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BA  119  /  2nd  Semester,  AY  2013-­‐2014  /  Process  Costing  Spoilage  Exercise  

Surname:  ______________________________________  Student  Number:  _______________________________

 
TYPES  OF  LOST  UNITS  
 
CONTINUOUS  LOSS  –  occurs  fairly  uniformly  throughout  the  production  process  
 
DISCRETE  LOSS  –  assumed  to  occur  at  a  specific  point  
 
ACCOUNTING  FOR  LOST  UNITS  
The  method  of  accounting  for  the  cost  of  lost  units  depends  on  whether  the  loss  is  considered  
normal  or  abnormal  and  whether  the  loss  occurred  continuously  in  the  process  or  at  a  discrete  
point.  
 
The  costs  of  normal  shrinkage  and  normal  continuous  losses  are  handled  through  the  METHOD  OF  
NEGLECT:  
• excludes  the  spoiled  units  in  the  equivalent  units  schedule  
• raises  the  cost  per  equivalent  unit.    
• cost  of  lost  units  is  spread  proportionately  over  the  good  units  transferred  and  those  
remaining  in  WIP  
 
The  cost  of  normal,  discrete  losses  is  assigned  only  to  units  that  have  passed  the  inspection  point.    
 
Type   Assumed  to   May  Be   Cost  Handled   Cost  Assigned  
Occur   How?   To?  
Normal   Absorbed  by  all   Product  
units  in  ending  
inventory  and  
Uniformly  
transferred  out  
Continuous   throughout  the  
on  an  EUP  basis  
process  
Abnormal   Written  off  as  a   Period  
loss  on  an  EUP  
basis  
Normal   Absorbed  by  all   Product  
units  past  
inspection  point  
in  ending  
At  inspection  
inventory  and  
Discrete   point  or  at  end  of  
transferred  out  
process  
on  an  EUP  basis  
Abnormal   Written  off  as  a   Period  
loss  on  an  EUP  
basis  
 
 

*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
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HANDLING  LOST  UNITS  IN  A  PROCESS  COSTING  SYSTEM  

 
TYPE   NORMAL   ABNORMAL  
Continuous   • Do  not  include  equivalent   • Must  include  equivalent  lost  
lost  units  in  EUP  schedule   units  in  EUP  schedule  
• Units  effectively  disappear   • Assign  cost  to  lost  units  and  
• Unit  costs  of  good   charge  as  loss  of  period  
production  are  increased  
Discrete   • Must  include  equivalent  lost   • Must  include  equivalent  lost  
units  in  EUP  schedule   units  in  EUP  schedule  
• Assign  cost  to  lost  units   • Assign  cost  to  lost  units  and  
• Determine  point  of  ending   charge  as  loss  of  period  
work  in  process  
o If  before  inspection  point,  
assign  cost  of  lost  units  only  
to  units  transferred  
o If  after  inspection  point,  
prorate  cost  of  spoiled  units  
between  units  transferred  
and  units  in  ending  
inventory  
 
 
 
EXERCISE  
Note:  Please  DO  NOT  use  Excel  when  you  answer.  
 
REQUIREMENT:    
For  each  case,  compute  for  the  EUP,  cost/EUP,  Costs  Transferred  Out  of  WIP  and  Ending  WIP.  
   
NKF   Company   produces   paint   for   appliances   and   equipment.   The   paint   is   produced   in   a   single  
department   and   then   sold   to   appliance   and   equipment   manufacturers.   All   materials   are   added   at  
the   start   of   the   process,   and   conversion   costs   are   applied   uniformly   throughout   the   production  
process.   Containers   are   provided   by   buyers,   hence,   not   a   cost   to   NKF.   The   company   uses   FIFO  
method  of  calculating  equivalent  units.  
 
