This simplifies the process because the beginning inventory and current period production can be combined or “averaged” together. 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. The equivalent unit calculations are carried forward into the “cost per equivalent unit” schedule. This shows how the combined costs from beginning work in process (assumed at $2,122,500) and current period production (assumed at $7,365,000) are divided by the equivalent units. The result is the weighted-average cost per equivalent unit for each factor of production. The individual cost factors can be combined to identify conversion cost and overall cost per equivalent unit.
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- The Mixing Department transferred 3,000 batches to the Molding Department in March, and 3,000 were still in process on March 31.
- 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.
- Equivalent units are a theoretical number of units a company could have made with a given amount of material, labor, and manufacturing overhead.
- Equivalent units must be considered relative to each of the factors of production.
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. Once the total units have been reconciled, the equivalent units are computed. The correct manipulation of the data will depend on the inventory method in use. In this illustration, Navarro is assumed to use the weighted-average costing method (other approaches such as FIFO could be used).
4: Process Costing (Weighted Average)
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. In the previous page, we discussed the physical flow of units (step 1) and how to calculate equivalent units of production (step 2) under the weighted average method. We will continue the discussion under the weighted average method and calculate a cost per equivalent unit.
Accountants have devised the concept of an equivalent unit, a physical unit expressed in terms of a finished unit. Equivalent unit of production costs to four decimal places. 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%.
Equivalent Units of Production
The full process cost report can be found by clicking Jax_process cost). The problem will provide the information related to beginning work in process inventory costs and units. Keep in mind, there are no Generally Accepted Accounting Principles (GAAP) that mandate how we must do a process cost report. We will focus on the calculations involved and show you an example of a process cost summary report but know there are several ways to present the information, but the calculations are all the same. The first stage in Navarro’s production process is the Melting Department. Navarro started the month of June with 300,000 tons of iron ore in process in the Melting Department.
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%). Although 25 percent of the units are unfinished, in “equivalent unit talk” you can treat them as 150,000 completed units. Add them to the really completed units to get 750,000 units, which represents the number of equivalent whole units you have produced. It’s a lot easier to talk about a whole unit than some whole units and some partially completed units.
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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. In the next page, we will do a demonstration problem of the FIFO method for process costing. In this way, every transferred out unit is an equivalent unit. 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).
Therefore, to convert the work-in-process inventory into equivalent units, it is important to keep the percentage of completion in the calculation. Secondly, the number of units introduced and completed in the current period should be calculated. To measure output accurately, these partially completed units must be considered in the output computation. 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. Equivalent or effective units of production represent the production of a process expressed in terms of completed units.