Addition of Materials – Increase in Units and Change in Unit Cost

Addition of Materials – Increase in Units and Change in Unit Cost

Learning Objective:

  1. What is the effect on the calculation in the cost of production report when materials are added in a department subsequent to the first and as a result number of units increase and unit cost is decreased?

When additional materials result in additional units, different computations are necessary. The greater number of units causes a decrease in unit cost which necessitates an adjustment of the preceding department’s unit cost, since the increased number of units will absorb the same total cost transferred from the preceding department.


To illustrate the situation of additional units resulting from the addition of materials, assume that the Terminal department of the Clone x Corporation cost for labour and factory overhead of $32,400 and 19,800, respectively, an additional materials cost of $17,020, and an increase of 8,000 units as the result of added materials. The effect of these assumptions on the Terminal Department’s cost of production report is shown below:

The Clone x Corporation
Terminal Department (3rd Dept.)
Cost of Production Report
For the Month of January, 19        

Quantity Schedule:
Units received from the preceding department 40,000
Additional units put into process 8,000 48,000
——- =====
Units transferred to finished goods storeroom 44,000
Units still in process (1/4 labour and FOH) 4,000 48,000
Cost Charged To the Department: Total
Cost from preceding department:
Transferred in during the month (40,000 units) $140,400 $3.51
Cost added by the department:
Materials $17,020 $0.37
Labour 32,400 0.72
Factory Overhead (FOH) 19,800 0.44
—— —–
Total cost added $69,220 $1.53
Adjusted units cost for additional units 2.925*
——- ——
Total cost to be accounted for $209,620 $4.455
====== ======
Cost Accounted for as Follows:
Transferred to finished goods storeroom (44,000 × $4.455) $196,020
Work in process – ending inventory:
Adjusted cost from preceding department(4,000 × $2.925) $11,700
Materials (4,000 × 1/2 × $0.37) 740
Labour (4,000 × 1/4 × $0.72) 720
Factory Overhead (4,000 × 1/4 × $0.44) 440
Total cost accounted for $209,620

Additional Computations:

Equivalent Production:

materials = 44,000 + 4,000 / 2 = 46,000 units

Labour and factory overhead = 44,000 + 4,000 / 4 = 45,000 units

Unit Costs:

Materials = $17,020 / 46,000 = $0.37

Labour = $32,400 / 45,000 = $0.720 per unit

Factory overhead = $19,800 / 45,000 = 0.44 per unit

*Adjustment for Additional Units


Cost from preceding department / (Units received from preceding department + Units added)

 $140,400 / 48,000 = 2.925 per unit

When additional materials increase the number o units being processed, it is still possible to have lost units. However, should increase and lost units occur, no separate calculation is required for the lost units; only net units added are used. In the example above, 8,000 additional units resulted from added materials. It is quite possible, though, that the materials added should have yielded 10,000 units. The difference between the 8,000 units and the anticipated 10,000 units could be due to the loss of 2,000 units. I 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 10,000 additional units should have resulted, the effect of losing units can be determined as follows:

  1. Compute the unit cost of work done in preceding departments and the Terminal Department as if no loss had occurred.
  2. Compute the loss by multiplying the unit cost obtained in the preceding computation by the 2,000 lost units.

You may also be interested in other useful articles from “process costing system – addition of materials and beginning inventory” chapter:

  1. Increase in Unit Cost Due to Addition of Materials
  2. Addition of Materials – Increase in units and Change is Unit Cost
  3. Beginning Work in Process Inventories – Average Costing Method
  4. Cost of Production Report FIFO
  5. Average Costing Method Versus FIFO Costing Method – Process Costing
  6. Difficulties Encountered in Process Costing Procedure
  7. Discussion Questions and Answers
  8. Similarities and Differences between Job Order and Process Costing System

  9. Operation Costing /Hybrid Costing System

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