Normal and Abnormal Wastage
Normal Wastage (Loss)
This term refers to the natural percentage of unavoidable wastage in a process or operation. Such wastage is not avoidable as it occurs in the operation’s natural course. The resulting normal wastage and loss should be charged to the good units arising out of the process.
In this way, the cost of spoiled and lost units is absorbed as an additional post of the goods produced by a given process.
Accounting for Normal Wastage
Several points must be considered when accounting for normal wastage. First, in some cases, the defective goods carry value. The amount, if realized, should be credited to the process concerned.
Also, when the scrap’s value is small, it will be better to credit the total sale proceeds of such material to the works overheads account. However, if there is any loss, the process account must be debited.
In a few cases, the output might be re-worked in the same process or an earlier one. Such an output may be of little worth. In these cases, the relevant process should be charged to the process to which such material is relegated.
Abnormal Wastage (Loss)
Abnormal wastage does not occur in the natural course of the operation and is usefully more than the normal process wastage or loss. Abnormal wastage occurs because of carelessness, defective scheduling or designing, sabotage, and so on.
Treatment of Abnormal Wastage
To treat abnormal wastage, first compute the normal loss. Then compute the cost of production per unit of the relevant process after considering the normal loss but assuming no abnormal loss.
In turn, the cost of production per unit just computed should be multiplied by the lost abnormal units. This calculation will give the total abnormal wastage.
The abnormal wastage account is then debited, and the relevant process account is credited with the amount and the quantity of abnormal wastage.
The balance in the process account will indicate the cost of good units produced by the process concerned. The abnormal wastage account will then be closed by transferring the balance standing to the costing profit and loss account.
Occasionally, the actual production process may exceed the expected or estimated production. This excess is known as abnormal effectives. In normal circumstances, this does not affect the cost of producing good units.
Valuation for abnormal effectives is done at the rate at which good units are valued. The amount is debited to the relevant process account and credited to the abnormal effectives account, which at the end is closed by transferring the balance to the costing profit and loss account.