Inefficiencies in production are in reality treated differently. There are companies who don’t even know that they’re being inefficient, there are companies who consider inefficiencies as a part of the everyday process and those who treat inefficiencies as something very serious and fight against them. 

Leaving aside how they should be treated in production process and how to fight against such situations, we would focus now on how to account for inefficiencies in production. IAS 2 Inventories very clearly states that the costs excluded from the cost of inventories are abnormal amounts of wasted materials, labor or other production costs. Your local accounting framework may see different wordings for it and it may even find occasions when such amounts are in fact included within the cost of inventories, however it’s important to understand that anything not directly related to production, anything that’s exceeding what’s scheduled to be used for production just buffs the production price of the item and isn’t giving you a fair picture of how you’re actually using your materials.

It’s important to understand if and where you’re being inefficient because at the end of the day it’s your money you’re wasting.