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Types of Material Losses

Types of Material Losses

mt loss

Types of Material Losses

Classifications of  Losses of Material in an Organization are(i) wastage, (ii) spoilage, (iii) scrap and (iv) defectives.

(i) Wastages:

Wastage of materials can be either normal or abnormal, normal wastage is unavoidable and occurs on account of the following reasons:

(a) Evaporation of oil, chemicals and paints, etc.

(b) Leakage of certain liquid materials.

(c) Natural decay or deterioration of materials e.g., rusting etc.

(d) Breakage in case of delicate material items.

Normal wastages are not separately recorded in costing books but are covered by enhancing the production cost by increasing the unit price of materials Issued for recovering the total cost out of a quantity which is actually used.

Abnormal wastages occur when normal limits of wastage are crossed. It is transferred to Costing Profit and Loss account so as to avoid fluctuations in production costs. Following reasons are responsible for such losses, viz.,

(a) Accidents, fire and earth-quake etc.

(b) Defective and careless storage and handling of materials.

(c) Pilferage.

(d) Mischief on account of deliberate destruction and spoilage of materials.

(e) Obsolescence of materials due to improper and irregular issue of materials i.e., issuing fresh supplies earlier than old ones.

With certain care and caution, abnormal wastages can be minimised by controlling certain controllable causes viz., pilferage, defectives and careless handling and resorting to proper method of material issues to different jobs or departments, etc,.

For apprising the authorities with regard to occurrence of wastage and suggesting proper ways and means to control the same, a Waste Report is prepared by the foreman or inspector concerned with the inspection of the job.

Types of Material Losses

(ii) Spoilage:

Spoilage refers to the deterioration of goods beyond rectification and is sold out without any further processing. Spoilage is of two types. The first is normal spoilage which occurs due to inherent nature of the manufacturing operations.

Such spoilage is uncontrollable. Like normal wastage it is not recorded in the books of cost accounts but its cost is spread over the remaining units.

The second type is abnormal spoilage which takes place due to certain avoidable causes as explained while discussing abnormal wastage. It. is debited to Costing Profit and Loss Account.

Recommended Read: Related Party Transactions – AS18

(iii) Scrap:

Scrap may be defined as “the incidental residue from certain types of manufacture usually of small amount and low value, recoverable without further processing.” For example, outlined metal from turnings, borings, saw dust, short lengths from wood work operations and iron dust from machines and foundry works, etc.

The difference between scrap and waste is that the former is always available after the completion of a particular production operation while the latter may or not be available in the residue form.

For controlling or minimising scrap, proper standards for scrap should be fixed in advance of actual operations and records in the form of Scrap Reports should be prepared and preserved for future references.

Scrap can be of three types viz.,

(a) Pre-determined or Anticipated Scrap is fixed in advance at the time of anticipation of costs.

(b) Administrative Scrap occurs due to obsolete design of a product.

(c) Defective Scrap takes place due to basic defects in raw materials, production processes and other discrepancies leading to unsaleable products.

Accounting Treatment of Scrap:

Under the first method, the realisable value of scrap is credited to Costing Profit and Loss Account and termed as abnormal gain. The unit cost of the product includes the value of scrap.

This method of recording scrap value is quite simple and can be employed very successfully where the quantum of scrap is negligible. Effective control over scrap lacks under this method as detailed records of scrap values are not preserved and are un-identified to different jobs and processes.

Under the second method, the net sale proceeds of scrap (obtained after deducting selling and distribution costs) is deducted from material cost or factory overheads, thereby reducing the overall cost of materials and overheads.

This method is most suitable where several production orders are undertaken simultaneously and scrap values are not worked out for each order. Again this method is very suitable in exercising control over scrap arising in different processes and jobs.

Under the third method, which is an improvement over the first two methods, the scrap values realised are credited to each job, process or operation. This is a detailed method and is immensely helpful in identifying scrap values in case of every job, process or operation.

Types of Material Losses

Must Read: AS 14: Accounting For Amalgamations

(iv) Defectives:

‘Defectives’ signify units or portion of production which can be rectified and turned out as good units by the application of additional materials, labour or other services. Defectives arise due to sub-standard materials, inadequate equipment, inefficient supervision, defective planning and poor workmanship, etc.

Usually, it is possible to avoid defects in the units produced but to some extent defectives may be unavoidable. 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.

A “Defective Work Report” is prepared by the inspector specifying information pertaining to defective units, normal defectives, abnormal defectives, and cost of rectification, disposal value of defectives and reasons and actions suggested.

The normal defectives are unavoidable and can be identified with specific jobs and their cost of rectification can be attributed to the job. But if the defective production cannot be identified with the specific jobs, the cost of defectives should be added to the factory overheads. In case of defectives arising due to abnormal circumstances, the cost of rectification is treated as an abnormal loss and charged to the Costing Profit and Loss Account.

Types of Material Losses

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Types of Material Losses

Types of Material Losses

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