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A normal loss of units falls within a tolerance level expected during production. Management creates a range of tolerance of spoiled units specified by the accepted quality level, as mentioned in the beginning of this chapter. If a company had set its quality goal as 98 percent of goods produced, the company would have been expecting a normal loss of 2 percent. Any loss in excess of the AQL is an abnormal loss. Thus, the difference between normal and abnormal loss is merely one of degree and is determined by management.
A variety of methods can be used to account for units lost during production.
Selection of the most appropriate method depends on two factors:
(1) the cause of the decrease and
(2) management expectations regarding lost units.
Understanding why units decreased during production requires detailed knowledge of the manufacturing process. Management’s expectations are important to determine the acceptable loss quantities from defects, spoilage, or shrinkage as well as the revenue and cost considerations of defective and spoiled units.
Some companies may estimate the normal loss to be quite high because the lowest cost material, labor, or overhead support is chosen.
