# Classification of Cost by Normality

This classification asks: Is the cost a regular feature of operations, or is it the result of an unusual event? The answer decides whether the cost becomes part of the product cost or is written off straight to the Profit & Loss Account.

## Normal Cost

Incurred normally for a given level of output under specified (normal) operating conditions.
Forms a routine part of production.
Charged to the product/process (i.e., included in cost per unit).
Examples: normal wastage of raw material, normal idle time, regular machine maintenance.

## Abnormal Cost

Incurred under abnormal / unusual conditions — fire, flood, theft, strike, machinery breakdown beyond normal.
Not a routine cost.
Charged to Profit & Loss Account — NOT to the cost of product.
Examples: cost of material destroyed in fire, wages paid during strike, abnormal idle time.

> Rule: Normal → absorbed into product cost. Abnormal → expense in P&L, kept out of cost sheet.

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# Normal Loss vs Abnormal Loss

The same principle is applied to physical loss of units during production.

## Normal Loss

Unavoidable; inherent in the production process (e.g., evaporation, shrinkage, normal scrap).
Expected and pre-estimated.
Treatment: The cost of normal loss is absorbed by the remaining good units — it raises the cost per unit of good output. No separate entry to P&L.
Sales of any scrap from normal loss reduce the total process cost.

## Abnormal Loss

Avoidable; caused by an unusual event (fire, theft, accident, negligence).
Treatment: Valued at the cost per unit of good production and transferred directly to the Profit & Loss Account.
Both the units and the cost of abnormal loss are removed from the process / cost sheet so they do not distort the cost of good output.

## Side-by-side Comparison

Aspect	Normal Loss	Abnormal Loss
Cause	Inherent in process	Unusual event
Predictability	Expected, pre-estimated	Unexpected
Cost treatment	Absorbed by good units (↑ cost/unit)	Debited to P&L A/c
Unit treatment	Reduces good output	Removed from output count
Effect on cost/unit of good output	Increases	No effect (transferred to P&L)

## Formula for Cost per Good Unit (Normal Loss case)

$$\text{Cost per good unit} = \frac{\text{Total Cost} - \text{Scrap value of normal loss}}{\text{Input units} - \text{Normal loss units}}$$

## Formula for Abnormal Loss

$$\text{Abnormal Loss (₹)} = \text{Cost per good unit} \times \text{Abnormal loss units}$$

The cost per good unit used here is computed AFTER adjusting for normal loss.

Worked example

### Example 1

Example — Normal Loss only

1,000 kg of input is introduced into a process. Normal loss is 10% of input, having no scrap value. Total process cost is ₹45,000. Find the cost per kg of good output.

Normal loss = 10% × 1,000 = 100 kg

Good output = 1,000 − 100 = 900 kg

Cost per good kg = ₹45,000 / 900 = ₹50 per kg

Note: the ₹45,000 cost is spread over only the 900 good kg — the loss is absorbed.

### Example 2

Example — Normal + Abnormal Loss together

Input: 1,000 units. Total cost: ₹45,000.

Normal loss expected: 10% of input (no scrap).

Actual output: 850 units.

Step 1 — Identify losses

Normal loss = 10% × 1,000 = 100 units → expected
Total loss = 1,000 − 850 = 150 units
Abnormal loss = 150 − 100 = 50 units

Step 2 — Cost per good unit (after normal loss only)

= ₹45,000 / (1,000 − 100) = ₹45,000 / 900 = ₹50 per unit

Step 3 — Treatment

Cost of abnormal loss = 50 × ₹50 = ₹2,500 → debited to P&L A/c
Cost of 850 good units = 850 × ₹50 = ₹42,500
Verify: 42,500 + 2,500 = ₹45,000 ✓

The abnormal loss does not distort the ₹50 per unit cost of good output.

⚠️ Common exam mistakes

Computing cost per good unit by dividing by (Input − Normal loss − Abnormal loss). Correct: divide by (Input − Normal loss) ONLY.
Charging abnormal loss to the cost of good output — it must go to P&L A/c.
Treating 'losses due to inefficient labour over and above standard' as normal loss — that's abnormal.
Forgetting to subtract scrap value of normal loss from the total cost before dividing by good units.
Confusing abnormal loss with abnormal gain — if actual output exceeds expected good output, you have abnormal gain (mirror image treatment, credited to P&L).

Reference:

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Classification by Normality + Normal vs Abnormal Loss Treatment

Worked example

⚠️ Common exam mistakes