Abnormal Wastage Journal Entry
Abnormal wastage is any inventory that is damaged, spoiled, or otherwise rendered unsellable. While some amount of abnormal wastage is to be expected in any business that deals with perishable goods, it’s important to keep track of it so that steps can be taken to reduce the amount of inventory lost.
There are a number of ways to track abnormal wastage, but one simple method is to include it as a line item on your inventory report. This will help you to see at a glance how much inventory is being lost and take steps to address the problem. In addition, it’s important to investigate the cause of any abnormal wastage so that you can prevent it from happening in the future. By tracking and investigating abnormal wastage, you can help to reduce losses and improve your bottom line.
Abnormal wastage in production can be due to a number of factors, including poor quality raw materials, incorrect or inefficient production processes, and damaged or defective products. In order to reduce abnormal wastage, it is important to identify and address the root causes. For example, if poor-quality raw materials are causing defects in the finished product, sources for these materials must be identified and replaced.
Similarly, if production processes are inefficient or not well-suited to the needs of the product, they should be updated or redesigned. Finally, if damaged or defective products are being produced, measures should be taken to ensure that these products are repaired or recycled rather than discarded. By taking these steps, companies can significantly reduce the amount of abnormal wastage in their production process.
The abnormal wastage is the cost that company spends during the production process. But it is not the inventory cost, company needs to record it as the expense on the income statement.
Journal Entry for Abnormal Wastage
Based on the accounting standard, abnormal waste is not part of the inventory cost. So the company should record it as an expense on the income statement immediately. It is not part of the production cost, it happens due to the carelessness, production efficiency, and other factors caused by the company.
The company needs to carefully calculate the wastage and separate them between normal and abnormal wastage. The normal wastage is part of the inventory while the abnormal is recorded as the expense.
The journal entry is debiting abnormal loss expense and credit material/labor.
| Account | Debit | Credit |
|---|---|---|
| Abnormal Wastage Expense | 000 | |
| Material/Labor | 000 |
The abnormal wastage is the expense on the income statement which will reduce the company profit.
Example
Company ABC is producing car spare parts and sells them to car manufacturers. The operation manager is testing a new production line which expects to increase the production capacity. However, there are errors in the work process that result in the loss of material cost $ 50,000. After investigation, it happens due to a mistake during the testing period and considers the abnormal loss during the production.
Please prepare the journal entry for the abnormal wastage.
Based on the example above, the material wastage of $ 50,000 happens due to the testing of new operations. It is not the wastage on the normal production line. So the company needs to treat it as an expense on the income statement. It is not the cost of production which need to include in the inventory cost.
The journal entry is debiting the abnormal wastage expense $ 50,000 and credit raw material $ 50,000.
| Account | Debit | Credit |
|---|---|---|
| Abnormal Wastage Expense | 50,000 | |
| Raw Material | 50,000 |