Inventory loss leads to massive wastage of resources, time, and energy. When running an eCommerce business, facing such experiences is not unnatural. Spoilage is inevitable, but how do you deal with recurring inventory expenses?
If you are selling perishable items, it’s important to create an action plan to reduce abnormal spoilage. Let’s discuss the concept of spoilage in detail, including its definition, causes, and ways to prevent it.
What is Abnormal Spoilage?
Abnormal spoilage refers to waste or loss in the manufacturing process that exceeds the expected or acceptable level. Unlike normal spoilage, which is anticipated and accounted for in production costs, abnormal spoilage is considered an inefficiency that could be avoided under optimal operating conditions.
It is a red flag for manufacturers, signalling potential issues in the production line, such as faulty equipment, human error, or inadequate quality control measures. Since it is preventable, companies strive to minimize or eliminate it to improve profitability.
Causes of Abnormal Spoilage
Understanding the causes of abnormal spoilage is critical for businesses to take corrective action. Some common causes include:
1) Human Error
Inadequately trained employees or negligence can result in mistakes that lead to abnormal spoilage. Mishandling materials or equipment during production can lead to defects and wastage that go beyond acceptable limits.
2) Faulty Equipment
Malfunctioning machinery or equipment failure can lead to spoilage. For instance, a temperature-controlled production process could be disrupted by defective cooling systems, causing spoilage.
3) Inadequate Raw Materials
Poor-quality or expired raw materials are a leading cause of abnormal spoilage. Using inferior or contaminated inputs results in products that don’t meet quality standards, leading to wastage.
4) Improper Storage
Storing products under improper conditions, such as exposure to extreme temperatures or moisture, can increase the cost of abnormal wastage. Food manufacturers, for example, must ensure their perishable goods are stored correctly to prevent inventory shrinkage.
5) Production Overruns
Overproduction or producing more units than required can also result in abnormal spoilage if products remain unsold or exceed their shelf life.
6) Inadequate Quality Control
Failure to implement effective quality control measures throughout the production process increases the likelihood of abnormal spoilage. Continuous monitoring and inspection are crucial to catching defects early on.
How to Calculate Abnormal Spoilage
Calculating abnormal spoilage journal entry is essential for businesses to quantify their losses and take corrective measures. The formula of abnormal wastage is:
Abnormal Spoilage=Total Spoilage−Normal Spoilage
Step 1:
Identify Total Spoilage: This is the total number of defective or wasted units that occurred during the production process. These units either do not meet quality standards or cannot be sold in the market.
Step 2:
Determine Normal Spoilage: This refers to the level of waste or defect that is expected and acceptable in the production process. It is generally expressed as a percentage of total production, based on industry standards or historical data.
Step 3:
Subtract the normal spoilage from total spoilage to arrive at an abnormal loss formula. Any deviation beyond the acceptable limit is considered abnormal.
Example:
Let’s say a company produces 10,000 units and expects a normal spoilage rate of 2%. During production, 400 units are found to be defective.
Total spoilage = 400 units
Normal spoilage (2% of 10,000 units) = 200 units
Abnormal spoilage = 400 units – 200 units = 200 units
In this example, 200 units would be classified as abnormal spoilage.
How to Minimize Abnormal Spoilage
While abnormal spoilage is avoidable, it requires proactive management and a focus on improving operational efficiency. Here are some ways companies can minimize it:
1) Training Employees
Proper training ensures that employees understand the production process, reducing the chances of human error. Regular refresher courses can also keep staff updated on the latest procedures.
2) Regular Equipment Maintenance
Conducting routine maintenance checks on machinery and equipment can prevent breakdowns and malfunctions that lead to abnormal spoilage. Early detection of issues is key to avoiding major disruptions.
3) Use of High-Quality Raw Materials
Ensuring a reliable supply of high-quality raw materials minimizes the risk of spoilage caused by inferior inputs. This is particularly crucial in industries like food and pharmaceuticals.
4) Improved Quality Control Systems
Implementing stricter quality control protocols can help identify defects early in the production process, reducing overall spoilage. Continuous monitoring and testing at every stage is vital.
5) Data-Driven Production Planning
Forecasting demand accurately prevents overproduction, which can lead to spoilage. Advanced data analytics can help businesses optimize their production schedules and minimize waste.
6) Automation
Automation of repetitive tasks can reduce the risk of human error and improve consistency in the production process. Automated systems for temperature control, for example, can reduce spoilage risks.
Financial Impact of Abnormal Spoilage
The cost of spoilage can be significant. Because it is considered avoidable, it is not included in product costs but is recorded as a loss on the company’s financial statements. It affects both the bottom line and the overall profitability of the business.
By reducing spoilage, companies can improve their cost efficiency, lower production costs, and increase inventory control. Conversely, unchecked spoilage costs can erode profit margins, damage brand reputation, and lead to financial instability.
FAQs – Abnormal Spoilage
What is the difference between normal spoilage and abnormal spoilage?
Normal spoilage refers to waste or defective units that are expected as part of the production process, whereas abnormal spoilage represents excess waste beyond the acceptable level due to inefficiencies or errors.
How can companies prevent spoilage?
Companies can prevent spoilage through employee training, regular equipment maintenance, improved quality control systems, and better production planning. Automation also plays a key role in minimizing errors that lead to spoilage.
How is spoilage recorded in accounting?
Spoilage is recorded as a loss in financial statements and is not factored into the cost of goods sold. Since it is avoidable, it is treated as a cost overrun rather than a part of normal production expenses.
Can stock spoilage be eliminated?
While it may not be possible to eliminate inventory spoilage entirely, businesses can significantly reduce it by optimizing processes, improving quality control, and implementing preventive measures.
Why is it important to calculate spoilage?
Calculating inventory spoilage helps businesses identify inefficiencies in their production process and take corrective actions. It also allows them to accurately assess their financial performance and make informed decisions to reduce costs.
How does spoilage affect product pricing?
High spoilage can increase production costs because the waste isn’t accounted for in the normal cost of goods. When these costs rise, manufacturers may need to increase the price of their products to maintain profit margins, potentially making their goods less competitive in the market.
What role does technology play in reducing spoilage?
Advanced technologies such as IoT sensors, AI-driven analytics, and automation can significantly reduce spoilage by providing real-time monitoring, predicting potential equipment failures, and automating quality checks, ensuring consistent product standards and minimizing human error.
Conclusion
Inventory loss due to factors beyond your control can negatively impact your business operations. Fortunately, proper warehouse management can help prevent abnormal spoilage by ensuring consistent product output. For further assistance in inventory management, contact Qodenext today.
