Material Losses

Generally, manufacturing operations cannot escape the occurrence of certain losses or output reduction due to scrap, spoilage, or defective work management and the entire personnel of an organization should cooperate to reduce such losses to a minimum. As long as they occur, however, they must be reported and controlled. The following are the types of material losses.

Waste Spoiled goods Scrap Defectives

Materials managers are constantly confronted with these problems. Waste When basic raw materials are lost in the course of manufacture, rendering no realizable value, such are known as wastage. Wastage may be visible (e.g. waste in the form of smokes, dusts etc.) & invisible (e.g. due to evaporation, shrinkage etc.). Sometimes very nominal value may be realized from visible wastes. Accounting Treatment of wastes: a. Good units should absorb the Normal wastes whereas cost of abnormal wastes should be written off to costing profit & loss account. b. When wastes fetch some sales value, such value should be credited to process account. c. When such value is insignificant, then it may be treated as miscellaneous income. Exercise of control should be on purchase, production, storage, inspection etc. Waste reports should be prepared & such preparation should be made compulsory. On the basis of

past experience, estimation of wastes should be made before production & comparison of actual wastes should be made with the estimated wastes. Spoilage Materials which have been damaged in the course of manufacture & it's not possible to economically rectify the damage & hence has to be taken out of the process so that the same can be disposed of in some way without being further processed, such damage is known as spoilage. Accounting Treatment of Spoilage : a. Spoilage may be normal or abnormal. Due to causes inherent in operation, normal spoilage occurs whereas due to causes not inherent in operation, abnormal spoilage occurs. b. Production cost includes costs of normal spoilage. This can be done in 2 alternate ways: - (i) by charging the loss to production order, or (ii) by charging the loss to overhead. c. If any value is realized from the spoilage, then such value is credited to the production order or overhead as the case may be. d. Production cost excludes the cost of abnormal spoilage, which is transferred to costing profit & loss A/c. e. Sometimes the specifications of the customer's are so rigid that any production not satisfying the specification is liable to be regarded as spoilage. In such cases, the cost of spoilage should be borne by the good units. Spoilage should be controlled through compulsory preparation of spoilage report, setting standards for spoilage, & comparing the actual with standards.