Normal Wastage refers to the inevitable and unavoidable loss that occurs during the production process. It is an expected part of manufacturing and is accounted for while determining the cost of production. Since normal wastage is inherent to the process, it is typically absorbed by the cost of the good units produced.
Characteristics of Normal Wastage:
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Predictable and Expected:
Normal wastage is anticipated based on industry standards or historical data.
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Part of the Production Process:
It arises due to the nature of the materials or the production method, such as evaporation, shrinkage, or breakage.
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Pre-determined Level:
The percentage or quantity of normal wastage is usually determined based on experience.
Accounting Treatment of Normal Wastage:
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Inclusion in the Cost of Good Units:
The cost of normal wastage is spread across the good units that are produced. The value of the wastage is not treated as a separate cost but is included in the cost of the remaining units.
For example, if 1,000 units are produced and 5% (50 units) is normal wastage, the cost of the total input is divided among the remaining 950 units.
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Recording in Process Accounts:
- Debit the Process Account with the total costs (materials, labor, and overheads).
- Credit the Process Account for the normal wastage, typically at its realizable (scrap) value.
The difference between the cost of input and the value of the wastage is absorbed by the good units.
Example:
Suppose a company has the following data:
- Total input: 1,000 units at ₹10 per unit = ₹10,000
- Normal wastage: 5% (50 units), sold as scrap at ₹2 per unit
- Good units produced: 950 units
Process Account:
| Particulars | Units | Amount (₹) | Particulars | Units | Amount (₹) | |
| To Direct Materials | 1,000 | 10,000 | By Normal Wastage (50 units @ ₹2/unit) | 50 | 100 | |
| To Direct Labor | XXXX | By Transfer to Finished Goods | 950 | XXXX | ||
| To Overheads | XXXX |
- The normal wastage (50 units) is recorded at its scrap value (₹100).
- The cost of the remaining 950 good units is adjusted after accounting for the value of the wastage.
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No Separate Charge for Normal Wastage:
Since it is a part of the production process, the cost of normal wastage is absorbed by the cost of production and does not appear separately as an expense.
Key Points
- The value of the normal wastage is usually negligible and is treated as part of the production cost.
- The realizable value of the wastage (if any) is credited to the process account, reducing the overall cost of production.
- The cost of normal wastage is borne by the remaining good units, leading to a slightly higher per-unit cost.