PROCESS COSTING

ACCOUNTING FOR LOST UNITS

1. Normal Lost Units- these are spoiled units which are expected or
anticipated, inherent, usual and unavoidable in the production process or
within the tolerance limit set by the company. Wight losses, shrinkage,
evaporation, rusting are examples of normal loss. Normal loss increases the
cost of production of the usable goods realized.
The cost of normal lost units is accounted as product costs. It is included as
part of the cost of all finished units or work in process units. That’s why;
costs of the normal lost units are absorbed by the good units.
2. Abnormal Lost Units- these are spoiled units which are unexpected, not
inherent, unusual and avoidable or if it’s expected, it be beyond the
tolerance limit by the company. A loss realized over the normal loss units is
called abnormal loss. Abnormal loss arises because of abnormal working
conditions, accidents, strikes, machine breakdown, fortuitous events,
inefficient workers, low quality or defective raw materials. Abnormal loss is
a controllable loss and thus, can be avoided if corrective measures are
taken.
The cost of the abnormal lost units will be accounted as period costs
(expense) because such costs are unnecessary in the production process
and should be written off when incurred. Therefore, costs of abnormal lost
units are not absorbed by the good units.

Detection of Lost Units

A. Continuous Loss- loss occur evenly throughout the production process

1. Continuous normal lost units

Determination of Stage of Completion

Inspection Point Stage of Completion

Start of the process
0%- Use the method of neglect. It means that any
lost units discovered
At the start of the production are treated as if
they were never put into process because they
are already expected even before the actual
production. Therefore, it excludes the lost units in
the computation of EUP which results to a smaller
number of total EUP. A smaller number of EUP
leads to higher cost per equivalent units (unit
cost)
During the process 0%- Lost units discovered during the production
process are assumed to have been inspected at
the start of the process because difficulties might
arise finding the right stage of completion for lost
units.

End of the process 100% -because lost units discovered at the end of
the process are already been completed

Nota Bene: If the problem would be silent on the inspection point, assume the
normal lost units were discovered at the start of
the process. Therefore, it has zero stage of
completion.

Computation of Cost of Lost Units

Inspection Point Dept. 1 Subsequent Dept.

Start/During No cost Actual normal lost units X U.C from

prior dept.

End EUP of normal lost units (EUP of normal lost units X U.C. of this
X U.C of this dept 1 dept.+(Actual normal lost units
Cost of Normal lost units X U.C from prior dept.}

Absorbing Good Units

FIFO Start/During End
W/P-Beg Finished and transferred units No Yes
Started in process, Finished and transferred Yes Yes
W/P end units Yes No

WEIGHTED AVERAGE

Finished and transferred units Yes Yes

W/P End units Yes No

2. Continuous Abnormal lost units

Determination of Stage of Completion

Inspection point Stage of Completion

Start of the process 0% - it excludes the lost units in the computation of EUP
which result to a smaller number of total EUP

During the process 100%-Lost units discovered during the process are
assumed to have been inspected at the end of the
process because the costs of lost units are unnecessary
 in the production process and should be written off
when incurred

End of the process 100%-because lost units discovered at the end of the
process are already been completed. The costs of lost
units are allocated proportionately over the good units
(completed units)

Nota Bene: If the problem would be silent on the inspection point, assume the
abnormal lost units were discovered at the end of the
process. Therefore, it has 100% percentage of
completion

Absorbing units

The costs of the abnormal lost units are not absorbed by the good units in process
and it shall be treated as period costs (expense).

Discrete Loss-it occurs at the specific point in the production process and it will
be detected only when the firm performed a quality control inspection at the
inspection point.

The cost of normal discrete lost units should only be allocated to units that
have passed the inspection point. Such units should be considered good units
in the production process. Any units that have not reached the inspection
point may be good units or they may be defective or spoiled.

The cost of abnormal discrete lost units should be considered as period costs.

