At the end of the month, 1,400 units had been produced and transferred to the next process, 460 units were uncompleted and 140 units had been scrapped. The principle applies when operation costs are being apportioned between work- in-progress and completed output. Thus in each process an estimate is made of the percentage completion of any work-in-progress. Soap Production Company’s Mixing department
shows the following information for the 1,000 units of product
remaining in work in process at the end of the period. 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. Once the cost per EU is calculated, the costs are allocated to the goods that were partially finished and completely finished during the period.
- By calculating EUP, businesses can better manage their inventory levels, as they have a more accurate understanding of the number of units in different stages of production.
- EUP allows for more accurate measurement of production output, as it considers partially completed units.
- To solve the problem of work-in-progress, we can calculate equivalent units of production (or “effective production”).
- Let’s assume we figure the ending WIP inventory to be 35% complete as to the process.
- The costs for material and conversion need to reconcile with the total beginning inventory and the costs incurred for the department during that month.
Trying to determine the value of those partial stages of completion requires application of the equivalent unit computation. The equivalent unit computation determines the number of units if each is manufactured in its entirety before manufacturing the next unit. For example, forty units that are 25% complete would be ten (40 × 25%) units that are totally complete. It is instrumental in process costing, where the production process is continuous and involves multiple stages of production.
Challenges in Calculating Equivalent Units of Production
The concept of equivalent production units is widely used in various industries such as manufacturing, mining, agriculture, etc. While the basic principle of calculating equivalent units of production remains the same, some variations in the calculation method depend on the specific industry and the nature of the production process. 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. Equivalent units must be considered relative to each of the factors of production.
Production may be seasonal in agriculture, with high and low production periods. This can make it challenging to compare equivalent production units across different periods or make accurate forecasts for future production. 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.
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. Regular inventory counting is necessary to determine the number of goods in progress and finished goods on hand. It can help ensure that all units are accounted for and can help prevent over- or under-reporting of equivalent production units.
- Only consider using the FIFO method when costs vary substantially from period to period, so that management can see the trends in costs.
- Often there is a different percentage of completion for materials than there is for labor.
- This assumption will definitely have a different impact on the cost of completed units and closing inventory of work in progress.
- Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
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. The shaping department completed 7,500 units and transferred them to the testing and sorting department.
What this example shows is that although there are 200 physical units of product in work in process, as they are only 25% complete it is equivalent to having 50 units of finished, fully completed product. Equivalent units of production are used by a manufacturer to express partially completed units of product in terms of finished units. 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.
In the agricultural industry, the equivalent production units may be calculated based on the crop yield or the livestock’s weight. This approach helps measure the productivity of farms and ranches and determine agricultural product value. In the mining industry, equivalent production units may be calculated based on the weight or volume of the minerals extracted rather than on the number of units produced. This approach considers that the value of the minerals extracted may vary depending on their weight or volume. EUP can help managers make informed decisions about production, pricing, and business operations.
Identify the units of production to be measured:
All of the costs incurred during the period would be allocated to the goods because they were all completed. Understanding equivalent production units is essential for businesses to accurately determine production costs and track inventory. This measurement takes into account the percentage of completion of each unit. It enables businesses to estimate the total number of completed units that could be produced from the work in progress. If overhead is applied based on labor, the process is simplified because the “percent complete” would be the same for labor and overhead. For the shaping department, the materials are \(100\%\) complete with regard to materials costs and \(35\%\) complete with regard to conversion costs.
Common Applications of Equivalent Units of Production in Manufacturing
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. EUP is particularly useful in process costing, where the production process is continuous and involves multiple stages of production. By accurately reconciliation process measuring the EUP, businesses can determine the cost of producing a product over a continuous production process. This helps companies to make informed decisions regarding their production processes and allocate resources efficiently. Under this method opening work-in-progress is stated in equivalent completed units by applying the percentage of work needed to complete the unfinished work of the previous period.
Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. This video will provide a demonstration of cost assignment under the FIFO method. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License .
If we have 1000 units in the ending WIP inventory after process 1, this would equal 350, using the formula for equivalent units. We could then add these equivalent units to the ending WIP inventory for process 1. Any units that have been moved into process 2, will be subtracted from the WIP inventory for process 1. At the end, he determines that his 100 units are only 70 percent the way through the production process. 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, 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%. Read this article to learn about the meaning, calculation, procedure and problems of equivalent production. To apply this to the real world, let’s look at the enrollment
data for Sierra College, a community college
located near Sacramento, California.
Consistent Units of Measure
For example, knowing the number of partially completed units can help managers decide which products to prioritize for completion and which ones to delay or discontinue. Under this method units of uncompleted input are added to the units of incomplete work in opening stock and out of the total units, incomplete work in closing stock are deducted to have units of equitant production. Equivalent Production represents the production of a process in terms of completed units. At the end Of any given period there are likely to be partly completed units (work-in-process).
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.
By calculating the EUP, businesses can accurately estimate their production costs and determine the value of their inventory at different stages of production. It also helps determine the cost of producing a product over a continuous production process. 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. First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period.