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Entry of defective product

Atharv Sankliya (1354 Points)

04 November 2021

entry of defective product and its treatment in trading and profit and loss account

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6 Replies

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 04 November 2021

In cost accounting provision for defective goods is already created. That can be shown in the liabilities. Finally it is written off to trading account.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 04 November 2021

Normal spoilage 5% of input
Total spoiled units 550 units
Total Cost `10,000
Sale value of spoilage `0.50 per unit
Standard output Input less 5% of Spoilage
4,750 units
Cost of abnormal spoilage
4 750

=10 000 -250 x .5 x300/4750

= `623.68
Net cost of abnormal spoilage `623.68 – (300 x 0.50) = `473.68

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 04 November 2021

Now the manufactur

ing manager can decide it to be like this

Purchases 4750

To payables a/c 4750

To Provision a/c 250

Then create a provision for 5%. When there is no defective goods

By Provision 250

By Payables 4750

To Bank a/c 5000

If there is a defect, and cannot be returned, write off the loss to profit and loss

By Payables 4750

By provision loss 250

To bank 5000

By Provision liability 250

To Inventory 250

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 04 November 2021

forgot to mention, 5000 units. I am feeling sleepy

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Atharv Sankliya (1354 Points)
Replied 05 November 2021

Does provision for defective product is made because to follow accural concept ??

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 05 November 2021

Provisions is a different standard. Provision is usually created on accruals like receivables, warranties. Defective product provisioning will fall under capital provisioning like restructuring, dismantling Etc cause it is related to stock rather than purchases or payments.