Learning Objectives
After studying this unit students should be able to;
1. Explain the nature of Material Losses
2. Understand different types of Material Losses
3. Differentiate Normal Material Losses & Abnormal
Material Losses
4. Understand the accounting treatment for Material
Losses
5. Know the approaches of minimizing Material Losses
An overview of material losses
■ In every type of manufacturing organization, there is some
difference between input and output of production
process. If output is less than the input, there is a tendency
of material losses.
■ Material loss is the result of handling, storage and usage of
materials, a part of the material may be wasted, spoiled or
scrapped and thus lost. The problems of wastage,
spoilage and scrap are common to all businesses that
produces goods.
■ Material losses take place in one way or the other in the
process of material handling, storage and issue to
respective departments or jobs.
An overview of material losses
The two categories of Material Losses are;
1. A normal Loss
a. Loss due to evaporation
b. Loss due to
breaking/shrinkage
c. Loss in loading and unloading
of materials.
2. An Abnormal Loss
a.
b.
c.
d.
Improper storage
Breakage of materials
Theft and Pilferage
Use of defective device or
equipment
Types of Material Losses
1. Wastage
■ This refers to portion of raw materials, which is lost in the
process of manufacturing.
■ Waste is a complete loss of material which cannot be rectified
■ Waste may be visible or invisible.
■ Quantity of production (output) is reduced on account of
wastes.
■ If waste is a part of abnormal loss, it is transferred to P&L A/c.
Waste Control
In order to control waste in manufacturing industries, a waste report is
prepared at regular intervals.
Thus, decisions to reduce/minimize waste is based on past
performances reported.
Types of Material Losses
2. Scrap
■ The incidental residue/remainder of small quantity and low value
■ Scrap increases the cost of production, thus, a proper control must
be maintained.
■ Sale of scrap may be treated as other income and can be credited
to P&L A/c.
Scrap occurs due to the following;
a)
b)
c)
d)
e)
Faulty planning of processes
Poor manufacturing processes
Low quality raw materials used
Faulty devices/machines
Improper inspection system
Types of Material Losses
2. Scrap
Three types of scrape;
a) Legitimate Scrap
Scrape from unavoidable factors which are expected to occur
b) Administrative Scrap
Scrap resulted from administration issues/faults. Poor management
decision.
c) Defective Scrap
This is due to poor quality of materials and labour work
Types of Material Losses
3. Spoilage
■ This refers to materials which are damaged and cannot be
brought to normal conditions.
■ Normal spoilage is a part of total cost, while abnormal spoilage
is to be transferred/charged to profit and loss account.
4. Defectives
■ Items produced below the required standard and can be
rectified by incurring additional expenditure.
■ Proper control should be exercised over the defective goods.
■ The rectification costs should be debited to the particular jobs.
■ In case of abnormal defective work, the cost may be transferred
to costing profit and loss account.
Types of Material Losses
5. Obsolete Materials
Obsolete Materials means parts, components and other
materials listed in the Bill of Material or deleted from a Bill of
Material, which as of a particular date have zero demand
and/or are anticipated to have zero demand after a given
period, based on the current forecast in effect as of such
particular date, and which are not associated with Products
currently manufactured by the company.
Types of Material Losses
5. Obsolete, Slow moving, Dormant materials/stocks
Items in a production firm can become obsolete due to the
following;
 Lack of coordination (communication & reporting) between
departments such as production department and
procurement/purchasing department
 Lack of incorporating technology that results in poor quality
 Changes in market demand or consumer taste
 Seasoned items have less to no demand after a particular
season is over.
Types of Material Losses
5. Obsolete Materials.
Losses through Obsolete can be minimized through;
 Keep up-to-date with changes in technology and market
demands
 Have good regular coordination between departments
 Have other alternatives to involve the obsolete material in
production or even sell them on a disposable price
Types of Material Losses
A bill of materials (BOM) is a comprehensive inventory/list of
the raw materials, assemblies, sub-assemblies, parts and
components, as well as the quantities of each, needed to
manufacture a product.
A well-defined BOM helps companies:
■
■
■
■
■
■
Plan purchases of raw materials
Estimate material costs
Gain inventory control
Track and plan material requirements
Maintain accurate records (necessary cost and quantity)
Ensure supply strength and reduce waste
Minimizing Material Losses
As discussed, materials is lost in the process of production or storage, in
number of ways. However, the loss of materials can be minimized
through;
1. Control ordering
Must have minimum order quantity (MOQ)
2. Reuse/reprocess
If the items can be reused or process again in the production, then it must
be used.
3. Product Design
The design of production should initially account for losses or minimize
material losses
4. Assess systems and revise procedures periodically
The production processes should be routinely revised and analysed to
minimize material losses
Chapter Summary
 Material losses may take the form of waste, scrap, defectives and
spoilage. Problems of spoilage, waste, defective units and scrap
are bound to arise in almost all manufacturing concerns, so there is
usually a difference between the quantity of the output and the
input.
 Usually the quantity of the output is less than that of the input
because of waste, scrap or spoilage. Efforts should be made to
reduce the difference between the quantities of the output and the
input so that cost of production may be reduced.
 Methods of treatment of spoilage, waste etc. and the
interpretations given to these terms vary considerably from one
industrial concern to another because of different situations arising
in different concerns. The terms are also loosely used; for example,
waste and scrap may be taken to have the same meaning.
Bibliography
 Balakrishnan, R., Sprinkle, G. B., & Sivaramakrishnan, K. (2010). Managerial
Accounting (1st ed.). New Delhi, India: John Wiley & Sons, Inc.
 Charles, T. H., Monte, W., William, M., Rebecca, T., Srikant, M. D., George, F., . . .
Christopher, I. (2011). Cost Accounting - A Managerial Emphasis (1st ed.). (K.
Hutchings, S. Goodhall, M. Stone, K. Pittard, R. Deighton, C. Pike, . . . J. Rudd, Eds.)
Frenchs Forest, Sydney, Australia: Pearson.
 Garg, A. K. (2012). Production and Operations Management. (K. Bellani, V. Mahajan,
& K. K. Jha, Eds.) New Delhi, India: McGraw Hill Education.
 Khan, M. Y., & Jain, P. K. (2013). Management Accounting; Text, Problems and
Cases (6th ed.). (K. Bellani, V. Mahajan, T. K. Maji, S. Khare, & S. Negi, Eds.) New
Delhi, India: McGraw Hill Education (India) PTY LTD.
End of Lecture
Complete the
exercise on the
student course
book