• INCREASE IN UNITS

• The additional materials in some production process can

bring about an increase in the total volume or number of
units of the product.
• For example in the manufacture of shampoo, the
ingredients are often mixed in one department and water
being added in a succeeding department. The addition of
the water increases the volume of liquid shampoo to be
accounted for. Increasing the quantity of liquid shampoo
reduces the unit cost of prior department cost since the
total prior department’s cost will have to be allocated to a
larger volume of product.
• This is true because the increased quantity of liquid product
absorbs the same total amount of the preceding
department cost.
• The Multiplicator Company produces its product in
three departments. In Department 3, materials
added double the number of units. The following
data pertain to operations of Department 3 in
March:
• Units: Received from Department 2 – 10,000 units;
Transferred to storeroom – 16,000 units
• In Process, end (100% complete as to materials,
50% complete as to labor & overhead)
• Costs: Transferred from Department 2 – P15,000
• Added this department: Materials, P4,400; Labor,
P4,500; Overhead, P3,600
• LOST UNITS
• Continuous processing can lead to the possibility of
waste, shrinkage, and other possible factors that can
cause loss or spoilage of production units. Whether as a
result of accidents, machine malfunctions, poor
workmanship, or substandard materials, it is to be
expected that some portion of the production process
will have to be scrapped. To the extent that this
spoilage is unavoidable is properly included as one of
the costs of obtaining good units of inventory. On the
other hand, spoilage above and beyond the normal
spoilage is treated as a loss. Thus one of our tasks in
dealing with spoilage will be to segregate normal from
abnormal loss.
• Normal loss is defined as the average spoilage
necessary in the production process and will be
included as an inventoriable cost. Being inherent in the
production process this loss is otherwise known as
“unavoidable loss”. Thus, the cost of normal loss is
absorbed in the finished units as well as the units still in
process.
• Abnormal loss is defined as the spoilage in excess of
average and will be treated as a period loss. (Moriarity,
et.al. 1984) This type of loss is otherwise known as
“avoidable loss”. Thus abnormal loss is accounted for
separately like the way we account for finished units
and units still in process.
Lost units occurring at the start of
the process
• When the lost units occurred at the start of the
production process in the initial department, it is
assumed that the equivalent production is zero and the
cost also zero, hence, there are no adjustments made
on the remaining good units. However, if the lost units
occurring at the start of the process happened in a
succeeding department, while the equivalent
production is still zero, its cost is no longer zero
because it has already absorbed the cost of the prior
department, which is then allocated to the remaining
good units regardless of stage of completion.
Remaining good units in this context is defined as the
units left after deducting the lost units from the total
units started in process.
Lost units occurring during the
process
• The equivalent production of lost units occurring
during the process is likewise zero and the cost is
also zero when the loss occurred in the initial
department. If the lost units occurred during the
process in a succeeding department, its cost is also
the prior department’s cost which is then allocated
to the remaining good units regardless of stage of
completion.
Lost units occurring at the end of
the process
• When units are lost at the end of the process, their
equivalent production as well as their cost is a
hundred percent (100%). The cost absorbed by the
lost units is then allocated to the finished units
only.
Normal Loss Units
Applicability Initial Succeeding Department
Method Department
Lost Units - Equivalent Production = zero Equivalent Production = 0
I & II Start of Cost absorbed = zero Cost = prior department
process Cost Allocated to =
Remaining Good Units
Lost Units – Equivalent Production = zero Equivalent Production = 0
I During the Cost absorbed = zero Cost = prior department
process Cost Allocated to =
Remaining Good Units

Initial Department Succeeding Department

Equivalent production = 100% Equivalent production = 100%
Cost absorbed = this department’s cost Cost absorbed = cost of initial dept & this dept
Cost Allocated = finished units Cost Allocated = finished units
• The Bokod Company produces a pharmaceutical
product which is processed in three successive
departments. There are lost units in all
departments.
In Dept 1, lost units are discovered at the start of the process;
In Dept 2, the units are lost at the end of the process; while
In Dept 3, during the process
 Dept 1 Dept 2 Dept 3
Units:
Started in process 20,000 - -
Received from prior dept - 16,000 14,000
Units lost in process 1,000 1,000 1,000
In process, end 3,000 1,000 3,000
Stages of Completion 1/3 1/2 2/3

