5 3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage Principles of Accounting, Volume 2: Managerial Accounting

No units were lost to spoilage, which consists of any units that are not fit for sale due to breakage or other imperfections. 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. (1) Find out equivalent production after taking into consideration the process losses, degree of completion of opening and/or closing stock.

  • As described previously, process costing can have more than one work in process account.
  • This assumption will definitely have a different impact on the cost of completed units and closing inventory of work in progress.
  • The closing valuation of work-in-progress in the old period is added to the cost of the new period and an average rate obtained which tends to even out price fluctuations.

To use this method, the owner must elect exclusion from MACRS by the return due date for the tax year the property is initially placed into service. The unit of production method is a method of calculating the depreciation of the value of an asset over time. It becomes useful when an asset’s value is more closely related to the number of units it produces rather than the number of years it is in use. This method often results in greater deductions being taken for depreciation in years when the asset is heavily used, which can then offset periods when the equipment experiences less use.

Accurate financial reporting

A production cost report is a departmental report that illustrates all of the information for quick analysis by management. The weighted average method of computing equivalent units of production blends together the units and cost of current period with the units and cost of previous period. However, if the physical units are not 100 percent complete, the equivalent units will be less than the physical units. At the end, he determines that his 100 units are only 70 percent the way through the production process. 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%).

  • In that case, it can be challenging to determine the equivalent production units for each period.
  • For example, suppose one production team consistently produces more EUP than another.
  • By tracking the cost of producing equivalent units at each stage, businesses can identify areas where costs can be reduced or optimized, leading to more efficient operations and improved profitability.
  • Often shrouded in the complexities of manufacturing, understanding EUP unlocks a profound comprehension of inventory valuation and cost allocation within production processes.

While the regulation is flexible, the onus is on the manufacturer to document and justify that the units/devices are equivalent. Production equivalence  infers that a manufacturer has created the test samples from controlled, approved documentation using equivalent materials and manufacturing processes to those used for the final production product. Additionally, section 820.30(i) of the regulation regarding design changes requires verification of design changes before their implementation.

What is Production Equivalence?

The term “unit of production” refers to a tangible item that a business produces or manufactures, such as a product, part, or component. It is a measurable quantity of a good or service that a company produces within a specific timeframe. For example, suppose a manufacturer consistently produces fewer units than expected in a particular production stage. In that case, they may need to allocate more resources to that stage to improve efficiency. 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. Some of the design validation performance and functionality activities will need to be repeated once the design is transferred from the design and development to the regular production facility.

Disadvantages of Using Equivalent Units of Production

You can use the same method for calculating the overhead costs and materials if you know the percentage of completion of each pricing factor. 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 how to calculate ending inventory under specific identification 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 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.

Cost Per Equivalent Unit

This lesson introduces the topic of equivalent units and demonstrates how to calculate this number. It also calculates per unit cost of production and illustrates a production cost report and the way in which the corresponding numbers are used by management. The processing departments often have partially complete units in ending inventory known as work in process ending inventory. In order to compute the per unit cost of a department, we need to determine the total output of that department. 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.

In reconciling total units into production with the total units transferred out/still in process, it is not uncommon for there to be a shortfall. The reason is that many processes may involve scrap, waste, or spoilage (e.g., evaporation, spilling, etc.). Waste and spoilage would be added as a third component needed to balance the lower portion of the quantity schedule column.

The reconciliation involves the total of beginning inventory and units started into production. 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. 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.


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