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Spoilage

Wastage or scrap that from the manufacturing process or badly damaged material from processing a product

What is Spoilage?

Spoilage is wastage or loss of material that occurs during the manufacturing process, it can also be used to classify badly damaged material that is used for processing a product. Spoilage is used to refer most commonly to raw materials whose lifespan is very short. In accounting, spoilage is classified into two types – normal spoilage and abnormal spoilage.

 

Spoilage

 

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Normal spoilage vs. Abnormal spoilage

Normal spoilage is the kind of spoilage that happens during the production process that business owners can say is normal and acceptable. For example, a fruit importer understands that transporting fruits by sea or ground will definitely incur spoilage for various reasons.

One reason is that some fruits age faster than the rest, making them rot faster; or that some fruits might become spoiled because of the way they were handled as they were moved from one vehicle to the next. The importer then will consider a pound of rotten fruits to be normal spoilage when it arrives at his shop and may charge it to the “cost of goods sold.”

Abnormal spoilage, on the other hand, is spoilage that is beyond the normal point wherein the level is unexpectedly high. It may be due to defective machinery, sub-standard quality of materials, and even incompetent operators.

Unlike normal spoilage, abnormal spoilage is charged as expenses incurred or is entered as a separate cost that can no longer be recovered. One example is a manufacturing company for doughnuts whose normal spoilage is 5,000 donuts or 5% of the total production of 100,000 doughnuts a day. If the number goes up to more than 5,000, then the excess is considered abnormal spoilage.

 

How to calculate normal spoilage

To calculate for normal spoilage, the total finished products must be counted first, then, the spoiled products are determined next. For example, a shoe manufacturing company produces 10,000 pairs a month and 500 of those cannot be sold due to defects or quality control issues.

The normal spoilage will be calculated as the total number of spoiled units, divided by the total units produced, and multiplied by 100. In this case, it would be 500 / 10,000 x 100 = 5%.

 

Normal Spoilage Formula

 

How to calculate abnormal spoilage

Abnormal spoilage is easy to see, especially if it is posted as a separate entry and labeled as something that cannot be recovered anymore. From the above example, we can say that any spoilage that is beyond the normal spoilage is considered abnormal spoilage.

 

Why should spoilage be given attention?

Spoilage, especially normal spoilage, is always part of the production process as it is unavoidable and expected. However, it is important to take notice of them and do something about them before they turn for the worse and become abnormal spoilage. Here are some reasons why:

  • They can signal a need to evaluate the production process. A part of the production process can be responsible for the spoilage. For example, a conveyor belt in a cookie manufacturing plant that is too loose and makes erratic movements can cause the cookies to break.
  • Spoilage can indicate a mistake that is continuously and unknowingly done by an operator. When evaluated, the operators may be required to undergo re-training or training in a new process.

 

Spoilage vs. By-products

The main difference between spoilage and by-products is that spoilage is considered scrap or trash that cannot be used anymore for any other purpose. By-products, on the other hand, are products that can still be of use or may be sold as a product other than what was originally created.

For example, a restaurant that serves chicken barbecue can consider chicken barbecue as its main product while the excess barbecue sauce it makes that is lathered all over the chicken barbecue may be sold as an entirely different product to customers. It can now be considered a by-product. Meanwhile, spoilage will be the parts of the chicken that cannot be used anymore such as the feet and the head.

 

Final thoughts

Business owners understand that normal spoilage is an acceptable occurrence during production. However, they should not be left unnoticed because it may indicate a problem. What is best to do is to conduct an assessment or evaluation of the production process in order to correct the steps which need to be addressed, before the spoilage becomes abnormal spoilage.

 

Additional resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Cost of Goods Manufactured (COGM)
  • Fixed and Variable Costs
  • Inventory Writedown
  • Operating Cycle

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