Abnormal Loss | Meaning, Causes and Treatment

What is Abnormal Loss?

Abnormal Loss can be defined as any loss that occurs over and above the pre-determined loss(normal loss). Abnormal loss can not be pre-determined as they happen due to carelessness in normal processing. Abnormal loss can not be certain, like Normal Loss. Abnormal Loss happens due to non-recurring events, like fire, theft, other natural calamities, etc. It is a case where units lost in the production process are more than the normal loss, the variance between the two is called Abnormal Loss. Although abnormal losses can not be determined in advance they have a vital impact on the company’s financial position, and so they are to be given proper due care.

What are the causes of Abnormal Loss?

Abnormal Losses are not certain and can not be pre-determined because abnormal losses happen due to uncertain events and exceptional events. Following could be some of the causes of abnormal loss:

• Natural Calamity
• Machine Failure
• Faulty Equipment
• Unskilled labour unable to adapt to new technology.
• Any error in implementing the product plan
• Theft of Goods
• Bad Handling/storage of goods.
• Any other event that results in loss other than normally expected loss, etc.

Example of Abnormal Loss

Assume that GFG (P) Ltd. is a company in Noida (U.P.) engaged in the production of milk products like Milk, Cheese, Butter, Buttermilk, Yogurt, etc. While working at full capacity, GFG (P) Ltd. processes 1,00,000 liters of milk daily. As per the calculation of the production department, there is a 5% normal loss due to evaporation and normal wastage. One day, the company observed a machine failure, so the production department replaced the machinery with the latest machinery. However, the workers were not skilled enough to use the New Machinery. The production department recorded a total of 9% loss on that production day. Calculate the Normal Loss and Abnormal Loss and identify the causes of Abnormal Loss.

Solution:

Normal Loss = % = % = 5,000 Liters

Actual Loss Recorded = % = % = 9,000 Liters

Calculation of Abnormal Loss = Actual Loss – Normal Loss = 9,000 Liters – 5,000 Liters

Hence, Abnormal Loss = 4,000 Liters.

Accounting Treatment for Abnormal Loss

Any Abnormal loss that occurs in a production is a cost that is to be borne by the business hence, it should be taken into account carefully and needs to be recorded fairly. Abnormal loss is credited to the respected production account and is Debited to the Profit and Loss Account. It is to be noted that to arrive at the Total Cost of production Abnormal loss units shall be deducted from the gross produced units at their respective production price.

Journal Entries are passed to record Abnormal Loss: