Spoilage, Cost, and Inventory Flow

Question 1

Define “normal spoilage”.

Answer 1

Unavoidable as part of the manufacturing process. Normal spoilage is included with other costs as an inventorial product cost.

Question 2

Define “abnormal spoilage”.

Answer 2

Unplanned but considered controllable, for example, spoilage due to natural disaster, carelessness, inefficiency, or accidents. Abnormal spoilage is separated and deducted as a period expense in the calculation of net income.

Question 3

Describe the accounting treatment of proceeds from sale of scrap.

Answer 3

If the amount of scrap in immaterial, any monies received from the sale of scrap can be used to reduce factory overhead, and thereby reduce Cost of Goods Sold. Alternatively, if the value of scrap is significant and is salable, it can be treated as “other sales” in the revenue.

Question 4

Describe the accounting treatment of normal spoilage.

Answer 4

Included with other costs as an inventorial product cost.

Question 5

Describe the differences between retail inventories and manufacturing inventories.

Answer 5

Retail = merchandising inventory
Manufacturing = raw materials, work-in-process, and finished goods.