Normal spoilage belongs in the product's cost; abnormal spoilage belongs on the income statement, and the equivalent unit count decides whether it gets there.
In process costing, spoiled units are costed like good units, then split: normal spoilage, the expected loss of an efficient process, is added to the cost of the good units that passed inspection, and abnormal spoilage, everything above that allowance, is written off to the income statement as a loss for the period. On an illustrative month with 1,100 spoiled units and a 5 per cent allowance on good output, 880 units are normal and 220 abnormal: the good units carry 33.60 each instead of 32.00, and 7,040 goes to profit and loss as an abnormal loss.
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The split matters because the two kinds of spoilage tell different stories. Normal spoilage is a cost of making the product and belongs in its unit cost and in inventory. Abnormal spoilage is a cost of a bad month, a machine fault or a bad batch of material, and it should be visible to management as a separate line, not buried in a unit cost that then sits in stock.
| Item | Units | Conversion complete |
|---|---|---|
| Opening work in progress | 1,500 | 60% |
| Started in the month | 20,000 | |
| To account for | 21,500 | |
| Good units completed and transferred out | 17,600 | 100% |
| Spoiled units, found at final inspection | 1,100 | 100% |
| Closing work in progress | 2,800 | 50% |
| Accounted for | 21,500 |
| Cost | Materials | Conversion | Total |
|---|---|---|---|
| Opening work in progress | 18,000 | 10,800 | 28,800 |
| Added in the month | 240,000 | 391,200 | 631,200 |
| To account for | 258,000 | 402,000 | 660,000 |
Materials enter at the start, conversion evenly. Inspection happens at the end of the process, so spoiled units are complete when they are found, and closing work in progress has not yet been inspected. Normal spoilage is set at 5 per cent of the good units that pass inspection.
Normal spoilage = 5% × 17,600 good units = 880. Abnormal spoilage = 1,100 − 880 = 220.
Materials: 17,600 + 1,100 + 2,800 = 21,500
Conversion: 17,600 + 1,100 + 2,800 × 50% = 17,600 + 1,100 + 1,400 = 20,100
Materials: 258,000 ÷ 21,500 = 12.00. Conversion: 402,000 ÷ 20,100 = 20.00. Total 32.00.
Excel, conversion pool in C8, good units in B5, spoiled in B6, closing units in B7 and their percentage in C7: =C8/(B5+B6+B7*C7)
Good units: 17,600 × 32.00 = 563,200
Normal spoilage: 880 × 32.00 = 28,160, added to the good units
Transferred out: 563,200 + 28,160 = 591,360, or 33.60 a good unit
Abnormal spoilage: 220 × 32.00 = 7,040, charged to profit and loss
Closing work in progress: 2,800 × 12.00 + 1,400 × 20.00 = 33,600 + 28,000 = 61,600
Check: 591,360 + 7,040 + 61,600 = 660,000.
Closing work in progress gets none of the normal spoilage, because it has not reached the inspection point. If inspection were halfway through the process and the closing units were beyond it, they would take a share of normal spoilage in proportion to their units.
Normal spoilage adds 1.60 to every good unit, 5.0 per cent of its cost, which is the right answer: an efficient process making this product loses about one unit in twenty, and the price has to recover it. The 7,040 abnormal loss is the measure of how far this month fell short of that standard, and it is reported, not capitalised.
| Normal allowance | Normal units | Abnormal units | Cost per good unit | Abnormal loss | Transferred out |
|---|---|---|---|---|---|
| 3.00% | 528 | 572 | 32.96 | 18,304 | 580,096 |
| 4.00% | 704 | 396 | 33.28 | 12,672 | 585,728 |
| 5.00% | 880 | 220 | 33.60 | 7,040 | 591,360 |
| 6.25% | 1,100 | 0 | 34.00 | 0 | 598,400 |
The allowance is a judgement, and it moves cost between inventory and the income statement. A generous allowance of 6.25 per cent absorbs every spoiled unit into product cost and shows no abnormal loss at all; a tight 3.00 per cent allowance reports 18,304 of loss. Neither changes the cash spent. Where finished goods are still in stock at the period end, a generous allowance defers part of the month's waste into the balance sheet, which is why auditors ask how the normal rate was set and when it was last tested against actual yields. Where actual spoilage falls below the allowance, some costing systems in the CIMA tradition record an abnormal gain; others simply treat all spoilage as normal.
Leaving all spoiled units, abnormal ones included, out of the equivalent units altogether, sometimes called the method of neglect. The cost then spreads over fewer units and over everything still in the process:
| Line | Spoilage split | Spoiled units ignored | Difference |
|---|---|---|---|
| Equivalent units, materials / conversion | 21,500 / 20,100 | 20,400 / 19,000 | |
| Cost per equivalent unit | 32.00 | 33.805 | |
| Transferred out | 591,360 | 594,967 | 3,607 |
| Closing work in progress | 61,600 | 65,033 | 3,433 |
| Abnormal loss | 7,040 | 0 | −7,040 |
The 7,040 has not disappeared. It has moved into finished goods and into unfinished work that has not even been inspected, so inventory is overstated by 3,433 in work in progress alone, and the month's abnormal loss never reaches a management report. The equivalent unit mechanics without spoilage, including the FIFO version, are in how to calculate equivalent units of production.
Count spoiled units in the equivalent units, cost them at the same rate as good ones, then send normal spoilage to the units that passed inspection and abnormal spoilage to profit and loss. Here that is 33.60 a good unit and a 7,040 loss the production manager should be asked about. The full factory costing, with its pools, drivers and unit costs, is in the free workbook for this case.
Normal spoilage is the loss expected from an efficient process and is treated as part of the cost of good output. Abnormal spoilage is anything above that allowance, caused by faults or poor control, and is written off as a period loss. With a 5 per cent allowance on 17,600 good units, 880 of 1,100 spoiled units are normal and 220 abnormal, a loss of 7,040 at 32.00 a unit.
Yes. Its cost is added to the good units that passed inspection, so it flows into finished goods and, when they are sold, into cost of sales. In the illustrative month, 28,160 of normal spoilage raises the cost of each good unit from 32.00 to 33.60. Abnormal spoilage is never inventoried; it goes straight to the income statement.
Only if it has passed the inspection point. When inspection is at the end of the process, closing work in progress has not been inspected, so it absorbs none: in the illustrative month it carries 61,600 at plain cost. Ignoring spoiled units in the equivalent unit count instead loads it with 65,033, overstating it by 3,433.
This article is one calculation from Cost Accounting. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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