Question

What are the benefits of equivalent units of production in process costing?

Answer 1

An equivalent unit of production is an expression of the amount of work done by a manufacturer on units of output that are partially completed at the end of an accounting period. Basically the fully completed units and the partially completed units are expressed in terms of fully completed units.

Equivalent units are used in the production cost reports for the producing departments of manufacturers using a process costing system. Cost accounting textbooks are likely to present the cost calculations per equivalent unit of production under two cost flow assumptions: weighted-average and FIFO.

Benefits of equivalent units of production in process costing are as below -

1. Easy to Use - It is an easier system to use when costing homogenous products compared to other cost allocation methods. Business owners allocate business costs according to the number of processes each good travels through in the production system

2. Flexible - Business owners use this method because it creates a flexible production process. Companies needing to refine their process can simply add or remove a process as necessary. This also allows companies to lower their production cost for each good. Business owners typically look for ways to refine a production process to increase cost savings. Eliminating redundant processes often achieves this goal. Adding a process allows companies to produce slightly different goods or improve product quality.