The term of a normal loss determines loss which is passed-down and can not be escaped. It shall also be reflected on during the time of when the closing stock is valued. To estblish the cost per one good after the normal loss, we wil need to use undermentioned formula:
Cost per one good=(Expenses incurred+Total cost)/(Total quantity- Normal loss)
Normal loses during the regular method of production are inevitable. This includes such an example as lost in the weight of timber due to evaporation, scraps remaining after making an armchair as well as gold dust as an outcome of making a ring.No matter how much the sender of goods or receiver try this cannot be prevented. Thus, it is reckoned as a component of production cost.
An example of Normal loss
To understand better the concept of a normal loss here is an example: Hypothetically a vegetable seller buys a box of carrots containing 100 carrots for 95$. One carrot costs 95 cents. Let's just say that 5% of the vegetables are damaged, it would not be correct to say that the cost per carrot is 95 cents. In reality, a vegetable seller is buying 95 carrots for 95 $ and that price for one carrot is 1$ not 95 cents. In the case when the seller is charged 95 cents per apple and establishes selling price at 98, he will lose [[money]] when all carrots are vended at the price of 95 cents. Even though, one would think he earns 3 cents per carrot. That is why price should be established with regard to the 1$ cost per carrot.Such an operation is named inflating the cost of the products. It is used to cover the normal loss of the products. Products that were not sold are also treated in the same. In addition to that, the same rule applies when goods on consignment are evaluated .
Abnormal loss happens when some unexpected situations occur such as lack of care, usage of inappropriate materials, fire, etc. As this situation shouldn't occur during regular actions of production, as an outcome, the cost is not charged in the product.
Accounting approaches for normal loss
The process of a loss might happen early in a process or while process. The process of a loss might also happen at the closing stages of a process. The time of existence the normal losses (damaged goods) is very important because it effects deciding which of the listed approaches should be considered in a process of accounting :
- First Approach- in this case, the cost of normal loss goods should be incorporated in the cost of all goods calculated as equivalent production.
- Second Approach- in this case, the cost of normal loss goods should be incorporated in the cost of all fine goods which have been completed and consequently the cost of normal loss goods will not be asked payment for closing work in progress.
- (C.Drury 2010)
- (N.D.Kapoor, B.Bhushan 2008)
- (J.Lal 2011)
- (R.Izhar, J.Hontoir 2001)
- Drury C. (2010)., Management and Cost Accounting, Cengage Learning EMEA
- Izhar R. , Hontoir J. (2001)., Accounting, Costing and Management
- Kapoor N.D. (2008)., A Complete Course in ISC Accounting, Pitambar Publishing
- Lal J. (2011)., Cost Accounting 4E, Tata McGraw-Hill Education
Author: Julia Lech