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 ,etc. 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 los 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.

Problem Exercises

1. The following information is available for JYD Company for April 2019

Started this month 80,000 units

Beginning W/P Inventory 7,500 units (40% completed)
Normal spoilage (discreet) 1,100 units
Ending W/P 13,000 units (70% completed)
Transferred Out 72,500 units
Costs
W/P-Beg
Materials P10,400
Conversion Costs 13,800
Current Costs
Materials P120,000
Conversion Costs 350,000
All materials are added at the start of production and the inspection point is at the end of the
process.

Required:
a. Calculate the Equivalent of Production under Weighted Average and FIFO methods
b. The Unit cost per EUP under Average and FIFO methods
c. Calculate the cost assigned to ending inventory and cost of transferred out using FIFO method.

2. Peter Senen Manufacturing Company makes a single product in two departments. The production
data for Department 2 for April 2019 follows:
Quantities
In Process, April 1, (40% completed) 4,000 units
Received from dept 1 30,000 units
Completed and transferred 25,000 units
 In Process, April 30 (60% completed) 6,000 units
Production Costs
April 1 April 30
Received fr. Dept 1 P16.300 P89,100
Materials 3,800 67,500
Conversion cost 1,940 81,000
Materials are added at the start of the process, and losses normally occur during the early stage of the
operation.

Required:
Using the Average costing method
a. calculate the EUP .
b. Calculate the Unit Cost per EUP
c. Calculate the cost assigned to the transferred out units and the work in process inventory at the
end.

3. Ethel Company manufactures a product in different departments. As their cost accountant you are
given the production data of Department A to accumulate costs and prepare the necessary reports.

W/P, May 1, 2019 (30% completed ) 15,000 units

Started in process 60,000 units
W/P, May 31, 2019 (50% completed) 3,000 units
Normal lost units discovered at the end of the process 2,000 units

Costs
Materials P78,000
Conversion cost 85,000
W/P, May 1, 2019 45,000
Materials are added at the start of the process while conversion costs are evenly applied during
the process.

Required: Under FIFO

1. Calculate the EUP
2. Calculate the Units cost per EUP
3. Calculate the cost of the completed units and the W/P Inventory at the end.