As you’ve learned, 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. The process cost system must calculate the equivalent units of production for units completed (with respect to materials and conversion) and for ending WIP with respect to materials and conversion. As you’ve learned, 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.
Step 3
It’s a lot easier to talk about a whole unit than some whole units and some partially completed units. 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. In this method, both the beginning and ending inventory is converted into equivalent units, so there is a bit more work to do. For those units that were in the beginning inventory, we need to figure out how much work was DONE on them in this period to get them to the point of being transferred to the next process. For those items in the ending inventory, it is the same as the weighted-average method, where we need to calculate how much work has been done to them already. 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%).
Comparison of Equivalent Units of Production to Actual Units Produced
By calculating the EUP, businesses can accurately estimate their production costs and determine the value of their inventory at different stages of production. It also helps determine the cost of producing a product over a continuous production process. 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). The calculation of equivalent units influences how costs are allocated within manufacturing processes.
Calculating Inventory Transferred and Work in Process Costs
We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory. We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion. Companies should allocate joint costs using a consistent method when calculating how to post a transaction in sundry sales equivalent production units for joint products. It can help ensure that each product is assigned a fair share of the costs and can help prevent over- or under-reporting of equivalent production units. EUP considers partially completed units in the production process, while actual units produced only consider fully completed units ready for sale or use.
Step 3 of 3
- No units were lost to spoilage, which consists of any units that are not fit for sale due to breakage or other imperfections.
- It’s a lot easier to talk about a whole unit than some whole units and some partially completed units.
- The 1,750 ending WIP units are 100% complete with regard to material and have 1,750 (1,750 × 100%) equivalent units for material.
- The beginning step in computingDepartment B’s equivalent units for Jax Company is determining thestage of completion of the 2,000 unfinished units (rememberunits completed and transferred are always 100% complete).
- Those are considered 100% complete for the work done in that department, otherwise they wouldn’t be moving forward to the next process.
The calculation of EUP requires conversion factors to determine the equivalent number of completed units. These conversion factors are often based on assumptions and estimates and may not accurately reflect the work done at each production stage. EUP helps businesses determine the value of their inventory at different stages of production accurately. This is important because the value of work-in-progress inventory is not the same as the value of finished goods inventory, and businesses need to know the true value of their inventory to make informed decisions. EUP calculates the number of completed units that could have been produced from the work in progress during a given period.
This will give you the cost that can be allocated to each equivalent unit produced during the period. This report shows the costs used in the preparation of a product, including the cost per unit for materials and conversion costs, and the amount of work in process and finished goods inventory. A complete production cost report for the shaping department is illustrated in Figure 8.71.
In the example, the cost per equivalent unit for direct materials is 10.00, cost per equivalent unit for direct labor is 4.00, and the cost per equivalent unit for manufacturing overhead is 1.50. Accountants often assume that unitsare at the same stage of completion for both labor and overhead.Accountants call the combined labor and overhead costs conversioncosts. Conversioncosts are those costs incurred to convert rawmaterials into the final product (meaning, direct labor andoverhead). The units that were completed and transferred out plus the ending inventory equal the total units to account for. The packaging department for Rock City Percussion completed 6,500 units and transferred them into finished goods inventory. Since the maximum number of units to possibly be completed is 8,250 and no units were lost to spoilage, the number of units in the packaging department’s ending inventory must be 1,750.
It considers partially completed units of production and estimates how many fully completed units could have been produced based on the degree of completion of each unit. At the end of process 1, our planners have their paper and ink ready to be printed. Let’s assume we figure the ending WIP inventory to be 35% complete as to the process.
We can make this calculation easier bymultiplying the units by a percentage of complete. EUP is calculated over a specific period, usually a month or a quarter, while actual units produced refer to the total number of finished goods produced up to a specific point. This can make it challenging to compare equivalent production units across different periods or make accurate forecasts for future production.
This conversion ensures that cost reports are not only timely but also reflective of the current production environment, thus aiding in performance analysis. One thing to keep in mind when using the weighted average method, we don’t need to compute the equivalent units for the ones transferred out. Those are considered 100% complete for the work done in that department, otherwise they wouldn’t be moving forward to the next process. The objective of using equivalent units is to be able to apportion the costs of production to completed units and partially completed units held in work in process. 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.
Accurate cost allocation allows companies to manage resources and pricing strategies effectively. We will calculate a cost per equivalent unit for each cost element (direct materials and conversion costs (or direct labor and overhead). Understanding equivalent production units is essential for businesses to accurately determine production costs and track inventory. It enables businesses to estimate the total number of completed units that could be produced from the work in progress. If overhead is applied based on labor, the process is simplified because the “percent complete” would be the same for labor and overhead.