ABNORMAL LOSS & ABNORMAL GAINOmkar Pradeep Phutane

(Roll no. 24)

WHAT IS ABNORMAL LOSS & ABNORMAL GAIN?

Imagine that a tank is filled with some chemical. This chemical has a tendency to evaporate at the rate of 10ml every hour. This evaporation loss is NORMAL LOSS. This loss is inevitable & cannot be controlled due to physical/ chemical properties. But if there is mishandling or leakage in the tank then any amount of chemical would be wasted. This is obviously controllable. If such loss occurs then it is ABNORMAL LOSS however, if the loss is less than anticipated then it is ABNORMAL GAIN. In other words abnormal gain is opposite of abnormal loss.

Normal wastage arises out of breakage, evaporation, deterioration, shrinkage, etc. whereas, Abnormal wastage occurs because of an avoidable or abnormal reason. On the other hand, abnormal gain arises because of an abnormal efficiency in the performance or use of raw material. Thus abnormal gain or abnormal effective will reduce the normal loss.

HOW TO CALCULATE?Abnormal loss = (No. of units of abnormal loss * per unit cost of normal output)

Abnormal gain = (No. of units of abnormal gain * per unit cost of normal output)

ACCOUNTING TREATMENTAbnormal Loss: Loss due to the abnormal wastage should not be treated as a part of the

manufacturing cost but must be regarded as a financial loss in no way connected with manufacturing. Such abnormal wastage minus realization from sale of wasted units must be charged to profit and loss account.

Abnormal Gain: The process account under which abnormal gain arises is debited with the abnormal gain and credited to the abnormal gain account which is closed by transferring to the costing profit and loss account.

IMPORTANCEOrganizations can increase their efficiency by calculating and reducing abnormal loss, as we know

that it’s avoidable or controllable.

Abnormal gain is a sign of efficient business. It shows that all resources are utilized very efficiently.

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EXAMPLEQuestion In a process 3000 units @ Rs. 9 per unit are issued. The normal loss is 10% of the units introduced. The actual output of the said process is 2820 units. The sale price of the normal loss is Rs. 3 per unit.

AnswerUnits introduced = 3000 unitsLess normal loss @ 10% = 300 units

Normal output = 2700 units

The actual output in this process is 2820 units which is (2820- 2700) = 120 units more than the expected or normal output. Hence these 120 units will be known as abnormal gain (if actual output is less than expected or normal output then, it’s called as abnormal loss).

Cost of abnormal gain: The cost calculation is important as the benefit of this extra efficiency should not be absorbed in the process but it should be separately accounted for, and hence the profit due to abnormal gain should be credited to costing profit and loss account.

Cost of abnormal gain = * Abnormal gain (in units)

Normal cost of the normal output = (cost – Sale value of normal loss)= (3000*9 – 300*3)= 26100

So, cost of abnormal gain = (26100/ 2700)* 120 = 1160

Amount to be taken to profit and loss accountAbnormal gain = 1160Sale price of the abnormal gain (120*3) = 360Gain due to abnormal = 800

Note: Calculation is same for the abnormal loss.

THANK YOU

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Normal cost of the normal outputNormal output