Following are the forms of material losses: 1. Waste or Wastage 2. Scrap 3. Spoilage.
Waste is that portion of a basic raw material lost in processing, having no recovery value. So waste is a type of material loss which arises in the course of production and has no value. It may be visible or invisible.
A visible waste is that which is physically present, and which can be seen and handled. Saw dust in a wood working plant, ash in a cooking industry, etc. are examples of visible wastage. An invisible waste is that which cannot be seen and handled. Gas vaporated in the air is an example of invisible waste.
Waste is of two types i.e.:
(i) Normal waste and
(ii) Abnormal waste.
Normal waste is that which is likely to arise normally due to the inherent nature of the materials. Liquid lost due to evaporation is an example of normal waste.
On the other hand, abnormal waste is that which is excess of the normal waste and which arises due to abnormal causes, such as, defective planning, inefficiency in operation, fire, etc.
Waste of material cannot be completely eliminated but it can be controlled or reduced.
For controlling waste, the following may be taken:
1. Waste can be controlled by setting up standard or limit of waste.
2. Waste of material can be controlled by adopting corrective measures such as, use of good quality material, careful handling of materials use of modern handling equipment, etc.
3. By regular waste reporting, wastage can be controlled by taking necessary action.
The cost of normal waste of material is treated as a cost of production. So it can be recovered from the good units of materials by inflating the issue price of good units proportionately. Alternatively, it can be treated as a factory overhead.
On the other hand, the cost of abnormal waste of materials is excluded from cost as its cost is not considered as a part of cost of production. It is charged to costing Profit and Loss Account.
Scrap is the residue of certain materials left from certain type of manufacture having small recovery value without further processing. Examples of scrap are chippings of wood, off cuts of sheet metals, small pieces of cloth, etc. It is always visible.
As it can be used in some other industry, it has some recovery value. As it has recovery value, the entire cost of scrap is not a loss. Only the difference between the original cost of the scrap and its recovery value is the loss.
1. It is arised from manufacturing process.
2. Scrap is always physically available.
3. It cannot be used as a material for original purpose.
4. It has small recovery value.
5. No further processing is required to realise its recovery value.
There are two types of scrap:
(i) Normal scrap and
(ii) Abnormal scrap.
(i) Normal Scrap:
Normal scrap is that portion of scrap which occurs normally due to the inherent nature of the manufacturing process or due to administrative actions, such as change in the method of production or design.
(ii) Abnormal Scrap:
Abnormal scrap refers to the scrap in excess of the normal scrap, arising from abnormal causes like bad quality of materials, defective method of working, defective machines, bad workmanship, etc.
The cost of the normal scrap is absorbed by the process or job in which the normal scrap occurs. The realisable value of the normal scrap is deducted from the material cost of the concerned process or job.
Where the scrap occurs, if the scrap can be identified with any process or job, then the realisable value of the normal scrap is deducted from the factory overhead. The loss arising from abnormal scrap should be excluded from cost, and charged to costing Profit and Loss Account.
Scrap can be controlled through the following measures:
1. By fixing the limit of normal scrap.
2. Through regular scrap report.
3. By remedial action (such as, use of good quality material, improvement, in the manufacturing methods, use of modern machines, improved workmanship).
Waste and scrap are not the same. They differ from each other.
The main differences between the two are:
i. Waste occurs in almost every manufacturing industry, whereas, scrap occurs in only certain types of industries.
ii. Waste arises due to loading and unloading, careless handling, breaking the bulk evaporation, leakage, etc. On the other hand, scrap arises due to certain manufacturing operations such as, turning, shaving, moulding, etc.
iii. Waste arises due to inherent nature of the material. But scrap arises due to inherent nature of the manufacturing process.
iv. Waste may be visible or invisible, whereas scrap is always visible.
v. Waste cannot be reused in any other process, whether it is visible or invisible. But scrap can be reused in some other process.
vi. Waste does not have realisable value, whereas scrap has realisable value.
Spoilage refers to that portion of production which is so damaged in the course of manufacture that it cannot be rectified with further processing, and so, has to be disposed off as second or third quality goods without further processing.
It may be noted that spoilage can be used again as raw materials either in the same manufacturing process or in some other manufacturing process.
Spoilage can be classified into two types:
1. Normal spoilage and
2. Abnormal spoilage.
1. Normal Spoilage:
Normal spoilage refers to that portion of spoilage which occurs normally due to the inherent nature of the manufacturing process.
2. Abnormal Spoilage:
Abnormal spoilage refers to spoilage in excess of normal spoilage due to abnormal causes like break down of machinery, inferior quality of materials, bad workmanship, etc.
The cost of spoilage comprises the cost of material used, labour cost and overheads incurred on the spoiled goods up to the point of rejection. However, as the spoilage has recovery value, the entire cost of spoilage cannot be the loss on spoilage. The loss on spoilage is the difference between the cost of spoilage minus the recovery value of the spoilage.
The loss due to normal spoilage which is due to inherent nature of the manufacturing process, and hence cannot be controlled or avoided, can be recovered from good units. This type of treatment is known as treatment by neglect.
The loss arising from abnormal spoilage, which is avoidable or controllable, should be excluded from cost, and charged to closing Profit and Loss Account.
Spoilage can be controlled or reduced through the following measures:
1. By setting up standard for the spoilage.
2. By reporting to the authority concerned.
3. By taking remedial action such as the causes responsible for the deviation should be analysed and necessary corrective steps should be taken immediately. The remedial measures may be the use of good quality materials, improved methods of manufacture, improved machinery, improved labour, etc.
The main difference between these two are:
1. Scrap is in respect of material whereas spoilage is in respect of finished goods.
2. Scrap arises due to the inherent nature of manufacturing process or operation. On the other hand, spoilage arises either due to the defect in material or due to the defect in manufacturing process.
3. Scrap can be used only in some other manufacturing process. But spoilage can be used either in the same manufacturing process or in some other manufacturing process.
4. Scrap involves only material cost. But spoilage involves material cost, labour cost and overheads.
It refers to those materials which are no longer required for production either due to change in the design of the finished products for which they have been used or due to the fall in the demand for the finished product arising from the change of fashion.
The main causes for obsolescence of materials are as follows:
1. The failure on the part of the production control department to inform the purchase department of any contemplated change in the design of the product.
2. Absence of standardisation.
3. Non-maintenance of separate register of obsolete materials.
4. Carelessness on the part of the purchasing manager in purchasing materials which are no longer required.
5. The failure on the part of the stock-keeper to keep the purchasing department informed regularly about the slow moving items of materials.
6. The failure of the purchasing department to cancel the outstanding orders for materials which are no longer required for production.
7. The failure on the part of the sales department to inform the production planning department and the purchasing department about the change of fashion and the resulting fall in the demand for finished products for which the obsolete materials are used.
The loss arising from obsolescence of materials cannot be avoided.
But they can certainly be controlled or minimised, and for this the following measures can be followed:
1. The production control department should bring to the notice of all the concerned personnel about the changes contemplated in the design of the finished product.
2. When any change is contemplated in the design of the product or when there is the emergence of better substitute materials, the purchasing manager should take the necessary steps to cancel the outstanding order for the obsolete materials.
3. The store-keeper should send regular report of slow moving materials to the purchasing department, the production department and the production control department.
4. A separate register should be maintained for obsolete materials to provide up-to-date information on such materials.
5. Wherever possible, the obsolete materials should be used within the factory for some other work order.
6. If the obsolete materials cannot be used within the factory for some other work order, they should be scrapped and sold.
7. If the obsolete materials do not command any scrap value, they should be discarded.