5 3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage Principles of Accounting, Volume 2: Managerial Accounting

In other words, 80% of necessary direct material may be in process but only 60% of the direct labor and factory overhead. Therefore, proper costing methodology for 100 units in process would entail 80 equivalent units of material, and 60 equivalent units of conversion (i.e., labor and overhead). Recall that Desk Products, Inc., has two departments—Assembly and Finishing.

The reason why is because the figure of completed units alone is not an accurate measure of a department’s output since some of the department’s efforts during a period are expended on units that are only partially complete. Equivalent or effective units of production represent the production of a process expressed in terms of completed units. A This column represents actual physical units accounted for before converting to equivalent units.

Managerial Accounting

If the closing work-in-progress is 800 units, 70% complete in all respects, the equivalent units of production of closing work-in-progress is 560 units (i.e., 800 x 70%). Thirdly, the equivalent units of production for the closing work-in-progress should be determined by considering the number of units of closing work-in-progress and the level of completed work. C This must match total costs to be accounted for shown in Figure 4.5 “Summary of Costs to Be Accounted for in Desk Products’ Assembly Department”. Although not an issue in this example, rounding the cost per equivalent unit may cause minor differences between the two amounts.

• Once the total units have been reconciled, the equivalent units are computed.
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• Hershey likely uses a process costing system since it produces identical units of product in batches employing a consistent process.
• The correct manipulation of the data will depend on the inventory method in use.

To better understand equivalent units, focus on an example for Navarro Steel. To begin, one needs to identify the total units that are to be considered, no matter their stage of completion at the beginning and end of the month. Secondly, the number of units introduced and completed in the current period should be calculated. First, the equivalent production of opening work-in-progress should be determined by taking into account the degree of work to be performed in the current period. To measure output accurately, these partially completed units must be considered in the output computation. Figure 4.6 “Calculation of the Cost per Equivalent Unit for Desk Products’ Assembly Department” presents the cost per equivalent unit calculation for Desk Products’ Assembly department.

What is an equivalent unit of production?

The calculation goes to four decimal places, because when you’re making candy that sells for 20 cents per unit, and you’re producing hundreds of thousands of units, every tiny fraction of a dollar counts. The following example outlines the steps and information needed to calculate Cost Per Equivalent Unit. Based on the above data, determine each of the following amounts.

The challenge is determining the unit cost of products being transferred out of each departmental work-in-process inventory account. Advanced managerial accounting courses usually demonstrate the mechanics of handling the cost of spoilage within a process cost system. However, for now simply know that the cost of “normal” spoilage should be allocated to the inventory of good units, while the cost of excessive waste is charged off as a loss on the income statement. When goods are produced in a continuous process, how are costs to be allocated between work in process and finished goods? Accountants have devised the concept of an equivalent unit, a physical unit expressed in terms of a finished unit. Under the weighted average method, we use beginning work in process costs AND costs added this period.

What is Cost Per Equivalent Unit?

This will give you the cost that can be allocated to each equivalent unit produced during the period. Now you can determine the cost of the units transferred out and the cost of the units still in process in the shaping department. Managerial and cost accountants use the equivalent units of production to allocate production costs to units during the manufacturing process. For instance, calculating the cost of goods produced is simple if there is no beginning or ending goods in process inventory.

Say you’ve mixed enough sugar to make 600,000 units of candy. Assume that ending work in process is 25 percent complete for all components of production (material, labor, and overhead). In cost accounting, equivalent units are the units in production multiplied by the percentage of those units that are complete (100 percent) or those that are in process. The June 1 work in process inventory consisted of 5,000 pounds with $16,000 in materials cost and $12,000 in conversion cots. The June 1 work in process inventory was 100% complete with respect to materials and 50% complete with respect to conversion.

Cost Per Equivalent Unit Calculator

All of the units transferred to the next department must be 100% complete with regard to that department’s cost or they would not be transferred. So the number of units transferred is the same for material units and for conversion units. The process cost system must calculate the equivalent units of production for units completed (with respect to materials and conversion) https://turbo-tax.org/turbotax-review/ and for ending work in process with respect to materials and conversion. Equivalent units of production is a term applied to the work-in-process inventory at the end of an accounting period. In short, if 100 units are in process but you have only expended 40% of the processing costs on them, then you are considered to have 40 equivalent units of production.

• Under the FIFO method, we will only use the costs added this period.
• The output of a department is always stated in terms of equivalent units of production.
• If overhead is applied based on labor, the process is simplified because the “percent complete” would be the same for labor and overhead.
• Although rounding differences still may occur, this will minimize the size of rounding errors when attempting to reconcile costs to be accounted for (step 2) with costs accounted for (step 4).
• The previous schedule shows that 4,000 units were completed and transferred out (3,000 from beginning WIP inventory and 1,000 from the units started and completed during the month), and 5,000 units remain in ending WIP inventory.
• Finally, the equivalent units of production calculated via the previous three steps should be aggregated to ascertain the total output in terms of equivalent units or equivalent production.