1

PSBA-MANILA
Accounting 10
Prof. C. Gonzaga
LOST UNITS AND ACCRETION
Loss of Units
Shrinkage is a decrease in units arising from an inherent characteristic of the production process; includes decreases
caused by evaporation, leakage, and oxidation.
Economically reworked means that the incremental revenue from the sale of reworked defective units is greater than the
incremental cost of the rework.
A defective unit is a unit that has been rejected at a control inspection point for failure to meet appropriate standards of
quality or designated product specifications; it can be economically reworked and sold through normal distribution
channels.
A spoiled unit is a unit that is rejected at a control inspection point for failure to meet appropriate standards of quality or
designated product specifications; it cannot be economically reworked to be brought up to standard.
A normal loss is an expected decline in units during the production process.
An abnormal loss is a decline in units in excess of normal expectations during a production process.
A variety of methods may be applied to account for units that are lost during production, and the designation of the most
suitable method depends on two factors:
a.
the cause of the decrease and
b.
management expectations regarding lost units.
Types of Lost Units
Normal loss is normally calculated on the basis of goods output or actual input.
a.
The normal loss is often estimated to be quite high since the lowest costing material, labor, or overhead support is
chosen.
b.
Highly estimated normal losses can also be caused by a problem inherent in the design or production process.
c.
Managers often discover, based on cost-benefit analysis, that a problem would cost more to eliminate than to
tolerate.
An abnormal loss is a loss in excess of the normal, predicted tolerance limits.
a.
When an abnormal loss occurs, so does a normal lossunless zero defects have been set as the AQL (accepted
quality level).
b.
Abnormal losses usually arise due to human or machine error during the production process.
Continuous loss is loss that is assumed to occur uniformly throughout the production process.
A discrete loss is a loss that occurs at a specific point in the production process.
Accounting for Lost Units
Normal loss cost is treated as a product cost.
a.
Such cost is included as part of the cost of good units that result from the production process.
b.
The cost of normal spoilage is inventoried in Work in Process and Finished Goods and expensed only when good
units are sold.
Abnormal loss cost is considered to be a period loss since abnormal spoilage is not necessary in the production of good
units and its cost is avoidable in the future.
a.
Such cost should be brought to the attention of the responsible production manager.
b.
The production manager should then investigate the causes of the spoilage to determine what action needs to be
taken to prevent similar occurrences in the future.
PROBLEM 1
Department 1 and Department 2 use FIFO costing.
Units are introduced into the process in Department 1 (this is the only material added in Department 1). Spoilage
occurs continuously through the department and normal spoilage should not exceed 10 percent of the units
started.
Department 2 adds material (packaging) at the 75 percent completion point; this material does not cause an
increase in the number of units being processed. A quality control inspection takes place when the goods are 80
percent complete. Spoilage should not exceed 5 percent of the units transferred in from Department 1.

The following production cost data are applicable for operations for May 20A:
Department 1 Production Data
Beginning inventory (65% complete)
Units started
Units completed
Units in ending inventory (40% complete)
Department 1 Cost Data
Beginning inventory:
Material

1,000
25,000
22,000
2,800

P1,550

2
Conversion

2,300

Current period:
Material
Conversion
Total costs to account for
Department 2 Production Data
Beginning inventory (90% complete)
Units transferred in
Units completed
Units in ending inventory (20% complete)
Department 2 Cost Data
Beginning inventory:
Transferred in
Material
Conversion
Current period:
Transferred in
Material`
Conversion
Total costs to account for

P3,850

P38,080
78,645

116,725
P120,575
8,000
22,000
24,000
4,500

P40,800
24,000
4,320

P 69,120

P113,700*
53,775
11,079

178,554
P247,674

*This may not be the same amount determined for Department 1; ignore any difference and use this figure.
Required:
a.
Compute the equivalent units of production in each department.
b.
Determine the cost per equivalent unit in each department and compute the cost transferred out, the cost in
ending inventory, and the cost of spoilage (if necessary).

PROBLEM 2
Consider the following data for a cooking department for the month of January:
Physical
Units
Work in process, beginning inventory* 11,000
Started during current period
To account for
Good units completed and transferred out during current period:
From beginning work in process 11,000
Started and completed
Good units completed
Spoiled units 8,000
Work in process, ending inventory~
Accounted for

74,000
85,000
50,000
61,000
16,000
85,000

*Direct material, 100% complete; conversion costs, 25% complete

~Direct material, 100% complete; conversion costs, 75% complete
Inspection occurs when production is 100 percent completed. Normal spoilage is 11 percent of good units
completed and transferred out during the current period.
The following cost data are available:
Work in process, beginning inventory:
Direct material
Conversion costs
Costs added during current period:
Direct material
Conversion costs
Costs to account for

P220,000
30,000

P 250,000
1,480,000
942,000
P2,672,000

Required: Prepare a detailed cost of production report. Use the FIFO method. Distinguish between normal and
abnormal spoilage.