Example of Normal and abnormal loss

Example of Normal and abnormal loss

Normal loss is an expected loss where the abnormal loss is over and above the normal loss. In below example the accounting treatment of normal and abnormal loss is being explained.

Normal loss is valued at nil value and the cost is born by the good output where the abnormal loss treated separately from process account.

Example

There are two department production and finishing. The production department cost of 100,000 units is during the year is as under

Item	amount
Material consumed	600,000
Labour applied	400,000
Overheads	200,000
Normal loss is	10%
Actual loss	12,000 units

Prepare the  process account for production Department

1. Determine the output and Losses.

Actual Loss		12,000
Normal loss	10% of 10,000	(10,000)
Abnormal Loss		2000

2. Calculate cost per unit

Cost incurred		1,200,000
Expected output	(100,000-10,000)	90,000
Cost per unit	Cost/expected output	1,200,000/90,000= 13.333

3. Output, Normal and Abnormal loss

	units	Rate	Amount
Output actual	88,000	13.333	1,173,304
Normal Loss	10,000
Abnormal Loss	2000	13.33	26,666

                                                                       Process Account

item	units	amount	item	Units	Amount
Material	100,000	600,000	Output	88,000	1,173,304
Labour applied		400,000	Normal loss	10,000
Overheads		200,000	Abnormal loss	2,000	26,666
Total	100,000	1,200,000		100,000	1,200,000