Meaning Of Waste
The loss of raw materials in processing is waste. Waste has no receivable value. It is a quantity loss of material in the process of producing goods.
Waste is brought into record by comparing the input quantity with the output quantity. Waste may occur due to shrinkage, smoke, weight loss and evaporation causing the material to become waste. They are material losses causing a quantity loss. Waste may occur in terms of a by-product which does not produce any realizable value.
For example, 20kg of potato does not give 20kg of potato chips. Thus, the fact that 15 kg of chips is produced out of 20kg potato means that 5 kg of potato is wasted in the course of making chips. 5kg of waste does not produce any sales value and so is treated as waste.
Types Of Waste
Waste is divided into two types, normal and abnormal waste. Normal waste is estimated before production and is inherent in the nature of the raw material. Abnormal waste occurs because of a low quality/substandard of input material, bad process work, carelessness etc.
Accounting Treatment Of Waste
Normal waste is absorbed by the cost of the output. Quantity of normal waste, if any, is deducted out of the input quantity to get the output quantity. The realizable value associated with the waste is deducted out of the cost of process to get the cost of output.
Abnormal waste is undesirable waste exceeding the normal loss set aside. The value of an abnormal loss is calculated as in the process account by using the formula for transferring to Profit and Loss account.