Conversion costs are defined as direct labor plus manufacturing costs needed to finish a product. In addition to the equivalent units, it is necessary to track the units completed as well as the units remaining in ending inventory. A similar process is used to account for the costs completed and transferred. Reconciling the number of units and the costs is part of the process costing system.
The reconciliation involves the total of beginning inventory and units started into production. The cost per equivalent unit is calculated for direct materials, direct labor, and overhead. Simply divide total costs to be accounted for by total equivalent units accounted for. Units completed and transferred are
finished units and will always be 100% complete for equivalent unit
calculations for direct materials, direct labor and overhead. For
units in ending work in process, we would take the units unfinished
x a percent complete.
- 4800 units × $2.09 plus the $658 of costs incurred for the beginning inventory that was transferred out.
- Work-in-progress can be valued based on actual cost (i.e., an attempt may be made to find out how much materials have been used on the incomplete units and how much labor and expenses were used).
- Thirdly, the equivalent units of production for the closing work-in-progress should be determined by considering the number of units of closing work-in-progress and the level of completed work.
- EUs for beginning inventory is the complement of last month’s ending inventory because now you are finishing them up.
- The next step is to convert the physical units in production shown above (10,000) into equivalent units.
costs are those costs incurred to convert raw
materials into the final product (meaning, direct labor and
overhead). In this example the FIFO method is used and the beginning WIP units are partially completed at the start of the accounting period. The production costs incurred during the accounting period are therefore spent on the uncompleted part of the beginning WIP units. The objective of using equivalent units is to be able to apportion the costs of production to completed units and partially completed units held in work in process. Summarize the physical flow of units and compute the equivalent units for direct materials, direct labor, and overhead.
EUs for beginning inventory is the complement of last month’s ending inventory because now you are finishing them up. If the beginning work-in-process inventory is 10% done, then the factor to use to calculate EUs to finish it up this month is 90%. This involves deducting the closing work-in-progress from the amount introduced in the process during the current period. In other words, a unit that is 25% done is the equivalent of ¼ of a completed unit. This video will provide a demonstration of cost assignment under the FIFO method. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
To illustrate more completely the operation of the FIFO process cost method, we use an example of the month of June production costs for a company’s Department B. Department B adds materials only at the beginning of processing. The May 31 inventory in Department B (June’s beginning work in process) consists of 2,000 units that are fully complete as to materials and 60% complete as to conversion. Essentially, the concept of equivalent units involves expressing a given number of partially completed units as a smaller number of fully completed units.
In this case, since materials are all added at the beginning, the Equivalent Units for Direct Materials is 100% of the actual units, but the Equivalent Units for the Conversion Costs allocation is 25% of actual units or 250 EUs. First, the equivalent production of opening work-in-progress should be determined by taking into account the degree of work to be performed in the current period. The table below summarizes the movement of physical units during the accounting period.
Equivalent Units Formula
We will continue the discussion under the weighted average method and calculate a cost per equivalent unit. We will calculate a cost per equivalent unit for each cost element (direct materials and conversion costs (or direct labor and overhead). Accountants often assume that units are at the same stage of completion for both labor and overhead. Accountants call the combined labor and overhead costs conversion costs. Conversion costs are those costs incurred to convert raw materials into the final product (meaning, direct labor and overhead).
3: Equivalent Units (Weighted Average)
During the accounting period a further 8,000 units are added to the production process and 6,000 units are completed and transferred out, leaving an ending balance of 4,000 units in work in process. Equivalent units FIFO method is used by a manufacturer to express partially units started and completed formula completed units of product in terms of finished units. Figure 4.5 “Summary of Costs to Be Accounted for in Desk Products’ Assembly Department” shows that costs totaling $386,000 must be assigned to (1) completed units transferred out and (2) units in ending WIP inventory.
Mathematically, this is done by converting the partially completed units into fully completed units and then adjusting the output figure. The reason why is because the figure of completed units alone is not an accurate measure of a department’s output since some of the department’s efforts during a period are expended on units that are only partially complete. For example, the closing stock of 200 units in a process, with 60% complete in respect of materials, wages, and overheads, is equivalent to 120 units (i.e., 200 x 60%), which are 100% complete. Equivalent or effective units of production represent the production of a process expressed in terms of completed units. 4800 units × $2.09 plus the $658 of costs incurred for the beginning inventory that was transferred out. Under the weighted average method, we use beginning work in process costs AND costs added this period.
Summarize the costs to be accounted for (separated into direct materials, direct labor, and overhead). The amount transferred out will include materials costs incurred during the current period plus any amount in beginning inventory. Because we calculated EUs based on completed units, including EUs that represent the effort it took to complete the beginning inventory, we divide ONLY costs added during the period by our Equivalent Units. Units started during the period, finished, and then transferred out are 100% complete, so the Equivalent Units and the actual physical units are the same. The concept of equivalent units is defined as the number of units that would have been produced given the total amount of manufacturing effort expended for a given period.
The beginning step in computing
Department B’s equivalent units for Jax Company is determining the
stage of completion of the 2,000 unfinished units (remember
units completed and transferred are always 100% complete). In
Department B, the ending units may be in different stages of
completion regarding the materials, labor, and overhead costs. Assume that Department B adds all materials at the beginning of the
production process. Then ending inventory would be 100% complete as
to materials since we received all materials at the beginning of
the process. For the shaping department, the materials are 100% complete with regard to materials costs and 35% complete with regard to conversion costs.
3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage
However, the first step is the same as with the weighted average method. In this case, the equivalent production for opening work-in-progress in the period is 300 units (i.e., 500 x 60%). Work-in-progress can be valued based on actual cost (i.e., an attempt may be made to find out how much materials have been used on the incomplete units and how much labor and expenses were used). For example, during the month of July, Rock City Percussion purchased raw material inventory of $25,000 for the shaping department.
The 750 shells in production at the end of January were 60% complete as to conversion costs and 100% complete as to direct materials, so in February they will need 40% more conversion but 0% more direct materials. Mathematically you can convert this to say that the same amount of water would make 6 of the buckets 100% full (8 x 3/4). It is highly unlikely that it would rain in such a way that only one bucket would fill at a time.
First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. The total materials costs for the period (including any beginning inventory costs) is computed and divided by the equivalent units for materials. The total of the cost per unit for material ($1.17) and for conversion costs ($2.80) is the total cost of each unit transferred to the finishing department ($3.97). In the previous page, we discussed the physical flow of units (step 1) and how to calculate equivalent units of production (step 2) under the weighted average method.
For example, if we bring 1,000 units to a 40 % state of completion, this is equivalent to 400 units (1,000 x 40%) that are 100% complete. Accountants base this concept on the supposition that a company must incur approximately the same amount of costs to bring 1,000 units to a 40% level of completion as it would to complete 400 units. This is where https://personal-accounting.org/ equivalent units are different than the normal formula, but only for beginning inventory. Secondly, the number of units introduced and completed in the current period should be calculated. For example, if the opening work-in-progress is 500 units, 40% complete in all respects, then the degree of work to be performed in the current period is 60%.