BSA 2103 – Cost Accounting and Control Process Costing: Lost Units; Addition of Materials

Process Costing: Lost Units

Continuous operating and processing lead to the possibility of waste, seepage, shrinkage, and other factors which cause
loss or spoilage of production units. Lost units reduce the number of units over which total cost can be spread, and cause
and increase in unit costs.

Management is interested not only in the quantities reported as completed production, units in process, and lost units but
also in a comparison of planned and actual results. In verifying reported figures, the accountant will reconcile quantities put
into process with quantities reported as completed and lost. One method of making such reconciliations is to establish
process yields, that is, the finished production that should result form processing various raw materials. These yields are
computed as follows:

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

∗ 100 = 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑌𝑖𝑒𝑙𝑑
𝑊𝑒𝑖𝑔ℎ𝑡 𝑖𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝐶ℎ𝑎𝑟𝑔𝑒𝑑 𝐼𝑛

The yield figure is useful managerial control of materials consumption. Various yields are established as normal. Yields
below normal are measures of inefficiencies and are sometimes used to compute lost units.

The correct measurement of completed production and accurate determination of lost units ties in closely with quality control
procedures of a firm. Frequently quality control data are used to compute production costs since the use of incorrect
quantities would result in incorrect unit costs.

Units are lost through evaporation, shrinkage, poor yields, or spoiled work. In some instances, units are lost through causes
which are not inherent in the manufacturing process. Such causes as defective quality of materials used or inefficiency of
workmen result in abnormal lost units. The avoidable loss that is beyond normal tolerance limits should be charged to
Soilage or Lost Units or some other current period expense account which is eventually closed to the Income and Expense
Summary account. The cost of abnormal lost units is calculated in accordance with their stage of completion.

In many instances, the nature of operations in such that certain losses cannot be avoided or are within normal tolerance
limits for human and machine error. Units lost through causes that are unavoidable to the manufacturing process are
considered normal lost units. A common method of accounting for normal lost units does not show the cost of lost units as
a separate item of cost but spreads it over the remaining good units.

Lost units may occur at the beginning, during or at the end of a process. Ordinarily, for purposes of practicability and
simplicity, it is assumed that units lost at the beginning or during a process were never put in process. Under this assumption,
units lost at the start or during the process in the first department could not have absorbed any cost and are therefore
ignored for costing purposes. Units lost at the start or during the process in any department other than the first will have
accumulated cost from preceding departments, hence the loss can be computed by multiplying the number of units lost by
the cost these units have absorbed from preceding departments. The cost of units lost at the start of processing is
apportioned equally among the remaining good units received from preceding department during the period (lost units
deducted from units received from the preceding department) resulting in an equal allocation of the loss among the units
completed and units still in process regardless completion of the latter.

It is important to note the for FIFO costing, units lost during processing must be identified as either opening work in process
units or new units started during the period. The identification is needed to determine which unit cost should be adjusted. In
either case, it means that because units were lost, total costs incurred must be spread over a smaller number of units. If the
units lost during the process came from those placed in process during the period, that is, from units received from the
preceding department during the month, then the loss may be apportioned in the same manner as that of units lost at the
start of processing, that is, equally among the remaining good units received from the preceding department regardless
whether these units are complete or still in process. It should be noted that this method apportions to units in process at the
beginning a part of the full unit loss at the end of the previous costing period. For the purposes of discussion, this will be
referred to as Method I.

If units lost during the process of production were identified not only with new units started during the period but also with
opening work in process units, then the cost of units lost during processing may be apportioned among all the goods units
based on the equivalent production of the latter. In this procedure, units in process at the beginning of the period received
an apportionment of the loss. For the purposes of discussion, this will be referred to as Method II.

When lost units occur at the end of a process and the process cost system of a firm is designed to account for this possibility,
the cost of lost units is charged to completed units only. No part of the loss is charged to units in process. Furthermore, if
one part of the loss due to the occurrence of lost units is normally unavoidable and another part is avoidable (abnormal),
the former loss is treated as discussed previously with consideration of the time when the loss was incurred, that is, at the
beginning, during, or at the end of the process. The avoidable loss part is charged to an expense account, Lost Units.

Process Costing: Increase in Units and Change in Unit Cost Due to Addition of Materials
When additional materials result in additional units, different computations are necessary. The greater number of units
decreases the unit cost and necessitates an adjustment of the preceding department’s unit cost, for the increased number
of units will absorb the same total cost transferred from the preceding department.

When additional materials increase the number of units being processed, it is still possible to have lost units. However,
should increased and lost units occur, no separate calculation need be made for the lost units; only net units added are to
be used.

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