# Storage Losses, Stock Discrepancies and Material Handling Cost

## Normal and Abnormal Loss During Storage

When physical stock-take reveals a gap between the book balance (stores ledger/computer records) and the actual physical balance, apply a 3-step process:

Step 1: Transfer the difference to "Inventory Adjustment A/c"

Step 2 — If the reason is NORMAL (e.g., evaporation, natural shrinkage):

Transfer difference to Overhead Control A/c, OR
Inflate the price of material issued to production (so normal loss is absorbed into material cost)

Step 3 — If the reason is ABNORMAL (e.g., theft, negligence):

Debit the cost of the difference directly to P&L A/c

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## Common Reasons for Physical Stock Discrepancies

Reason	Nature
Wrong entries in stores ledger / computer records	Clerical / data-entry error
Material placed at wrong physical location (uncounted)	Storage/location error
Arithmetic errors in bin card stock balances	Calculation error

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## Material Handling Cost

Definition: All expenses involved in receiving, storing, and issuing materials.

### Approach 1 — Add to Cost of Material

Calculate a material handling rate based on:

Cost of material issued, OR
Weight of material issued

Then load this rate onto the cost of each unit of material.

### Approach 2 — Include in Manufacturing Overhead

Treat as part of manufacturing overhead; absorb into products on the basis of:

Direct Labour Hours, OR
Machine Hours

### Which Approach to Use?

Approach 1 is preferred when handling cost varies with the type/value/weight of material. Approach 2 is simpler when handling cost is more uniform across materials.

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## Quick Revision: True/False Checklist (Common Exam Statements)

Statement	Answer	Why
Safety stock increases as demand increases	False	We increase order quantity; safety stock buffers against supply delays, not demand changes
ABC analysis — high-cost items fall in Category A	False	Category is based on annual consumption VALUE (price × quantity used), not unit cost
Large batch size protects against stock-outs	True	More inventory on hand reduces the chance of a stock-out
EOQ balances carrying cost and shortage cost	False	EOQ minimises ordering cost + carrying cost
Lead time = time until last instalment of goods received	False	Lead time = time from placing order to receipt of each order (not the last instalment)

Worked example

### Example 1

Physical count shows 480 kg on hand; stores ledger shows 500 kg. Difference = 20 kg.

Step 1: Transfer 20 kg to Inventory Adjustment A/c.

Investigation: 12 kg = normal evaporation (normal) → transfer to Overhead Control A/c.

Remaining 8 kg = unexplained / suspected pilferage (abnormal) → debit cost to P&L A/c.

### Example 2

A factory's material handling department incurs ₹60,000 annually. Total weight of material issued = 1,200 kg.

Approach 1: Material handling rate = ₹60,000 ÷ 1,200 = ₹50 per kg. This is added to the cost of each kg of material issued.

Approach 2: If factory works 10,000 direct labour hours, absorption rate = ₹60,000 ÷ 10,000 = ₹6 per DLH, charged via overhead.

⚠️ Common exam mistakes

Increasing safety stock when demand increases — demand increase calls for a higher order quantity, not a larger safety stock buffer
Confusing ABC analysis basis with unit cost — classification is by annual consumption value (unit cost × annual usage), not by unit price alone
Misdefining EOQ as balancing carrying cost and shortage cost — it balances ordering cost and carrying cost; shortage/stock-out cost is separate
Routing abnormal storage losses through overheads instead of directly to P&L A/c
Skipping the Inventory Adjustment A/c and directly debiting P&L without first identifying whether the loss is normal or abnormal

Reference:

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Storage Losses, Physical Stock Discrepancies and Material Handling Cost

Worked example

⚠️ Common exam mistakes