Chapter 6: Process Costing

SPOILAGES IN PROCESS COSTING

In process costing, homogenous products shall pass through a series of processes and receive
similar amounts of manufacturing costs. It uses Work in process account when accumulating its costs.
Units and costs are transferred from one department to another. Spoilage happens in process costing
when there is a waste or loss, damaged material during the manufacturing process, and when lifespan is
very short. Normal spoilage happens when for example, fruit is being imported and since some fruits
happen to age or rot faster it would incur spoilage. Also, when fruits are being handled improperly while
in transit, the importer will consider it as normal spoilage and is charged to cost of goods sold. Another
thing to consider is the abnormal spoilage which is the excess of the normal spoilage. One example is a
manufacturing company for cakes and pastries. If the number of pastries exceeds the estimated normal
amount of spoilage, then it shall be treated as an expense and entered into a separate account of cost that
can no longer be recovered.

The theoretical concepts are consistent and relevant to the book being used. It is somehow
applicable to most manufacturing firms like the hospital industry or food industry. These concepts are
comprehensible but take a little knowledge in Math when it comes to costing abnormal spoilage. In a
manufacturing processing industry particularly those that produce homogenous products, continuous and
discrete losses are important factors to be considered especially in the preparation of financial
statements. Normal spoilage, as it is to be considered and takes part of the manufacturing process
expected and unavoidable, should be taken extra time to consider before they become worse and
abnormal spoilage. Continuous mistakes during the production without being known by the operator
could worsen the production process and the final product that leads to re-training or training in a new
process. Units are also lost in the production process. Continuous losses occur fairly uniformly
throughout the production process while discrete loss occurs at some specific point. It should be noted
that prevention is more often efficient and important to prevent incurring future costs. Lastly, a process
that generated a continuous defect/spoilage loss requires a quality control point at the end of production;
otherwise, some defective units would not be found creating external failure costs since these units will
be delivered to customers. As a future consultant, critical decision-making should be taken into account
as it is one of the key responsibilities.