The costs of normal shrinkage and normal continuous losses are handled through the method of neglect, which simply excludes the spoiled units in the equivalent units schedule. Ignoring the spoilage results in a smaller number of equivalent units of production (EUP) and, by dividing production costs by a smaller EUP, raises the cost per equivalent unit.
Thus, the cost of lost units is spread proportionately over the good units transferred and those remaining in Work in Process Inventory.
Alternatively, the cost of normal, discrete losses is assigned only to units that have passed the inspection point. Such units should be good units (relative to the inspected characteristic), whereas the units prior to this point may be good or may be defective/spoiled. Assigning loss costs to units that may be found to be defective/ spoiled in the next period would not be reasonable.
Regardless of whether defects/spoilage occur in a continuous or discrete fashion, the cost of abnormal losses should be accumulated and treated as a loss in the period in which those losses occurred. This treatment is justified by the cost principle discussed in financial accounting. The cost principle allows only costs that are necessary to acquire or produce inventory to attach to it.
.png)