He has worked as an current portion of long term debt in balance sheet accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.
Cash Flow Statement
It provides a unified measure of completed work, considering both finished goods and the progress on unfinished units. It helps manufacturers understand progress, allocate costs wisely, and optimize production. The concept of equivalent units is defined as the number of units that would have been produced given the total amount of manufacturing effort expended for a given period. In this example the weighted average cost method is used and the beginning WIP units are treated as being 100% completed during the period. The shaping department completed 7,500 units and transferred them to the testing and sorting department. No units were lost to spoilage, which consists of any units that are not fit for sale due to breakage or other imperfections.
The next step is to convert the physical units in production shown above (10,000) into equivalent units. Calculate the total equivalent production, the cost per complete unit and the value of work-in-progress. Mathematically, this is done by converting the partially completed units into fully completed units and then adjusting the output figure. To measure output accurately, these partially completed units must be considered in the output computation. The reason why is because the figure of completed units alone is not an accurate measure of a department’s output since some of the department’s efforts during a period are expended on units that are only partially complete. Once the cost per EU is calculated, the costs are allocated to the goods that were partially finished and completely finished during the period.
Get in Touch With a Financial Advisor
Once the equivalent units for materials and conversion are known, the cost per equivalent unit is computed in a similar manner as the units accounted for. The costs for material and conversion need to reconcile with the total beginning inventory and the costs incurred for the department during that month. 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. Thus, the equivalent units for direct materials are generally higher than for other manufacturing expenses. 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.
After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. This involves deducting the closing work-in-progress from the amount introduced in the process during the current period. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.
The packaging department for Rock City Percussion completed 6,500 units and transferred them into finished goods inventory. Since the maximum number of units to possibly be completed is 8,250 and no units were lost to spoilage, the number of units in the packaging department’s ending inventory must be 1,750. The total of the 6,500 units completed and transferred out and the 1,750 units in ending inventory equal the 8,250 possible units in the packaging department.
For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. The units that remain in the ending work-in-process inventory, however, are not complete. Sometimes that knowledge leads to management’s decision to stop production, but sometimes that decision isn’t as simple as it seems.
As you’ve learned, 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. The process cost system must calculate the equivalent units of production for units completed (with respect to materials and conversion) and for ending WIP with respect to materials and conversion. All of the materials have been added to the shaping department, but all of the conversion elements have not; the numbers of equivalent units for material costs and for conversion costs remaining in ending inventory are different.
Equivalent or effective units of production represent the production of a process expressed in terms of completed units. In many production departments, units are typically transferred from the initial xero accounting software blog and news stage to the next stage in the process. When the units are transferred, the accumulated cost per unit is transferred along with them. Since the unit being produced includes work from all of the prior departments, the transferred-in cost is the cost of the work performed in all earlier departments. The physical units can now be represented as equivalent units for each production factor.
To solve the problem of work-in-progress, we can calculate equivalent units of production (or «effective production»). 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 (EUP) calculation is a fundamental process in process costing. In calculating equivalent units, each cost element must be treated separately and then the cost per unit of each element is added to ascertain the cost of a complete unit. Therefore, to convert the work-in-process inventory into equivalent units, it is important to keep the percentage of completion in the calculation. For example, the closing stock of 200 units in a process, with 60% complete in respect of materials, wages, and overheads, is equivalent to 120 units (i.e., 200 x 60%), which are 100% complete.
Step Three: Determining the Stage 2 Cost per Equivalent Unit
The cost to produce a penny is more than one cent, and yet, the United States still makes pennies. See this article from Forbes that explains the difference among cost, worth, and value to learn more. Notice that by including the costs brought forward, 100% of the cost of producing the units in beginning WIP are included. Statement showing the cost of Finished goods, abnormal loss and closing work-in- progress. In continuous processes, there is work-in-progress at the beginning and end of a period, as well as a degree of completion of closing work-in-progress. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
Sum the equivalent production values from Steps 1, 2, and 3 to arrive at the total output in EUP terms. Secondly, the number of units introduced and completed in the current period should be calculated. 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. 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%. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
- Then, the total costs for the period are divided by the total equivalent units to determine the cost per equivalent unit.
- The physical units can now be represented as equivalent units for each production factor.
- The equivalent unit computation determines the number of units if each is manufactured in its entirety before manufacturing the next unit.
- Direct materials and conversion costs may have different completion levels, so their equivalent units may vary.
- At the end of the most recent accounting period, ABC had 1,000 green widgets still under construction.
- Sometimes that knowledge leads to management’s decision to stop production, but sometimes that decision isn’t as simple as it seems.
At the start of an accounting period a business has 2,000 units in beginning work in process. 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 of production (EUP) is a method used in manufacturing to express partially completed units (WIP) in terms of fully completed units. When a product moves through various stages, some units may be completed while others remain in various stages of completion, known as work-in-progress (WIP). Equivalent units is a cost accounting concept that is used in process costing for cost calculations.
Basically the fully completed units and the partially completed units are expressed in terms of fully completed units. Just to spread the total costs equitably over part finished and fully complete units the concept of equivalent units is required. The number of equivalent units is the number of equivalent fully complete units which the partly completed units represent. The objective of using equivalent units is to be able to apportion the costs of production to completed units and partially completed units held in work in process. These costs are then used to calculate the equivalent units and total production costs in a four-step process. Finally, the equivalent units of production calculated via the previous three steps should be aggregated to ascertain the total output in terms of equivalent units or equivalent production.
Would you prefer to work with a financial professional remotely or in-person?
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. 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. An equivalent unit of production is an expression of the amount of work done by a manufacturer on units of output that are partially completed at the end of an accounting period.
