Accounting for Material Wastage and Spoilage in Your Handmade Business
If you're not accounting for material wastage and spoilage, your product costs are wrong and your margins are lying to you. Here's how to track it and treat it correctly.
You finish a candle pour. The wax pot has a coating inside that won’t scrape out cleanly. Half a batch of cold process soap seized up and went into the bin. A bottle of fragrance oil you bought in bulk has gone off before you got to it.
None of that counts in your books. And that’s a problem.
When material waste isn’t recorded and accounted for properly, it doesn’t disappear. It just shows up somewhere else: inflated apparent margins, wrong product costs, and a Schedule C that doesn’t tell the whole story at tax time.
This post covers the accounting side of wastage and spoilage. If you want the basics on tracking and calculating your shrinkage rate first, start with our guide to inventory shrinkage for makers. What we’re covering here is what to do with those losses once you know they exist.
What counts as material wastage and spoilage?
Before we get into the accounting, it helps to know what you’re dealing with. Not all waste is the same, and the accounting treatment differs depending on the type.
Production scrap: material consumed in the making process that doesn’t end up in the finished product. The wax residue in the pour pot. Soap trimmings from squaring up a loaf. Clay that dried out on the workbench. Wire clippings in jewellery making. This is the normal cost of production: expected, predictable, and entirely yours to build in.
Failed batches: a whole manufacture that can’t be sold. Soap that volcano-erupted in the mold. Candles that tunnelled. Resin that stayed tacky. Sometimes you can rebatch. Often you can’t. Every gram of ingredient is gone.
Spoilage: materials that expired before you used them. Carrier oils that went rancid. Fragrance oils that discoloured. Dried herbs that lost potency. This is a real risk when you buy in bulk, and it hits hardest with food-grade and organic ingredients.
Samples and test batches: product you made to check a formula, test a fragrance load, or photograph for a listing. The finished goods aren’t being sold, but the materials are gone.
Handling losses: the dropped bottle, the split bag, the accidentally broken mold. Not production waste exactly, but the result is the same: materials leave your inventory with no sale to show for it.
The accounting question for each type is: does this belong in your cost of goods sold, or should it be written off differently?
Why ignoring waste makes your margins look better than they are
Here’s the thing that catches a lot of makers off guard.
If you price your candles based on a recipe that uses exactly 200g of soy wax and 20ml of fragrance oil, but in practice you’re losing 8% of each to pot residue and pour waste, your real material cost per candle is about 8% higher than the recipe says.
That gap doesn’t show up anywhere until a stocktake or tax time. But it’s there in every single candle you’ve sold.
Say your materials theoretically cost $3.20 per candle. With 8% production waste running through your business, the real cost is closer to $3.46. At 100 candles per month, that’s $26 a month in unaccounted costs. Not dramatic on its own. Multiply it across 12 months and you’ve been $312 short on cost calculations. And that’s just one product.
The effect compounds when you’re using these costs to set prices. If you built your pricing on the clean recipe number, you’ve baked a margin error into every sale. You think you’re making $8.50 profit per candle. You’re actually making $8.24. Not a crisis, but it adds up. And it means the “profitable” read on your business isn’t quite right.
This is how makers end up “busy but broke.” The work is there. The revenue is real. But somewhere in the gap between the recipe and reality, a quiet leak has been running the whole time.
How to include waste in your COGS
The cleanest way to handle predictable production waste is to build it into your cost of goods sold from the start, so it’s costed into every unit you make rather than discovered as a loss at stocktake time.
The scrap percentage method
Most inventory tools for makers, including Craftybase, let you add a wastage percentage to each material in a recipe. If you consistently lose 10% of your coconut oil to pot residue and measuring error, you record the recipe as using 110% of the theoretical amount. Every manufacture then deducts a realistic quantity, not the perfect-batch number.
This keeps your COGS per unit accurate by default. When you price using those numbers, the waste is already in the cost. When you report COGS at tax time, the losses are already captured.
The tricky part is knowing your actual waste rate. The practical approach: run a few careful batches with precise measurements before and after production, and calculate how much of each key material you’re actually consuming versus what the recipe says. That gives you a real wastage figure to enter, not a guess.
