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

Under CAS-based cost sheet practice, how is the realisable value of normal scrap, which cannot be traced to a specific job, usually treated?

Sale value of normal scrap not identifiable with a particular job is deducted from factory overheads, so it reduces the cost of production. It is not shown as other income, because it arises as an ordinary by-product of manufacturing activity and belongs within cost.

  1. ACredited to the costing profit and loss account as other income
  2. BDeducted from the factory overheads, reducing the cost of productionCorrect
  3. CAdded to the direct material cost of the next batch
  4. DTreated as a deduction from the selling price

Explanation

When scrap arises generally and is not identifiable with a job, its sale value is credited to factory overheads, thereby reducing production cost. Treating it as other income (option 1) is the practice only for abnormal or unrelated items and would leave cost overstated.

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