Question

Spoilage is the unacceptable units of production that are discarded or sold for disposal value. Accountants should be able to distinguish between normal and abnormal spoilage. Differentiate the two types of spoilage as aforesaid. [8 marks]

Answer 1

Spoilage is waste or scrap arising from the production process.

All spoiled units are classified as either normal or abnormal.
Normal spoilage is the amount that is expected from the production process.
For whatever process is being looked at, the company will have established standards about how many defective (spoiled) units there should be (or are expected to occur).

NORMAL SPOILAGE cannot be avoided.It results from the manufacturing process such as evaporation and treated as one of the manufacturing cost account.

ABNORMAL SPOILAGE does not occur in efficient manufacturing environment, need further investigation and in some cases should be disclosed in a separate account.

This expected amount of spoilage is usually presented in a question in one of three ways:

1) A percentage of the number of units started into production
2) A percentage of the units that complete production
3) A percentage of the good units that passed inspection This is helpful for us as it gives in the question the way to calculate the number of spoiled units. The number of spoiled units up to and including, but not exceeding, this expected number are classified as Normal Spoilage.

Any spoiled units in excess of the expected spoilage are classified as Abnormal Spoilage. This distinction is important because the treatment of the costs associated with normal and abnormal spoilage is different.

The process of calculation would thus be

(1) Calculate any normal loss units (forms part of the output units)

(2) By looking at actual output, determine whether there is an abnormal loss or gain.

(3) Value the inputs.

(4) Value the normal loss (if any).

(5) Calculate the average cost per unit:

Net costs of Input/ Expected output

(6) Value the good output and abnormal loss or gain at this average cost per unit.

Normal process loss:The loss expected or anticipated prior to production is a normal process loss. It is thus called a standard loss. A provision for such a loss is made before starting production. Weight losses, shrinkage, evaporation, rusting etc. are the examples of normal loss. Normal loss increases the cost of production of the usable goods realized.

Abnormal process lossThe loss realized over the normal loss is called an abnormal loss. Abnormal loss arises because of abnormal working conditions, bad working condition, carelessness, rough handling, lack of proper knowledge, low quality raw material, machine breakdown, accident etc. Therefore an abnormal loss is an unanticipated loss. Abnormal loss is a controllable loss and thus can be avoided if corrective measures are taken. Therefore, abnormal loss is also called an avoidable loss. The value of an abnormal loss is assessed on the basis of the production cost with which the profit and loss account is charged.

Value of abnormal loss = (Normal cost of normal output/Normal output) X Abnormal loss qty.