Fundamentals of Financial and Cost Accounting · Statement of Cost and Profit (Cost Sheet)

Treatment of Stocks, Scrap, Waste and Special Items in a Cost Sheet

Updated 10 October 2026

In a cost sheet, opening stock is added and closing stock is deducted at each stage: raw material, WIP and finished goods. Normal scrap and waste sale value reduces cost. Abnormal loss is removed from cost and written off to Costing Profit and Loss. Rebates and discounts on purchases reduce material cost.

Understand Treatment of Stocks, Scrap, Waste and Special Items

A cost sheet shows the cost of goods made and sold in a period. But the materials and goods used in a period are not always the same as those bought or made in it. Stocks carried over must be adjusted so that only the cost of what was actually used or sold is shown.

There are three stocks. Raw material stock adjusts material purchased to give material consumed. Work in progress (WIP) stock adjusts factory cost to give the cost of goods produced. Finished goods stock adjusts cost of production to give cost of goods sold. At each stage you add the opening stock and subtract the closing stock.

Losses come next. Normal loss is the loss that cannot be avoided in the usual course of work. Its cost is absorbed by the good units, and any scrap value it fetches is deducted from cost. Abnormal loss is the loss beyond the normal level, caused by avoidable events like carelessness or accidents. It is valued like a good unit, taken out of the cost of production, and written off to the Costing Profit and Loss Account. It must not sit in the cost of sales.

Other special items follow simple rules. Scrap is a material residue of small value. Waste has no value or is only a loss in weight. Defectives are units that fail quality checks. They are reworked or sold as seconds. Normal rework cost is part of production cost. Trade discount and rebates received reduce purchase cost. Items like interest and income tax paid are financial and do not enter the cost sheet.

Key formulas to remember

Material consumed: Opening stock of raw material + Purchases + Carriage inwards − Closing stock of raw material; Deduct trade discount and rebates from purchases. Include other direct purchase expenses.
Factory cost: Prime cost + Factory overheads + Opening WIP − Closing WIP; WIP adjustment is made at factory cost level, after adding factory overheads.
Cost of production: Cost of production = Factory cost + Administration overheads; Make the normal scrap credit and the abnormal loss deduction only where they have not already been dealt with in the process or job account. Normal scrap is usually credited where it arises, so do not deduct it twice. Show abnormal loss separately as written off to Costing Profit and Loss.
Cost of goods sold: Opening finished goods + Cost of production − Closing finished goods; Done on units produced and costed. Add selling and distribution overheads afterwards to reach cost of sales.
Abnormal loss value: Abnormal loss = Abnormal units × (Total cost − Scrap value of normal loss) ÷ (Input units − Normal loss units); then credit scrap realised on abnormal units against it; The denominator, Input units − Normal loss units, is the expected good output when there is no abnormal gain. This values abnormal loss at the cost per good unit. Scrap realised on the abnormal units is then set against the abnormal loss, so only the net amount is written off.
Treatment rule: Normal loss: part of cost. Abnormal loss: Costing P&L. Scrap sale: reduces cost.; Abnormal loss scrap value is credited against the abnormal loss, not against production cost.

How to solve Treatment of Stocks, Scrap, Waste and Special Items questions

Follow the order of the cost sheet. Do not jump to the total. Each adjustment goes at its own stage.

1List every figure given and tag it: material, labour, factory, office, selling, stock or loss.
2Find material consumed: opening stock + purchases + direct purchase expenses − discounts and rebates − closing stock.
3Add direct labour and direct expenses to get prime cost. Add factory overheads.
4Add opening WIP and subtract closing WIP to reach factory cost.
5Add administration overheads. Subtract the sale value of normal scrap only if it has not already been credited to the process or job. Then deduct abnormal loss so that cost of production covers good units only.
6Add opening finished goods and subtract closing finished goods to reach cost of goods sold.
7Add selling and distribution overheads to reach cost of sales. Add profit to reach sales, if asked.
8Drop any item that is not a cost, such as interest paid, donations or income tax.

Quickest way: Stock-adjustment ladder

When to use it: Use for MCQs that ask for cost of production, cost of goods sold or cost of sales from given figures.

