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Equivalent
production
By:
Sanjeet Yadav
Equivalent units is a cost accounting concept that is used in process
costing for cost calculations. It has no relevance from an operational
perspective, nor is it useful for any other type of cost derivation other
than process costing. In order to determine the true cost of finished
goods it is necessary to value the units of work-in-progress.
As these units are at various stages of production, hence its valuation
is a difficult task. It may be possible that some units may have been
recently introduced in production, whereas some units maybe in the
last stage of completion.
Definition :
“Equivalent units of production is a term applied to the
work-in-progress inventory at the end of an accounting
period. An equivalent unit of production is an indication
of the amount of work done by manufacturers who have
partially completed units on hand 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.”
Valuation of work-in-progress
There are two methods :
1. Actual Cost basis: In this method, the valuation of WIP is done on the basis of
actual amount incurred on these units i.e., the actual amount incurred on these units
in respect of material , labour and overheads till the end of the financial year is treated
as the value of work-in-progress .
This method can be adopted only when the accounts have been kept on such a way
that it can disclose the actual cost of incompleted units. Generally , this method is not
practiced.
2. Equivalent production basis: In this method , the incompleted units or WIP units
are expressed in terms of completed units i.e. they are made equivalent to finished
units. After making the incompleted units equivalent to completed units , the cost of
these incompleted units are determined on the basis off completed units. In other
words , in this method a calculation is done to find out as to how much incompleted
units are equal to how many units of completed units .
To express the incomplete units into completed units , it is necessary to determine the
stage of incomplete units.
Equivalent production = Actual number of units In process of manufacture ×
Percentage of work completed
For example ,
If in any process 500 units have been introduced out of
which 300 units have been completed at the end of the
accounting period and on 200 units 60% work has
been completed , then 200 incompleted units will be
equivalent to 120 ( 200 × 60% ) completed units, and
the total completed units in the process will be treated
to be 420 ( 300 + 120 )
Calculation of equivalent production of
opening work-in-progress
Work-in-progress can be valued in three ways
• First-in-first-out ( FIFO ) method
• Average cost method
• LIFO method
• FIFO Method - The incompleted units of previous accounting period in the
opening stock are first taken up for completion, and the new units are taken up
next, for manufature.as a result of application of this method , no unit of the
opening WIP remains incomplete in manufacture , nor such a unit finds place in
the closing work-in-progress of current year. Thus , the WIP in the closing stock of
the current year has the incomplete units belonging only to the current year , and
are, therefore, valued at the current year’s costs.
• Average cost method – Under this method , all the units are taken up
together , whether belonging to the opening WIP , or to the new lot
in the current period . So the cost of opening WIP is not separated from the
cost of new units , but combined together, as both the types of units Are
manufactured together . The average cost is determined by dividing the
cost of all the units by the units manufactured together .
• LIFO method – As per this method , the units entering the process at the
end will be completed first. Hence , those units which have been introduced
in production during the current year will be treated as completed units
shown at current cost
Procedure for valuation of equivalent
production
• Preparation of statement of equivalent production: First of all a statement of
equivalent production will be prepared to show the number of equivalent
completed units.
• Ascertain of per unit cost of equivalent production: This statement is prepared in
order to determine the elementwise cost per equivalent unit.
• Ascertaining the cost of work-in-progress and completed work: In this statement,
the apportionment of total process cost is made between finished product and
work-in-progress units of the process.
• Process accounts: At the end, the process accounts are prepared.
Equivalent production in Cost Accounting
Equivalent production in Cost Accounting

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Equivalent production in Cost Accounting

  • 2. Equivalent units is a cost accounting concept that is used in process costing for cost calculations. It has no relevance from an operational perspective, nor is it useful for any other type of cost derivation other than process costing. In order to determine the true cost of finished goods it is necessary to value the units of work-in-progress. As these units are at various stages of production, hence its valuation is a difficult task. It may be possible that some units may have been recently introduced in production, whereas some units maybe in the last stage of completion.
  • 3. Definition : “Equivalent units of production is a term applied to the work-in-progress inventory at the end of an accounting period. An equivalent unit of production is an indication of the amount of work done by manufacturers who have partially completed units on hand 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.”
  • 4. Valuation of work-in-progress There are two methods : 1. Actual Cost basis: In this method, the valuation of WIP is done on the basis of actual amount incurred on these units i.e., the actual amount incurred on these units in respect of material , labour and overheads till the end of the financial year is treated as the value of work-in-progress . This method can be adopted only when the accounts have been kept on such a way that it can disclose the actual cost of incompleted units. Generally , this method is not practiced.
  • 5. 2. Equivalent production basis: In this method , the incompleted units or WIP units are expressed in terms of completed units i.e. they are made equivalent to finished units. After making the incompleted units equivalent to completed units , the cost of these incompleted units are determined on the basis off completed units. In other words , in this method a calculation is done to find out as to how much incompleted units are equal to how many units of completed units . To express the incomplete units into completed units , it is necessary to determine the stage of incomplete units. Equivalent production = Actual number of units In process of manufacture × Percentage of work completed
  • 6. For example , If in any process 500 units have been introduced out of which 300 units have been completed at the end of the accounting period and on 200 units 60% work has been completed , then 200 incompleted units will be equivalent to 120 ( 200 × 60% ) completed units, and the total completed units in the process will be treated to be 420 ( 300 + 120 )
  • 7. Calculation of equivalent production of opening work-in-progress Work-in-progress can be valued in three ways • First-in-first-out ( FIFO ) method • Average cost method • LIFO method • FIFO Method - The incompleted units of previous accounting period in the opening stock are first taken up for completion, and the new units are taken up next, for manufature.as a result of application of this method , no unit of the opening WIP remains incomplete in manufacture , nor such a unit finds place in the closing work-in-progress of current year. Thus , the WIP in the closing stock of the current year has the incomplete units belonging only to the current year , and are, therefore, valued at the current year’s costs.
  • 8. • Average cost method – Under this method , all the units are taken up together , whether belonging to the opening WIP , or to the new lot in the current period . So the cost of opening WIP is not separated from the cost of new units , but combined together, as both the types of units Are manufactured together . The average cost is determined by dividing the cost of all the units by the units manufactured together . • LIFO method – As per this method , the units entering the process at the end will be completed first. Hence , those units which have been introduced in production during the current year will be treated as completed units shown at current cost
  • 9. Procedure for valuation of equivalent production • Preparation of statement of equivalent production: First of all a statement of equivalent production will be prepared to show the number of equivalent completed units. • Ascertain of per unit cost of equivalent production: This statement is prepared in order to determine the elementwise cost per equivalent unit. • Ascertaining the cost of work-in-progress and completed work: In this statement, the apportionment of total process cost is made between finished product and work-in-progress units of the process. • Process accounts: At the end, the process accounts are prepared.