What Is Abnormal Spoilage?
Abnormal spoilage is the amount of waste or destruction of inventory that a firm experiences beyond what is expected in normal business operations or production processes. Abnormal spoilage can be the result of broken machinery or from inefficient operations, and it is considered to be at least partially preventable.
In accounting, abnormal spoilage is an expense item and is recorded separately from normal spoilage on internal books and financial statements.
- Abnormal spoilage refers to expenses related to excess waste or unusable goods that exceed the normal levels of expected spoilage, which cost businesses money.
- Normal levels are often computed off of historical experience and normal spoilage is an expected and ordinary expense.
- Abnormal spoilage is a special line item that can result from poor production management, inefficiencies, or faulty equipment, and are often unseen in advance.
- Specialty insurance policies can help lessen the financial impact of such events.
Understanding Abnormal Spoilage
Material spoilage is often discovered during the inspection and quality control process. In job costing, spoilage can be assigned to specific jobs or units, or can be assigned to all jobs associated with production as part of the overall overhead. Normal spoilage is just that—normal—and is expected in the ordinary course of manufacturing or business operations, especially for companies that make or handle perishable products (i.e. food and beverage).
Spoilage beyond what is historically standard or expected is considered abnormal spoilage. Insurance companies that specialize in underwriting policies for firms with spoilage risks can help mitigate losses incurred from spoilage, but typically up to certain limits, which means that abnormal spoilage will probably not be covered.
Examples of Abnormal Spoilage
Suppose a yogurt maker is running a production batch over a four-hour continuous shift before the line is shut down for quick cleaning of some equipment. A very minor portion of the yogurt in mid-production sits at temperatures above the quality control cut-off temperature and must be eliminated from the batch. This is the normal spoilage amount. However, due to delays in restarting the production line after cleaning, additional portions are exposed to higher-than-acceptable temperatures for too long, resulting in abnormal spoilage.
A hamburger and fries joint, to prepare for the busy lunch crowd, grills dozens of hamburgers ahead of time and places them under six sets of heat lamps to keep them at 140 degrees Fahrenheit to prevent the growth of bacteria as they sit. However, two heat lamps fail, causing a number of burgers to cool below 120 degrees by lunchtime. Food poisoning is a risk, so these burgers cannot be sold. The restaurant discards them and records a loss from abnormal spoilage.
Normal Spoilage vs. Abnormal Spoilage
Abnormal spoilage, which is considered avoidable and controllable, is charged to a separate expense account that will show up on a line item further down the income statement. It, therefore, has no impact on gross margin going forward. It is important for investors and other financial statement users to be able to quickly identify the expenses incurred due to abnormal spoilage, since is not expected as part of a normal course of business.
Normal spoilage, in contrast, occurs inevitably as firms see at least part of their production line wasted or destroyed during extraction, manufacturing, transporting, or while in inventory. Consequently, firms will use historical data along with some forecasting methods to produce a number or rate of normal spoilage to account for such losses. The expenses incurred due to normal spoilage are often included as a portion of the cost of goods sold (COGS).