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Which is the accounting Treatment of Spoilage Costs?

Which is the accounting Treatment of Spoilage Costs?

Answers

Wilfred
1) Normal Spoilage Costs: These costs are assigned to the good output using two approaches:

(i) Omission Approach: Under this approach, the normally spoilt units are not included in the calculation of equivalent units. This means that the cost of the normally spoilt units will automatically be distributed to the good output. By excluding the normal spoilage in the computation to the good output, a lower figure will be derived. The weaknesses of this method are;
(a) The cost of normal spoilage is spread equally into the finished goods and the ending W.I.P regardless of whether the ending W.I.P. has passed the inspection stage or not.
(b) It does not allow the manager to see the costs of spoilage because these costs are not computed.

(ii) Recognition and Re-Assignment Approach In this approach, the normal spoilage is included in the equivalent units computation; further, the normally spoilt units will be assigned costs just like any other unit. The spoilage costs will then be reallocated to these good units that have passed the inspection point. The steps to follow under this method are:
(a) Compute equivalent units including normal spoilage.
(b) Assign costs to all units including normal spoilage.
(c) Reassign normal spoilage costs to good output.

2) Abnormal Spoilage Costs
These costs do not add any production benefit to the company and are treated as accounting losses. The costs are written off directly as losses for the period in which they occur.
Wilfykil answered the question on April 17, 2019 at 08:22

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