Write the three stage labels: material, factory cost, goods sold.
At each stage, add opening and subtract closing. Do not mix the stocks.
Strike out non-cost items first.
Deduct normal scrap sale only if it is not already credited to the process or job. Deduct abnormal loss so cost of production covers good units only. Do both before the finished goods adjustment.
Check which total the question wants. Stop at that total, then match the option.

Common mistakes in Treatment of Stocks, Scrap, Waste and Special Items

Adding closing stock and subtracting opening stock.
Students mix this up with the trading account for sales or confuse the direction.
Fix: Remember opening is brought in and added. Closing is carried forward and deducted.
Adjusting WIP at the prime cost stage.
WIP feels like a material item.
Fix: WIP includes factory overheads. Adjust it only after adding factory overheads.
Leaving abnormal loss inside cost of production.
Students treat all losses like normal loss.
Fix: Abnormal loss is deducted from cost of production and written off to Costing Profit and Loss.
Deducting scrap value of normal loss from sales instead of cost.
Scrap is sold, so it looks like revenue.
Fix: Treat normal scrap sale as a reduction in cost of production, unless the question says it is credited elsewhere.
Ignoring rebates and trade discount on purchases.
Students take the invoice figure as it is.
Fix: Deduct trade discount and rebates from purchases. Cash discount is a financial item and is not deducted.
Valuing abnormal loss at the sale price of scrap.
Students value what remains instead of what was lost.
Fix: Value abnormal loss at cost per good unit, then credit the scrap realised against it.

Worked examples

Example 1

From the following, find the cost of production. Opening raw material ₹40,000; purchases ₹2,10,000; closing raw material ₹50,000; direct wages ₹80,000; factory overheads ₹60,000; opening WIP ₹20,000; closing WIP ₹30,000; administration overheads ₹40,000.

Show the solution

Material consumed = 40,000 + 2,10,000 − 50,000 = ₹2,00,000.
Prime cost = 2,00,000 + 80,000 = ₹2,80,000.
Add factory overheads: 2,80,000 + 60,000 = ₹3,40,000.
WIP adjustment: 3,40,000 + 20,000 − 30,000 = ₹3,30,000 factory cost.
Add administration overheads: 3,30,000 + 40,000 = ₹3,70,000.

Answer: Cost of production = ₹3,70,000.

Example 2

The total cost of production for 1,000 units is ₹3,00,000, before any abnormal loss is removed. There is no normal loss. 50 units were lost due to a machine fault, which is abnormal, so 950 units are good. The firm had opening finished goods of ₹20,000 and closing finished goods of ₹35,000, both on the same cost basis. Find the cost of goods sold.

Show the solution

Cost per unit = 3,00,000 ÷ 1,000 = ₹300.
Abnormal loss = 50 × 300 = ₹15,000, written off to Costing Profit and Loss.
Cost of production of good units = 3,00,000 − 15,000 = ₹2,85,000.
Cost of goods sold = 20,000 + 2,85,000 − 35,000 = ₹2,70,000.

Answer: Cost of goods sold = ₹2,70,000, and ₹15,000 abnormal loss goes to Costing Profit and Loss.

Exam tips

Read what total the question wants: prime cost, factory cost, cost of production, cost of goods sold or cost of sales.
Look for words like abnormal, accident or negligence. They signal removal from cost.
Cross out items like interest, dividend and income tax before you calculate.
If WIP or finished goods figures are given as units, check whether you need to value them at cost per unit first.
With no negative marking, always mark an answer. Eliminate options that add closing stock.

Practice questions from Statement of Cost and Profit (Cost Sheet)

Treatment of Stocks, Scrap, Waste and Special Items: frequently asked questions

How is work in progress treated in a cost sheet?

Opening WIP is added and closing WIP is deducted after factory overheads are included. This gives factory cost. It makes sure only the cost of completed work for the period is carried forward.

What is the difference between normal and abnormal loss?

Normal loss is unavoidable in regular operations, so its cost is absorbed by good units. Abnormal loss is beyond normal limits and avoidable. It is removed from cost and written off to Costing Profit and Loss.

How is scrap treated in a cost sheet?

Sale value of normal scrap is usually deducted from the cost of production or from the related job or process. Scrap from abnormal loss is credited to the abnormal loss account instead.

Where does closing stock of finished goods go in the cost sheet?

It is deducted from the sum of opening finished goods and cost of production to give cost of goods sold. This is done before selling and distribution overheads are added.