## Waste

Portion of raw material that is lost in the production process and has no recoverable value.

Types:

Visible waste (shrinkage): physically measurable — e.g., cutting losses
Invisible waste (evaporation): cannot be physically measured — e.g., solvent loss

### Accounting Treatment

Type of Waste	Treatment
Normal waste	Cost absorbed by the good output (unit cost of good units is inflated to cover the loss)
Abnormal waste	Cost charged directly to Profit & Loss Account (not passed to product cost)

### Control of Waste

1. Fix a normal wastage standard for each material/process

2. Compare actual wastage with the standard periodically

3. Investigate and assign responsibility to the appropriate department: Purchasing / Storage / Production / Inspection

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## Scrap

Material that emerges as a residual from a manufacturing process and has a recoverable (saleable) value. Always visible.

> Scrap differs from waste because it can be sold — it has monetary value.

### Accounting Treatment (3 scenarios)

Scenario 1 — Scrap value is negligible:

Scenario 2 — Scrap value is significant AND identifiable to a specific job:

Full cost of scrap → Debit Scrap Account, Credit Job Account (job is relieved of the cost)
Sale proceeds → Credit Scrap Account
Net profit or loss in Scrap Account → Transfer to P&L Account

Scenario 3 — Scrap value is significant but NOT identifiable to a specific job:

Net sale value of scrap (after deducting selling and distribution costs) → Deducted from total material cost
Reduces the effective cost of materials for the period

Worked example

### Example 1

Normal vs Abnormal Waste:

A process uses 1,000 kg of raw material costing ₹50,000. Normal waste is 5% (50 kg); actual waste is 80 kg.

Normal waste (50 kg): Cost = 50/1,000 × ₹50,000 = ₹2,500 → absorbed in the cost of 950 kg good output.

Abnormal waste (80 − 50 = 30 kg): Cost = 30/1,000 × ₹50,000 = ₹1,500 → charged to P&L Account.

Good output = 1,000 − 80 = 920 kg.

Cost per kg of good output = (₹50,000 − ₹1,500 abnormal) ÷ 920 = ₹48,500 ÷ 920 ≈ ₹52.72/kg.

### Example 2

Scrap Treatment — Significant & Job-Identifiable:

Job No. 105 generates scrap material costing ₹800. Scrap is later sold for ₹600.

Entry 1 — When scrap arises:

Debit Scrap A/c ₹800 | Credit Job 105 A/c ₹800 (job cost reduced)

Entry 2 — When scrap is sold:

Debit Bank ₹600 | Credit Scrap A/c ₹600

Scrap A/c balance: Dr ₹800 − Cr ₹600 = ₹200 loss → Transfer to P&L A/c.

⚠️ Common exam mistakes

Treating scrap and waste as the same — waste has NO recoverable value; scrap HAS a recoverable value.
Charging abnormal waste to production cost instead of P&L — only normal waste is a production cost.
In Scenario 2 (scrap significant & job-identifiable), forgetting to credit the Job Account when scrap arises — the job should be relieved of the scrap cost.
In Scenario 3 (not job-identifiable), deducting gross scrap sale value instead of NET value (after selling & distribution costs) from material cost.

Reference:

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Treatment of Waste and Scrap in Cost Accounts

Worked example