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  1. 1. Equivalent Units of Production:Definition and Explanation of Equivalent Units of Production:After materials, labor and overhead costs have been accumulated in a department, the departments output must bedetermined so that unit cost can be computed. A department usually has some partially completed units in its endinginventory. It does not seem reasonable to count these partially completed units as equivalent to fully completed unitswhen counting the departments output. These partially converted units are mathematically converted intoan equivalent number of fully completed units. In process costing this is done by using the following formula:Equivalent Units = Number of partially Completed Units × Percentage of CompletionEquivalent units of production for a period can be calculated in two different ways 1. Weighted Average method 2. First in First Out (FIFO) methodEquivalent Units―Weighted Average Method:Weighted Average method blends together units and costs from the current period with units and costs from the priorperiod. In a weighted average method the equivalent units of production for a department are the number of unitstransferred to the next department of finished goods plus the equivalent units in the departments ending work inprocess inventory.Example:Following is the data from Shaping and Milling department, one of the departments at Norton Company Percent Complete Shaping and Milling Department Units Materials ConversionWork in process, May 1 200 55% 30%Units started in production during May 5,000Units completed in May and transferred to the next department 4,800 100%* 100%*Work in Process, May31 400 40% 25%*It is always assumed that units transferred out of a department are 100% complete with respect to the processingdone in that department.Note that the May1 beginning Work in Process is 55% complete with respect to materials costs, and 30% completewith respect to conversion costs. This means that 55% of the materials costs required to complete the units in thedepartment has already been incurred. Likewise, 30% of the conversion cost required to complete the units hasalready been incurred.Since Nortons work in process inventories are at different stages of completion in terms of amounts of materials costand conversion cost that have been added in the department, two equivalent unit figure must be completed.The equivalent units computations are shown below. Shaping and Milling Department Materials ConversionUnits transferred to the next department 4,800 4,800Work in Process, May 31400 units × 40% 160400 units × 25% 100 -------- --------Equivalent units of production 4,960 4,900 ===== =====Note from above computations that units in the beginning work in process inventory are ignored. The weightedaverage method is concerned only with the fact that there are 4,900 equivalent units for conversion cost in endinginventories and in units transferred to the next department―the method is not concerned with the additional fact thatsome of this work was accomplished in the prior periods. This is a key point in the weighted average method that iseasy to overlook
  2. 2. Equivalent Units―First-in-First-Out (FIFO) Method:The computation of equivalent units under FIFO method differs from weighted average method in two ways. First theunits transferred out figure is divided into two parts. One part consists of the units from beginning inventory that werecompleted and transferred out, and the other part consists of the units that were both started and completed duringthe current period. Second full consideration is given to the amount of work expended during the current period onunits in the beginning work in process inventory as well as units in the ending inventory. Thus, under the FIFOmethod, it is necessary to convert both beginning and ending inventories to an equivalent unit basis. For thebeginning inventory, the equivalent units represent the work done to complete the units; for the ending inventory,the equivalent units represent the work done to bring the units to a stage of partial completion at the end of theperiod (the same as with the weighted average method). The formula for computing equivalent units of production ismore complex under FIFO method than under weighted average method.Formula for Calculating Equivalent Units―FIFO method:Equivalent Units of Production = Equivalent units to complete beginning inventory* + Units started and completedduring the period + Equivalent units in ending work in process inventory*Equivalent units to complete beginning inventory = Units in beginning inventory × (100% − Percentage completion of beginning inventory)Or, the equivalent units of production can also be determined as follows:Equivalent Units of Production = Units transferred out + Equivalent units in ending work in process inventory− Equivalent units in beginning inventory.Example:To illustrate the FIFO method, Refer again the data of shaping and milling department of Norton Company.Shaping and Milling Department Materials ConversionWork in Process May 1:200 units × (100% − 55%)* 90200 units × (100% − 30%)* 140Units started and completed in May **4,600 **4,600Work in process, May 31:400 units × 40% 160400 units × 25% 100 -------- --------Equivalent Units of Production 4,850 4,840 ===== =====*This is the work needed to complete the units in the beginning inventory.**(5,000 units started) − (400 units in the ending work in process) = 4,600 units started and completed. The FIFOmethod assumes that the units in the beginning inventory are finished first.