Advantages of Subscription-Based Banking
Commercial banks were first hesitant to adopt a subscription-based revenue model. This is because it was widely believed that such a revenue model would lead to a drop in revenue for the banks and hence would be unsustainable in the long run. However, over the years, several studies have been conducted. The results of the […]
Pension Funds and Income Redistribution
The purpose of pension funds is to ensure that the wealth created by an individual is invested and distributed in such a way that they can afford to maintain their standard of living throughout their lifetime. Pension funds have become a very important tool for retirement planning. An average pensioner plans to survive almost twenty […]
Net Present Value Calculations
The net present value (NPV) is the most important concept in corporate finance. It is on the basis of this concept that investment decisions are made or not made. It is on the basis of this concept that stocks and bonds are valued. Thus, it is an absolute imperative for any student of corporate finance […]
The Impact of Bankruptcy on Shareholders
Companies that file for bankruptcy also have a capital structure just like normal companies. This means that their capital structure is comprised of debt as well as equity. In the past few articles, we have been continuously talking about the interests of the debt holders i.e., how they will get paid in the event of […]
How Pre-Revenue Companies are Valued?
Valuation of any company can be a very complex task. However, when it comes to pre-revenue companies, this complexity is magnified. This is because of the fact that valuation is generally the discounted value of the future cash flows which are likely to arise in the future. The current cash flows are used as a […]
Scrap is the waste that arises while manufacturing goods. It may arise because the unit being manufactured has been irreparably damaged during production. Alternatively it can arise because too much direct material is being used for production. In either case, it signifies that there are problems with the manufacturing process that need to be addressed. If left unaddressed, these can be the cause of major costs and reduce the profitability of the company.
Now, when the term scrap is used, the mind automatically conjures up images of waste materials. The term scrap is associated with warehouse full of junk that may not have much value for the company. Disposing them without harming the environment is often supposed to be the only priority. But, this may not always be the case.
In many cases, scrap may have significant value. This makes it necessary to ensure that the job order costing system can account for scrap.
Once the material is declared to be scrap, its value needs to be ascertained and it is added back in the inventory of the organization. This inventory account is usually the direct materials account of the relevant job.
In some cases, companies also tend to use scrap from one job as a part of direct material for another job. This may be done directly or sometimes material may have to be processed. For instance, metal scrap can be molted and reshaped and it becomes as useful as a new piece of metal. Therefore it can be directly used in the production process.
Here are the costing conventions that are related to the treatment of scrap in job order costing. They have been mentioned in this article:
No distinction needs to be made between normal and abnormal like it is made in the case of rework and spoilage. Hence if a scrap can be traced to a particular job, its value is adjusted to the material inventory that has been used for that particular job.
Your email address will not be published. Required fields are marked *
