ACCOUNTING FOR PRODUCTION LOSSES (PRODUCT COSTING)

Cost Accounting Review Papers

 Spoiled or Lost Units

- Are units that have been damaged or improperly manufactured and cannot be completed as
salable products

 Classifications:
 Normal Spoilage/Normal Lost Units – inherent in the manufacturing process,
unavoidable and cannot be eliminated
- Part of production cost
 Abnormal Spoilage/Abnormal Lost Units – results from unusual and nonrecurring
factors, such as fire or water damage; avoidable and controllable
- Treated as a period expense

Quantity Schedule

Actual Units
WIP beg. xx
Started in Process/ Rec’d from previous dept. xx
Total units to account for xx

Transferred out
Work in Process, beg. xx
Place in Process/Rec’d xx EUP = Actual Units x Work Done
WIP, end xx
Normal loss xx EUP = Actual Units x Work Done
Abnormal loss xx (WD depends as to when the lost
Total units accounted for xx units are detected)

 Normal Lost Units

Continuous Loss – loss occurs fairly uniformly throughout the process
Discrete Loss – loss occurs at a specific point and is detectable only when a quality check
is performed
 Treatment of Neglect – lost units are considered as never having been put into production
regardless of the amount work performed on them
 Cost of Normal Lost Units
Stage of Inspection Work Done
First Department Second Department
Start of the
Zero
production/ Normal
(Theory of Neglect) Unit cost (Preceding
Shrinkage
Department) x
During the Production No cost of lost units
Actual Normal Lost
(Point of Inspection is Zero
Unit
not Identified or (Theory of Neglect)
Continuous Loss)

WD for materials:
Depends on when
materials are added,
(Unit Cost of
During the Production and the inspection
Preceding Dept x
(Point of Inspection is point Unit cost (this dept.)
Actual Normal Lost
identified) x EUP of normal lost
Units) + (Unit cost of
WD for CC: units
this Dept. x EUP of
Depends on the
Normal Lost Units)
Point of Inspection

End of Production
100%
(Discrete Loss)

 Allocation of Normal Lost Units

Stage of Inspection
Absorbing Units
Start/During End
FIFO Method:
 In Process beg. (finished and transferred) xx
 Started/Received (finished and transferred) xx xx
 Completed and On Hand xx xx
 In process, end xx

Weighted Average Method:

 Finished and transferred xx xx
 Completed and On Hand xx xx
 In process, end xx

Notes:
 Normal losses are treated as product costs
 General rule: the cost of normal losses should be assigned to good units that have
passed the inspection point during the current period
 Abnormal Lost Units

Cost of Normal Lost Units

Stage of Inspection Work Done Second
First Department
Department

Zero
Since the lost units were Unit cost from
discovered at the start of Preceding
Start of Production the production, then they No cost of lost units Department x
will be removed from the Actual Abnormal
actual production and will Loss
never be process

It depends on the point (UC from Prec.

of inspection or what Dept. x Actual
Unit cost this
particular percentage Abnormal Loss) +
During the Production Department x EUP of
abnormal loss (UC of this dept. x
Abnormal Loss
happened EUP of Abnormal
Loss)

100% (UC from the

Because they are already Preceding
completed when they Unit cost this Department x
End of Production were discovered Department x EUP of Actual Abnormal
Abnormal Loss Loss) + (UC of this
Department x EUP
of Abnormal Loss)

 Accounting for Increase in Units

 The addition of materials in subsequent department/s may result in an increase in the
number of physical units
 When there is an increase in units during production, the total costs is spread among the
larger number of units to produce lover average unit costs