SPOILED UNITS/LOSS

UNITS
OF
PRODUCTION
Spoiled Units
• Sometimes called loss units.
• Units that have been damaged or improperly
manufactured.
• Cannot be completed as saleable product
• Once discovered, they are taken out of the production
and no further work is performed on them.

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Normal Spoilage
• Common occurrence that is inherent with the
manufacturing process.
• Unavoidable and cannot be eliminated
• They are to be absorbed by the remaining good units
as part of their product cost.

3
Abnormal Losses
• Results from unusual and non-recurring factors, such
as fire and accidents.
• They are avoidable and controllable.
• They are separated from the production and treated as
a period cost.

4
Classification of Losses as to Discovery
• Continuous loss – cannot be identified specifically
within the production. Usually they are normal losses
and uses the Method of Neglect.
• Discrete loss – can be identified when the loss occur. It
is usually determined during inspection point. It may
be a normal loss or abnormal loss

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Summary of Losses

Continuous Discrete Disposition

Normal loss YES YES Product cost
Abnormal loss NO YES Period cost

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Inspection Point
• The stage of production cycle where products are
inspected to determine spoiled units.
• It usually occur at the end of production, however, it
may also occur at various stages of production cycle.
• The cost of the spoiled units will be computed up to
the inspection point.

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Accounting for Normal Losses
• If the normal loss is a continuous loss, no cost is
allocated. Method of neglect is used. It means nothing
is done, just account for the remaining units. The total
cost will be divided by the remaining units that will
result to a higher cost per EUP.

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Accounting for Normal Losses
• If the normal loss is discrete, meaning it was
discovered during an inspection point, the cost is to be
computed up to the inspection point.

• Who shall burden the cost of normal loss?

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Accounting for Normal Losses
AS A RULE, the normal loss shall be charged against
the units who passed the inspection point.

• If the inspection point is at the end of production

process, the loss will be added to the cost of finished
and transferred out.

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Accounting for Normal Losses
AS A RULE, the normal loss shall be charged against
the units who passed the inspection point.

• If the inspection point is at a specific point in the

production process, the loss will be added to the units
who passed the inspection point.

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Accounting for Normal Losses
• The units that passes the inspection point is referred to
as “good units”.
• If it happens that the completed units and ending WIP
had passed the inspection point, the loss will be
allocated prorated accordingly.

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Accounting for Abnormal Losses
• Since all abnormal losses are discrete, it is required to
compute the cost of abnormal loss up to the point of
inspection.
• The loss will be removed from WIP and shall be
recognized as a period cost either in FOH Control
account or an Abnormal Loss account.

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