For most crafts, starting with 5-10% is reasonable and refining from there as you collect data.
Separate waste tracking
For losses that aren’t production scrap (failed batches, spoilage, test batches) you track them separately as they happen, not through the recipe.
In Craftybase, this means recording an inventory adjustment for materials used in a failed batch, or a write-off for spoiled stock. The materials come off your inventory. The cost goes to your records. Nothing gets lost in the background.
The discipline here matters: record the loss at the time it happens, not at the end of the quarter. A failed batch on a Tuesday morning is easy to forget by Friday. Log it right then and the adjustment takes thirty seconds. Wait a week and it’s gone.
COGS versus expense: which bucket does wastage go in?
This is the accounting question most makers get wrong, or never think about.
The short answer: most material wastage belongs in COGS, not as a general expense. But it depends on the type.
Goes in COGS:
- Production scrap from recipes (already handled via the wastage percentage)
- Failed batches, because the materials were consumed in the attempt to produce a sellable product
- Test batches made to refine a recipe that eventually gets sold
Can go in operating expenses:
- Spoiled materials that were never used in production. Fragrance oil that went off on the shelf before you got to it, for example. This is technically a loss on raw materials, not a production cost. It can be expensed as a business loss.
- Samples given away for marketing purposes. These are closer to a marketing expense than a production cost.
The practical difference matters most at tax time. If wastage goes into COGS, it reduces your gross profit directly. If it goes into operating expenses, it reduces your net income a step later. Either way it reduces your taxable income, but the placement affects how your profit and loss looks and how it maps to Schedule C.
When in doubt: if the material was consumed trying to make something to sell, it belongs in COGS.
Schedule C treatment for material waste
On Schedule C (the form sole proprietors file for business income), material costs including waste generally flow through in one of two places:
Line 36 (Cost of goods sold): This is where your total COGS lands, which includes production waste built into your recipe costs. If you’ve correctly accounted for wastage in your COGS calculation, this figure already reflects it.
Line 21 (Other expenses): Spoilage of raw materials that weren’t used in production and don’t cleanly belong in COGS can be claimed here as a business loss. Describe it clearly, something like: “Spoilage of raw materials, expired fragrance oils and carrier oils.”
The COGS and Schedule C guide for handmade sellers covers the full mechanics of how COGS rolls into Schedule C. The key point for waste: if it’s a real cost you incurred trying to run your business, you can deduct it. You just need records. A manufacture log, an inventory adjustment note, a spoilage record: something that documents the loss.
A note: tax rules vary by country and by your situation. If you have significant spoilage losses, it’s worth asking your accountant where they land in your jurisdiction. The principles here apply broadly, but the exact form lines differ for UK Self Assessment, Australian BAS, and other systems.
The margin inflation problem at tax time
Here’s why unrecorded waste specifically hurts at tax time: if your inventory counts are higher than reality (because waste has never been deducted), your ending inventory value is overstated. And ending inventory directly affects COGS.
The COGS formula is:
COGS = Beginning Inventory + Purchases - Ending Inventory
If your ending inventory is inflated by unrecorded losses, your COGS looks lower than it should. Lower COGS means higher apparent gross profit. Higher apparent gross profit means higher taxable income.
Failing to record wastage can actually cause you to overpay tax by making your business look more profitable than it is.
The fix is simple: record your waste. But it has to happen consistently throughout the year, not in a catch-up session in April. Retroactive waste estimates are harder to defend and harder to get right.
How to track this in Craftybase
Craftybase handles wastage accounting at two levels.
At the recipe level
When you set up a product recipe, you can add a wastage percentage per material. If your soap recipe theoretically uses 500g of olive oil, but you know you lose 8% to residue and off-cuts, set the wastage at 8%. Craftybase will deduct 540g when you record a manufacture. Your inventory adjusts to what you actually use. Your COGS per unit reflects the real cost, including the waste.
This is the “set and forget” approach for predictable production scrap. You configure it once and every future manufacture handles it automatically.
