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. 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.
The amount of normal spoilage is set as a standard in the cost accounting records. This amount is primarily based on historical results, along with input from the industrial engineering staff regarding the expectations for spoilage.