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Accounting for Lost Units in Process Costing System



Lost units: Continuous operating and processing leads to the possibility of wastage, seepage, shrinkage, and other factors which cause loss or spoilage of production units. Management is interested not only in the quantities reported as completed production, units in process, and lost units - but also in a comparison of planned and actual results. In verifying reported figures, the accountant will reconcile quantities put into process with quantities reported as completed and lost. One method of making such reconciliations is to establish process yields; i.e., the finished production that should result from processing various raw materials. These yields are computed as follows: 


Percent Yield = (Weight of Finished Product/Weight of Raw Materials Charged In)*100

The yield figure is a useful managerial control of materials consumption.

Various yields are established as normal. Yields below normal are measures of inefficiencies and are sometimes used to compute lost units.

The correct measurement of completed production and accurate determination of lost units ties in closely with a firm's quality control procedures.

Frequently quality control data are used to compute production costs since the use of incorrect quantities would result in incorrect unit costs. 

Units Lost in the First Department. Lost units reduce the number of units over which total cost can be spread, causing an increase in unit costs. 

The one thousand units lost in the Mixing Department increase the unit cost of materials, labor, and factory overhead. Had these units not been lost, the equivalent production figure would be higher for materials and some lower for labor and factory overhead. The unit cost for materials, labor and overhead would be reduced.
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