Accounting

Adjustment Of Cost From Preceding Department-Process Costing

Adjustment of Cost from Preceding Department under Process Costing: These computations do not differ from those previously discussed. Peculiar to this situation is the unit cost from preceding department. Total cost charged to the Finishing Department as Cost from Preceding Department must now be allocated over a greater number of units, thereby reducing the unit cost of work done in the preceding department.

The adjusted¬†cost from preceding department is inserted in the production report above as “Adjusted unit cost of units transferred in during the month” and is added to departmental unit costs to arrive at the cumulative unit cost to the end of operations in the Finishing Department. When additional materials increase the number of units being processed, it is still possible to have lost units.

However, should increased and lost units occur, no separate calculation need be made for the lost units; only net units added are to be used. In the last illustration, 8,000 additional units resulted from added materials. It is quite possible, though, that the materials added should have yielded 10,000 additional units.

The difference between the 8,000 units and the anticipated 10,000 units could be due to the loss of 2,000 units. If this is the case, the effect of the lost units is similar to that of units lost in the first department; that is, the cost is absorbed within the department as an increase in unit costs. However, if desired, it is also possible to report the effect of these lost units separately.

If 10,000 additional units should have resulted, the effect of losing 2,000 units can be determined as follows: (1) compute the unit cost of work done in preceding departments and in this department as if no loss had occurred; (2) compute the loss by multiplying the unit cost obtained in the above computation by the 2,000 lost units.

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