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. For the shaping department, the materials are 100% complete with regard to materials costs and 35% complete with regard to conversion costs. 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 shaping department completed \(7,500\) units and transferred them to the testing and sorting department. 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. For example, suppose a manufacturer has many units in the final stage of production but a limited number of units in earlier stages. In that case, they may need to adjust their production schedule to ensure that they have a steady supply of partially completed units to work on.
Cash Flow Statement
The manufacturing process for a green widget requires that all materials be sent to the shop floor at the start of the process, and then a variety of processing steps are added before the widgets are considered complete. 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. Units of product in work-in-process inventory are assumed to be
partially completed; otherwise, the units would not be in
work-in-process inventory.
- By tracking EUP, managers can make more informed decisions about allocating resources and managing inventory, ultimately leading to a more prosperous and profitable business.
- Figure 4.3 provides an example of the equivalent unit concept in
which four desks, 50 percent complete, are the equivalent of two
completed desks. - The total materials costs for the period (including any beginning inventory costs) is computed and divided by the equivalent units for materials.
- 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.
An equivalent unit of production is used in accounting and manufacturing to measure the output of partially completed units of production in terms of fully completed units. Calculate the equivalent units for each of the three product
costs—direct materials, direct labor, and overhead. 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. 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 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.
In this example the weighted average cost method is used and the beginning WIP units are treated as being 100% completed during the period. Thus, the 650,000 units that were completed are counted as 650,000 equivalent units of output no matter their physical origin from beginning inventory or otherwise. However, the units in ending work in process require more thoughtful consideration. Regular inventory counting is necessary to determine the number of goods in progress and finished goods on hand.
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Calculating Equivalent Units of Production (EUP) is a crucial process in manufacturing accounting that helps businesses accurately determine the cost of goods sold and the value of their inventory. EUP helps businesses to accurately measure their production output, which is essential for accurate financial reporting. Accurate financial reporting is necessary for making informed decisions about business operations, attracting investors, and complying with regulatory requirements. Therefore, to convert the work-in-process inventory into equivalent units, it is important to keep the percentage of completion in the calculation.
The first three batches were finished and transferred over to the baking department. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.
In production, units completed in a period is equivalent to units that got into the finished goods or work-in-progress. 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. Units of production can be used to measure output and productivity, and they are often used in cost accounting to determine the cost of production for each unit.
Accounting for partially completed units
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). 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). This means that $100,000 (10,000 X $10) of labor costs will be assigned to the finished units and $3,000 (300 equivalent units X $10 accretion dilution analysis labor cost per equivalent unit) will be assigned to the 1,000 partially completed units. Thus, the equivalent units for direct materials are generally higher than for other manufacturing expenses. As described previously, process costing can have more than one work in process account. Determining the value of the work in process inventory accounts is challenging because each product is at varying stages of completion and the computation needs to be done for each department.
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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. Under this method equivalent production units regarding opening and closing work-in- progress are to be calculated with due adjustment for process losses as already discussed in the previous pages. Sometimes, particulars relating to in between process (say process B) are given. Companies should allocate joint costs using a consistent method when calculating equivalent production units for joint products.
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If overhead is applied based on labor, the process is simplified because the “percent complete” would be the same for labor and overhead. 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 (\(\$3.97\)). ABC International has a manufacturing line that produces large amounts of green widgets. At the end of the most recent accounting period, ABC had 1,000 green widgets still under construction.
Managerial Accounting
All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. This involves deducting the closing work-in-progress from the amount introduced in the process during the current period. Ltd. produces three types of products A, B and C and keeps accounts for Process I, Process II and Process III.
To accurately compare equivalent production units over time, companies should use consistent units of measure. It can help ensure that the calculation is accurate and can be easily understood by stakeholders. For example, a manufacturer may produce 10,000 units of a product, but only 8,000 units are fully completed. The EUP for the 2,000 partially completed units can be calculated to determine the cost per production unit. EUP is a valuable tool for cost accounting as it accurately represents the cost per production unit for partially completed goods. By using EUP, manufacturers can more accurately track the costs of production, which can help them make more informed decisions about pricing and profitability.
