Cost Accounting · Ch 2 — Material
Material Loss
Material Loss
Not all material bought ends up in the finished product. Some is unavoidably lost or diminished during handling, storage and processing. In cost accounting it matters greatly whether a loss is normal (expected, unavoidable) or abnormal (avoidable, exceptional), because the two are treated quite differently in the accounts.
Material Loss
Material Loss is the difference between the quantity of material put into a process (input) and the quantity of good output obtained from it, arising through waste, scrap, spoilage or defectives during handling, storage or processing.
Types of material loss
1. Waste — the portion of material that is lost in processing and has NO recoverable/sale value (or even a disposal cost). Waste may be visible (e.g. gases, dust, smoke, evaporation) or invisible (e.g. shrinkage). Normal waste is unavoidable and is absorbed into the cost of good output; abnormal waste is charged to the Costing Profit & Loss Account, not to production.
2. Scrap — the residue of material that arises incidentally in processing and has a small but definite recoverable/sale value (e.g. metal turnings, off-cuts, trimmings). The sale value of normal scrap is credited so as to reduce the cost of production; abnormal scrap is dealt with separately.
3. Spoilage — units of material or output so badly damaged in processing that they cannot be rectified and are sold or disposed of as they are, at a low value. Normal spoilage cost is borne by good output; abnormal spoilage is transferred to the Costing Profit & Loss Account.
4. Defectives — units that fall short of the required standard but which CAN be brought up to standard by incurring some extra (rectification) cost. If the defect is normal, the rectification cost is absorbed into production cost; if abnormal, it is charged to Costing Profit & Loss Account.
| Type | Recoverable value | Can it be rectified? |
|---|---|---|
| Waste | Nil (may even cost to dispose of) | No |
| Scrap | Small, definite sale value | No (sold as residue) |
| Spoilage | Low disposal/sale value | No (sold/disposed as spoiled) |
| Defectives | — | Yes — can be re-worked to standard at extra cost |
Normal vs Abnormal loss (the key control principle)
- Normal loss is the loss that is expected and unavoidable under efficient working; its cost is treated as part of the cost of good output (spread over the good units), so good production quietly absorbs it. …
The difference between material input to a process and the good output obtained, arising through waste, scrap, spoilage or defectives during handli …
Expected, unavoidable loss under efficient working; its cost is absorbed into the cost …
Avoidable loss over and above the normal, charged to the Costing Profit & Loss Account so it does not distort the …