This document discusses special production issues related to lost units and accretion in cost accounting. It defines key terms like accepted quality level and explains the differences between normal and abnormal losses. Normal losses are considered a product cost and included in the costs of good units, while abnormal losses are written off as a period cost. The document also addresses how lost units, rework costs, and accretion are treated in different costing systems like job order costing.

1. Chapter 7
Special Production Issues:
Lost Units and Accretion
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. Learning Objectives (1 of 2)
• Define “accepted quality level”
• Contrast the accepted quality level to a zero
tolerance for errors and defects
• Explain why lost units occur in
manufacturing processes
• Contrast normal and abnormal losses
• Describe how normal and abnormal losses
are treated on an EUP schedule

3. Learning Objectives (2 of 2)
• Describe how the costs of normal and
abnormal losses are assigned
• Explain how the rework costs of defective
units are treated
• Explain how losses are treated in a job order
costing system
• Describe how accretion of units affects the
EUP schedule and costs per unit
• Describe the cost of quality products

4. Quality Level
Accepted Quality Level
• Limit of number of
defects or errors in a
process
• Goal is to operate below
the limit
Zero-Defect Tolerance

5. Lost Units Caused by
• Shrinkage
– evaporation, leakage, oxidation
• Errors in the production process
– Do not meet quality standards
– Do not meet product specifications

6. Defective vs. Spoiled Units
• Economically reworked
– unit can be reprocessed for sale
– cost of rework is less than incremental revenue
from sale
• Defective units can be economically
reworked
• Spoiled units cannot be economically
reworked

7. Types of Spoilage
Normal
• Within accepted
quality level
Abnormal
• Exceeds accepted
quality level

8. Normal Spoilage
• Estimated by management
• Based on good output or actual input
• Affected by
– workers’ skill level
– product or process design
• Cost to avoid normal spoilage may be
greater than cost to tolerate normal spoilage

9. Abnormal Spoilage
• Caused by human or machine error in the
production process
• More preventable than some types of
normal losses due to non-random, special
adverse conditions and actions

10. Timing
• Continuous loss
• Discrete loss
– Loss determined at inspection point
• compare costs of inspection points to costs
of not finding spoiled or defective units
• put inspection points before bottlenecks

11. Accounting for Lost Units
Answer these Questions
• What is the process flow?
• Where is material added during the process?
• How are labor and overhead applied?
• What is stage of completion for beginning
and ending inventory?
• Where are the quality control inspection
points?
• How do defective/spoiled units occur
(continuously or discrete)?

12. Accounting for Normal Loss
• Considered a product cost
• Included in the cost of the good units
• Inventoried in
– Work in Process and
– Finished Goods
• Expensed when the good units
are sold

13. Accounting for Abnormal Loss
• Period cost
• Written off in the period incurred

14. Continuous Lost units Lost units
not in EUP in EUP
Costs of lost Period
units in cost cost
of good units
Discrete Lost units Lost units
in EUP in EUP
Assign costs Period
to lost units cost
Normal Abnormal
Accounting for Lost Units

15. Defective Units and Rework
• Normal Rework - Actual costing
– Rework costs are included in WIP costs for all
units completed
• Normal Rework - Normal costing
– Overhead application rate is increased to cover
rework costs -- Rework costs are assigned to
the Manufacturing Overhead account
• Abnormal rework
– Rework costs are assigned to a loss account

16. Irregular Units
• Sold at less than normal selling price
• Production costs recorded in special
inventory account
• Deficiency—selling price minus cost to
rework and sell is less than total cost
– Normal - include in cost of good units
– Abnormal - write off as a period cost

17. Job Order Costing
• Spoilage occurs on most jobs
– Overhead rate includes net cost of normal
spoilage
• Spoilage identified with particular job
– Normal defects/spoilage - costs attach to job
– Abnormal defects/spoilage - costs written off as
period cost

18. Accretion
• Increase in units or volume due to
– addition of material in successor departments
– factors (heat) inherent in the production process
• Materials added in a single department
– increase equivalent units
• Accretion occurs in successor departments
– number of units transferred and related cost per
unit adjusted

19. Controlling Quality
Minimizing Lost Units
Answer These Questions
• What do lost units actually cost?
• Why do lost units occur?
• How can lost units be controlled?

20. Controlling Quality
Minimizing Lost Units
• What do lost units actually cost?
– Costs are often buried
– In service industry, cost may even be more
difficult to determine
– Customers view “lost units” as poor service
• Why do lost units occur?
• How can lost units be controlled?

21. Controlling Quality
Minimizing Lost Units
• What do lost units actually cost?
• Why do lost units occur?
– Lost units are minimal
– It is acceptable to have losses
– Loss is unavoidable
• How can lost units be controlled?

22. Controlling Quality
Minimizing Lost Units
• What do lost units actually cost?
• Why do lost units occur?
• How can lost units be controlled?
– Move from detection towards prevention
– Use statistical process control

23. Questions
• Why do lost units occur in manufacturing
processes?
• What is the difference between normal and
abnormal losses?
• How are the rework costs of defective units
treated?