How to account for a process that creates lost units

To best understand how to account for a process that creates lost goods, it is helpful to know the answers to the following questions:

1. What is the process flow?
2. Where is material added during the process?
3. How are labor and overhead applied? (This answer is usually “Continuously,” but not necessarily at the same rate.)
4. At what stage of completion was the beginning inventory and what is the ending inventory?
5. Where are the quality control inspection points?
6. How do defective/spoiled units occur? (Continuously or discretely?)

Impervious Inc. is used to illustrate several alternative situations regarding the handling of lost units in a process costing environment. Impervious produces a hightech, very durable, nonfade (once color pigment is added) paint base material— hereafter simply referred to as paint—for appliances and equipment. The paint is produced in a single department and then sold to appliance and equipment manufacturers. 

All materials are added at the start of the process, and conversion costs are applied uniformly throughout the production process. Recyclable containers are provided by buyers and, therefore, are not a cost to Impervious. The company uses the FIFO method of calculating equivalent units.