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.
How to Calculate Normal Spoilage
The steps required to calculate normal spoilage are as follows:
Determine expected spoilage rate. Obtain the historical or standard spoilage rate for the production process. This is often expressed as a percentage of total production units. For example, if the expected spoilage rate is 2%, then for every 100 units produced, two are expected to be spoiled.
Calculate total units started or produced. Identify the number of units produced or started during the period. This includes both completed and spoiled units.
Apply the spoilage rate to total units. Multiply the total units by the expected spoilage rate to estimate the number of normal spoiled units.
The formula to calculate normal spoilage is as follows:
Normal spoilage = Total units produced × Spoilage rate
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.