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Accounting treatment for quality inspection

Atharv Sankliya (1356 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) (6306 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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Yasaswi Gomes new (Finance ) (4545 Points)
Replied 24 January 2025

That is cost manufacturing issue. That is an expense, allocate it or expense it. Check for tax provisions. This is max because the WIP costs are the finished goods cost. AS 2 mentions some transactions which can be included into cost of inventory. If it says 'etc' include it into inventory cost.

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