Accounting treatment for quality inspection

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1359 Points Joined October 2021

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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On 30 December 2024 at 13:55 Report
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Master in Accounts & high court Advocate
9060 Points Joined December 2011

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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On 31 December 2024 at 14:27
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Finance
4545 Points Joined September 2020

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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On 24 January 2025 at 12:39


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