LOST UNITS PROCESS COSTING
Accounting for Lost Units
1. Normal Lost Units- these are spoiled units which are expected or
incapacitated, inherent, usual, and unavoidable in the production process
or within the tolerance limits set by the company. Examples are weight
losses, shrinkage, evaporation, rusting. Normal loss increases the cost of
production of the usable goods realized.
The cost or normal lost units are accounted as product cost. It is included
as part of the cost of all finished units or work in process units. That’s why
costs of the normal lost units are absorbed by the good units.
Equivalent Units for Normal Loss Units
a) If the lost units are discovered at the start of the process, the cost of lost
units is apportioned among the remaining good units equally, regardless of
the stage of completion.
b) If the lost units are discovered progressively during the process, the cost of
lost units is allocated among the remaining good units based on the
equivalent units of production.
c) If lost units are discovered at the end of the process, the cost of lost units is
distributed among the remaining completed units.
2. Abnormal Lost Units- these are spoiled units which are unexpected, not
inherent, unusual and avoidable or if it is expected, it beyond the tolerance
limit set by the company. A loss realized over the normal loss is called
abnormal loss. Abnormal loss arises because of abnormal working
conditions, strikes, machine breakdown, fortuitous events, inefficient
workers, low quality or defective raw materials, etc.
Abnormal loss is a controllable loss and thus, can be avoided if corrective
measures are taken.
The cost of the abnormal lost units will be accounted as period costs
(expense) because such costs are unnecessary in the production process
and should be written-off when incurred. Therefore, costs of abnormal loss
units are not absorbed by the good units.
EUP for abnormal loss Units- abnormal lost units should be included in the
calculation of Equivalent units of production