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Appendix6B Shrinkage and Lost Units
Appendix6B Shrinkage and Lost Units
The illustrations presented in Chapter 6 of the textbook assume that units that are
in process are either completed or still awaiting completion at the end of each pe- LEARNINGOBJECTIVE 9
riod. In reality, units can disappear because of evaporation, losses, or rejection. Such Compute the cost of lost
missing units can be considered to be a normal part of the processing or may be units or shrinkage.
deemed to be abnormal. Abnormal losses can be thought of as costs akin to unusual
losses studied in financial accounting. Normal losses are normal costs of operating
the process department.
Two accounting treatments are prevalent for normal losses. One, the amount of
the loss can be charged to a specific loss account, which could be charged to manu-
facturing overhead. Two, the amount of the loss could be spread over all of the good
units of work done during the period.
If significant in amount and truly abnormal, losses should always be assigned to
the unusual section of the income statement, where they can be offset by any recov-
eries from insurance or other means.
The following cases illustrate the two alternative treatments of normal losses.
The weighted-average method of costing is used for illustration.
Quantity Schedule
Quantity
Schedule
Units to be accounted for:
Work in process, beginning (all materials, 30% labour and
overhead added last month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Started into production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Total units to be accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Equivalent Units
Materials Labour Overhead
Units accounted for as follows:
Transferred out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 160,000 160,000 160,000
Units lostnormal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000* 0 0 0
Work in process, ending (all materials, 40% labour and
overhead added this month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 30,000 12,000 12,000
Total units accounted for . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 190,000 172,000 172,000
*Total units to be accounted for, 200,000 - Units transferred, 160,000 - Units in process, ending, 30,000 = 10,000 units lost.
40% 30,000 units = 12,000 EU.
EU = Equivalent unit.
6B-4 Appendix 6B Shrinkage and Lost Units
APPENDIXBQUESTIONSANDPROBLEMS
6B1 Describe two methods of dealing with normal losses in a process.
6B2 Which of the two methods of dealing with normal losses would you prefer from a
management control perspective? Why?
In Department 2, it is expected that 5% of good output will be spoiled. Inspection takes place
at the end of the process. Materials are added after inspection in Department 2.
Required:
1. Prepare a cost report for Department 2 for April using the weighted-average method,
showing the determination of equivalent units, the cost per equivalent unit, the disposi-
tion and cost of spoiled units, the cost of goods transferred out, and the cost of the ending
work in process inventory. Charge the costs of normal spoilage to manufacturing
overhead.
2. Was the spoilage in Department 2 greater or less than normal? What was its cost to
Mosley? How should any abnormal spoilage be accounted for?
3. How much could Mosley save if it could cut its normal spoilage to 2%?
(CGA, adapted)