Equivalent or effective units of production represent the production of a process expressed in terms of completed units. In many production departments, units are typically transferred from the initial stage to the next stage in the process. When the units are transferred, the accumulated cost per unit is transferred along with them. Since the unit being produced includes work from all of the prior departments, the transferred-in cost is the cost of the work performed in all earlier departments. The physical units can now be represented as equivalent units for each production factor.
The total of the cost per unit for material ($1.17) and for conversion costs ($2.80) is the total cost of each unit transferred to the finishing department ($3.97). In addition to the equivalent units, it xero advisor directory is necessary to track the units completed as well as the units remaining in ending inventory. The reconciliation involves the total of beginning inventory and units started into production. Now you can determine the cost of the units transferred out and the cost of the units still in process in the shaping department.
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To calculate equivalent units of production using a weighted average, the important step is to combine the equivalent units of work completed in the current period with the equivalent units of work in process from the previous period. Then, the total costs for the period are divided by the total equivalent units to determine the cost per equivalent unit. If the department’s direct labor cost was $103,000 during the month, it’s June direct labor cost per equivalent unit will be $10 ($103,000 divided by 10,300 equivalent units).
It can also be applied to gain a general idea of the additional costs required to convert work-in-process into finished goods. It has no relevance from an operational perspective, nor is it useful for any other type of cost derivation other than process costing. The limitation of equivalent units computation is that it does not take into account the number of units completed in any specific unit. For example, let’s assume that a company manufactured 2000 motorcycles for this year and 30% of motorcycles were lost due to defects. If these defects are non recurring then such units should be excluded from equivalent production. Equivalent Units of Production is a more accurate method to determine whether the proposed output of the process will be able to meet or exceed that budgeted for.
- The total of the cost per unit for material ($1.17) and for conversion costs ($2.80) is the total cost of each unit transferred to the finishing department ($3.97).
- The cost of each element (i.e., material, labor, and overhead) is divided by the equivalent units of production of that element.
- For the packaging department, the materials are 100% complete with regard to materials costs and 40% complete with regard to conversion costs.
The only direct material added in the packaging department for the 5A sticks is packaging. The packaging materials are added at the beginning of the process, so all the materials have been added before the units are transferred out, but all of the conversion elements have not. As a result, the number of equivalent units for material costs and for conversion costs remaining in ending inventory is different for the testing and sorting department.
Calculating Equivalent Units of Production
Equivalent units of production is a term applied to the work-in-process inventory at the end of an accounting period. It is the number of completed units of an item that a company could theoretically have produced, given the amount of direct materials, direct labor, and manufacturing overhead costs incurred during that period for the items not yet completed. In essence, it is a relatively easy way to derive how much as been invested in goods that have not yet been completed and converted into finished goods. 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.
Equivalent Units of Production
But the ending WIP value is determined by taking the product of the work in process material units and the cost per equivalent unit for materials plus the product of the work in process conversion units and the cost per equivalent unit for conversion. Now you can determine the cost of the units transferred out and the cost of the units still in process in the finishing department. But the ending WIP value is determined by taking the product of the work in process materials units and the cost per equivalent unit for materials plus the product of the work in process conversion units and the cost per equivalent unit for conversion.
When the hickory size 5A drumsticks have completed the shaping process, they are transferred to the packaging department along with the inventory costs of $29,775. The inventory costs of $29,775 were $8,775 for materials and $21,000 for conversion costs and were calculated in Figure 5.6. During the month of July, Rock City Percussion purchased raw material inventory of $2,000 for the packaging department. As with the shaping department, the packaging department tracks its costs and requisitions the raw material from the material storeroom. The packaging department has computed direct material costs of $2,000, direct labor costs of $13,000, and applied overhead of $9,100, for a total of $22,100 in conversion costs. For the shaping department, the materials are 100% complete with regard to materials costs and 35% complete with regard to conversion costs.
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) and for ending work in process with respect to materials and conversion.
Direct materials and conversion costs may have different completion levels, so their equivalent units may vary. The FIFO method is more accurate, but the additional calculations do not represent a good cost-benefit trade off. Only consider using the FIFO method when costs vary substantially from period to period, so that management can see the trends in costs. The following example is used to demonstrate how the equivalent units of production are used to allocate production costs between completed and partially completed units. In the example above we simply stated that the estimated percentage of completion was 25%. In practice the percentage of completion needs to be based on each factor of production such as direct materials, direct labor, and manufacturing overheads.
Equivalent Production (With Examples) Cost Accountancy
Since the maximum number of units that could possibly be completed is 8,700, the number of units in the shaping department’s ending inventory must be 1,200. The total of the 7,500 units completed and transferred out and the 1,200 units in ending inventory equal the 8,700 possible units in the shaping department. Equivalent Production represents the production of a process in terms of completed units. At the end Of any given period there are likely to be partly completed units (work-in-process). It is evident that some of the costs pertaining to this period are attributable to the units which have not been completed.
At the end of the period, ABC had incurred 35% of the labor and manufacturing overhead costs required to complete the 1,000 green widgets. Consequently, there were 1,000 equivalent units for materials and 350 equivalent units for direct labor and manufacturing overhead. The total materials costs for the period (including any beginning inventory costs) are computed and divided by the equivalent units for materials. The total of the cost per unit for materials ($1.50) and for conversion small business bookkeeping memphis costs ($6.90) is the total cost of each unit transferred to the testing and sorting department. By using the equivalent units of production weighted average method the business has taken actual production costs of 137,500 and allocated 93,000 to the 6,000 completed units, and 44,500 to the 4,000 partially completed units held in work in process. The total materials costs for the period (including any beginning inventory costs) is computed and divided by the equivalent units for materials.
The 7,500 units completed and transferred out to the finishing department must be 100% complete with regard to materials and conversion, so they make up 7,500 (7,500 × 100%) units. The 1,200 ending work in process units are 100% complete with regard to material and have 1,200 (1,200 × 100%) equivalent units for material. The 1,200 ending work in process units are only 35% complete with regard to conversion costs and represent 420 (1,200 × 35%) equivalent units.
A complete production cost report for the shaping department is illustrated in Figure 5.6. Direct material is added in stages, such as the beginning, middle, or end of the process, while conversion costs are expensed evenly over the process. Often there is a different percentage of completion for materials than there is for labor.