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.

RELATED TERMS
  1. Inventory Reserve

    An inventory reserve is a contra asset account on a company's ...
  2. Normalized Earnings

    Normalized earnings are adjusted to remove the effects of seasonality, ...
  3. Inventory

    Inventory is the term for merchandise or raw materials on hand.
  4. Extended Normal Costing

    Extended normal costing is a method of tracking production costs ...
  5. Average Inventory

    Average inventory is a calculation that estimates the value or ...
  6. Average Age Of Inventory

    The average age of inventory is the average number of days it ...
Related Articles
  1. Investing

    When You Should Pay Attention to Market Volatility

    Market volatility is normal and understanding it will help you know when it is cause for concern or not.
  2. Investing

    Measuring Company Efficiency To Maximize Profits

    Efficiency ratios can provide indications of profitability, shows how efficiently a company is being managed, utilizes its assets and handles liabilities.
  3. Investing

    Want To Start Trading Oil? Understand The Basics First

    The overall economics of oil extraction is that there is money in it - both for extraction companies and their investors.
  4. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  5. Financial Advisor

    4 Countries That Produce the Most Food

    Learn about the world's four largest food producers - China, India, the United States and Brazil - and what sets them apart from the rest of the world.
  6. Insights

    How China Makes Money (BABA, PFE)

    China has the first or second largest GDP in the world but is not nearly as developed as others in the top 10.
  7. Personal Finance

    Average Investors and Average Financial Advisors

    Does an average investor gain value from an average financial advisor? It appears so.
  8. Trading

    Contango vs. Normal Backwardation

    Learn about the futures curve, contango and backwardation, and what they mean for hedgers and speculators.
  9. Investing

    Company Survival: Cash Conversion Cycle Is Key

    Find out how to use this figure to analyze a firm's financial condition.
  10. Investing

    U.S. Crude Oil Inventories Up (XOM)

    U.S. crude oil inventories are at “historically high levels” for this time of the year, according to the Energy and Information Administration.
RELATED FAQS
  1. How do you calculate inventory turnover?

    Inventory turnover measures how many times inventory has sold during a period and provides insight into a company's inventory ... Read Answer >>
  2. How are period costs and product costs different?

    Product costs are the direct costs involved in producing a product. Period costs are all costs not included in product costs ... Read Answer >>
  3. How to calculate the inventory turnover ratio?

    The inventory turnover ratio is a key measure for evaluating how effective a company's management is at managing inventory ... Read Answer >>
  4. How is the economic order quantity model used in inventory management?

    Understand what types of costs make up total inventory costs, and learn how the economic order quantity model is used to ... Read Answer >>
  5. What does a high inventory turnover tell investors about a company?

    Inventory turnover is an important metric for evaluating how efficiently a firm turns its inventory into sales. Read Answer >>
  6. Which industries tend to have the most inventory turnover?

    Understand what inventory turnover measures and why it is good to have high inventory turnover. Learn what industries tend ... Read Answer >>
Trading Center