Material Losses in Cost Accounting

What are Material Losses in Cost Accounting?

Losses of material during handling, storage or manufacturing are called as material losses in cost accounting. We could classified material losses into two parts i.e. normal losses and abnormal losses.

Normal Losses: Losses which are unavoidable are called Normal losses. Normal losses of material can not be completely avoided but may be controlled to a limited extent .These losses are transferred to factory overheads .Examples of material losses are as follows:

  • Losses by evaporation
  • Loss due to loading and unloading
  • Losses due to breaking the bulk etc.

Abnormal Losses: Losses that arises due to inefficiency in operations, carelessness etc. is called as abnormal losses. These losses are charged to coasting profit and loss account.  Examples of abnormal losses are as follows:

  • Breakage
  • Fire, accident, flood etc.
  • Improper storage
  • Theft

Forms of Material Losses:

Material losses could arise in the form of waste, scrape, spoilage and defectives.

Waste: It comprise of all visible, invisible losses that can not be collected and also unsalable portion of the collected loss. Examples of waste are dust, smoke, gases etc.

Scrap: It represents the unusable loss which can be sold. It is measurable and has a minor value .Scrap may arise in the form of turning’s, filing etc. from metal; off-cuts and cut pieces in leather & cloth industry .

Spoilage: Spoilage is those materials or components which are so damaged in the manufacturing and operation process that they can not be repaired or reconditioned. Spoiled units do not attain the quality required and it is not economic to correct them.

Defectives: A good in which there is a manufacturing fault or defect is called Defective goods, this fault could be removed by applying additional cost called rectification cost.