06 Jul how to calculate equivalent units of production 4
How to Calculate Equivalent Units of Production
Equivalent units of production is an important concept in cost accounting, especially for companies that manufacture products through multiple processes. It allows manufacturers to accurately track production output and allocate costs even when some units are not yet complete. In this comprehensive guide I’ll explain what equivalent units of production are why they matter, and walk through the step-by-step process for calculating them. 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.
Step 1: Calculate Equivalent Units for Direct Materials
Assume that a manufacturer uses direct labor continuously in one of its production departments. During June, the department began with no units in inventory and then started and completed 10,000 units. In addition, it started 1,000 units but they were only 30% complete at the end of June. The production cost report for this department will indicate that it manufactured 10,300 (10,000 + 300) equivalent units of product during June.
- In this case, the equivalent production for opening work-in-progress in the period is 300 units (i.e., 500 x 60%).
- Units transferred in, completed, and then transferred out are 100% complete, and the Equivalent Units and Actual Units will always be the same for those items.
- The costs per equivalent unit are also used to value the ending work-in-process inventory.
Weighted Average
The weighted-average method combines the work done in the current period with the work done in the previous period (beginning inventory) to calculate the equivalent units. The weighted-average method does not differentiate between the work done on beginning inventory and the work done in the current period, making the calculation more straightforward. The work done in the period in relation to opening stock, units completely processed, closing stock, how to calculate equivalent units of production abnormal loss, etc., are separately shown for material, labour and overheads. Often in a continuous process there will be opening as well as closing work-in-progress which are to be converted into equivalent of completed units for apportionment of process costs. The procedure of conversion of opening work-in-progress will vary depending upon which method of valuation of work-in-progress is used.
- Multiply opening WIP units by the remaining work percentage to obtain equivalent production.
- Companies often face challenges in accounting for partially completed units at the end of a period.
- Work is done on fresh units from the previous process only after completing the opening stock units.
- Now you can determine the cost of the units transferred out and the cost of the units still in process in the finishing department.
This continuous application necessitates a percentage-of-completion estimate for any unfinished units. These calculated costs per equivalent unit are then applied to determine the total cost of units transferred out during the period. The units transferred out are multiplied by the combined cost per equivalent unit for direct materials and conversion costs. This process ensures a proper share of both material and conversion expenses is assigned to products that have completed the department’s processing.
Work-in-progress can be valued based on actual cost (i.e., an attempt may be made to find out how much materials have been used on the incomplete units and how much labor and expenses were used). Note that, in the weighted average method, beginning work-in-process inventory is ignored. When you use weighted averages, all work accomplished in prior periods is not factored into the equations. This lesson will discuss manufacturing costs in a job order costing system and demonstrate the proper recording and recognition of manufacturing and period costs through journal entries. This lesson will review the process costing system and discuss how manufacturing companies track the flow of expenses through departments involved with the manufacturing process. This article explains the computation of equivalent units of production under FIFO method.
Ending Work in Process
Work is done on fresh units from the previous process only after completing the opening stock units. (2) Find out net process cost according to elements of costs i.e., materials, labour and overheads. For example, if 70% work has been done on the average on 200 units still in process, then 200 such units will be equal to 140 completed units.
Although having information about the number of students enrolled is helpful, headcount data do not provide an indication of whether the students are full time or part time. For the Weighted Average method, simply total the units entirely completed and add the product of units in progress and their percentage of completion. In the following sections, we’ll explore not only the fundamental approach to the calculation of equivalent units of production but also how you can employ Sourcetable to automate and simplify this process. Discover the convenience of Sourcetable’s AI-powered spreadsheet assistant by signing up at app.sourcetable.com/signup.
Income Statement
These goods in process must have costs allocated to them along with the goods that were finished during the period. In this case, the equivalent production for opening work-in-progress in the period is 300 units (i.e., 500 x 60%). In this article, we will dive into the concept of equivalent units of production, how they are calculated, and provide examples to illustrate their application in process costing. We will also explore the different approaches to handling the equivalent units in production processes, including weighted-average and FIFO methods.
The output of a department is always stated in terms of equivalent units of production. This is the number of units that are partially completed at the end of the time period, or ending work-in-progress inventory. When a custom ordered product is manufactured, a number of costs are accumulated during the production process. In this lesson, you will learn how costs are transferred in a job order costing system.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. Trying to determine the value of those partial stages of completion requires application of the equivalent unit computation.
In process costing, the total output of a department during a particular period of time is usually termed as equivalent units of production. In our example, the equivalent units of production of department X is 5,400 units which could be used for computing per unit cost of the department. Second, the FIFO method gives full consideration to the amount of processing done during the current period on the units in beginning inventory and on the units in ending inventory.
The computation of equivalent units under FIFO method are a little bit complex than under weighted average method. Using FIFO, you’ll have two percentages to determine for beginning and ending inventory. Equivalent units of production describe the amount of work done on a number of physical items, quantifying the effort or materials used even if the products are not fully completed. They help in determining the worth of these partially completed products to a company. Assume a company manufactures products in a continuous process, and the production is tracked for one month. The significance of EUP lies in its ability to bridge the gap between raw work and finished products in process costing.