An abnormal loss is a cost accounting term that refers to a situation where the expected output of a production process is not achieved due to factors beyond the control of management. This can lead to an increase in the cost of goods sold and, ultimately, a decrease in profits.
Let’s try to understand in more depth what is abnormal loss, its causes and the accounting treatment of abnormal losses in the books of cost accounting records.
Causes of Abnormal Losses
Abnormal losses can occur for a variety of reasons, but the most common is when there is a break in the production process. This can be caused by a machine malfunction, power outage, or even human error. When this happens, fixing the problem and getting the production process back up and running can often take time. This can lead to a loss of output and as a result, an increase in costs.
Another common cause of abnormal loss is when raw materials are of poor quality. This can also lead to higher costs as it can take longer to produce the final product.
In some cases, normal losses can also be considered abnormal. This is typically when the loss is much higher than what is typically seen in the production process. For example, if a company typically has a 2% defect rate but sees a 10% defect rate in a particular production run, this would be considered an abnormal loss.
Abnormal losses can have a significant impact on a company’s bottom line. In some cases, it can even lead to financial losses. As such, businesses need to keep track of their abnormal losses and take steps to avoid them.
There are a few different ways to account for abnormal losses. One option is to charge the costs directly to the cost of goods sold. This method is often used when abnormal losses are considered unavoidable.
Another option is to charge the costs to an expense account. This can be used when abnormal losses are considered to be avoidable. This method is often used when businesses are looking to improve their processes and prevent future abnormal losses.
No matter which method is used, it is important to ensure that all costs are properly accounted for. Abnormal losses can have a significant impact on a company’s financial statements. As such, they should be given careful consideration.
I hope that now you understand how an abnormal loss in cost accounting can impact the profits of the company. If you have any confusion or doubts please do let us know in the comments section.