## Treatment of Material Losses

Material losses fall into five categories. Each has a different nature and accounting treatment.

### Quick Comparison Table

Type	Definition	Recoverable?	Rectifiable?
Waste	Raw material lost/discarded in storage or production	Generally no	No
Scrap	Residue with small/no value; cannot be used as-is	Small value	No (usually)
Spoilage	Badly damaged in process; cannot be rectified economically	Small value via disposal	No
Defectives	Sub-standard output; can be rectified	Sold at lower price	Yes
Obsolescence	Loss in value due to technological change	Disposal value	N/A

### (i) Waste

Lost during storage or production; may be visible (clippings) or invisible (evaporation).
Normal: Absorbed into cost of good production.
Abnormal: Transferred to Costing Profit & Loss Account.

### (ii) Scrap

Residual material with small but recoverable value; sometimes reintroduced as raw material.
Normal: Cost borne by good units; realisable value deducted from total cost.
Abnormal: Scrap Account charged with full cost; profit/loss on realisation → Costing P&L.

### (iii) Spoilage

Materials badly damaged; cannot be economically rectified; removed from process.
Normal (inherent in process): Cost included in production order or spread via production overhead. Realisable value credited to production order/overhead.
Abnormal (non-inherent causes): Full cost charged to Costing P&L.
Special case: Spoilage due to rigid specifications → cost absorbed by good production; disposal cost charged to production overhead.

### (iv) Defectives

Units that don't meet quality standards but can be rectified (rework) or discarded (rejects).
Caused by: sub-standard materials, bad supervision, poor workmanship, inadequate equipment.
Reworks: Units rectified by additional material, labour, and overhead.
Rejects: Disposed of or recycled.
Normal: (Cost of defective − Realisable value) absorbed into material cost of good production.
Abnormal: Material cost of abnormal defectives → Costing P&L (after crediting realisable value).

Reclamation Steps for Defective Units:

1. Send all defective units to a designated area.

2. Dismantle units.

3. Separate good/serviceable parts → return to stock.

4. Repairable parts → workshop → return to stock after repair.

5. Irreparable parts → collect for scrap sale or melting.

### (v) Obsolescence

Loss in intrinsic value due to supersession by technology or market change.
Circumstances: spare part/component machine is discontinued; product itself is obsolete; material replaced by superior alternative.
Treatment: Immediate disposal at best available price.
The loss is abnormal → does not form part of cost of manufacture → charged to Costing P&L.

Worked example

### Example 1

Normal vs Abnormal Scrap Treatment

Production run: 1,000 units; normal scrap rate = 5%.

Actual scrap = 70 units; Total cost = ₹10,000.

Normal scrap = 50 units (5% of 1,000). Scrap realisable value = ₹2/unit.

Normal scrap treatment:

Abnormal scrap = 70 − 50 = 20 units.

### Example 2

Defectives — Normal Treatment

500 units produced; 20 units are normal defective (reworkable).

Cost of rework per unit = ₹15; realisable value of unrectable rejects = ₹8/unit (say 5 units).

Cost of 20 defectives (proportion of production cost) = ₹400.

Less: Realisable value of 5 rejects = ₹40.

Net charge to good production = ₹360 spread over 495 good units.

Rework cost of 15 units = 15 × ₹15 = ₹225 added to production cost.

⚠️ Common exam mistakes

Treating all scrap as the same as waste — scrap has recoverable value and is identifiable; waste typically does not.
Confusing spoilage with defectives — spoilage cannot be rectified economically; defectives can be reworked or recycled.
Charging abnormal losses to production overhead instead of Costing P&L — only normal losses are part of product cost.
Forgetting to credit realisable/disposal value before transferring the net abnormal loss to Costing P&L.
Treating obsolescence as a normal cost — it is an abnormal loss and must be excluded from cost of production.
Mixing up 'rejects' (defectives that cannot be rectified) with 'reworks' (defectives that can be fixed) — the accounting treatment differs.

Reference:

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Treatment of Material Losses — Waste, Scrap, Spoilage, Defectives, Obsolescence

Worked example