The treatments are: 1. Pricing of Materials Returned to Supplier 2. Pricing of Materials Returned from Production Department 3. Transfer of Materials from One Job to Another 4. Treatment of Material and Production Losses 5. Scrap 6. Spoilage 7. Defective Work/Rejects.

Treatment of Items in Material Pricing:

  1. Pricing of Materials Returned to Supplier
  2. Pricing of Materials Returned from Production Department
  3. Transfer of Materials from One Job to Another
  4. Treatment of Material and Production Losses
  5. Scrap
  6. Spoilage
  7. Defective Work/Rejects

Material Pricing: Treatment # 1.

Pricing of Materials Returned to Supplier:


Materials purchased may be returned to the supplier. In cost accounting the following rules are generally applicable as to the valuation of such returns:

(i) When FIFO method is followed, the materials returned would be valued at the price of the oldest goods in stock on the date of such return.

(ii) In case of LIFO the returned materials would be valued at the price of latest units in stock.

(iii) In case the business firm follows average price method, purchase returns would be valued at average price.


The quantity and value of materials returned are shown generally in the issue column. They may also be shown in Receipt column in red ink.

Material Pricing: Treatment # 2.

Pricing of Materials Returned from Production Department:

Problems arise when excess of defective materials are returned from the requisitioning departments to store.


The following rules apply in regard to pricing of such materials in store ledger:

(i) In case the firm follows FIFO or LIFO method, the returned materials should be recorded in the Store Ledger at a price they were originally issued. Those units will be issued at the old price on the next requisition which is received. Alternatively, those units may be treated as a new purchase and may be issued according to the principles of method adopted.

(ii) If the firm follows average price method, the returned materials should be entered in the Receipt column at a price, the materials were originally issued. A new average cost is to be computed as if the goods returned were a new purchase.

The quantity and value of materials returned may be shown in issue column in red ink or alternatively, they may be shown in the Receipt column.


Materials Return Note:

Excess materials on a particular job or in a department are returned to the storeroom with a note duly signed by the Foreman. These notes are coloured differently for easy identification. The materials returned are placed in the appropriate Bins and entered in the Bin Card.

Material Pricing: Treatment # 3.


Transfer of Materials from One Job to Another:

Materials issued to one job may be transferred to another job. This is done when the need for one job is more urgent. To obviate unauthorized transfers, malpractices and manipulations in materials consumption, such transfers should take place on the basis of a document known as Materials Transfer Note.

Valuation of such materials is done at the price at which they were originally issued. No entry is required to be made in the store ledger.

Material Pricing: Treatment # 4.


Treatment of Material and Production Losses:

Material and production losses may arise due to Waste, Scrap, Spoilage and Defective work. The difference between the input of material and output in a process may be in the form of waste, scrap, spoilage or defectives.

In the production process waste represents discarded substances having no value, Waste comprises invisible loss or visible loss of material. Examples of waste are smoke, dust, gases, slag etc. Input loss of material may be either physical or economic. Physical loss may occur prior to production (evaporation) or during the production process.

An economic loss signifies the loss of value although some residual may physically remain.


Accounting treatment:

(i) Normal waste:

This is unavoidable and uncontrollable and treated as a part of product cost. The cost of waste is borne by the good units. So, loss on normal wastage is usually charged to production thereby inflating the unit price of material used.

(ii) Abnormal Waste:

Abnormal waste is the excess of material losses over the normal losses. The causes of abnormal waste are pilferage, careless handling of materials defective workman­ship, obsolescence due to irrational issues etc.

Abnormal waste is transferred to costing Profit and Loss Account.


In most of the industrial units waste report is submitted periodically by the foreman or production in-charge.

Material Pricing: Treatment # 5.


Scrap is a residue incidentally obtained from manufacturing processes having a small value which is recoverable without further processing.

Examples of scrap are:

Metal from stamping operation, clipping of wood, off-cuts of sheet metal. Scrap normally occurs in engineering industries where operations like boring, drilling, turning etc. are carried out. Scrap may arise in the form of Sawdust in Timber Industry, off-cuts and cut-pieces in leather industry.

Accounting treatment of scrap:

(i) When the scrap is sold

(a) Treatment by neglect:

If the value of Scrap is negligible, the sale of Scrap is treated as other income in profit and loss account. Under this method unit cost of production includes cost of scrap.

(b) Credited to Job or Work-in-Progress Account:

If the value of scrap is significant and the quantity varies from job to job, the sale value of scrap is credited to the job account.

