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Equivalent Units of Production Formula, Calculation & Example

The mill starts up the machines at the beginning of the month, putting in enough logs to make 1,000 sheets of plywood. 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.

  1. Obviously the units started and completed during the period are 100% complete and the equivalent units are the same as the physical units.
  2. 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.
  3. Under the weighted average method, costs transferred in from last month are added to this month’s costs and distributed across all units.
  4. The first step is to classify the units into one of three groups in the whole units column based on when they were started and completed according to the information given.

Essentially, the concept of
units involves expressing a given number of
partially completed units as a smaller number of fully completed
units. We do this because it is easier to account for whole units
then parts of a unit. For example, if we have 3 units 1/3 of
the way complete, we can add them together to make 1 equivalent
unit (1/3 + 1/3 + 1/3). We can make this calculation easier by
multiplying the units by a percentage of complete.

Question Submitted

The cost of each element (i.e., material, labor, and overhead) is divided by the equivalent units of production of that element. Remember, in the weighted average method, we add the beginning WIP and the product started and finished in the period, adding the units started, but not completed based on the percentage completed. 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.

Journalizing Costs Assigned to Units Completed and Transferred

Essentially saying, that process 1 completed 850 units to completion of process 1 in this period. For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit. We do the same of ending work in process but using the equivalent units for ending work in process.

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To calculate cost per equivalent unit by taking the total costs (both beginning work in process and costs added this period) and divide by the total equivalent units. We started with 750 units that were 100% complete as to materials and 60% processed, so the beginning work-in-process EUs for direct materials is 0% of 750 and for conversion costs is 40% of 750 which is 300. 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.

Likewise, the ending work in process units are only partially complete at the end of the period and again, need to be converted to equivalent units. The following example is used to demonstrate how the equivalent units FIFO method is used to allocate production costs between completed and partially completed units. So from our example above, we have 4925 equivalent units of production using the weighted average method.

For example, if we bring 1,000 units to a 40 % state of completion, this is equivalent to 400 units (1,000 x 40%) that are 100%  complete. Accountants base this concept on the supposition that a company must incur approximately the same amount of costs to bring 1,000 units to a 40% level of completion as it would to complete 400 units. This is where equivalent units are different than the normal formula, but only for beginning inventory. Secondly, the number of units introduced and completed in the current period should be calculated. For example, if the opening work-in-progress is 500 units, 40% complete in all respects, then the degree of work to be performed in the current period is 60%.

However, the first step is the same as with the weighted average method. In this case, the equivalent production for opening work-in-progress in the period is 300 units (i.e., 500 x 60%). 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). For example, during the month of July, Rock City Percussion purchased raw material inventory of $25,000 for the shaping department.

During the accounting period a further 8,000 units are added to the production process and 6,000 units are completed and transferred out, leaving an ending balance of 4,000 units in work in process. Equivalent units FIFO method is used by a manufacturer to express partially units started and completed formula completed units of product in terms of finished units. Figure 4.5 “Summary of Costs to Be Accounted for in Desk Products’ Assembly Department” shows that costs totaling $386,000 must be assigned to (1) completed units transferred out and (2) units in ending WIP inventory.

The trick is to make sure you completely understand how to calculate Equivalent Units and to take the allocation of costs base on EUs step-by-step, which is what we will do in the next section. Materials are added at the beginning of the process; conversion costs are added evenly throughout the process. In the next page, we will do a demonstration problem of the FIFO method for process costing. The units that remain in the ending work-in-process inventory, however, are not complete. The cost of the products initially in the beginning WIP need to be added in since in the FIFO method, we had not yet accounted for those costs.

How much are you saving for retirement each month?

(1) Group 1 consists of 5,900 (given) units started the previous month and completed this month. 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. The materials costs consisted of $30,000 in beginning inventory and $88,000 incurred during the month, for a total of $118,000. Total costs to account for should always equal what was assigned in total costs accounted for. Unfinished units (work-in-process) in this department have to be converted to Equivalent Units.

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. Kelley Paint Company uses the weighted average method to account for costs of production. Kelley manufactures base paint in two separate departments—Mixing and Packaging.

All preliminary and final calculations are rounded to two decimal places.

We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion. 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). As you examine the diagram, think of the amount of water in the glasses as costs that the company has already incurred. 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. In production, units completed in a period is equivalent to units that got into the finished goods or work-in-progress. 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%).