Sample Problem

During the month of January 2020, Department X received 40,000 units from
preceding department with a total cost of P152,000. Production report of
Department X is shown below:

Units Data:
Finished and transferred to storeroom 32,000
Work in process, end (1/2 completed) 6,000

Costs Incurred:
Materials P35,000
Labor 28,000
Overhead 21,000

Prepare a cost of production report for the month of January 2020 based on the
following independent cases:
1. Normal lost units were discovered at the start of the process
2. Normal lost units were discovered during the process
3. Normal lost units were discovered at the end of the process
4. Lost units were deemed abnormal.
Solution:
1. Cost of Production Report
For the month ended January 31, 2020
Department X

Quantity Schedule: Actual Units Work Done E.U.P

Received from prior dept. 40,000

Finished and transferred units 32,000 100% 32,000

Work in process, end 6,000 50% 3,000
Lost units discovered at the
start of process 2,000 0% -0-
Total units as accounted for 40,000 35,000

COST ANALYSIS Total cost Units Unit Cost

Cost transferred in from
prior dept. P152,000 40,000 P3.80
Cost incurred in this dept. 84,000 35,000 2.40
Total cost to be accounted for P236,000 P6.20

Adjustment for lost units = Lost units X UC from prior dept

Total units to be accounted for- lost units
= 2,000X P3.80
38,000 units
= P0.20

Cost accounted for as follows:

Transferred out to finished goods

Cost from prior dept. (32,000X P3.80) P121,600
Cost, this dept. (32,000 X P2.40) 76,800
Adjustment for lost units (32,000 X P.020) 6,400
Total cost transferred P204,800

Work in process-End
Cost from prior dept. ( 6,000 X P3.80) P22,800
Cost this dept. (3,000 X P2.40) 7,200
Adjustment for lost units (6,000 X P.20) 1,200 31,200
Total costs as accounted for P236,000

Nota Bene: Lost units determined at the beginning of the process have no
equivalent units of production since no work was done yet. They only carried
costs from prior department and no additional costs were incurred. The cost of
lost units is allocated to the remaining units ( Units completed and W/P-End).
2. Cost of Production Report
For the month ended January 31, 2020
Department X

Quantity Schedule: Actual Units Work Done E.U.P

Received from prior dept. 40,000

Finished and transferred units 32,000 100% 32,000

Work in process, end 6,000 50% 3,000
Lost units discovered at the
start of process 2,000 0% -0-
Total units as accounted for 40,000 35,000

COST ANALYSIS Total cost Units Unit Cost

Cost transferred in from
prior dept. P152,000 40,000 P3.80
Cost incurred in this dept. 84,000 35,000 2.40
Total cost to be accounted for P236,000 P6.20

Adjustment for lost units = Lost units X UC from prior dept

Equivalent Units of Production
= 2,000X P3.80
35,000 units
= P0.2171

Cost accounted for as follows:

Transferred out to finished goods

Cost from prior dept. (32,000X P3.80) P121,600
Cost, this dept. (32,000 X P2.40) 76,800
Adjustment for lost units (32,000 X P.2171) 6,947
Total cost transferred P205,347

Work in process-End
Cost from prior dept. ( 6,000 X P3.80) P22,800
Cost this dept. (3,000 X P2.40) 7,200
Adj for lost units (3,000 X P.2171) 653* 31,653
Total costs as accounted for P236,000

*There is minor difference due to rounding

Nota Bene: Lost units discovered at the end of the process have corresponding
EUP. Cost of lost units is absorbed by the completed units only.

When lost units are discovered during the process, there is a difficulty of
determining the amount of work done on lost units. Accordingly, there is no EUP
assigned for these lost units. The cost of lost units is apportioned among the
remaining good units based on total equivalent production.
3.

