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What Is a Normal Loss?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 April 2014
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    2003-2014
    Conjecture Corporation
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Normal loss is a classification of loss that takes place 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 normal loss is anticipated and sometimes unavoidable, allowances for this type of loss is made within the total cost of the operation.

Identifying expenses associated with normal loss are often developed using historical data. Businesses come to understand that some factors may be inherent in a given production process, such as the evaporation of fluids used in the process, changes in the composition of chemicals during storage, or even the production of goods that are not quite up to standards. Breakage is also a common example of normal loss that occurs during the course of manufacturing goods, with calculations on productivity usually allowing for a certain amount to occur during a routine hour of production time.

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There are many examples of normal loss that may occur during the ongoing operation of a business. With a large scale manufacturing effort like a textile plant, there is an opportunity that defects will creep into a portion of the goods produced. When this happens, those goods cannot be sold as first-quality items at the usual prices. In like manner, plastics companies may find that a small portion of preformed or molded goods do not meet certain standards, and cannot be sold as first-line goods. Both these situations represent a loss, since the inferior goods were produced using the same resources as the goods that do meet the company’s quality standards.

In some cases, it is possible to reduce the impact of normal loss by selling the inferior goods as second or third quality offerings. For example, a textile plant that produces bedding products may sell second quality comforters or bed sheets with minor defects for a fraction of the standard purchase price. In like manner, the plastics manufacturer may be able to sell the slightly defective plastic goods at a discount, assuming the defects do not interfere with the ability of consumers to actually use those goods for their intended purposes. This approach helps to at least recoup part of the investment made in the production of those goods. Depending on the nature of the defect, the purchase price for the second quality goods may come close to covering expenses but will rarely yield even a small amount of profit from the sale.

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Discuss this Article

lighth0se33
Post 3

@shell4life - I think it comes down to the specifics laid out in the contract. My friend owns a retail clothing store, and she is able to return defective garments to the manufacturer, while another store down the road just marks them down and puts them on a rack in the back.

My friend was adamant about having a return clause in the contract, because she didn’t want to be stuck with a loss that wasn’t her fault. Also, she thought that selling defective clothing, even at a discounted price, could make her store look bad.

She always asks a person who returns an item what was wrong with it. If there was a problem in the design of the garment, then she is not out any money. If they simply don’t like the way it fits, then she considers this part of her normal loss.

shell4life
Post 2

I can see how manufacturers can account for normal loss, but what about retail stores? Can a store owner return a defective item to the manufacturer, or is he stuck having to sell it himself at a discount?

I have seen items marked way down in some stores, and they have clearly been labeled as defective merchandise. In other stores, I never see anything like this.

This makes me wonder if it’s all in the individual contracts between the manufacturer and the retail store. Is there an industry standard, or is it just understood that if you buy it, you will be stuck with it?

seag47
Post 1

Normal loss can actually benefit the consumer seeking a bargain, provided they are willing to put up with a few minor defects. I love going to discount warehouses and paying a lot less for certain items.

However, I always check them carefully to make sure that the defect is not too extreme. I have tried on clothing at a place like this and found that the zippers were broken on several dresses, so I didn’t buy them.

When it comes to items like blankets and soaps, you might not even notice anything is wrong with them, and even if you did, it probably wouldn’t matter to you. I bought a king-size blanket that had a slightly crooked shape to it at an amazingly low price, and this never bothers me while I’m sleeping under it.

I’m sure the manufacturer is not too happy about the normal loss, but at least it isn’t a total loss. The company still gets to sell the stuff.

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