Question

Explain the concepts of equivalent units in process recounts

Answer 1

The concept of equivalent units is applied to work in process inventory in process costing. Equivalent units are the way of expressing the unfinished work in process in terms of completed units. A process costing method has unfinished work in process inventory at the end of the period. It is usually expressed in terms of percentage of completion for materials and conversion cost. The percentage is then applied to units in process to arrive at equivalent units. If direct materials are added at beginning of the process there are no closing equivalent units. Conversion cost is added throughout the process and hence closing work in process will have percentage completion applied to it. For example : the closing work in process is 5,000 units and the percentage completion is 50% for conversion the equivalent units of closing work in process for conversion cost is 2,500 units (5,000* 50%)

There are 2 methods of accounting for equivalent units – FIFO and weighted average method. The difference is FIFO considers the work done on unfinished opening work in process inventory and units started and completed during the period whereas weighted average method considers the units completed and transferred out during the period. Weighted average method averages the cost of opening work in process and cost incurred during the period.

The purpose of equivalent unit computation is to arrive at cost per equivalent unit. Cost per equivalent unit helps in calculating the cost of finished goods transferred or cost of material transferred out to next department and closing stock valuation.