Cost Accounting · Material Costs

Accounting for Material Losses and Wastage in Cost Accounting

Updated 10 October 2026 · Fact-checked

Material losses are the difference between material bought or issued and good output obtained. Waste has no value, scrap has small value, spoilage is unrectifiable and sold at a reduced price, and defectives can be reworked. Normal losses go into the cost of good units; abnormal losses go to the Costing Profit and Loss Account.

Understand Accounting for Material Losses and Wastage

Every factory loses some material. Some loss cannot be avoided, such as evaporation, cutting off-cuts or dust. Some loss is avoidable and comes from poor handling, bad machines or careless work. Cost accounting first separates the two, because the treatment is different.

Learn the four terms by their value and fix.

Waste: the part of input that is lost and has no recoverable value, for example evaporation, smoke or dust. It may even cost money to dispose of.
Scrap: the incidental residue from a process that has small recovery value, such as metal off-cuts or sawdust. It can be sold or reused.
Spoilage: units that are damaged in production and cannot be corrected economically. They are sold at a disposal value.
Defectives: units that do not meet the standard but can be corrected by extra work, called rework. They then pass as good units.

The key test is normal or abnormal. Normal loss is inherent in the process and expected under efficient working. Its cost is absorbed by the good units, after deducting any sale value of the loss. Abnormal loss is beyond the normal level. Its cost is not loaded on good units. It is charged to the Costing Profit and Loss Account, after deducting its sale value.

Two other items complete the topic. Inventory discrepancies are differences found between book and physical stock. Normal shortage (for example, due to natural causes) is treated as part of material cost or overhead; abnormal shortage is written off to the Costing Profit and Loss Account. Obsolete stock is stock that is no longer usable in production. Its loss, net of any disposal value, is written off, normally to the Costing Profit and Loss Account when it is abnormal, or charged to overheads when it is a normal, regular feature. Always follow the facts in the question.

Key rules to remember

Normal loss cost per good unit: Cost per good unit = (Total cost of input − Sale value of normal loss) ÷ Good units expected; Good units expected = Input − Normal loss units. Use this when the loss is a normal part of the process.
Abnormal loss value: Abnormal loss = Abnormal loss units × Cost per good unit; Credit the process or job account, debit Abnormal Loss Account. Then credit it with the sale value and transfer the balance to Costing Profit and Loss Account.
Normal scrap (in process or job): Sale value of scrap is credited to the process or job account (or to overheads); This reduces the cost of good output. Scrap of a specific job is credited to that job.
Spoilage, normal: Net spoilage cost = Cost of spoiled units − Disposal value; If normal and common to all jobs, charge to production overhead. If due to a specific job, charge to that job.
Spoilage, abnormal: Net loss = Cost of spoiled units − Disposal value → Costing Profit and Loss Account; Never include abnormal spoilage in the cost of good units.
Defectives, rework: Rework cost = Material + Labour + Overhead for rectification; If normal and general, charge to production overhead. If abnormal or job-specific, charge to Costing Profit and Loss Account or that job.
Obsolete stock loss: Loss = Book value of stock − Realisable value; Charge to Costing Profit and Loss Account if abnormal; to overheads if normal and regular.

How to solve Accounting for Material Losses and Wastage questions

Use this order for any question on material losses. It keeps normal and abnormal items from mixing.

1Identify the item: waste, scrap, spoilage, defectives, shortage or obsolete stock. Check whether it has any sale value.
2Decide whether it is normal or abnormal. Normal is usually given as a percentage of input or a stated allowance. Anything beyond it is abnormal.
3Work out the units: Input − Normal loss = Expected good units. Compare with actual good units.
4Calculate the cost per good unit: (Total cost − Sale value of normal loss) ÷ Expected good units.
5Value any abnormal loss at that cost per unit, then deduct its sale value to get the net abnormal loss.
6Post the entries: normal loss cost stays in good output or overheads; abnormal loss goes to the Costing Profit and Loss Account; sale proceeds are credited as stated.
7State the treatment in a short sentence and show the final figure clearly, such as cost per unit and net loss written off.

Quickest way: Normal units first, abnormal after

When to use it: Use for numerical questions with a percentage normal loss and a stated actual output, under time pressure.

Write Input, Normal loss units, Expected good units in one line.
Compute net cost = Total cost − Normal loss sale value.
Divide by expected good units to get the rate.
Multiply the rate by abnormal units and subtract their sale value to get the charge to Costing P&L.
For MCQs, remember: normal loss goes to good units, abnormal loss goes to Costing P&L, and scrap value reduces cost.

