April 19, 2021

SB-Accounting

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Meaning of Normal Cost and Key Explanations

Meaning of Normal Cost and Key Explanations
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Certain costs which are unavoidable are expenses expected to occur. If this is true, it can be referred to as what is normal. The normality of it may be as a result of the way the equipment are used or the materials are utilised. In this article, normal cost is examined with key explanations to help you understand it.

Definition of Normal Cost

This is a type of cost which the entity’s management believes will occur during production processes or in performing a service. It can also be defined as unavoidable expenses that occurs during a production process. Generally, it is referred to as wastages that cannot be prevented during a production process.

Key Explanations

A cost. There are different types of cost. Specifically there are two main costs; direct and indirect expenses. However, others can emerge. Normal cost is one of such.

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It is certain to occur. The management of the entity believes the expense will occur. It is what we call normal loss in process costing. Such loss or wastage cannot be prevented during production processes.

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Meaning of Normal Cost and Key Explanations
For example during production, it is normal for materials to be wasted. This may be as a result of testing the product if it has met the required standard. Also, the evaporation may have allowed a few units of the materials to waste during the process of production.

Unavoidable cost. It cannot be avoided. They are bound to occur, unless the production process hasn’t kicked off. There are certain units of materials that are allowed to be lost during production. Any excess of this becomes an abnormal expenses.

For example, if 5 units 543 units of material A are allowed to waste during a production process. Then, that’s the normal expense. Any excess of this is abnormal. Assuming, each unit is 25 Naira, the normal loss is 5 units × 25 Naira. That gives 125 Naira.

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Form part of the cost of production. Normal loss is also an allowable loss. And therefore, from part of the cost of producing the product.

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Conclusion

Normal cost is an unavoidable cost. It occurs as a result of a production process. In process costing such loss is referred to as normal loss. However, any expense above what the entity’s management has allowed to be normal expenses is abnormal cost.

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