Question

Part 1: Explain and provide a real life business example for equivalent units. Explain the importance and main purpose for equivalent units.

Answer 1

Equivalent Units is the number of completed units that could have been obtained from the material and effort that went into the partially completed units.

Example:

If a unit of production requires 20kg of material, and only 75 % of work is completed then equivalent number of units will be   

=20 kg × 75% = 15 kg

Example : A company in Cochi is engaged in the production of oil.The company has 2000 units in the process and the stage of completion is estimated to be :

Material - 100%

Labour -50%

Overhead-50%

8000 units are transferred to next process.

  Solution

  

Particular	Units	Material	Labour and overhead
		%completed	Equivalent units	%completed	Equivalent units
Finished and trasfered	8000	100%	8000	100%	8000
Closing WIP	2000	100%	2000	50%	1000
Total production	10000		10000		9000

Importance and main purpose of computing equivalent units are :

1. An estimate can be of the percentage completion of work in process with regard to different elements of cost ,viz.,material,labour and overheads.

2. All the physical units may not be completed at the same time and same extent .Various goods may at different stages of production. So computation of equivalent units is relevant.