Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. Finance Strategists is a leading financial literacy non-profit organization priding itself on providing accurate and reliable financial information to millions of readers each year. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.
The total cost is divided from the equivalent units to compute the cost per unit equivalent unit. Equivalent Units of Production is a more accurate method to determine whether the proposed output of the process will be able to meet or exceed that budgeted for. It allows us to accurately calculate if we are meeting our production. In production, units completed in a period is equivalent to units that got into the finished goods or work-in-progress. Say you’ve mixed enough sugar to make 600,000 units of candy.
Reviewed by Subject Matter Experts
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. To calculate cost per equivalent unit, sum the beginning work in process inventory costs and the costs added in the period, then divide by the number of units. We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion.
- The full process cost report can be found by clicking Jax_process cost).
- 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.
- Say you’ve mixed enough sugar to make 600,000 units of candy.
- 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.
The cost of each element (i.e., material, labor, and overhead) is divided by the equivalent units of production of that element. The June 1 work in process inventory consisted of 5,000 pounds with $16,000 in materials cost and $12,000 in conversion cots. The June 1 work in process inventory was 100% complete with respect to materials and 50% complete with respect to conversion. The June 30 work in process inventory consisted of 8,000 pounds that were 100% complete with respect to materials and 40% complete with respect to conversion. At the end of process 1, our planners have their paper and ink ready to be printed. Let’s assume we figure the ending WIP inventory to be 35% complete as to the process.
Why Calculate Equivalent Units of Production?
In this way, every transferred out unit is an equivalent unit. Equivalent units are a theoretical number of units a company could have made with a given amount of material, labor, and manufacturing overhead. The full process cost report can be found by clicking Jax_process cost). The following example outlines the steps and information needed to calculate Cost Per Equivalent Unit. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
- Now assign the cost per equivalent unit to the completed work and the WIP.
- Equivalent or effective units of production represent the production of a process expressed in terms of completed units.
- Kenneth W. Boyd has 30 years of experience in accounting and financial services.
If a unit is completed and transferred out, it’s 100 percent complete. Now, that may seem obvious, but it’s a point that gets lost when accountants start this analysis. Your approach to complex analysis should be to account for the easy stuff first. The completed and transferred out units are easier to address than work in process. In cost accounting, equivalent units are the units in production multiplied by the percentage of those units that are complete (100 percent) or those that are in process. In this method, both the beginning and ending inventory is converted into equivalent units, so there is a bit more work to do.
FIFO
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. 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. For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit. We do the same of ending work in process but using the equivalent units for ending 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 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. For those items in the ending inventory, it is the same as the weighted-average method, where we need to calculate how much work has been done to them already. We also have 1000 partially completed units that are 50% complete. Under the weighted average method, we use beginning work in process costs AND costs added this period.
Cost Per Equivalent Unit Calculator
Secondly, the number of units introduced and completed in the current period should be calculated. In this case, the equivalent production for opening work-in-progress in the period is 300 units (i.e., 500 x 60%). 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%. 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. 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. 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).
Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. This involves deducting the closing work-in-progress from the amount introduced in the process during the current period. 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. Dummies has always stood for taking on complex concepts and making them easy to understand. Dummies helps everyone be more knowledgeable and confident in applying what they know.
How is equivalent production related to job order costing?
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. The output of a department is always stated in terms of equivalent units of production.
