Equivalent units of production is a term applied to the work-in-process inventory at the end of an accounting period. It is the number of completed units of an item that a company could theoretically have produced, given the amount of direct materials, direct labor, and manufacturing overhead costs incurred during that period for the items not yet completed. In essence, it is a relatively easy way to derive how much as been invested in goods that have not yet been completed and converted into finished goods. In short, if 100 units are in process but you have only expended 40% of the processing costs on them, then you are considered to have 40 equivalent units of production.
For example the work in process units might be 80% complete in terms of direct materials, 65% complete in terms of direct labor, and 35% complete in terms of manufacturing overhead. To calculate the cost per equivalent unit formula, you must divide the total production costs assigned in the process by the equivalent units of production. This will give you the cost that can be allocated to each equivalent unit business forecasting produced during the period.
Which of these is most important for your financial advisor to have?
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 1,200 ending work in process units are only 35% complete with regard to conversion costs and represent 420 (1,200 × 35%) equivalent units.
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). In addition to the equivalent units, it is necessary to track the units completed as well as the units remaining in ending inventory. The reconciliation involves the total of beginning inventory and units started into production. Now you can determine the cost of the units transferred out and the cost of the units still in process in the shaping department.
In production, units completed in a period is equivalent to units that got into the finished goods or work-in-progress. The cost of each element (i.e., material, labor, and overhead) is divided by the equivalent units of production of that element. 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%). The units that were completed and transferred out plus the ending inventory equal the total units to account for.
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 labor cost per equivalent unit) will be assigned to the 1,000 partially completed units. Managerial and cost accountants use the equivalent units of quicken vs quickbooks production to allocate production costs to units during the manufacturing process. For instance, calculating the cost of goods produced is simple if there is no beginning or ending goods in process inventory. All of the costs incurred during the period would be allocated to the goods because they were all completed. Equivalent units of production for direct materials and conversion aren’t always the same.
A copy of 11 Financial’s current written disclosure statement discussing 11 Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – from 11 Financial upon written request.
Equivalent Units of Production
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. Although each department tracks the direct material it uses in its own department, all material is held in the material storeroom.
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. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing.
Estimating the Percentage of Completion
It is a little different, however when there is a beginning and ending number of units that have been partially finished. These goods in process must have costs allocated to them along with the goods that were finished during the period. Multiply closing WIP units by the completion percentage to obtain equivalent production.
Allocating the Cost of 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.
How To Calculate?
- The total materials costs for the period (including any beginning inventory costs) are computed and divided by the equivalent units for materials.
- In this example the weighted average cost method is used and the beginning WIP units are treated as being 100% completed during the period.
- These goods in process must have costs allocated to them along with the goods that were finished during the period.
- 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.
- The significance of EUP lies in its ability to bridge the gap between raw work and finished products in process costing.
- Let us assume that in a given period production was 3,000 complete units and 800 partly complete units.
Multiply opening WIP units by the remaining work percentage to obtain equivalent production. Let us assume that in a given period production was 3,000 complete units and 800 partly complete units. The treatment of the beginning WIP units will depend on which costing method, usually weighted average or FIFO, the business is using. Equivalent units are calculated by multiply the number of physical units in work in process by the estimated percentage of completion of the units. In this case, the equivalent production for opening work-in-progress in the period is 300 units (i.e., 500 x 60%).
The production cost report for this department will indicate that it manufactured 10,300 (10,000 + 300) equivalent units of product during June. The equivalent production for each department is determined, which is later used to calculate the cost per unit of each job order by apportioning their total costs on basis of equivalent units. 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.
For the packaging department, the materials are 100% complete with regard to materials costs and 40% complete with regard to conversion costs. The 6,500 units completed and transferred out to the finishing department must be 100% complete with regard to materials and conversion, so they make up 6,500 (6,500 × 100%) 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 1,750 ending WIP units are only 40% complete with regard to conversion costs and represent 700 (1,750 × 40%) equivalent units.
As with calculating the equivalent units and total cost of production in the initial processing stage, there are four steps for calculating these costs in a subsequent processing stage. Equivalent units of production are used by a manufacturer to express partially completed units of product in terms of finished units. Thirdly, the equivalent units of production for the closing work-in-progress should be determined by considering the number of units of closing work-in-progress and the level of completed work. At the end, he determines that his 100 units are only 70 percent the way through the production process. The significance of EUP lies in its ability to bridge the gap between raw work and finished products in process costing.