Common mistakes in Accounting for Material Losses and Wastage

Dividing total cost by actual good units instead of expected good units when finding the rate
Students forget that abnormal loss must carry its own cost and must not inflate good units.
Fix: Always divide by input minus normal loss, then value abnormal units at that rate.
Loading abnormal loss on good units
The words 'loss' and 'cost' blur the normal/abnormal distinction.
Fix: Abnormal loss is a separate account and is written off to the Costing Profit and Loss Account.
Ignoring the sale value of normal loss or scrap
Students treat loss as zero value by default.
Fix: Read the question for disposal or scrap value and deduct it before finding the cost per unit.
Mixing up spoilage and defectives
Both are poor-quality units, so they sound alike.
Fix: Spoilage cannot be corrected and is sold at a reduced price. Defectives can be reworked at extra cost.
Charging every obsolete stock write-off to overheads
Students apply one rule to all cases.
Fix: Abnormal write-offs go to Costing Profit and Loss Account. Only normal, regular obsolescence is absorbed in overheads.

Worked examples

Example 1

A process receives 1,000 kg of material at ₹40 per kg. Processing cost is ₹10,000. Normal loss is 10% of input, sold at ₹5 per kg. Actual output is 850 kg. Find the cost per kg of good output, the value of abnormal loss and the net amount to be written off.

Show the solution

Material cost = 1,000 × ₹40 = ₹40,000. Total cost = ₹40,000 + ₹10,000 = ₹50,000.
Normal loss = 10% × 1,000 = 100 kg. Sale value = 100 × ₹5 = ₹500.
Expected good output = 1,000 − 100 = 900 kg.
Cost per kg = (₹50,000 − ₹500) ÷ 900 = ₹49,500 ÷ 900 = ₹55.
Actual output = 850 kg, so abnormal loss = 900 − 850 = 50 kg.
Abnormal loss value = 50 × ₹55 = ₹2,750.
Sale value of abnormal loss = 50 × ₹5 = ₹250.
Net abnormal loss = ₹2,750 − ₹250 = ₹2,500, transferred to Costing Profit and Loss Account.

Answer: Cost per kg of good output = ₹55. Abnormal loss = ₹2,750 (50 kg). Net loss written off to Costing Profit and Loss Account = ₹2,500.

Example 2

Sharma Engineering makes 200 units of a component for a job. 10 units are found defective. Rework costs ₹30 per defective unit. Separately, stock of Material R, book value ₹48,000, has become obsolete and can be sold for ₹18,000. Rework is normal and common to all jobs; obsolescence is abnormal. Show the treatment.

Show the solution

Total rework cost = 10 × ₹30 = ₹300.
Rework is normal and common to all jobs, so ₹300 is charged to production overhead, not to this job alone.
Obsolete stock loss = Book value − Realisable value = ₹48,000 − ₹18,000 = ₹30,000.
The obsolescence is abnormal, so ₹30,000 is not included in overheads or in job cost.
Entry: Dr Cash/Bank ₹18,000, Dr Costing Profit and Loss Account ₹30,000, Cr Stores Ledger Control Account ₹48,000.

Answer: Rework cost of ₹300 goes to production overhead. Obsolete stock loss of ₹30,000 is written off to Costing Profit and Loss Account.

Exam tips

Always show the units working (input, normal loss, expected good output) first. Step marks often come from it.
Read for the word 'normal' or 'abnormal' and for any sale value of loss or scrap. These decide the treatment.
In theory questions, define each term and give its treatment in one line. A short comparison of waste, scrap, spoilage and defectives scores well.
For MCQs, link the item to its account: abnormal loss to Costing P&L, normal scrap value to reduce cost, rework to overhead or job as stated.
End with a one-line statement of treatment so the examiner can see the conclusion.

Practice questions from Material Costs

Accounting for Material Losses and Wastage in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateAccounting for Material Losses: Waste, Scrap, Spoilage, Defectives

Accounting for Material Losses and Wastage: frequently asked questions

What is the difference between waste, scrap, spoilage and defectives?

Waste has no recoverable value. Scrap has small sale value and arises as residue. Spoilage is production that cannot be corrected and is sold at a reduced price. Defectives can be corrected through rework and then treated as good units.

How is scrap treated in cost accounting?

The sale value of scrap is normally credited to the process or job account, or to overheads, which lowers the cost of good output. If scrap belongs to a specific job, credit that job. Treatment depends on whether the scrap is normal and how the question describes it.

What is the treatment of normal and abnormal loss of material?

Normal loss cost, after deducting any sale value, is absorbed by good units. Abnormal loss is valued at the cost per good unit, less its sale value, and written off to the Costing Profit and Loss Account.

How do I treat obsolete stock in cost accounting?

Find the loss as book value less realisable value. If it is abnormal, write it off to the Costing Profit and Loss Account. If it is a normal, regular feature of the business, it may be absorbed in overheads.