Normal spoilage definition
/What is Normal Spoilage?
Normal spoilage is the expected amount of materials that are rendered unusable as part of the production process. This expected amount is included in the standard cost of goods for units produced. This amount is primarily based on historical results, along with input from the industrial engineering staff regarding the expectations for spoilage.
Normal Spoilage vs. Abnormal Spoilage
Normal spoilage is the expected amount of materials rendered unusable, while abnormal spoilage is any additional spoilage above this amount. There are many possible causes of abnormal spoilage, such as an incorrect machine setup or perishable goods being stored at an excessively high temperature.
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Accounting for Normal Spoilage
If these units are completed and subsequently held in stock, it means that the cost of normal spoilage is being temporarily recorded as an asset. When the units are sold, the built-in cost of normal spoilage is then charged to expense, within the cost of goods sold classification on the income statement.
Accounting for Abnormal Spoilage
Abnormal spoilage is charged to expense as incurred. It is never included in the cost of inventory. If you were to instead include the cost of abnormal spoilage in inventory, you would be shifting a current-period cost into a future period.