The following journal entries will be passed:

(i) Scrap A/c Dr.

To Job A/c or Work-in-Progress A/c

(ii) For cash received Dr.

Cash A/c

To Scrap A/c

(c) Credited to Manufacturing Overhead:

When the scrap cannot be identified with the individual jobs, the sale of scrap is credited to Manufacturing Overhead Account. As a result of this, the overhead rate is reduced.

Journal Entries:

(i) Scrap A/c Dr.

To Manufacturing Overhead A/c

(ii) Cash A/c Dr.

To Scrap A/c

(ii) When Scrap is Reprocessed:

Sometimes scrap can be reprocessed to convert it into useful raw materials for subsequent production of basic products. If the scrap is used for reprocessing, the most recent acquisition price is considered.

It may be necessary to process the scrap to make it worthy of reprocessing. In such a situation, the amount by which the cost of work-in-progress is to be reduced will depend upon the cost to be incurred for its further processing for re-use.

Control of Scrap:

Management should take appropriate steps to keep scrap output within the acceptable limits. Managerial efforts should be made to produce maximum from a given quantity of raw materials.

Following points are relevant for effective Control of Scrap:

i. Designing stage:

Scrap control begins form the product designing stage but not at the production stage. Therefore, attention must be given to avoid scrap at the stage of designing the product.

ii. Selection of right material and equipment:

The use of good quality of material and sophisticated equipment reduces the occurrence of scrap to a great extent.

iii. Selection of skilled personnel:

Right type of personnel with proper training and experience in material processing should be selected.

iv. Determination of acceptable limits:

For control of scrap, it is very much necessary to ascertain the acceptable limits of scrap output. Product design, material specification and labour force are to be considered primarily for this purpose. The determination of acceptable limits requires a lot of trial runs, experience and analytical study of required data available for the industry.

v. Scrap reports:

Different scrap reports should be used for control of scrap. These reports may differ in contents in different organisations according to specific requirements.

A common format for scrap report is given below:

Scrap Report

Material Pricing: Treatment # 6.


Sometimes in manufacturing operations materials are so damaged that they are taken out of process and disposed of since such materials cannot be repaired or reconditioned. Such materials are known as spoilage. Spoilage occurs due to some defect in operations or materials.

For the sake of control, spoilage can be classified as:

(i) Normal Spoilage and

(ii) Abnormal Spoilage.

If the spoilage is well within limits, it is treated as normal spoilage while spoilage exceeds the limits of normal spoilage, it is referred to as abnormal spoilage.

Accounting Treatment of Spoilage:

Following accounting treatment may be adopted:

a. Losses due to normal spoilage are charged to process or job since normal spoilage forms part of cost of good production.

b. Cost of abnormal Spoilage represents avoidable losses, so, it does not for a part of cost of good production. For this reason loss on account of abnormal Spoilage should be charged to Profit and Loss Account.

c. If spoiled units are reused as raw material in the same manufacturing process, no separate accounting treatment is required. If spoilage is used for any other process or job, credit is given to relevant process or job account.

A systematic reporting goes a long way to exercise control over spoilage. Spoilage of each department should be communicated to departmental heads for taking appropriate measures for controlling spoilage.

Material Pricing: Treatment # 7.

Defective Work/Rejects:

Defectives are that portion of the process loss which can be converted into a finished product by incurring further materials and expenses. Defective work may be the result of a number of factors like poor quality of materials, careless planning, poor workmanship, incompetent supervision. Defective units are subsequently reworked and rectified.

There may also be defective finished goods, which have been in stock for too long a time and have become defective.

Accounting Treatment of Defective Work:

i. Treatment by neglect:

When the defective work has a nominal value, the amount of loss is absorbed completely by good units.

ii. Charging to Overhead:

The additional cost of rectification of defective is charged to factory overheads and apportioned to various goods as part of the factory overheads. If a particular department is responsible for the additional cost of rectification, it can be charged to that department.

iii. Charging to specific job:

If the defective units can be traced to a specific job/order, the additional costs can be charged to the job or order.

iv. Charging to Costing Profit & Loss Account:

If the defectives are abnormal and due to uncontrollable factors, the additional costs are charged to Costing Profit and Loss Account.

Defective Report:

At each stage of production, defective and spoiled goods are separated. If reconditioning work has to be done, a report is prepared and attached to the production order representing the defective work. Reconditioning work should be approved by a senior official. Specimen of Defective Work Report