Definition of Inventory Shrinkage
Inventory shrinkage is a term to describe the loss of inventory. The shrinkage could be the result of theft, breakage, poor recordkeeping, etc.
The term shrinkage may also be used by manufacturers to describe the loss of raw materials during their production processes. This shrinkage is also known as spoilage or waste and it can be either normal or abnormal.
Example of Inventory Shrinkage
Assume that a retailer's computerized inventory records indicates that 961 units of Product X are on hand. However, a physical count of Product X indicates that only 891 units are on hand. The difference of 70 units is the inventory shrinkage. The retailer's inventory shrinkage might be due to shoplifting, employee theft, discarding defective units without preparing the necessary paperwork for updating the computerized records, etc.
A manufacturer of baked food items will experience some shrinkage throughout its processes due to ingredients being of a lesser quality, ingredients adhering to the beaters and bowls, evaporation, less experienced bakers, etc.