PROCESS COSTING

ACCOUNTING FOR LOST UNITS

I. Loss units defined

II. Equivalent units of production of lost units
III. Cost of lost units
IV. Absorbing unit for normal lost units.

LOSS UNITS refers to missing units at the end of the processing. Loss units are classified
into evaporation loss and spoilage loss. Evaporation loss refers to the normal decrease in
units or volume which is necessary or inherent in processing. Spoilage loss refers to
unwanted destruction or breakage of units during processing. Loss can discrete or
continuous. Discrete production loss is a reduction in units that occurs at a specific point
in a production process. If not specifically identifiable, discrete loss is assumed to have
occurred at the end of process. Continuous loss is any reduction in units that occurs
uniformly throughout a production process.

Classification of spoilage loss

1. Normal loss – lost units which are inherent, usual, or expected by the nature of
operations and within tolerance limits set by the company for human and machine
errors and therefore, it cannot be avoided. Normal lost units are expected under
efficient operating conditions and are uncontrollable.
2. Abnormal loss – defined as lost units which are unusual, or unexpected or even
though expected but it exceeds the normal limits. A company does not expect such
spoilage during the efficient operating conditions and can more likely prevent (or
avoid) abnormal loss than normal loss.

EUP COMPUTATION
1. Evaporation Loss is ignored and is not assigned EUP as if not placed into process and
is not valued.
2. Spoilage Loss (normal or abnormal) is assigned an equivalent unit of production and is
separately valued.

DISPOSITION OF THE COST OF SPOILAGE LOSS

1. Normal loss units
a. If the FOH application rate includes an estimate of spoilage, the cost of normal
loss units is debited to FOH Control up to the extent of estimated spoilage cost
charged to the units; the excess is debited to loss
b. If the FOH application rate does not include an estimate of spoilage, the cost of
normal loss is added to the cost of good units. Good units are those that
surpassed the point of inspection.

2. Abnormal loss units

- The cost of abnormal loss units is debited to Loss.
A. Equivalent Units of Production
Stage of Inspection
Start of the Production
During the production
(point of inspection is not
identified)
End of production
Work Done
Zero. Under the theory of neglect, any lost units
discovered at the start of production are treated as if
they were never put into production because they are
already expected even before the actual production.
Zero. Lost units discovered during the production are
assumed to have been discovered at the start of the
production because difficulties might arise finding the
right stage of completion for lost units.
100%. Because they are already completed when
they were discovered.

B. Cost of Normal Lost Units

1. First Department
a. Start/during the
production
b. End of production
No cost of lost units, because manufacturing cost
elements were not introduced in the production.
Unit cost this department multiplied by Equivalent Units
of Production (EUP) of Normal Lost.

2. Subsequent
Department
a. Start/during the Unit Cost from Preceding Department multiplied by the
production Actual Normal Lost Units.
b. End of production (Unit Cost from the Preceding Department plus Unit cost
this Department) multiplied by the Equivalent Units of
Production of Normal Lost

C. Absorbing Units
Start/During End
1. FIFO Method
In process, beginning, X
Completed & Transferred
Started/Received, X X
Completed and Transferred
In process, end X
Computation of Unit Cost Total Cost of Normal Lost Total Cost of Normal
for Lost Units Units divided by Lost Units divided by
Started/(Received, Finished (In process, beginning,
and Transferred plus In Finished &
process, end) Transferred plus
Started/Received,
Finished and
Transferred)