Costs:
Materials P 10,000 P 9,500 P 3,000
Labor 4,000 5,100 2,200
Manufacturing Overhead 3,000 4,000 2,000
Abnormal Loss
• Abnormal loss refers to losses that are not
expected to occur under efficient operating
conditions hence, abnormal loss is treated as
period loss. Inefficient labor, defective materials
are some examples that can cause abnormal loss.
Like normal loss, abnormal loss may also be
discovered at any point of the process, either, start,
progressively during the process or end of the
process Shown on the next page is a summary of
the equivalent production as well as cost absorbed
by the abnormal loss when discovered at the start,
during or end of the production process.
Stage of
Process Initial Department Succeeding Department
START Equivalent Prod’n = zero Equivalent Prod’n = zero
Cost = zero Cost = Prior Department
DURING Equivalent Production = Stage Equivalent Production = Stage of
of Completion Completion
Cost = Cost this dept based on Cost = Prior Dept + Cost this dept.
stage of completion based on stage of completion
END Equivalent Production = 100% Equivalent Production = 100%
Cost = Cost this Department Cost = Prior Dept + Cost this dep’t
• For purposes of illustrating the simultaneous occurrence of
normal and abnormal loss in a given situation when loss
occurs in a succeeding department, consider the data
pertaining to Alekssandra Manufacturing with regards its
operations in Department B for the month of July:
Units received from Department A 25,000
In process, end, 1/3 completed 7,500
Abnormal lost units at end of process 2,500
Normal lost units at start of process 5,000
Transferred to stockroom ?
• The cost of transferred units to Department B was P75,000;
costs incurred by Department B during the month:
Materials, P15,000; Labor, P9,000 and factory burden,
P6,000
Joint and by-product costs
• Joint costs are the costs of a production that yields multiple
products simultaneously. Consider the distillation of coal,
which yields coke, natural gas and other products. The cost
of this distillation is called a joint cost. The split-off point is
the juncture in a joint production process when two or more
products become separately identifiable. An example is the
point at which coal becomes coke, natural gas, and other
products. Separable costs are all costs – manufacturing,
marketing, distribution, and so on – incurred beyond the
split-off point that are assignable to each of the specific
products identified at the split-off point. At or beyond the
split-off point, decisions relating to sale or further
processing of each identifiable products can be made
independently of decisions about the other products.
 Industry Separable Products at the Split-off Point
Agriculture and Food Processing
Cocoa beans Cocoa butter, cocoa powder, cocoa drink mix, tanning
cream
Lamb Lamb cuts, tripe, hides, bones, fat
Hogs Bacon, ham, spare ribs, pork roast
Raw milk Cream, liquid skim
Lumber Lumber of varying grades and shapes
Chicken Breast, wings, thigh, drumstick, digest, poultry meat
Extractive Industries
Coal Coke, gas, benzol, tar, ammonia
Copper ore Copper, silver, lead, zinc
Petroleum Crude oil, natural gas, raw LPG
Salt Hydrogen, chlorine, caustic soda

Industry Separable Products at the Split-off Point

Chemical Industries
Raw LPG Butane, ethane, propane
(Liquified
petroleum
gas)
Semiconductor Industry
Fabrication of Memory chips of different quality (as to capacity), speed,
silicon-wafer life expectancy, and temperature tolerance
chips
• APPROACHES TO ALLOCATING JOINT COSTS: The
allocation of the joint costs incurred up to the split-off
point can be made by:
• The market or sales value method, based on the
relative market values of the individual product.
• The quantitative or physical unit method, based on
some physical measurement unit such as weight, linear
measure, or volume
• The average unit cost method
• The weighted average method, based on a
predetermined standard or index of production
• MARKET OR SALES VALUE METHOD
• This method enjoys great popularity because of the
argument that the market value of any product is a
manifestation of the cost incurred in its production.
The contention is that if one product sells for more
than another, it is because more cost was expended
to produce it. Therefore, the way to prorate the
joint cost is on the basis of the respective market
values of the items produced. The method is really
a weighted market value basis using the total
market or sales value of each unit (quantity sold
times the unit sales price)
• Assume that joint products A, B, C and D are
produced at a total joint production cost of
P120,000. Quantities produced are: A – 20,000
units; B – 15,000 units; C – 10,000 units; and D –
15,000 units. Product A sells for P0.25; B for P3.00;
C for P3.50; and D for P5.00. These prices are
market or sales values for the products at split-off
point.
• QUANTITATIVE UNIT METHOD
• This method attempts to distribute the total joint cost on
the basis of some unit of measurement, such as points,
gallons, tons or board feet. Of course, the joint products
must be measurable by the basic measurement unit. If this
is not possible, the joint units must be converted to a
denominator common to all units produced.
• This method requires that all products must receive a share
of the joint costs based on a physical measure such as
weight, volume, linear measure, etc. in proportion to the
material content of each product. It also requires that all
products must be converted to the same physical measure.
This method completely ignores the market value of the
products involved.
• The following table illustrates the use of weight as a
quantitative unit method of joint cost allocation:
Joint Units Grams Total Ratio Joint Cost
Products Produced per weight in (%) Allocated
unit grams
A 20,000 10 200,000 10 P 12,000
B 15,000 20 300,000 15 18,000
C 10,000 90 900,000 45 54,000
D 15,000 40 600,000 30 36,000
Total 2,000,000 100 P 120,000
• AVERAGE UNIT COST METHOD
• This method attempts to apportion the total joint
cost to the various products on the basis of a
predetermined standard or index of production.
An average unit cost is obtained by dividing the
total number of units produced into the total joint
production cost. As long as all units produced are
measured in terms of the same unit and do not
differ greatly, the method can be used without too
much misgiving. When the units produced are not
measured in like terms, the method cannot be
applied.
• WEIGHTED AVERAGE METHOD
• In many industries, the previously described
methods do not give a satisfactory answer to the
joint cost allocation problem. For this reason,
weight factors are often assigned to each unit,
based upon size of the unit, difficulty to
manufacture, time consumed in making the unit,
different in type of labor employed, amount of
materials used, etc. Finished production of every
kind is multiplied by weight factors to allocate the
total joint cost to individual units.
• Using the figures from the previous example,
weight factors assigned to the four products might
be as follows:
• Product A – 3 points; Product B - 12 points;
• Product C – 13.5 points; Product D – 15 points
Product Units Points Weighted Units Cost per unit* Joint Cost
A 20,000 3 60,000 P 0.20 P 12,000.00
B 15,000 12 180,000 P 0.20 36,000.00
C 10,000 13.5 135,000 P 0.20 27,000.00
D 15,000 15 225,000 P 0.20 45,000.00
Total 600,000 P 120,000.00