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Accounting for Raw Material Disposal Fees

Frank Lemanski's Profile

We are a consumer products company that purchases raw materials, which are shipped to third party co-packers to build our products for us. One of our co-packers is billing us a separate fee to dispose of some of our raw materials that can no longer be used in production of finished goods. It seems that this fee (primarily for the labor involved in disposing of the bad material) should be recorded as an operating expense instead of being recorded in COGS. Is this the correct accounting treatment?

Answers

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Frank
I think it would follow the cost of scrapping the raw material that is no longer usable.
Where do you report raw material write offs?

More importantly, do you factor this loss into your product pricing models if it is a reality of your business vs a rare occasion?

Frank Lemanski
Title: Controller
Company: Greenology Products Inc
(Controller, Greenology Products Inc) |

Thanks for your reply Len.
We do have a scrap account to account for raws lost during the normal process of producing finished goods and we have assigned the lost raw materials to this scrap account. I just was sure the disposal fee from our co-packer should be recorded in GOGS as part of the scrap amount or as a below the line operating expense.
thanks again.
Frank

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