Difference Between Normal Loss and Abnormal Loss
The main difference between normal loss and abnormal loss is that normal loss is a loss that is expected and is a part of the regular production process. For example, some amount of material is lost during the production of goods due to evaporation or spillage. On the other hand, abnormal loss is an unexpected loss that occurs due to reasons such as machine breakdown, mishandling, power failure, unplanned work, or any other unforeseen circumstance.
In this article, we will explore normal and abnormal losses and the differences that set them apart in business and accounting contexts. But before exploring that, let's go through the list of topics we will cover in this blog.
Table of Contents (TOC)
- Difference Between Normal Loss and Abnormal Loss
- What is Normal Loss?
- Normal Loss Example
- What is Abnormal Loss?
- Abnormal Loss Example
- Key Differences Between Normal Loss and Abnormal Loss
Difference Between Normal Loss and Abnormal Loss
For better clarity, let's comprehend the difference between normal and abnormal loss in a tabular format:
| Benchmark | Normal Loss | Abnormal Loss |
|---|---|---|
| Definition | Expected loss during standard production. | Loss due to unexpected, external events. |
| Predictability | Based on historical data and industry norms. | Unpredictable and irregular. |
| Cause | Inherent in production, e.g., material nature. | External factors like accidents, mishandling. |
| Frequency | Occurs in every production cycle. | Sporadic and not consistent with production. |
| Financial Impact | Reflected in higher unit cost of production. | Direct extra cost affecting profitability. |
| Examples | Evaporation, minor spillage. | Machine breakdown, power failures, theft. |
| Estimation Method | Standard loss percentages. | Assessed post-event. |
| Control and Management | Managed through production planning. | Requires risk assessment and mitigation. |
| Relevance to Operational Efficiency | Efficiency within expected parameters. | Signals potential operational inefficiencies. |
| Insurance Coverage | Generally not insurable. | Often covered by insurance. |
| Impact on Inventory Management | Anticipated in inventory planning. | Can cause unexpected inventory issues. |
| Influence on Pricing Strategy | Marginal price increase. | May necessitate significant price adjustments. |
| Role in Business Decision-making | Factored into routine decisions. | Triggers review of business strategies. |
| Technological Mitigation | Improved with process automation. | Reduced by safety measures and equipment maintenance. |
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What is Normal Loss?
Normal loss is a type of unavoidable loss that occurs during the production process due to the nature of raw materials. It includes losses such as spoiling, evaporation, leakage, or breakdown and can be estimated with the help of prior technical knowledge and experience.
Normal losses are part of the production cost and are not charged separately. There are four forms of normal loss:
- Normal scrap: Type of material that is discarded and has some value.
- Normal waste: Type of material that is discarded and has no value.
- Normal spoilage: A type of production that is discarded as it doesn't meet the quality standards.
- Normal defectives: Type of production that does not meet the quality standards but can be sent for preprocessing again.
These forms of normal loss are recorded in the books of accounts and apportioned over the remaining product units. You can calculate normal loss by using this simple formula:
Normal Loss=Total Quantity of Input×Expected Loss Percentage
Note:
- Total Quantity of Input: This is the total amount of raw materials or inputs used in the production process.
- Expected Loss Percentage: This percentage represents the anticipated loss during the process. It is usually based on past experiences or industry norms.
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Normal Loss Example
If you start with 1000 units of material and expect a 5% normal loss, the normal loss would be calculated as:
Normal Loss = 1000 × 0.05 = 50 units
This means out of 1000 units, 50 units are expected to be lost as a normal part of the process, leaving 950 units as the output.
What is Abnormal Loss?
Abnormal loss is an unexpected type of loss that can occur due to various events, such as carelessness, mishandling, lack of knowledge, unplanned work, accidents, etc. This type of loss is avoidable and not natural.
The cost of abnormal loss is not included in the cost of production, but it can affect a company's financial condition and requires additional resources to mitigate. Determining the root cause of abnormal loss is challenging and may require skilled investigation. You can calculate normal loss by using this simple formula:
Abnormal Loss = Actual Loss − Normal Loss
Note:
- Actual Loss: This is the total loss measured after the production process is completed. It includes both normal and abnormal loss.
- Normal Loss: As discussed earlier, this is the expected loss during production.
Abnormal Loss Example
If the total actual loss in a process is 100 units and the normal loss is expected to be 30 units, the abnormal loss would be:
Abnormal Loss = 100 − 30 = 70 units
Key Differences Between Normal Loss and Abnormal Loss
- Normal loss is an expected and planned loss, whereas abnormal loss is an unexpected and unplanned loss.
- Normal loss is a part of the production process and is accounted for in the cost of production, while abnormal loss is an additional cost incurred due to unforeseen circumstances.
- Abnormal loss may be unavoidable in specific situations, while normal loss can be minimized to some extent through process improvements.
- Normal loss does not impact the profitability of a business as it is already accounted for, whereas abnormal loss can significantly impact a business's profitability.
- Normal loss is predictable and can be estimated. In contrast, abnormal loss cannot be accurately predicted or vary greatly.
FAQs
Is insurance available for normal and abnormal losses?
Insurance typically covers only abnormal losses, not normal losses.
Do normal and abnormal losses affect stock management?
Yes, normal losses are factored into inventory levels, while abnormal losses can cause unexpected shortages.
Are there tax differences for these losses?
Normal losses are part of cost of goods sold, while abnormal losses might be tax-deductible.
How do these losses impact product pricing?
Normal losses increase cost per unit, potentially affecting pricing. Frequent abnormal losses might lead to strategic pricing adjustments.
Can technology reduce these losses?
Yes, technological advancements like automation and robotics, advanced monitoring systems, quality control technologies (like machine vision systems) can minimize both normal and abnormal losses in production.
Anshuman Singh is an accomplished content writer with over three years of experience specializing in cybersecurity, cloud computing, networking, and software testing. Known for his clear, concise, and informative wr... Read Full Bio
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