This study explores accounting for shrinkage in continuous flow industries, an area which has received no attention in the literature, but which appears to present some difficulty to cost accountants in some companies studied. The study presents an appropriate approach for process cost accounting where the materials in process undergo some dimensional transformation but remain measurable in the same physical units as the raw materials. Appropriate formulae are presented to help calculate the equivalent units of finished output that the semi‐processed materials in inventory represent. The initial development assumes a uniform loss rate, an assumption later relaxed to illustrate the solution procedure for non‐uniform loss ra