Normal Loss:
Normal loss refers to the expected and unavoidable loss or waste that occurs during the production process. It is inherent in the production process and is considered a normal part of operations. Normal loss can result from factors such as evaporation, shrinkage, spoilage, or defective units that are expected to occur at a consistent rate. The cost of normal loss is included in the cost of production and is spread over the units produced.
Abnormal Loss:
Abnormal loss refers to the unexpected or excessive loss or waste that occurs during the production process. It is not part of the normal production process and usually results from unforeseen events or errors. Abnormal loss can occur due to equipment breakdowns, accidents, quality control issues, or other abnormal circumstances. The cost of abnormal loss is treated separately from the cost of production and is usually charged as an expense in the period it occurs.
Normal Gain:
Normal gain refers to the expected and planned increase in the quantity or value of units during the production process. It occurs when the output is more than the expected yield due to factors such as better efficiency, improved quality, or reduced wastage. The cost of normal gain is considered a negative cost and is deducted from the cost of production, effectively reducing the overall cost per unit.
Abnormal Gain:
Abnormal gain refers to the unexpected or excessive increase in the quantity or value of units during the production process. It is not part of the normal production process and usually results from unforeseen events or errors that lead to a higher yield. Abnormal gain can occur due to process improvements, higher efficiency, or other abnormal circumstances. The cost of abnormal gain is treated separately from the cost of production and is usually accounted for as a reduction in the cost of production or recorded as a gain.
Example:
ABC Manufacturing Company produces chemical products through a continuous production process. During the month of January, the company incurs the following costs and experiences loss and gain in the production process:
- Direct materials cost: $50,000
- Direct labor cost: $30,000
- Manufacturing overhead cost: $20,000
- Units introduced into production: 10,000 units
- Expected normal loss: 5% of units introduced into production
- Abnormal loss: 300 units
- Abnormal gain: 400 units
Calculation of Normal Loss:
Expected normal loss = 5% of 10,000 units = 500 units
Calculation of Total Units Accounted For:
Total units accounted for = Units introduced into production + Abnormal gain – Abnormal loss
= 10,000 units + 400 units – 300 units
= 10,100 units
Calculation of Equivalent Units:
Equivalent units = Total units accounted for – Abnormal loss
= 10,100 units – 300 units
= 9,800 units
Calculation of Cost per Equivalent Unit:
Cost per equivalent unit = Total production cost / Equivalent units
= ($50,000 + $30,000 + $20,000) / 9,800 units
= $100,000 / 9,800 units
= $10.20 per unit
Calculation of Cost of Production:
Cost of production = Cost per equivalent unit x Equivalent units
= $10.20 per unit x 9,800 units
= $99,960
Accounting Treatment for Normal Loss:
The cost of normal loss is absorbed by the good units produced, and the cost per unit is adjusted accordingly. Assuming that all normal loss occurs at the end of the process, the accounting entries would be as follows:
Debit: Cost of Production (Work in Process) – $99,960
Credit: Normal Loss Account – $4,980
Credit: Finished Goods Inventory – $94,980 (10,000 units – 500 units)
Accounting Treatment for Abnormal Loss:
Abnormal loss is considered an abnormal expense and is recorded separately. The accounting entry would be as follows:
Debit: Abnormal Loss Account – $4,000 (300 units x $10.20 per unit)
Credit: Finished Goods Inventory – $4,000
Accounting Treatment for Abnormal Gain:
Abnormal gain is treated as a reduction in the cost of production. The accounting entry would be as follows:
Debit: Finished Goods Inventory – $4,080 (400 units x $10.20 per unit)
Credit: Cost of Production (Work in Process) – $4,080
By recording the normal loss, abnormal loss, and abnormal gain separately, the company can analyze the cost variances and take appropriate measures to minimize losses and improve efficiency in the production process.