Material Losses [Meaning, Types and Treatment]
Cost Accounting Notes B.Com CBCS Pattern
Material Losses Meaning
Material losses are those losses which arises due to evaporation, leakage, poor quality, careless handling, theft, accident, fire, inefficiency in operation, etc. Such losses are classified into two categories – normal losses and abnormal losses.
Material Losses Types
1. Normal Losses: Losses which are arises due to inherent nature of the material and unavoidable are called Normal losses. Normal losses of material cannot be completely avoided but may be controlled to a limited extent. Such loss can be estimated in advance on the basis of past experience or chemical data. These losses increase the cost per unit of raw material or can be transferred to factory overheads.
Examples of material losses are as follows:
a) Losses by evaporation
b) Loss due to loading and unloading
c) Losses due to breaking the bulk into small pieces etc.
2. Abnormal Losses:Losses that arises due to inefficiency in operations, carelessness, theft, accident etc. is called as abnormal losses. It is avoidable by preventive action, proper planning and control. These losses cannot to be charged to the cost of production. These are charged to costing profit and loss account.
Examples of abnormal losses are as follows:
a) Loss due to Breakage
b) Loss due to Fire, accident, flood etc.
Difference between normal loss and abnormal loss
|Bases||Normal Loss||Abnormal Loss|
|1. Source||It arises due to internal factors.||It arises due to external factor.|
|2. Nature||It is recurring in nature.||It is accidental in nature.|
|3. Estimation||It can be estimated in advance from the past experience.||It cannot be estimated in advance.|
|4. Access to insurance||It is not insurable loss.||It is insurance loss.|
|5. Avoidance||It is unavoidable loss.||It is avoidable.|
Normal and Abnormal losses can be further subdivided into two main categories:
1. Waste: Waste is defined as discarded substances having no values. In many industries, some waste is inevitable. Such waste may arise due to the inherent nature of materials, chemical reaction, evaporation, drying, sublimation of goods etc. Waste can also be in the form of smoke, gas, slag or dust which arises in the course of a manufacturing process. Wastes are of two types – Normal waste and abnormal waste.
a) Normal Waste: It is the loss which is unavoidable on account of inherent nature of material. Some materials such as liquid materials lose their weight due to evaporation. Similarly, there are some materials (i.e. coal) which are wasted due to loading and unloading. Materials may be wasted due to breaking the bulk into smaller parts. As waste has practically no value, its treatment in costing is relatively simple. The normal process loss is recorded only in terms of quantity.
b) Abnormal Waste: Any loss caused by unexpected or abnormal conditions such as sub-standard materials, carelessness, accident etc. or loss in excess of the margin anticipated for normal process loss should be regarded as abnormal waste.
Such loss representing the cost of materials, labour and overhead incurred on the wastage should he transferred to Profit and Loss Account (Costing Profit and Loss Account where no integral system of accounting is maintained) and not added to the cost of production so as to make meaningful comparison of costs of production of different periods.
2. Scrap: Scrap is discarded material having some values. It represents fragments or remnants of material that are left from certain type of manufacture. It is a material loss but has small value without further processing. Examples of scrap are available in operations like turning, boring, punching, sawing, shavings, moulding, etc. from metals on which machine operations are carried out; saw dust and trimmings in the timber industry; dead heads and bottom ends in foundries; and cuttings, pieces and splits in leather industry.
There are three types of scrap, namely:
(a) Legitimate scrap,
(b) Administrative scrap,
(c) Defective scrap.
Legitimate scrap arises due to the nature of operation like turning, boring, punching etc. as discussed above.
Administrative scrap arises due to administrative action, such as, a change in the method of production.
Defective scrap arises because of use of inferior quality of material or bad workmanship or defective machines. Such type of scrap is abnormal because it arises due to abnormal reasons.
Treatment of Scrap:
The useful methods for the treatment of scrap are as follows:
1. If realisable value of normal scrap is insignificant (i.e., legitimate scrap and administrative scrap) it may be credited to Profit and Loss Account like other income and is not shown in cost sheet.
2. The sale value of scrap may be deducted from the cost of materials consumed or factory overhead. This method is suitable when several production orders are commenced at a time and it is not possible to find scrap for each other.
3. The scrap may be assigned a cost if it can be related to the job which yielded the scrap. It will help in giving reasonable credit to the jobs which yielded scraps. This method of treatment is suitable when scraps from the various jobs widely differ in nature.
4. It is possible that scrap arising in one job may be used in another job. In such a case material transfer note for transfer of scrap from one job to another job should be prepared and credit should be given to the job where scrap arises and debit should be given to the job for the amount of scrap transferred to it.
5. When the actual scrap is in excess of the pre-determined quantity (i.e., normal quantity), the cost of the excess scrap is transferred to Costing Profit and Loss Account after deducting there-from the sale proceeds of such excess scrap. The valuation of excess scrap is done in the same way as the valuation of abnormal waste is done.
6. The cost of defective scraps after deduction there-from the sale a proceeds of such scrap is transferred to Costing Profit and Loss Account because it is an abnormal loss.
3. Defectives: Defective products or units are those which do not meet with dimensional or quality standards and are reworked for rectification of defects by application of material, labour and/or processing. Defectives may arise due to the following reasons:
– Sub-standard materials.
– Poor workmanship.
– Poor maintenance of machines.
– Wrong tool setting.
– Faulty design of products.
– Bad supervision.
– Careless inspection.
Treatment of Cost of Rectification of Defectives:
Following methods may be adopted for the treatment of this cost:
a) If the defective production is identified with a specific job or department, the cost of rectification is charged to that specific job or department.
b) If the defective production is not identified with a particular job or department, the cost of rectification is added to general factory overhead.
c) If the defective production is due to abnormal reasons, the rectification cost is transferred to Costing Profit and Loss Account
4. Spoilage: Spoilage refers to production that does not meet with dimensional or quality standards in such a way that it cannot be rectified economically and is junked and sold for a disposal value. So it occurs when goods are so damaged in course of manufacturing process as to become not rectifiable with some additional cost. Sometime spoilage of one process is used in other process as raw material. Spoilage can be of two types:
1) Normal spoilage and
2) Abnormal spoilage.
Normal spoilage is what arises under efficient operating conditions; it is an inherent result of the particular process and is thus uncontrollable in the short run.
Abnormal spoilage is spoilage that is not expected to arise under efficient operating conditions; it is not an inherent part of the selected production process”. Abnormal spoilage can be controlled because it arises as a result of inefficient operating conditions.
Treatment of Cost of Spoilage:
The treatment of cost of spoilage in cost accounting depends upon the nature of spoilage. If the spoilage is normal, the cost is borne by good units of output. In case of abnormal spoilage, cost of spoilage is transferred to Costing Profit and Loss Account. When, however, the normal spoiled units are used again as raw material in the same manufacturing process, no separate treatment becomes necessary.
If they are used for another process, job or order, a proper credit should be given to the process job or order giving rise to the spoilage keeping in view the utility value of the spoilage to the process, job or order for which the same is used.