Debitoor Dictionary

Accounting terms explained simply

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  1. Cost of goods sold
  2. Expense
  3. Inventory
  4. Joint products
  5. Raw materials

Spoilage – What is spoilage?

Spoilage is waste or scrap that occurs during the manufacturing process.

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Spoilage is usually associated with perishable raw materials such as food products but spoilage can occur in the production of any product.

Spoilage vs. by-products

Spoilage is the same concept as scrap or waste, but spoilage is different to a by-product) or a joint product. Whereas by-products can be further processed and sold on, spoilage usually has no market value, and is disposed of rather than sold.

For example, a company makes and sells fruit juice. Their production process creates three different products: the juice, lemon and orange oil, and orange peel.

Whilst the oil is not the intended product, it can be further processed and sold as well as the main product; the oil is therefore a by-product. However, the orange peel would be considered spoilage or waste,as it is disposed of rather than sold or used within another product.

Normal and abnormal spoilage

Within any production process, it is difficult to completely avoid waste or scrap. The standard amount of waste or scrap that occurs throughout the production process is known as normal spoilage. Normal spoilage should correspond to the amount of goods produced - the more goods, the more normal spoilage.

Any waste or spoilage that is not an expected part of the production process is known as abnormal spoilage. Abnormal spoilage does not directly correspond to the number of units produced, and is considered an unexcepted surplus.

For example, a restaurant sells vegetable soup. The vegetable peel cannot be used in the soup or in any other items from the menu, so is thrown away and considered normal spoilage. However, some of the vegetables go off before being used in hte soup. This is not a normal part of the production process, so is considered abnormal spoilage.

Spoilage in accounting

Spoilage is calculated as part of process costing. Companies usually calculate expected spoilage rates for different products, assigning the amount of spoilage they expect to the cost of goods sold. If less normal spoilage is incurred than excepted, this is recorded as an unexpected gain.

Abnormal spoilage is not included in the product cost as the cost cannot be attributed to a specific sale. Instead, abnormal spoilage is considered a separate, unrecoverable expense which should be recorded as a loss in a “loss for abnormal spoilage” account.