Case  1  (CONTINUOUS  LOSS)  
During   processing,   the   paint   is   mechanically   blended   and   cooked,   resulting   in   a   normal   loss   from  
shrinkage.   Any   decrease   of   10%   or   less   of   the   gallons   placed   into   production   for   a   period   is  
considered  normal.  The  July  2013  data  of  NKF  are  given  below:  
 
GALLONS  
Beginning  inventory  (60%  complete)   2,000  
Started  during  month   15,000  
Gallons  completed  and  transferred   13,200  
Ending  inventory  (75%  complete)   2,500  
Lost  gallons  (normal)   1,300  
     
*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
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COSTS  
Beginning  inventory:      
Material   P15,000    
Conversion   1,620   P16,620  
Current  period:      
Material   P102,750    
Conversion   19,425   122,175  
    P138,795  
 
Case  2  (DISCRETE)  
Use  the  same  information  as  Case  1,  except  that  no  shrinkage  occurs.  The  paint  is  inspected  at  the  
end   of   the   production   process.   Any   spoiled   gallons   are   removed   and   discarded   at   inspection;   a  
machine   malfunction   or   an   improper   blending   of   a   batch   of   paint   usually   causes   spoilage.   Any  
spoilage   of   10%   or   less   of   the   gallons   placed   into   production   during   the   period   is   considered  
normal.  
 
Case  3  
Use   the   same   information   as   Case   2,   except   that   NKF   inspects   the   paint   when   the   conversion  
process  is  50%  complete.    
 
Case  4  (CONTINUOUS  LOSS)  
Normal   spoilage   cannot   exceed   5%   of   the   gallons   placed   into   production.   Additionally,   as   in   Case   1,  
the  unit  reduction  is  assumed  to  occur  from  shrinkage.  The  quality  control  inspection  point  is  at  
the  end  of  the  processing.    
 
Case  5  
Normal  spoilage  cannot  exceed  5%  of  the  gallons  placed  into  production.  No  shrinkage  occurs.  The  
paint   is   inspected   at   the   end   of   the   production   process.   Any   spoiled   gallons   are   removed   and  
discarded   at  inspection;  a  machine  malfunction   or  an  improper  blending   of   a   batch   of  paint   usually  
causes  spoilage.  The  quality  control  inspection  point  is  at  the  end  of  the  processing.    
 
Case  6  
Same  as  Case  5  except  that  NKF  inspects  the  paint  when  the  conversion  process  is  50%  complete.  
 
Case  7  
Normal  spoilage  cannot  exceed  5%  of  good  output.  No  shrinkage  occurs.  The  paint  is  inspected  at  
the  end  of  the  production  process.  Any  spoiled  gallons  are  removed  and  discarded  at  inspection;  a  
machine   malfunction   or   an   improper   blending   of   a   batch   of   paint   usually   causes   spoilage.   The  
quality  control  inspection  point  is  at  the  end  of  the  processing.    
NOTE:  If  this  does  come  out  during  the  board  exams,  the  question  will  usually  say  /assume  
that   normal   spoilage   is   assumed   to   come   from   units   completed   during   the   period,   without  
regard  to  the  percentage  of  completion  of  Beginning  WIP  at  the  start  of  the  period.    
When   the   FIFO   cost   flow   assumption   is   used,   a   complicating   problem   arises.   This  
involves   determining   which   category   of   completed   units   the   spoilage   came   from.   If   the  
spoiled  or  lost  units  are  assumed  to  have  come  from  the  units  started  during  the  period,  then  
the   equivalent   units   spoiled   or   lost   are   added   to   the   denominator   in   the   cost/EUP  
calculation.   Note   that   this   is   the   same   way   spoilage   is   handled   in   the   weighted   average  

*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
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method.   It   is   the   usual   treatment   because   it   is   not   practical   to   identify   the   source   of   each  
spoiled  or  lost  unit.  
However,   if   the   spoiled   or   lost   units   are   assumed   to   have   come   from   the   beginning  
work   in   process,   then   only   the   equivalent   work   performed   on   them   during   the   period   is  
included   in   the   denominator.   This   is   complicated!   Hence,   Board   questions   where   spoiled  
units   are   sourced   from   Beginning   WIP   which   passed   through   inspection   during   the   period  
will  usually  assume  that  any  spoiled  or  lost  units  come  from  the  Beginning  WIP  included  in  
the   units   completed   and   transferred   out   during   the   period.   With   this   assumption,   the  
treatment   of   spoiled   and   lost   units   is   essentially   the   same   in   both   FIFO   and   weighted  
average.  
It   is   possible   though   for   Board   questions   to   include   FIFO   scenarios   where   spoilage  
comes  good  units  (units  inspected  during  the  period)  and  where  the  good  units  referred  to  
are  coming  from  Units  Started  and  Inspected  and  Ending  WIP.  This  means  that  spoilage  will  
be  allocated  to  both  Goods  Transferred  Out  of  WIP  and  Ending  WIP.  These  are  the  scenarios  
we  discussed  in  BA  116  (see  below).  
 
