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Cost of Quality, Spoilage (Store Losses) Homework Help, Tutoring
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Cost of Quality, Spoilage (Store Losses) Assignment / Homework Help
Cost of Quality, Spoilage (Store Losses)

Spoilage:
Materials which have been damaged in the course of manufacture & it's not possible to economically rectify the damage & hence has to be taken out of the process so that the same can be disposed of in some way without being further processed, such damage is known as spoilage.

Accounting Treatment of Spoilage :
  • Spoilage may be normal or abnormal. Due to causes inherent in operation, normal spoilage occurs whereas due to causes not inherent in operation, abnormal spoilage occurs.

  • Production cost includes costs of normal spoilage. This can be done in 2 alternate ways: - (i) by charging the loss to production order, or (ii) by charging the loss to overhead.

  • If any value is realized from the spoilage, then such value is credited to the production order or overhead as the case may be.

  • Production cost excludes the cost of abnormal spoilage, which is transferred to costing profit & loss A/c.

  • Sometimes the specifications of the customer's are so rigid that any production not satisfying the specification is liable to be regarded as spoilage. In such cases, the cost of spoilage should be borne by the good units.
Spoilage should be controlled through compulsory preparation of spoilage report, setting standards for spoilage, & comparing the actual with standards.

Scraps:

Scraps are incidental residue, which may be obtained from some type of manufacture, & can be sold for small value without further processing.

Accounting Treatment of Scraps:
  • Scraps which are of negligible value should be treated by neglect, i.e. the good units borne the loss. Proceeds of the scrap which are sold should be treated as other income.


  • Proceeds of the scraps, which cannot be traced with any process or job, should be credited to overhead, as a result of which overhead rates are reduced.


  • For scraps which are of significant value & which can be traced with any process or job, debit should be made to separate scraps account; credit should be made to particular job or process account with full costs of the scraps. Proceeds of the scrap which are sold should be credited to the scraps account, thereby transferring there from any profit or loss to costing profit & loss account.
Preparation of scraps report should be made compulsory for the purpose of control. Exercise of control should be not only on manufacture, but also upon production as a whole, which includes material procurement, equipment employment & employment of personnel etc. Standard for scraps for comparison with actual should be set up.

Defectives:

Defectives are those products which are not up to the standard & which are not meeting dimensional specification. Due to any one or more of the causes like, improper material, faulty supervision, bad workmanship, improper work planning, improper inspection etc., defectives may arise By incurring additional cost, defectives may be reconditioned or re-worked & can be brought to standard or little below standard.

Accounting Treatment of defectives:
  • When responsibility for defectives, cannot be located to any department, then in that case, the rectification cost should be treated as general overhead.

  • When responsibility for defectives, can be located to any department, then in that case, the rectification cost should be treated as overhead of that department.

  • When defectives have normal value & when defectives, subsequently rectified, is of normal quantity, the good units absorb the loss, i.e. the process account is credited with the proceeds of defectives.

  • When defectives are of abnormal quantity & arises out of uncontrollable causes, the rectification cost should be written off to costing profit & loss account.

  • The rectification cost of defectives which can be traced with a particular job should be charged to that job.

    • Control should be exercised on (i) production, & (ii) rectification of defectives. For defectives & rectification costs of defectives, standards should be set & comparison of actuals should be made with the corresponding standards. For the purpose of control, reports on defectives should be prepared.
Wastage:

When basic raw materials are lost in the course of manufacture, rendering no realizable value, such are known as wastage. Wastage may be visible (e.g. waste in the form of smokes, dusts etc.) & invisible (e.g. due to evaporation, shrinkage etc.). Sometimes very nominal value may be realized from visible wastes.

Accounting Treatment of wastes:
  • Good units should absorb the Normal wastes whereas cost of abnormal wastes should be written off to costing profit & loss account.

  • When wastes fetch some sales value, such value should be credited to process account.

  • When such value is insignificant, then it may be treated as miscellaneous income.
Exercise of control should be on purchase, production, storage, inspection etc. Waste reports should be prepared & such preparation should be made compulsory. On the basis of past experience, estimation of wastes should be made before production & comparison of actual wastes should be made with the estimated wastes.

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