Normal loss is an expected loss that occurs during business operations, such as evaporation or non-compliant products. Companies may sell inferior products as second quality to recover some investment.
Normal loss is a classification of loss that occurs during the routine course of a business operation. Losses of this type are anticipated and often result from the use of specific methods or strategies as part of a production process. Since a normal loss is anticipated and sometimes unavoidable, allowances for this type of loss are made within the full cost of the operation.
Identification costs associated with normal loss are often developed using historical data. Companies come to understand that some factors may be inherent to a given production process, such as evaporation of fluids used in the process, changes in the composition of chemicals during storage, or even the production of non-compliant products. with the standards. Breakage is also a common example of normal loss that occurs during the course of manufacturing goods, with productivity calculations generally allowing a certain amount to occur during a routine hour of production time.
There are many examples of normal losses that can occur during the ongoing operation of a business. With a large-scale manufacturing effort like a textile plant, there is a chance that defects will creep into a portion of the products produced. When this happens, those products cannot be sold as premium items at the usual prices. In the same way, plastics companies may find that a small portion of preformed or molded products do not meet certain standards and cannot be sold as top of the line products. Both situations represent a loss, since the inferior goods were produced using the same resources as the goods that meet the company’s quality standards.
In some cases, it is possible to reduce the impact of normal loss by selling the inferior products as second or third quality offerings. For example, a textile plant that produces bedding products may sell second-rate comforters or sheets with minor defects for a fraction of the standard purchase price. Similarly, the plastics manufacturer can sell slightly defective plastic products at a discount, assuming that the defects do not interfere with consumers’ ability to use those products for their intended purposes. This approach helps to recover at least part of the investment made in the production of those goods. Depending on the nature of the defect, the purchase price of second quality goods may be close to breaking even, but will rarely yield even a small amount of profit from the sale.
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