Thread: Accounting for spoilage

I would suggest doing a journal entry to remove from COGS and into a "Spoilage Expense" account. This is important for them to see how much they actually throw out - and technically not a COGS because it was product that didn't create income. Have them keep track on a spreadsheet and then you can do one Journal Entry each month.

It may be worth tracking but I doubt it. Spoilage is part of COGS, just as theft is. I can't see buying 24 head of lettuce, chopping it up and then trying to figure out how many whole heads of lettuce are thrown out. It is silly if you are even talking about whole heads of lettuce. Seriously, are you going to make a journal entry moving the cost of two head of lettuce from one COGS account to another COGS account? It is all part of COGS. Seems to me that an owner/manager can notice they are throwing out a lot of lettuce and figure that maybe they should order less next time.

Originally Posted by JoeTheCPA

I am in the process of automating receipts for a client of mine and I noticed that they have a spoilage expense they want to record. However, they are a cash basis company and the inventory they buy is getting expensed when they purchase it. Therefore, is a spoilage expense even necessary, since they don't carry inventory as an asset and no income was booked?

Or should I do a re-class between COGS and some sort of spoilage account?

From an accounting point of you, no entry is needed as you say. If the customer wants to obtain cost transparancy with regards to spoilage, shrinkage (theft) and other non-cost of sales items, your proposal to credit cost of sales and debit an appropriate account for reporting purposes is a good solution.
Werner Reisacher

Spoilage, theft, shrinkage are all part of cost of goods sold hence should not be recorded separately otherwise there would be an underestimation of costs and over estimation of income.You could just give the client a percentage instead of the salvage value of the inventory wasted.

Remember cogs is not usually an actual general ledger account, it is a classification category. Do keep that in mind when discussing the accounting treatment as one might be describing it in top end P&L terms while someone else is saying the same thing but as to the detailed accounts.

Theft is a typically a controllable expense in SG&A, not a component of cogs (at least in restaurants and convenience stores).

If you're talking restaurant operations here. Spoilage/waste is included in cogs.

For example a pizza restaurant would typically have several accounts representing different revenue and cogs categories. You'd have pizza revenues and cogs detail accounts for: food (oil, flour, sauce, etc), toppings (onions, hamburger, sausage, green peppers, etc), cheese and paper costs. You'd also split out beverage revenues and cogs (syrup, co2, cups). Repeat for other items as well (salads, sandwiches, pastas, etc.).

Note that not all paper would go into the same account as different types of paper might apply to different accounts. Some paper costs would be an operating expense such as placemats or menus. Each restaurant owner would of course apply their own unique twist to it also.

The restaurant would have a cogs budget that is based on the recipe ingredients and order quantities. Those that accurately measure and follow recipes will control their costs better than others. Spoilage/waste is part of that budget cost (but no separate account) and is usually factored at 1% or less. An operation that includes a salad bar would receive a greater allowance. The waste factor is usually an educated guess, very minimal and depends on the complexity of the restaurant operations.

Restaurants also have to account for/control costs based on gross and net(coupons/discounts) costs.

If you had abnormal spoilage on one occasion I bet you wouldnt put that in COGS in a restaurant.

Like all your fridges blew up and you had to throw everything out.

So it really all depends....

Typically the amount of an expense or the frequency of its occurrence has nothing to do with its classification as it's the nature of the event item that matters (so yes it all depends).

To me an instance qualifying as an appropriate reclassification from cogs would be something meeting the requirements of say a casualty loss.

Though treatments can vary as every company always has the right to set their own standards and policies. Another reason for maintaining an accounting policy manual.

Pat,

You mention that a company reserves the right to set their own policies regarding shrink and cost of goods sold. At my company I have the following losses:


Transfers out for promotions
Store use inventory/Merchandise testers
Broken/Damaged
Return to Vendor
Donations
Known theft

My question is, can I reclass some of these expenses out of inventory and into a non COGS expense such as theft or Store supplies. This will essentially reduce shrink at the end of the year because the inventory ledger won't be too high compared to the inventory count.

I can't find anything GAAP related except that the difference between inventory count and year end inventory ledger amount is considered shrink and part of COGS. Can we deviate from this? we are a retailer.

Any answers would be great.

Chi257,

It's a matter of preference along with the consistent application of known events.

Much of retail theft is due to "no rings" (pocketing the cash) by cashiers as opposed to customers walking out the door with items, it shows up as inventory shrinkage. There are many unknowns with accounting for retail inventories ranging from what was just discussed to price changes to accounting for rebates to vendor shorts/non deliveries that don't actually make it into the store but you are billed for.

All of the above can vary tremendously based on the controls an organization has in place.

If you know something occurred then make the appropriate entry but don't assume or make up numbers to just make one account look better. Hard factual information is hard to come by with retail inventories so don't play games with what you have (although you may have a feel/suspicion for what's going on). You need realistic account balances that have a consistent application of your policies to actually manage (make decisions) for the betterment of the company.

Frequent inventories with the appropriate accounting adjustments during the period are one way to exercise greater control and isolate events.

Good luck.