Briefly explain three possible methods of accounting for spoilage.

Management Accounting Block Revision Mock Exams

Normal spoilage (Normal loss) is what arises under efficient operating conditions: it is an inherent result of the particular process and thus uncontrollable in the short run.

Abnormal spoilage (Abnormal loss) is spoilage that is not expected to arise under efficient operating conditions. It is not an inherent part of the selected production process.

Three possible methods of accounting for spoilage are:

1) Ignoring the spoilage when the cost per unit is calculated. Cost per unit based on actual output.
2) Assuming that the lost units have a cost and therefore charging the spoilage to the P and L account, whenever they occur i.e. the cost per unit is based on the input units rather than output units.
3) It is a compromise system which is based on the view that:

a) If some loss is to be expected, it shouldn‟t be given a cost but
b) If there is some loss that shouldn‟t happen, it ought to give a cost.

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