Case  8  
Note:   DOES   NOT   COME   OUT   IN   THE   BOARD   EXAM   SINCE   SPOILAGE   IN   THIS   CASE   COMES  
FROM  BEGINNING  WIP  AND  UNITS  STARTED  AND  INSPECTED  DURING  THE  PERIOD.  See  Note  
In  Case  7.  
Normal  spoilage  is  expected  at  5%  of  units  inspected.  No  shrinkage  occurs.  The  paint  is  inspected  at  
the  end  of  the  production  process.  Any  spoiled  gallons  are  removed  and  discarded  at  inspection;  a  
machine   malfunction   or   an   improper   blending   of   a   batch   of   paint   usually   causes   spoilage.   The  
quality  control  inspection  point  is  at  the  end  of  the  processing.    
 
Refresher:  BA  116  Cases  on  Spoilage  -­‐  FIFO  
 
Pottery   Company   uses   process-­‐costing   techniques   to   accumulate   the   costs   of   glazing   one   of   its  
products.    The  major  portion  of  materials  are  placed  in  production  at  the  beginning  of  processing  in  
the  Glazing  Department,  with  a  small  amount  of  materials  being  added  at  various  times  through  the  
first   half   of   the   process.     There   is   no   change   in   the   number   of   units   as   a   result   of   the   addition   of  
materials.   Labor   and   overhead   costs   are   incurred   evenly   throughout   the   process.     Some   of   the  
pottery  pieces  are  spoiled  because  of  misapplication  of  glaze  or  improper  machine  handling.  
 
At   the   beginning   of   the   accounting   period,   WIP   inventory   for   this   product   was   PHP106,550,  
representing   8,000   pieces,   with   PHP48,000   of   transferred-­‐in   costs,   PHP50,000   of   materials   cost  
(85%   completed),   and   PHP8,550     of   labor   and   overhead   costs   (50%   completed).   During   the   period,  
29,000   pieces   were   transferred-­‐in   from   the   prior   process   at   a   cost   of   PHP114,000.     Materials  
costing   PHP143,500   were   placed   in   process   during   the   current   period,   and   direct   labor   of  
PHP26,000   was   charged   to   the   Glazing   Department.     Manufacturing   overhead   of   PHP20,800   was  
applied  to  production  at  the  rate  of  80%  of  direct  labor  costs.  Therefore,  total  labor  and  overhead  
cost  of  PHP46,800  (PHP26,000  +  PHP20,800)  were  charged  to  the  Glazing  Department  during  the  
period.  
The   work-­‐in-­‐process   ending   inventory   is   70%   complete   as   to   materials   and   40%   complete   as   to  
labor  and  overhead.    30,000  units  were  transferred  to  finished  goods  after  final  inspection.    Normal  
spoilage  is  5%  of  good  units.      
*Class  use  only.  Not  for  distribution  and/or  reproduction.  

 
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Case  1  
Actual   costing   is   used.   Inspection   point   is   when   Materials   are   at   60%   completion   and   Conversion  
Costs  at  30%.  2,000  units  were  spoiled.  
 
Case  2  
Actual   costing   is   used.   Inspection   point   is   when   Materials   are   at   60%   completion   and   Conversion  
Costs  at  30%.  2,000  units  were  spoiled.  Salvage  value  of  spoiled  units  is  PHP3.00/unit.  
 
Case  3  
Normal  costing  is  used.  Inspection  point  is  when  Materials  are  at  60%  completion  and  Conversion  
Costs  at  30%.  2,000  units  were  spoiled.    
 
 
 
 
 
 
 
 
Source:  
Barfield,  et  al.  Cost  Accounting:  Traditions  and  Innovations    

*Class  use  only.  Not  for  distribution  and/or  reproduction.