Abnormal spoilage definition
/What is Abnormal Spoilage?
Abnormal spoilage is that amount of scrap generated by a production process that exceeds the normal, expected level. The cost of this excess spoilage is charged to expense as incurred. It is never capitalized into inventory. A standard management function is to continually investigate and remediate the causes of abnormal spoilage, thereby reducing costs and increasing profits.
Causes of Abnormal Spoilage
Abnormal spoilage has many causes, including incorrect operator training, incorrect machine settings, and sub-standard materials quality. For example, incorrect operator training may result in a machine being set up incorrectly, so that all units produced do not meet specifications. Or, the purchasing department may have paid less for sub-standard materials, resulting in production output that fails quality assurance tests.
Example of Abnormal Spoilage
As an example of abnormal spoilage, a production process has an expected spoilage rate of 5%. A production run valued at $1,000,000 is initiated, for which the standard scrap cost is expected to be $50,000. The actual scrap amount turns out to be $58,000, so the abnormal scrap associated with the production run is $8,000 (calculated as $58,000 actual scrap minus $50,000 standard scrap).