Normal and Abnormal Loss

Normal loss is an unavoidable and non-transferable loss that happens throughout manufacturing or any business process. These losses are instantly documented in the books and allocated to the remaining product units. An abnormal loss, on the other hand, is defined as any loss that occurs by chance as a result of unforeseeable occurrences. The cost of these is not included in the cost of production since they are considered an expense to the firm.

Normal Loss

A portion of the products shipped on consignment may be lost or otherwise destroyed either in transit or at the consignee’s godown. The loss is borne by the consignor since, in the consignment model of business, ownership of goods stays with the consignor and does not pass to the consignee. The loss on consignment must be characterised as normal or abnormal in order to determine the right accounting treatment in the consignor’s accounts.

Normal loss happens mostly as a result of natural factors such as drying, evaporation, leakage, shrinking, or the perishing of a few items as a result of handling products in large quantities. It is an inescapable or unavoidable loss that cannot be averted by any means. Normal losses are mostly caused by the nature or kind of items being handled or transferred from one location to another. These losses are frequently anticipated in many companies and are often accepted to a greater extent than anomalous losses.

The typical loss is overlooked in consignment, which implies that its value is absorbed by the remaining good units in stock. For example, A sends B 10,000 pieces of products for Rs.95,000. Consignment costs Rs.9.5 per unit (= Rs.95,000/10,000 units).

Assume there is a usual loss of 500 units and the consignee receives 9500 units. After the typical loss, the higher per unit cost would be Rs10 (= Rs95,000/9500 units), and the stock on consignment would be evaluated using this new unit cost.

Characteristics of Normal Loss

• It is simple to estimate in advance using prior experience and empirical calculations.
• It is given as a percentage of the input to each process.
• It might happen at the start of a procedure or during one.
• It is expected to happen under typical process conditions.

Accounting Treatment

• The cost of typical loss is included in the cost of production. As a result, the cost of normal loss absorbs the units of items produced, raising the per-unit cost.
• Furthermore, when any sum is recovered as sale proceeds, the cost of the operation is lowered.

Unit Calculation

We use the following calculation to calculate the cost per unit after the typical loss:

Cost per unit = Total cost+Expenses Incurred/Total quantity-Normal Loss

Abnormal Loss

Some losses are unintentional, while others are the result of negligence. For example, theft or loss caused by fire, flood, earthquake, war, accidents in transit, and so on. Such losses are, to variable levels, uncommon. Assume a portion of the items is stolen; this reduces the value of the stock and, as a result, the profit on consignment. The best thing to do now is figure out how much the lost things cost. After determining the value, the consignment a/c is credited, and the anomalous a/c is debited and transferred to the profit and loss a/c, resulting in the right profit or loss of the consignment.

Some company owners may purchase insurance for products shipped or received. Such a coverage is obtained solely in the event of unusual loss to goods.

Characteristics of Abnormal Loss

• It is an unexpected loss.
• Losses arise as a result of exceptional and non-recurring events.
• These are not inherent in the production or manufacturing process.
• The difference between actual and predicted loss represents it.
• It is manageable if suitable preventative actions are followed.
• It is deducted from the profit and loss statement as a period cost.

Accounting Treatment

• The cost of anomalous loss is not factored into the manufacturing cost. It is also not absorbed by the units of commodities created
• The cost of unusual loss is allocated to a distinct account known as the Costing Profit and Loss Account.

Unit Calculation

Abnormal Loss Units = Expected Output – Actual Output

Expected Output = Input – Normal Loss

Cost of Abnormal Loss = Total cost incurred-Scrap value of normal loss/Input-Normal Loss×Units of Abnormal Loss

Conclusion 

Normal loss is a non-transferable loss that happens throughout the manufacturing process. The cost of these is not included in the cost of production since they are considered an expense to the firm. The loss is borne by the consignor since, in the consignment model of business, ownership of goods stays with the consignor and does not pass to the consignee. The loss on consignment must be characterised as normal or abnormal in order to determine the right accounting treatment in the consignor’s accounts. The typical loss is overlooked in consignment, which implies that its value is absorbed by the remaining good units in stock. The anomalous loss is subsequently transferred to Profit And Loss A/c to arrive at the exact profit or loss of consignment.