In: Accounting
Most companies using process costing systems have to calculate more than one EUP. Why? How many do they have to calculate?
Process costing refers to accumulating costs at each process separately so that total product cost can be calculated by summing up all process costs thus accumulated for that particular product. There are two methods of accounting costs in process costing such as 1) Weighted-average method 2) FIFO method.
Under weighted average method, equivalent units are to be calculated only for units completed & transferred out and units lying as ending work in process as it is assumed that the units once entered into the process become integral part of total units and no segregation between units transferred from beginning work in process and introduced during current process. Conversion cost includes Labor + Overheads. If the % of completion of works for labor and overheads are same, firm can use single EUP calculation for conversion to include labor and overheads. If not, separate EUP shall be calculated for labor and for overheads just like for materials.
Under FIFO method, equivalent units would consist efforts required to complete the beginning inventory, efforts put for completed and transferred out goods and for ending inventory. As the materials are introduced at the beginning itself, in general, beginning inventory will 100% complete in terms of materials and 0% efforts would be required in current process or period whereas conversion costs would require the uncompleted portion of costs in current process or period. For example, if the beginning WIP was complete 80% already, 20% efforts would be required in current period as for as conversion cost is concerned and EUP calculation for conversion should consider 20% of beginning WIP.
From the above lines, it is observed clearly that % of completion for different category of costs like materials, labor and overhead differs and so need arises to calculate more than one EUP (Equivalent Units of Production) for a same process.