BSA 2202 Strategic Cost Management Production Losses under Process Costing

Production Losses under Process Costing

Summary

Type of spoilage or lost units:

 Normal – expected losses under normal production process
 Abnormal – losses in excess of what has been predicted under normal production process
 Discrete – spoilage occurring at a specific point (percentage of completion) e.g. identified spoilage at
inspection point which is 80% complete
 Continuous – spoilage occurring fairly uniformly throughout production process e.g. evaporation of paint in
paint cans during the process
Accounting Treatment:

Type Assumed to Either How costs are Cost assigned to?

Occur handled?
Continuous Uniformly Normal Absorbed by all Product
throughout the units through
process method of neglect
Abnormal Written off as a loss Period
on an EUP basis
Discrete At inspection point Normal Absorbed by all Product
or at end of units past
process inspection point in
ending inventory
and/or transferred
out on an EUP
basis
Abnormal Written off as a loss Period
on an EUP basis
BSA 2202 Strategic Cost Management Production Losses under Process Costing

SAMPLE PROBLEM
Data for a manufacturing company using process costing are given below:
Gallons:
Beginning inventory (60% complete) 2,000
Started during the month 15,000
Gallons completed and transferred 13,200
Ending inventory (75% complete) 2,500
Lost gallons (normal) 1,300

Costs:
Beginning inventory
Material P15,000
Conversion 1,620 P16,620
Current costs
Material P102,750
Conversion 19,425 122,175
Total costs P138,795

Assume the following independent scenarios:

a. The loss is normal continuous
b. The loss is normal discrete, discovered at the end of process
c. The loss in normal discrete, discovered at 50% inspection point
d. The normal spoilage is 5% of units put into production. The rest of the losses is considered abnormal.