Question

Process costing is a bit more common in the manufacturing environment. When creating the costing reports we must determine the equivalent units of production and conversion cost. What are they? How do we account for them? Why does it matter?

Answer 1

PROCESS COSTING

A process costing is a system of costing where the cost is allocated to the production process. It is used by the companies that produces homogenious /similiar/identical units of products in batches employing a continuous or consistent process. It's a costing methodology thet uses and accumulates the direct costs, along with that it allocates the indirect costs of a manufacturing process. Under this , the production will be cotinuous , the product will be homogeneuous / similiar, & the process will be standardized.

what is equivalent units of production and conversion cost

Equivalent production or equivalent cost of production is an method of expressing the amount of work done by the manufaturer or otherwise the units of ouputs that are partially completed at the end of every accounting year of an organization. Such units are used in the production cost reports for the production departments. In costing , it can be represented as :

equivalent units of production = units of production * % of completed units/ % of processing units.

Conversion cost are the costs incurred on direct labour and overhead for the purpose of converting raw materials in to finished goods. Conversion costs are the full cost of manufacturing except the cost of rawmaterials. Conversion costs include both direct and overhead costs thet is incurred for the transformation of raw material in to finished products.

conversion costs = Direct labour + manufacturing overhead

CALCULATION OF EQUIVALENT UNITS OF PRODUCTION AND CONVERSION COSTING

• CONVERSION COST = Direct labour cost + manufacturing costs or Cost of production - raw material costs   
• EQUIVALENT COST = Number of physical units in work-in-progress * estimated % of completion of units .

  

IMPORTANCE FOR EQUIVALENT UNITS OF PRODUCTION AND CONVERSION COSTING

An equivalent units of production is an expression of the amount of work done by theb producer on units of output that are in process at the end of accounting period. It is important to calculate , because direct materials, direct labours and manufacturing overhead are enter the production process at different steps. So in this scenario equivalent units for each item have to be calculated.

Conversion costs have to be calculated by each company . It's a vital part for the important decision making in any organization. Also important for carrying out basic accounting tasks. It is essential to calculate cost per unit, which helps the company in pricing decisions.