What is Normal Spoilage
Normal spoilage refers to the inherent worsening of products during the production or inventory processes of the sales cycle. This is the deterioration of a firm's product line that is generally considered to be unavoidable and expected. For commodity producers this is the natural resource that is lost or destroyed during extraction, transportation or inventory. Companies typically set a normal spoilage rate for lines of products which they produce and assign the costs of such spoilage to cost of goods sold.
BREAKING DOWN Normal Spoilage
Normal spoilage occurs for companies operating in any sort of manufacturing or production environment. They will inevitably 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, typically as a portion of cost of goods sold.
Abnormal spoilage, which is considered avoidable and controllable, is usually charged to other expenses further down the income statement and therefore has no impact on gross margins. The normal spoilage rate is calculated by dividing the units of normal spoilage by the total unspoiled units produced and shipped. The normal spoilage rate excludes units already started in production.