Types of Material Losses
For the sake of the clarification there are different types of material losses are discussed below:-
1.Wastage
2.Scrap
3.Spoilage
4.Defectives
1.Wastage
It represents that type of material losses which have no recoverable value. Such wastage of material may take place during receiving, handling, storing or in the course of using the material in the production process. The wastage of material may be visible or invisible.
Ex:- Visible wastage may take the form of cash, dust etc whereas invisible wastage occurs due to evaporation, shrinkage etc.
Control of wastage
Wastage increases production cost. Therefore, every effort should be made to control wastage. That standard can be set on the basis of past experience or on the basis of some other technical consideration. The actual percentage of wastage is regularly compared with the standard percentage.
If the actual percentage exceeds the standard, the causes of excess wastage should be investigated and remedial action is taken for the above purpose, a wastage report may be prepared periodically. Regular consultation with the production staff is also made to control wastage. If the actual wastage exceeds standard, responsibility for such excess wastage should also be fixed.
Accounting Treatment Of Wastage
Accounting treatment of wastage depends on its nature. i.e; whether it is normal or abnormal wastage upto the standard quantity is called normal wastage. Where as wastage over and above the standard quantity is called Abnormal wastage. Normal wastage takes place due to the inherent nature of the material.
But abnormal wastage takes due to abnormal reasons like- theft, fire, careless, handling etc.The cost of normal wastage is recovered from the cost of production. This may be done by issuing materials at an inflated price. But the cost of abnormal wastage can’t be recovered for the cost of production. Rather it is transferred to costing profit and loss account.
2.Scrap
It refers to the residual material coming out of some manufacturing process. For example, saw dust is a scrap which results while sawing a wood. Similarly metal dust comes out while boring a metal. It should be noted that scrap is always physically present whereas wastage may or may not be physically present whereas wastage may or may not be physically present.
Another feature of scrap is that it has some recoverable value.Control over Scrap:Like wastage, scrap will also increase cost of production. Though scrap has some realisation value,yet such value is much less than the output lost. Therefore we have to keep the quantity of scrap within limit. Different measures taken for control of scrap are:
i. Setting standard for quantity of scrap.
ii.Fixing responsibility for quantity of scrap over and above the standard.
iii.Regularly comparing actual quantity of scrap with the standard quantity.
iv.Maintaining records relating to scrap.
v. Preparation of scrap reports periodically.
vi.Analysis of causes of higher scrap.
vii.Taking administrative or technical measures to control scrap.
Accounting Treatment Of Scrap
The values of scrap can be treated as follows:-
i.If the sale value of the scrap is negligible, it is transferred to the costing profit and loss account as Ab-normal gain.
ii. The net sale proceeds of scrap(sales values) may be deducted from the material cost or factory overhead.
iii. The value realised from the sale of normal scrap may be credited to the particular job, process or operation from which the scrap occurred and the net loss on account of abnormal scrap may be transferred to costing Profit and loss account.
3.Spoilage
It refers to goods damaged beyond rectification. So, it has to be sold without further processing.
Control Over Spoilage
The production control inspector prepares spoilage reports. The actual spoilage is compared with the standard or normal spoilage. Remedial measures are taken for preventing any abnormal spoilage.
Accounting Treatment Of Spoilage
If the spoilage is normal it is uncontrollable. So, the cost of such spoilage will be borne by the goods units. If the spoilage is abnormal, then its cost will be charged to the profit and loss account.4.
4.Defectives
It represents that portion of production which can be rectified and turned into good units by putting some extra material, labour and overheads.
Control Over Defectives
The production control inspector regularly prepares defective work reports. The cost of rectification on defectives is estimated and a decision is taken whether to rectify the defectives or not. Adequate steps must be taken to keep defects within the standard limit.
Accounting Treatment of Defectives
The defective may be normal or abnormal. Normal defectives may arise on account of inherent nature of manufacturing cost of rectification of such defectives be charged to the specific job or process if identification is possible.
If defectives can not be identified to a specific job, the cost of normal defectives should be charged to factory overhead.On the other hand, if a defect arises due to abnormal situations, its cost should be charged to the profit and loss account.
Difference Between Scrap Vs Spoilage
i.Scrap arises out of processing of material whereas spoilage arises due to some defect in material or operations services.
ii.Scrap has relatively low value whereas the value of spoilage may vary. Its value may be high if it can be sold in seconds.
iii.Scrap may be unavailable whereas spoilage is avoidable because it occurs due to defective machines, poor workmanship.
iv.Scrap involves loss of material only. Spoilage involves not only loss of material but also labour, manufacturing overhead etc.
Difference Between Spoilage vs Defectives
i.Spoiled units are those units which cannot be rectified whereas defective works include those units.
ii. As spoiled units can’t be rectified, they are not further processed and sold as it is But, defectives works are further processed by incurring some additional cost of material, labour, overhead etc. After such further processing, they are sold as good units.
