Meaning and Types of Waste
The loss of raw materials in processing is waste. Waste has no receivable value. It is a quantity loss of material in the process of producing goods.
Waste is brought into record by comparing the input quantity with the output quantity. Waste may occur due to shrinkage, smoke, weight loss and evaporation causing the material to become waste. They are material losses causing a quantity loss. Waste may occur in terms of a by-product which does not produce any realizable value.
For example, 20kg of potato does not give 20kg of potato chips. Thus, the fact that 15 kg of chips is produced out of 20kg potato means that 5 kg of potato is wasted in the course of making chips. 5kg of waste does not produce any sales value and so is treated as waste.
Waste is divided into two types, normal and abnormal waste. Normal waste is estimated before production and is inherent in the nature of the raw material. Abnormal waste occurs because of a low quality/substandard of input material, bad process work, carelessness etc.
Accounting Treatment of Waste
Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.
Abnormal waste is undesirable waste exceeding the normal loss set aside. The value of an abnormal loss is calculated as in the process account by using the formula for transferring to Profit and Loss account.
Meaning of Scrap
Scrap is a left over or residue after a product has been manufactured. The remnant of material resulting after producing the product is scrap. Thus, the residue of raw material incidentally realized in course of manufacturing goods is called scrap. Low quality raw material or abnormal size of raw material gives scrap material. Faulty or wrong product designing, substandard or unsuitable raw material, abnormal machine operation etc are the main causes of scraps. Thus a correct product design helps check scrap.
The leftovers of the coconut hair oil are fibres and the outer shield. Therefore, the fibres and the outer shield of a coconut are scrap since they have to be sold at a nominal value. A hard and thin outer cover of a tree known as bark, end pieces of timber, sawdust, curly pieces of the surface of timber called shavings are scrap of a timber mill.
Accounting Treatment of Scrap
Option 1: Nominal sales price realized out of negligible scrap is treated as other income in cost account.
Option 2: A scrap account is opened with the full amount of the scrap of the process or job if such a scrap value is significant. Process account or job account is given credit by the value of scrap. The scrap account is closed by the balance either of profit or loss to the profit or loss account.
Option 3: Net sales value of scrap after deduction of selling and distribution costs is deducted either from the overhead amount or from the material cost. Deduction out of overheads is made to adjust the overhead ratio if scrap is not possible to identify in relation to a process or a job.
Meaning of Spoilage
Badly damaged material in a manufacturing operation is spoilage. The spoil /damaged material during processing is called spoilage. Spoilage material is not possible to be rectified economically and put for further processing. Thus, such a spoilage material is taken out of the process and disposed off in the same form as it exists.
Two types of spoilage are normal and abnormal ones. Normal spoilage is estimated and is inherent. Abnormal spoilage is unexpected and does not occur always.
Accounting Treatment of Spoilage
Material damaged or destroyed in the course of a manufacturing process is spoilage. Manufactured goods of a low or inferior quality produced are also called spoilage.
Normal spoilage is included in the cost of the output in a single product line. In a multi-product context, spoilage is charged to the production overhead to record out of all the products. This means production overhead is made larger to spread spoilage over all products since the production overhead rate becomes greater. The abnormal spoilage cost is charged to the Profit and Loss account.
The spoilage arising on account of improper workmanship or malfunctioning of equipment is absorbed by good production treating it as charged to production overhead.