Question

Normal loss is borne by production department, but it leads to _______ in cost per annum.

• A. increase
• B. decrease
• C. no change
• D. cannot be determined

Hint:

Under process costing rules, good units must bear the cost of normal loss. This treatment increases the per-unit cost of your final inventory.

Answer 1

The Correct Option is A

Step 1: Understanding the Nature of Normal Loss:
Normal loss represents the inherent, unavoidable wastage of material (due to evaporation, chemical shrinkage, or scrap) that occurs during standard manufacturing operations. It is predictable based on historical data and engineering estimates.

Step 2: Analyzing the Cost Treatment of Normal Loss:
Because normal loss is considered an unavoidable cost of manufacturing, it is not treated as a separate financial loss. Instead, its cost is absorbed by the remaining good units produced. This is calculated as: $$\text{Revised Unit Cost} = \frac{\text{Total Process Cost} - \text{Scrap Realization of Normal Loss}}{\text{Input Units} - \text{Normal Loss Units}}$$

Step 3: Calculating the Impact:
Because the divisor (the number of good units) is reduced while the process costs remain largely the same, the average cost per unit of the remaining good output increases. This matches option (A).