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. The problem of work-in-progress in the process industries is a significant one.
It is evident that some of the costs pertaining to this period are attributable to the units which have not been completed. 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. EUP is most useful in industries where products are manufactured through multiple stages of production. In industries where products are made in a single stage or where the production process is relatively simple, EUP may not provide much benefit.
- The number of equivalent units is the number of equivalent fully complete units which the partly completed units represent.
- As described previously, process costing can have more than one work in process account.
- It also helps determine the cost of producing a product over a continuous production process.
EUP allows for more accurate measurement of production output, as it considers partially completed units. It is vital in industries where products are manufactured through several stages of production, as it provides a more precise measure of how much work has been completed at the end of each period. 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. If the department’s direct labor cost was $103,000 during the month, it’s June direct labor cost per equivalent unit will be $10 ($103,000 divided by 10,300 equivalent units).
Different Units of Measure
On the other hand, actual units produced refer to the total number of finished goods that have been produced and are ready for sale or use. Units of product in work-in-process inventory are assumed to be
partially completed; otherwise, the units would not be in
work-in-process inventory. Process costing requires partially
completed units in ending work-in-process inventory to be converted
to the equivalent completed units (called equivalent units). Equivalent units4 are calculated by
multiplying the number of physical (or actual) units on hand by the
percentage of completion of the units. If the physical units are
100 percent complete, equivalent units will be the same as the
physical units.
However, the units in ending work in process require more thoughtful consideration. 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.
So the number of units transferred is the same for material units and for conversion units. The process cost system must calculate the equivalent units of production for units completed (with respect to materials and conversion) and for ending work in process with respect to materials and conversion. 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.
- Mathematically, this is done by converting the partially completed units into fully completed units and then adjusting the output figure.
- At the end of the most recent accounting period, ABC had 1,000 green widgets still under construction.
- Calculate the equivalent units for each of the three product
costs—direct materials, direct labor, and overhead. - If the department’s direct labor cost was $103,000 during the month, it’s June direct labor cost per equivalent unit will be $10 ($103,000 divided by 10,300 equivalent units).
- Calculating EUP can be a complex process, especially in industries where products go through multiple stages of production.
However, if there are variations in the output quality, this can lead to inaccuracies in calculating equivalent production units. When a production process involves multiple products that are produced simultaneously, it can be challenging to allocate the joint costs of the process to each product. This can lead to inaccuracies in calculating equivalent production units for each product. EUP provides a more accurate picture of production output and cost analysis, as it considers partially completed units and provides a way to compare the cost of production to the number of units completed. Calculate the equivalent units for each of the three product
costs—direct materials, direct labor, and overhead.
Accurate Costing
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. Equivalent units must be considered relative to each of the factors of production. In other words, 80% of necessary direct material 4 bank reconciliation statement problems and solution example may be in process but only 60% of the direct labor and factory overhead. Therefore, proper costing methodology for 100 units in process would entail 80 equivalent units of material, and 60 equivalent units of conversion (i.e., labor and overhead). As described previously, process costing can have more than one work in process account.
In manufacturing, a product typically goes through multiple stages of production, and each stage may produce partially completed units of production that need further processing to become fully completed units. If overhead is applied based on labor, the process is simplified because the “percent complete” would be the same for labor and overhead. Now you can determine the cost of the units transferred out and the cost of the units still in process in the shaping department. Companies should have clear and well-defined production processes to ensure all production units are accounted for and accurately measured. It can help minimize errors and inconsistencies in calculating equivalent production units. Equivalent units of production (EUP) is a method used to calculate the number of units completed during a given period, considering partially completed units.
Regular analysis and review of the calculation of equivalent production units can help identify errors and inconsistencies and enable companies to make necessary adjustments. It can help ensure the calculation is accurate and can be used for effective decision-making. 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. 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. 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%).
All of the costs incurred during the period would be allocated to the goods because they were all completed. For the shaping department, the materials are 100% complete with regard to materials costs and 35% complete with regard to conversion costs. 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. In addition to the equivalent units, it is necessary to track the units completed as well as the units remaining in ending inventory.
Why Calculate Equivalent Units of Production?
In this example, direct materials (logs) are 100% complete because they are added at the beginning of the process. Let’s assume for the sake of simplicity that it takes about 50 days to process logs into sheets of plywood that are then ready to move on to the finishing department where they are sanded and the edges are trimmed. The mill starts up the machines at the beginning of the month, putting in enough logs to make 1,000 sheets of plywood. For example, ten units in process that are 30% complete equate to three equivalent units of output. None of the ten units is complete; merely the equivalent amount of work necessary to complete three units is said to have been performed.
Which of these is most important for your financial advisor to have?
The total materials costs for the period (including any beginning inventory costs) is computed and divided by the equivalent units for materials. 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). Suppose there are changes in the production process, such as changes in raw materials or production methods. In that case, it can be challenging to determine the equivalent production units for each period.
Reconciling the number of units and the costs is part of the process costing system. The reconciliation involves the total of beginning inventory and units started into production. It is instrumental in process costing, where the production process is continuous and involves multiple stages of production.
Companies should maintain detailed records of all inputs and outputs, including raw materials, labor, overhead costs, and any changes in the production process. The variations in calculating equivalent production units in different industries reflect each sector’s unique characteristics and challenges. Regardless of the industry, however, using equivalent production units is valuable for measuring and managing production processes and costs. Assume that a manufacturer uses direct labor continuously in one of its production departments.