# Treatment of Material Losses

Losses of material in storage or production are classified into five types. For each, the cost treatment depends on whether the loss is normal (inherent, unavoidable) or abnormal (due to avoidable causes). The guiding rule:

Normal loss → absorbed by good production (spread over good units).
Abnormal loss → transferred to the Costing Profit & Loss Account (so it does not distort product cost).

## A. Waste

The portion of raw material lost during storage or production and discarded. Waste may or may not have any value (often invisible — e.g. evaporation, smoke).

Normal: cost is absorbed by good production units.
Abnormal: cost is transferred to the Costing P&L Account.

## B. Scrap

Materials that result from production, are discarded, and disposed of without further treatment. Scrap is generally identifiable, has physical substance and a small realisable value.

Normal: cost is borne by good units; the realisable value is deducted from cost.
Abnormal: the scrap account is charged with full cost, credit is given to the job/process concerned, and the profit or loss on realisation is transferred to the Costing P&L Account.

## C. Spoilage

Materials badly damaged in manufacturing that fail to meet customer specifications and cannot be rectified economically.

Normal: included in cost — either charged to the production order or to production overhead (spread over all products).
Abnormal: charged to the Costing P&L Account.

## D. Defectives

Arise from sub-standard materials, bad supervision/planning, poor workmanship, inadequate equipment or careless inspection. Unlike spoilage, defectives can be rectified and reused.

Normal: cost (less realisable value on sale of defectives) is charged to the material cost of good production.
Abnormal: material cost is not included in material cost; treated as a loss after crediting the realisable value, and transferred to the Costing P&L Account.

## E. Obsolescence

Defined as "the loss in the intrinsic value of an asset due to its supersession." Material may become obsolete where:

it is a spare/component of machinery that is now obsolete;
it is used in making a product that has become obsolete; or
the material itself is replaced by another due to improved quality or a fall in price.

## Distinguishing the Types

### Waste vs Scrap

	Waste	Scrap
Connected with	Raw material / inputs	Output
Visibility	May be visible or invisible	Identifiable, has physical substance
Recoverable value	Generally none	Small recoverable value (a by-product)

### Scrap vs Defectives

	Scrap	Defectives
Connected with	Output only	Output and input
Avoidability	Not intended; cannot be eliminated (nature of material/process)	Not intended but can be eliminated through proper control
Use	Generally not used or rectified	Can be used after rectification
Value	Insignificant recoverable value	Sold at a lower value than good units

Worked example

### Example 1

Normal vs abnormal scrap treatment

A process yields scrap with a realisable value. If the scrap is normal, its sale value (say ₹500) is simply deducted from the process cost, reducing the cost of good units.

If instead the scrap is abnormal, the scrap account is charged with the full cost of the scrapped material, the process is credited, and any profit/loss on selling the scrap is taken to the Costing P&L Account — keeping the abnormal element out of product cost.

### Example 2

Defectives — normal treatment

Defective units cost ₹2,000 to produce and can be sold as defectives for ₹300. As a normal loss, the net ₹1,700 (cost less realisable value) is charged to the material cost of good production, so good units absorb the rectifiable loss.

⚠️ Common exam mistakes

Treating all losses the same way — the normal/abnormal split determines whether the cost goes to good units or to the Costing P&L Account.
Confusing scrap with defectives — defectives can be rectified and reused; scrap generally cannot.
Confusing waste (connected with input/raw material, often no value) with scrap (connected with output, has small realisable value).
For normal scrap, forgetting to DEDUCT its realisable value from cost.
Charging abnormal losses to good production, which wrongly inflates product cost.

Reference:

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Treatment of Material Losses (Waste, Scrap, Spoilage, Defectives, Obsolescence)

Worked example

⚠️ Common exam mistakes