Accounting Treatment of Spoilage Costs
1) Normal Spoilage Costs: These costs are assigned to the good output utilizing two approaches as:
(i) Omission Approach: Under this approach, the generally spoilt units are not involved in the calculation of equivalent units.This means that the cost of the generally spoilt units will automatically be distributed to the good output. Via excluding the common spoilage in the computation to the good output, a lower figure will be derived. The weaknesses of this method are as:
(a) The cost of common spoilage is spread equally/evenly into the finished goods and the ending W.I.P regardless of whether the ending W.I.P. has passed the inspection stage or not.
(b) It does not permit the manager to see the costs of spoilage since these costs are not computed.
(ii) Re-Assignment and Recognition Approach
In this approach, the common spoilage is involved in the equivalent unit's computation; additionally, the commonly spoilt units will be assigned costs just like any other unit. The spoilage costs will then be reallocated to these good units such have passed the inspection point. The steps to follow beneath this method are as:
(a) Compute equivalent units involving common spoilage.
(b) Assign costs to all units involving common spoilage.
(c) Reassign common spoilage costs to good output.
2) Abnormal Spoilage Costs - These costs do not add any production profit to the company and are treated as accounting losses. The costs are written off directly as losses for the period whether they happen.