to bear the cost.
A separate spoilage a/c is opened to debit the cost incurred and
credit the salvage vale if any therefore the bal to costing P&L a/c
look at an example. For instance, assume an ice cream
company is in the middle of mixing up a 10,000,000,000-gallon
vat of ice cream and the mixer breaks down. All of the ice cream
in process will be ruined or wasted. This spoilage could have
been avoided if the machine didn't break down. Another
example of abnormal spoilage is errors. If the chemist mixed in
too many cookie dough chunks into the ice cream mix, the
batch could also be ruined.

Loss in the value of the asset due to

suppression at an earlier date then was

It is some thing called external depression
because of the fact that a asset has to be
replaced before its useful life because of a
In the interest to increase the efficiency or to
compete with a newcomer in the industry it
becomes important to improve the machine
or employ a completely new process





Unusable materials having little or no value.
Nowadays, with good technology, companies can convert
waste into useful and saleable products. Example of such
conversion is the waste into fertilizers.
Materials that cannot be used for its original purpose
Difference between scrap and by-products are:
By-products have greater sale value than scrap
By-products are often processed further to make it saleable
while scrap is usually sold on an as is where is basis.
Those that cannot be used for its intended purpose.
A form of waste.
Arises due to inefficient production, poor workmanship, poor
material, etc.
The cost of spoilage comprise material, labor and overheads at
the point of defects.
Either additional cost are incur in rectifying the spoilt work or in
converting the spoilt work into new products.



Stock Losses

Items that are out-dated hence obsolete. Reasons could be

due to change in consumer demand, change in fashion,
change in specification.
Materials that are not accepted on inspection.
May be rejected when purchases are received or during the
course of manufacturing.
Where possible, rectification will be carried out or otherwise the
rejected item will be disposed off.
Losses that are due to improper storage, inherent defects,
accidents and errors in recording and measuring

Waste:This is a loss connected with raw material or inputs to the

production process and usually means to refer that input has been lost due
to any reason either because of its nature of the material itself, nature of the
process or some other conditions. Sometimes such output that does not
have any sales or use is also referred as waste.
For example in paint industry many chemical are used that are volatile i.e.
can evaporate at room temperature. Another example can be of break-oil
which is wasted in the process named bleeding in which air bubbles are
removed from the pressure pipes so that hydraulics can work effectively.
Scrap: This is a loss connected with the output. Most of the time at the end
of production/conversion process such outputs are generated that were not
intended but cannot be eliminated due the nature of material or process
itself. Usually they are of no to insignificant value as compared to the main
product that was intended. We usually know them with the term byproducts. This is considered as loss as not all of the raw material is
converted into intended product.
For example in furniture manufacturing chippings of wood and sawdust is a
common example. Another very known example is of gold dust in jewellery
and gold industry.

Spoil: This is also a loss connected with the output. In the production process if the

output is produced which is not up to the quality standard due to any problem and
now the product cannot be brought back in good state even after further processing
or reprocessing or it is simply not feasible to do so then such output is called spoil or
spoiled output or spoilage. This is considered as loss as it is such finished good which
is not worthy of sale and thus cannot generate intended revenue.
For example in fashion and clothing industry many of the well known brands have
strict quality standards which if not met then product is not considered to be worthy
to a regular retail outlet and is most of the time shredded or sold as B pair or
Defect: This is another type of loss connected with the output but it can be in the
input as well. This is close to waste but with the difference that it is such output
which does not qualify all the quality standards due to some problem but that
problem CAN be fixed by further processing or reprocessing and it is also feasible to
do so. This is considered as loss as more then normal effort will be required to bring
the goods into saleable condition.
For example in juice manufacturing industry where juice is not sweat up to a required
level or is not homogenized to give a required molecular level thus not consistent
enough. Another example can be car repair and maintenance where sometimes paint
dries too quickly thus not giving proper shine and will have to be touched again.