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  Material Losses

Introduction to Material Losses

One of the major reasons of increasing material costs is the loss of material within the production process. It is of paramount significance that there should be fixed control over the material losses failing that it will be very hard to keep the material costs in check. The material losses can be classified as given below.

Ø  Waste: - a loss of material either in stores or in production because of reasons such as evaporation, chemical reaction, shrinkage, unrecoverable residue etc is known as waste. Wastages might be invisible or visible. It is essential to take steps to control the material wastage. , the wastage is split into the following categories in cost accounting.

  • Normal Wastage: - This type of wastage is like that it cannot be prevented. It is inherent in any production process. The normal wastage is generally estimated in advance and involved in the material cost. Alternatively, the good units should allow the cost of normal wastage.
  • Abnormal Wastage: - the abnormal wastage is any wastage over and above the normal wastage. Particularly it is more than the standard wastage. The abnormal wastage's cost the is not charged to the production; however it is written off to the Costing Profit and Loss Account.
  • Wastage can be controlled through adopting severe quality control measures. Normal allowance of waste can be fixed along with technical assessment and past experience and through identifying the special characteristics of materials. The reasons for abnormal wastages should be studied thoroughly and responsibility should be constant for wastage. In controlling the wastage Better material handling system would also help.

Ø   Scrap: - Scrap is a residual material resultant from a manufacturing process. It comprises a recovery value and is measurable. The treatment of scrap in cost accounts is generally as per the following details.

  • The good units should allow the cost of scrap and any income collected will be treated like other income if the value of scrap is negligible.
  • If the value of scrap is substantial and identifiable with the process or job, the cost of job will be transferred to scrap account and any realization from sale of such type of scrap will be credited to the process or job account and any not recovered balance in the scrap account will be transferred to the Costing Profit and Loss Account.
  • If scrap value is fairly substantial and it is not identifiable with a specific job or process, the amount would be transferred to factory overhead account after removing the selling cost. This will decrease the cost of production to the scope of the scrap value.
  • Control of Scrap: - For the control purpose, scrap may be categorized into the following categories.
  • Legitimate Scrap: - This is anticipated or predetermined in advance because of experience in manufacturing operations.
  • Administrative Scrap: - This comes out from administrative decisions, example change in design of a product or discontinuation of existing product lines.
  • Defective Scrap: - This comes out from poor quality of raw material, negligent handling of material etc.
  • Scrap can be controlled via selection of correct type of material, determination of acceptable limits of scrap, selection of correct type of manpower and reporting the source of waste.

Ø  Spoilage: - Spoilage is the production that is not successful to meet quality or dimensional needs and very much damaged in manufacturing operations that they are not able of rectification and though has to remove and sold off with no further processing. Rectification can be complete at a cost that may not be economic. If the spoilage is under limits, it is termed as 'normal' spoilage and anything that is exceeding this limit is termed as as 'abnormal' spoilage. The accounting treatment of spoilage is as follows.

  • The normal spoilage's cost is extended over to the good production via charging either to the particular production order or to the product overheads.
  • The cost of abnormal spoilage is charged to the Costing Profit and Loss Account.

Ø  Defectives: - The defectives are part of production units that do not corroborate to the standards of quality but can be corrected with extra application of materials, labor and/or processing and complete it into saleable form either as firsts or seconds relies upon the types of the product. The accounting treatment of defectives is similar like that of spoilage. The cost of normal defectives is increase over the good units and the cost of extra processing is charged to a specific department/process if it is identifiable with similar. It is charged to factory overheads if it cannot be identified. Cost of abnormal defectives is charged to the Costing Profit and Loss Account.

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