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Accounting treatment for quality inspection

Atharv Sankliya (1355 Points)

30 December 2024

A manufacturing entity , after the production of its product , do some quality inspection/ testing which incur certain cost such as product itself & some other expenses so what is the accounting treatment of this cost

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Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (5778 Points)
Replied 31 December 2024

The accounting treatment for quality inspection/testing costs incurred by a manufacturing entity after production is as follows:

Normal Losses 1. _Absorption_: Normal losses (i.e., expected losses during inspection/testing) are absorbed into the cost of good units produced.

2. _Cost Accounting_: These losses are considered part of the cost of goods manufactured and are reflected in the cost of goods sold.

Abnormal Losses 1. _Separate Disclosure_: Abnormal losses (i.e., unexpected losses during inspection/testing) are separately disclosed as an expense in the income statement.

2. _Not Absorbed_: Abnormal losses are not absorbed into the cost of good units produced. Other Expenses

1. _Directly Related_: Other expenses directly related to quality inspection/testing, such as labor and overheads, are absorbed into the cost of goods manufactured.

2. _Indirectly Related_: Other expenses indirectly related to quality inspection/testing, such as depreciation and utilities, are treated as manufacturing overheads and absorbed into the cost of goods manufactured.

Accounting Entries 1. _Normal Losses_: Debit: Cost of Goods Manufactured; Credit: Inventory (for the cost of defective units)

2. _Abnormal Losses_: Debit: Abnormal Losses Expense; Credit: Inventory (for the cost of defective units)

3. _Other Expenses_: Debit: Cost of Goods Manufactured or Manufacturing Overheads; Credit: respective expense accounts International Financial Reporting Standards (IFRS) 1. _IAS 2_: Inventories; requires that abnormal losses be recognized as an expense in the period incurred.

2. _IAS 16_: Property, Plant and Equipment; requires that depreciation and other expenses related to quality inspection/testing be recognized as expenses in the period incurred. US Generally

Accepted Accounting Principles (GAAP) 1. _ASC 330_: Inventory; requires that abnormal losses be recognized as a cost of goods sold in the period incurred.

2. _ASC 360_: Property, Plant and Equipment; requires that depreciation and other expenses related to quality inspection/testing be recognized as expenses in the period incurred. Please note that the specific accounting treatment may vary depending on the applicable accounting standards and the entity's

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