Question

A manufacturing company had an accident in the factory and this specifically has affected as the actual results were much different than planned , as a manager what should be done in the upcoming month based on: operating profit, contribution margin , raw materials , labor, etc in a decision report.

Answer 1

ACCOUNTING FOR LOSSES

There is always a chance of occurrence of losses during the manufacturing process and even in the

finished goods godown. Such losses are classified as normal loss and abnormal loss:

LOSSES

Normal losses

Abnormal losses

Normal loss

Occurrence of this type of loss is always expected. It is unavoidable loss and is inherent in the

manufacturing process or its chances of happening are more likely than not. For example; while

transporting petrol, it is normal that a little quantity will be evaporated.

Abnormal loss

It is an unexpected loss. Measures are always taken to avoid abnormal losses. For example; security

system is installed to secure loss by theft from godown of finished goods. Safety measures are

undertaken during manufacturing process against any loss of breakage of the output. Special care is

taken during transportation of petrol to avoid its leakage.

Normal and abnormal losses are treated differently in the financial accounting and in the cost

accounting as well. Following is the self explanatory chart that will help in understanding the

difference between accounting treatment of the two different types of losses.

Treatment in Financial Accounting

Normal loss

Abnormal loss

1. Ignored (no treatment).

1. Specifically recorded

2. Per unit cost increases.

2. Inventory per unit cost remains same

3. Normal losses are absorbed by the good

units.

Treatment in Cost Accounting

Normal loss

Abnormal loss

1. Charged to FOH account.

1. Charged to specific WIP account.

2. Overall per unit cost increases

3. No impact on individual job cost.