Question

Q: Give numerical example explaining the concept of Equivalent number of units. Discuss the advantages of using equivalent number f units?

Answer 1

Equivalent units of production are a managerial accounting calculation that estimates the number of units that could have been started and completed if all resources were devoted to these units during a period. It is a cost accounting concept and this has been calculated in process costing. This term is applied to the work in process inventory at the end of an accounting period. It is equal to the number of completed units of an item that a company could have produced with the amount of direct material, direct labor and manufacturing overhead cost incurred during that period for the items not yet completed. It also helps in calculating the per unit cost.

For example; if there are 100 units and 50% have been completed during the period then the equivalent units are equal to (100*50%) =50 units.

Equivalent units for material are usually high as direct materials are added at the beginning whereas direct labor and overheads are incurred after the material has been added. Therefore the equivalent units for material are high as compared to conversion cost.

The following are the advantages;

1. It helps in knowing the number of units completed that a company could have produced with the amount of direct material, direct labor and manufacturing overhead cost incurred during that period for the items not yet completed.
2. If we know the equivalent units then it becomes easy to calculate the per unit cost of direct material and conversion by dividing the cost incurred during the year with the equivalent units.