In Cost Accounting, explain what is waste, scrap,spoilage,obsolescence,rejects and stock losses

August 8th, 2007 Comments off
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This article seeks to define waste, scrap, spoilage, obsolescence, rejects and stock losses.

Irrespective of the nature, Management needs to keep tight control over waste, scrap, spoilage, obsolescence, rejects and stock losses through specific control reports.

Generally, normal losses will be charged to the cost of production and abnormal losses will then charge into a separate account.

Terms

Definition

Waste

Unusable materials having little or no value.

Nowadays, with good technology, companies can convert waste into useful and saleable products. Example of such conversion is the waste into fertilizers.

Scrap

Materials that cannot be used for its original purpose

Difference between scrap and by-products are:

  • By-products have greater sale value than scrap
  • By-products are often processed further to make it saleable while scrap is usually sold on an “ as is where is” basis.

Spoilage

Those that cannot be used for its intended purpose.

A form of waste.

Arises due to inefficient production, poor workmanship, poor material, etc.

The cost of spoilage comprise material, labor and overheads at the point of defects.

Either additional cost are incur in rectifying the spoilt work or in converting the spoilt work into new products.

Obsolescence

Items that are out-dated hence obsolete. Reasons could be due to change in consumer demand, change in fashion, change in specification.

Rejects

Materials that are not accepted on inspection.

May be rejected when purchases are received or during the course of manufacturing.

Where possible, rectification will be carried out or otherwise the rejected item will be disposed off.

Stock Losses

Losses that are due to improper storage, inherent defects, accidents and errors in recording and measuring

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Financial Accounting

 
 

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