. Cost of Production Report

For the month ended January 31, 2020
Department X

Quantity Schedule: Actual Units Work Done E.U.P

Received from prior dept. 40,000

Finished and transferred units 32,000 100% 32,000

Work in process, end 6,000 50% 3,000
Lost units discovered at the
start of process 2,000 100% 2,000
Total units as accounted for 40,000 37,000

COST ANALYSIS Total cost Units Unit Cost

Cost transferred in from
prior dept. P152,000 40,000 P3.8000
Cost incurred in this dept. 84,000 37,000 2.2703
Total cost to be accounted for P236,000 P6.0703

Adjustment for lost units = Lost U. X UC from prior dept + Lost U. X UC this dept
Units Completed
= (2,000X P3.80)+ (2,000 X P2.27
32,000 units
= P0.3794

Cost accounted for as follows:

Transferred out to finished goods

Cost from prior dept. (32,000X P3.80) P121,600
Cost, this dept. (32,000 X P2.2703) 72,650
Adjustment for lost units (32,000 X P.3794) 12,141
Total cost transferred P206,391

Work in process-End
Cost from prior dept. ( 6,000 X P3.80) P22,800
Cost this dept. (3,000 X P2.2703) 6,809* 29,619
Total costs as accounted for P236,000

*There is minor difference due to rounding

Nota Bene: Lost units discovered at the end of the process have corresponding
EUP. Cost of lost units is absorbed by the completed units only.
4.
. Cost of Production Report
For the month ended January 31, 2020
Department X

Quantity Schedule: Actual Units Work Done E.U.P

Received from prior dept. 40,000

Finished and transferred units 32,000 100% 32,000

Work in process, end 6,000 50% 3,000
Lost units discovered at the
start of process 2,000 100% 2,000
Total units as accounted for 40,000 37,000

COST ANALYSIS Total cost Units Unit Cost

Cost transferred in from
prior dept. P152,000 40,000 P3.8000
Cost incurred in this dept. 84,000 37,000 2.2703
Total cost to be accounted for P236,000 P6.0703

Cost accounted for as follows:

Transferred out to finished goods

Cost from prior dept. (32,000X P3.80) P121,600
Cost, this dept. (32,000 X P2.2703) 72,650
Total cost transferred P194,250

Work in process-End
Cost from prior dept. ( 6,000 X P3.80) P22,800
Cost this dept. (3,000 X P2.2703) 6,811 29,611

Abnormal Lost units ( 2,000X P6.0703) 12,139*

Total costs as accounted for P236,000

*There is minor difference due to rounding

Nota Bene: Abnormal lost units have assigned EUP to determine the costs
absorbed by the lost units. These costs are charged to profit or loss. Notice that
the cost assigned to abnormal lost units is similar to the cost of normal lost units
discovered at the end of the process.

2. The following information is available for JYD Corp. for April

Started this month 80,000 units

In process, beg (40% complete) 7,500 units
 Normal spoilage (discrete) 1,100 units
Abnormal spoilage 900 units
In process, end ( 70% complete) 13,000 units
Transferred out 72,500 units

All materials are added at the start of the process and the inspection point
is at the end of the process.

Required:
1. Determine the unit cost per EUP for material using weighted average.
2. Determine the cost assigned to ending inventory

3. Peter Senen Manufacturing Corp. makes a single product in two

departments. The production data for Dept. 2 for April 2020 follows:
Quantities
In process, April 1 (40% complete) 4,000 units
Received from Dept. 1 30,000 units
Completed and transferred 25,000 units
In process, April 30 ( 60% completed) 6,000 units

Costs April 1 April 30

Received from Dept. 1 P16,300 P89,100
Materials 3,800 67,500
Conversion costs 1,940 81,000

Materials are added at the start of the process and losses normally occur
during the early stage of the operation.

Required. Using the average costing method calculate the cost of the Work
in process at the end.

4. EFD Corp. produces a product through a continuous process in different

departments. Each department has an independent cost accountant who is
tasked with cumulating costs and the preparation of reports for the
department assigned to him. You have been assigned as cost accountant for
Dept. A.

Production data of Dept. A for the month of Sept. 2020 were as follows:

In process beg. (70% complete) 14,000 kg

Started in process 70,000 kg
In process, end (60% complete) 12,000 kg
Lost units (normal at the end of the process) 2,000 kg.

In this dept, cost are applied as follows:

 Materials- Added at the start
Conversion cost Evenly distributed

Costs incurred in September, were

Materials P56,000
Labor 17,350
Overhead 13,880
In process beg 8,000

Required: Calculate the following

a. Current unit cost for materials and conversion cost.
b. The adjustment for lost units.