A terminology, Scrap is discarded material having some recovery value which is usually disposed of without further treatment. The cost of rectification is charged to specific jobs. Scrap:. Abnormal Waste – It arises due to abnormal factors or causes not inherent in the production. The main difference between spoilage and defectives is that spoilages cannot be rectified and sold as “seconds” or “thirds”, (in a majority of cases) while defectives can be rectified by reworking and sold as “firsts” or “seconds”. Cost Reduction. Tweet Accounting For Losses In process costing, we can often found the output from a process is less than the input. In many industries, some waste is inevitable. Plagiarism Prevention 5. The basic difference between ‘defectives’ and ‘spoilages’ is that the former can be sold after rectifying them whereas the latter has got to be rejected or sold as sub-standard or rejected articles. ii. (With Formula, Computation and Accounting Treatment), Types of Material Losses (With Accounting Treatment) | Cost Accounting, Forms of Material Losses: 3 Forms | Cost Accounting, Material Losses in Cost Accounting – Wastage, Spoilage, Scrap, Defectives and Obsolete Materials. J. Account Disable 11. Direct Costs. There is also an alternative accounting method for scrap. Losses of material during handling, storage or manufacturing are called as material losses in cost accounting. Defective products or units are those which do not meet with dimensional or quality standards and are reworked for rectification of defects by application of material, labour and/or processing and salvaged to the point of either standard product or sub­standard product to be sold as seconds. Quantity of abnormal loss – Normal output -Actual output. Wastage may occur due to evaporation, breaking the bulk, loading and unloading, leakage, inefficient handling, fire etc. Waste in certain industries creates problems of disposal. When the actual scrap is in excess of the pre-determined quantity (i.e., normal quantity), the cost of the excess scrap is transferred to Costing Profit and Loss Account after deducting there-from the sale proceeds of such excess scrap. (b) Abnormal Waste – Waste beyond the normal limits should be transferred to costing profit and loss account so as to avoid any fluctuations in the cost of production. The costing rule is that the loss on account of normal wastage will be borne by the good units. Scrap is the incidental material residue coming out of certain types of manufacturing processes, usually of small amount and low value, recoverable without further processing. Waste is that portion of basic raw material which is lost in production processes and has no recoverable value. In the process of handling, storage and usage of materials, a part of the materials may be wasted, spoiled or scrapped and thus lost. When defective units are used as raw materials, the accounting treatment will be the same as that of spoilage. Cost of rectification of such defectives should be charged to specific jobs or processes if identification is possible, otherwise to the works overheads. The realised value of scrap may be credited to the process account. However, materials that have no immediate demand are known as dormant materials. Wastage is a complete loss. The effect of waste is to increase the unit cost of production, since the total cost is spread over a smaller number of good units. Reasons for difference between the actual and standard should be investigated. Such a pre-determined wastage is an allowance made for normal wastage. However, the method fails to secure effective control over scrap is almost negligible. That portion of raw materials, which is lost in the process of manufacturing is known as waste. The quantity of normal loss is computed and credited to the process account in the unit’s column. Sawdust, for instance, in a wood-working plant, ash in the coke industry, sand, dust, etc., is the examples of visible wastage. Normal waste is unavoidable and as such may be reduced to some extent if there is strict control but cannot be totally eliminated. These are, generally, finished or semi-finished products which fail to satisfy standard specifications, but can be rectified by incurring additional expenses. Loss due to loading and unloading of materials. Spoilage refers to goods damaged beyond rectification and which are to be sold suitably without further processing. i. a. An immediate corrective action should be taken on the basis of the reasons responsible for the loss. The method is suitable in case where several production orders are taken in hand and it is not possible to segregate the value of scrap for each order. New and improved methods of production are followed under cost accounting system. (iii) If the defective production is due to abnormal reasons, the rectification cost is transferred to Costing Profit and Loss Account. The accounting treatment of scrap is more or less the same as that of waste. Normal cost of normal output- Expenditure of the process – Scrap value of normal loss. Examples of abnormal losses are as follows: Material losses could arise in the form of waste, scrape, spoilage and defectives. ?����a��.�0�KA�pմ�1W`�r�:9�ɢxD������1K�$�*�X(��=>�l��nh[�9��~��5Ci�FB 3. Keeping up proper records of scrap in the form of scrap reports. This will enable the management to avoid keeping capital locked up in undesirable items of materials. Spoilage should not be confused with scrap. <> It is one which can be pre-determined on the basis of past experience. Normal losses of material can not be completely avoided but may be controlled to a limited extent .These losses are transferred to factory overheads .Examples of material losses are as follows: Abnormal Losses: Losses that arises due to inefficiency in operations, carelessness etc. The Inspector prepares a Spoilage Report on finding that the work has been spoiled. Waste is a part of raw material lost in the process of production having no recoverable value. Scrap is defined as the incidental residue from certain types of manufacture usually of small amount and low value recoverable without further processing. Spoilage consists of goods that do not meet production standards and are either sold for their salvage value or discarded without further processing. The rectification costs should be debited to the concerning jobs. Waste:. i. The material which is retrieved from the spoilage work is known as salvage. When the defective units are rectified by the application of materials and labour, the re-operation cost may either be added to the total cost of manufacture, increasing at the same time the number of units produced, or the same may be treated as departmental manufacturing overhead. Additionally, learn about the accounting treatment and control of each type of material losses. Any income from the sale of such seconds will be credited to the cost of the job or process. d. Scrap cannot be used as a material for its original purpose. Defective Scrap – This arises because of inferior quality of or bad workmanship. This method is most suitable where several production orders are undertaken simultaneously and scrap values are not worked out for each order. The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified … Content Filtration 6. Such type of scrap is treated as abnormal because of abnormal reasons. The additional cost of rectifying the defectives is added to the total cost and the quantity of defectives rectified is added to the quantity of good output because defective units rectified can be sold as ‘first’ or ‘seconds’. Any income from the sale of scrap will go to reduce the cost. Materials having a very low turnover ratio are known as slow-moving items. Defectives are the products which are not according to the standards but they can rectify as a finished product by incurring rectification (rework) cost. Waste cannot be realised whereas scrap can be realised.