For failed batches and spoilage
When a batch fails or materials spoil, record an inventory adjustment in Craftybase. This is a manual step that pulls the materials off your stock and captures the loss. Adjust immediately, not in a batch at the end of the week.
The adjustment creates a record you can refer back to when explaining your COGS or supporting a tax deduction. It also keeps your stock counts accurate so your reorder levels, production planning, and overhead calculations stay grounded in reality.
What this looks like at tax time
When you run COGS reports in Craftybase at year end, the material costs include all the wastage built into your recipe deductions plus any manual adjustments. You’re not reconstructing losses from memory. You’re reading accurate numbers off a report that reflects how your business actually ran.
That’s the difference between clean books and a tax-time scramble.
A worked example: soap batch that seized
Say you’re a cold process soap maker. Your recipe for one loaf uses:
- 500g olive oil ($4.00)
- 200g coconut oil ($1.60)
- 100g lye ($0.80)
- 30g fragrance oil ($1.50)
Total material cost per loaf: $7.90. Yields 10 bars. Cost per bar: $0.79.
One Monday morning you unmold a batch and find it’s riced. The oils and lye separated and the texture is wrong. You bin the batch. That’s $7.90 in materials you can’t recover.
If you record this as an inventory adjustment in Craftybase:
- The materials come off your stock (no phantom inventory)
- The loss is captured in your records
- Your COGS for that period includes this failed batch
- Your business books reflect reality
If you don’t record it:
- Your stock counts are off ($7.90 of materials “on hand” that don’t exist)
- Your COGS is understated
- When you do a stocktake, you’ll find an unexplained discrepancy
- At tax time, you’ve potentially left a deduction unclaimed
One batch is small. But if you have one or two failed batches a month (not unusual at higher production volumes), you’re looking at $200+ a year in unrecorded losses.
Frequently Asked Questions
Does material wastage go in COGS or expenses?
Most material wastage belongs in COGS, not operating expenses. Production scrap, failed batches, and test batches were consumed in the attempt to make sellable products and are part of your production cost. Spoilage of raw materials that were never used in production can sometimes be claimed as a separate business expense. When in doubt, if the material was used trying to make something to sell, put it in COGS.
Can I deduct material spoilage on Schedule C?
Yes. Material spoilage is a legitimate business expense. If you include it in your COGS calculation, it flows through to Schedule C Line 36. If it's raw materials that spoiled before use, you can claim it as a business loss under other expenses. The key is having records: an inventory adjustment, a write-off note, or a manufacture log that documents the loss. Estimates without documentation are harder to support.
How does unrecorded waste affect my taxes?
Unrecorded waste inflates your ending inventory value, which understates your COGS and overstates your gross profit, meaning you may pay more tax than you should. The COGS formula subtracts ending inventory, so phantom inventory (materials on your books that don't exist) makes your business look more profitable than it is. Recording waste as it happens keeps your inventory accurate and your tax position correct.
How do I account for a failed batch in Craftybase?
Record it as an inventory adjustment in Craftybase at the time the batch fails, not at the end of the week when you're trying to remember. The adjustment removes the materials from your stock, captures the loss in your records, and keeps your inventory counts accurate. For predictable production scrap, set a wastage percentage in your recipe instead so every manufacture automatically deducts a realistic quantity.
What wastage percentage should I set in my recipes?
There's no universal rate. A practical approach: weigh your key materials before and after a few careful production runs, then calculate the difference as a percentage. For most handmade production, 5-10% is a reasonable starting point. High-waste products like cold process soap and candle pours typically run toward the higher end; precision crafts like jewellery with carefully weighed components run lower. Refine the number as you collect real data.
Unrecorded material waste is one of the quieter ways a maker’s business can feel more profitable than it is. Fixing it isn’t complicated. It’s mostly about building the habit of recording losses when they happen, setting realistic wastage percentages in your recipes, and checking your inventory counts against reality at least quarterly.
Craftybase handles the mechanics if you put the data in. The recipe wastage percentage takes care of predictable production scrap automatically. The manual adjustments cover the rest: failed batches, spoilage, test materials, so nothing disappears without a record.
If you want accurate COGS, you have to account for all the materials you use, including the ones that didn’t make it into finished products.
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