Equivalent Units of Production

Objectives:

• Explain and calculate equivalent units

• Compute the value of closing work-in-

progress and completed production using
the weighted average and first in, first out,
methods of valuing work in progress
 Equivalent Units of Production

Equivalent units are the

product of the number of
partially completed units and
the percentage completion of
those units.
Equivalent units refer to a conversion of part-
completed units into an equivalent number of
wholly-completed units.
These partially completed units complicate the
determination of a department’s output for a
given period and the unit cost that should be
assigned to that output.
 Equivalent Units – The Basic Idea

Two half completed products are equivalent

to one complete product.

+ = 1

So,
So, 10,000
10,000 units
units 70%
70% complete
complete
are
are equivalent
equivalent to
to 7,000
7,000 complete
complete units.
units.
 Learning Objective 2

Compute the
equivalent units of
production using the
weighted-average
method.
 Equivalent Units of Production
Weighted-Average Method

The weighted-average method . . .

1. Makes no distinction between work done in
prior or current periods.
2. Blends together units and costs from prior
and current periods.
3. Determines equivalent units of production
for a department by adding together the
number of units transferred out plus the
equivalent units in ending Work in Process
Inventory.
 Weighted-Average – An Example

Smith Company reported the following

activity in the Assembly Department for the
month of June: Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 Weighted-Average – An Example

The first step in calculating the equivalent units is to

identify the units completed and transferred out of
Assembly Department in June (5,400 units)
Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
 Weighted-Average – An Example
Step 2 is to Identify the equivalent units of production in ending
work in process with respect to materials (540) & conversion
cost (270) and adding this to the 5,400 transferred.

Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
 Weighted-Average – An Example
Equivalent units of production always
equals:
Units completed and transferred +
Equivalent units remaining in work in
process Materials Conversion
Units completed and transferred
out of the Department in June 5,400 5,400
Work in process, June 30:
900 units × 60% 540
900 units × 30% 270
Equivalent units of Production in
the Department during June 5,940 5,670
Learning Objective 3

Compute the cost

per equivalent unit
using the weighted-
average method.
 Compute and Apply Costs

The following information is given:

Beginning Work in Process Inventory: 300 units

Materials: 40% complete $ 6,119
Conversion: 20% complete $ 3,920

Production started during June 6,000 units

Production completed during June 5,400 units

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending Work in Process Inventory: 900 units

Materials: 60% complete
Conversion: 30% complete
 Compute and Apply Costs

The formula for computing the cost per equivalent

unit under the Weighted Average Method is:

Cost of beginning
Cost per
Work in Process + Cost added during
equivalent =
Inventory the period
unit Equivalent units of production
 Compute and Apply Costs

Here is a schedule with the cost and equivalent

unit information.

Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

 Compute and Apply Costs

Here is a schedule with the cost and equivalent

unit information.
$124,740 ÷ 5,940 units = $21.00$85,050 ÷ 5,670 units = $15.00
Total
Cost Materials Conversion
Cost to be accounted for:
Work in process, June 1 $ 10,039 $ 6,119 $ 3,920
Cost added in Assembly 199,751 118,621 81,130
Total cost $ 209,790 $ 124,740 $ 85,050

Equivalent units 5,940 5,670

Cost per equivalent unit $ 21.00 $ 15.00

Cost per equivalent unit = $21.00 + $15.00 =

$36.00
 Learning Objective 3

Assign costs to units

using the weighted-
average method.
 Computing the Cost of Units Transferred Out

Assembly Department
Cost of Ending WIP Inventory and Units Transferred Out
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 21.00 $ 15.00
Cost of Ending WIP inventory $ 11,340 $ 4,050 $ 15,390
Units completed and transferred out:
Units transferred 5,400 5,400
Cost per equivalent unit $ 21.00 $ 15.00
Cost of units transferred out $ 113,400 $ 81,000 $ 194,400
Learning Objective 4

Prepare a cost
reconciliation
report.
 Reconciling Costs

Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790
 Reconciling Costs

Assembly Department
Cost Reconciliation
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 15,390
Cost of units transferred out 194,400
Total cost accounted for $ 209,790
 FIFO vs. Weighted-Average Method

The FIFO method (generally considered more

accurate than the weighted-average method) differs
from the weighted-average method in two ways:

1. The computation of equivalent units.

2. The way in which the costs of beginning
inventory are treated.
Learning Objective 1

Compute the
equivalent units of
production using the
FIFO method.
 Equivalent Units – FIFO Method
Let’s revisit the Smith Company example. Here is
information concerning the Assembly Department
for the month of June.
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%

Units started into production in June 6,000

Units completed and transferred out 5,400

of Department A during June

Work in process, June 30 900 60% 30%

 Equivalent Units – FIFO Method

Step 1: Determine equivalent units needed to complete

beginning Work in Process Inventory.

Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
 Equivalent Units – FIFO Method

Step 2: Determine equivalent units started and

completed during the period.

Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
 Equivalent Units – FIFO Method

Step 3: Determine & Add the equivalent units in

beginning ending Work in Process Inventory.

Materials Conversion
To complete beginning Work in Process:
Materials: 300 units × (100% - 40%) 180
Conversion: 300 units × (100% - 20%) 240
Units started and completed during June 5,100 5,100
Ending Work in Process
Materials: 900 units × 60% complete 540
Conversion: 900 units × 30% complete 270
Equivalent units of production 5,820 5,610
 FIFO Example

Materials 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
40% Complete 60% Complete

300 × 60%
180 Equivalent Units
5,100 Units Completed 900 × 60%
540 Equivalent Units
5,820 Equivalent units
of production
 FIFO Example

Conversion 6,000 Units Started

Beginning Ending
Work in Process 5,100 Units Started Work in Process
300 Units and Completed 900 Units
20% Complete 30% Complete

300 × 80%
240 Equivalent Units
5,100 Units Completed 900 × 30%
270 Equivalent Units
5,610 Equivalent units
of production
 Equivalent Units:
Weighted-Average vs. FIFO

As shown below, the equivalent units in beginning inventory are

subtracted from the equivalent units of production per the
weighted-average method to obtain the equivalent units of
production under the FIFO method.

Materials Conversion
Equivalent units - weighted-average method 5,940 5,670
Less equivalent units in beginning inventory:
300 units × 40% 120
300 units × 20% 60
Equivalent units - FIFO method 5,820 5,610
Learning Objective 2

Compute the cost

per equivalent unit
using the FIFO
method.
 Cost per Equivalent Unit - FIFO

Let’s revisit the Smith Company Assembly Department

for the month of June to prepare our production report.
Beginning work in process: 300 units

Materials: 40% complete $ 6,119

Conversion: 20% complete $ 3,920

Production started during June 6,000 units

Production completed during June 5,400 units

Costs added to production in June

Materials cost $ 118,621
Conversion cost $ 81,130

Ending work in process 900 units

Materials: 60% complete
Conversion: 30% complete
 Cost per Equivalent Unit - FIFO

The formula for computing the cost per equivalent

unit under FIFO method is:

Cost per
Cost added during the period
equivalent =
Equivalent units of production
unit
 Cost per Equivalent Unit - FIFO

Total
Cost Materials Conversion

Cost added in June $ 199,751 $ 118,621 $ 81,130

Equivalent units 5,820 5,610
Cost per equivalent unit $ 20.3816 $ 14.4617

$118,621 ÷ 5,820 $81,130 ÷ 5,610

Total cost per equivalent unit = $20.3816 + $14.4617 = $34.8433

 Learning Objective 3

Assign costs to units

using the FIFO
method.
 Applying Costs - FIFO
Step 1: Record the equivalent units of production in ending Work
in Process Inventory.
Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270

900 units × 60% 900 units × 30%

 Applying Costs - FIFO

Step 3: Compute the cost of ending Work in Process Inventory.

Assembly Department
Cost of Ending WIP Inventory
Materials Conversion Total
Ending WIP inventory:
Equivalent units 540 270
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of Ending WIP inventory $ 11,006 $ 3,905 $ 14,911

540 × $20.3816 270 × 14.4617

 Cost of Units Transferred Out
Step 1: Record the cost in beginning Work in Process Inventory.

Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,669 $ 3,471 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,880
 Cost of Units Transferred Out
Step 2: Compute the cost to complete the units in beginning
Work in Process Inventory.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,669 $ 3,471 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,880
 Cost of Units Transferred Out
Step 3: Compute the cost of units started and completed this
period.
Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,669 $ 3,471 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,880
 Cost of Units Transferred Out
Step 4: Compute the total cost of units transferred out.

Assembly Department
Cost of Units Transferred Out in June
Materials Conversion Total
Cost of Units Transferred Out:
Cost in beginning WIP inventory $ 6,119 $ 3,920 $ 10,039
Cost to complete beginning WIP
Equivalent units to complete 180 240
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost to complete beginning WIP $ 3,669 $ 3,471 7,140
Cost of units started and completed:
Units started and completed 5,100 5,100
Cost per equivalent unit $ 20.3816 $ 14.4617
Cost of units started and completed $ 103,946 $ 73,755 177,701
Cost of Units Transferred Out $ 194,880
 Learning Objective 4

Prepare a cost
Prepare a cost
reconciliation report
reconciliation report
using the FIFO method.
using the FIFO
method.
 Reconciling Costs

Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 14,911
Cost of units transferred out 194,880
Total cost accounted for* $ 209,791
 Reconciling Costs

Assembly Department
Cost Reconciliation for June
Costs to be accounted for:
Cost of beginning Work in Process Inventory $ 10,039
Costs added to production during the period 199,751
Total cost to be accounted for $ 209,790

Cost accounted for as follows:

Cost of ending Work in Process Inventory $ 14,911
Cost of units transferred out 194,880
Total cost accounted for* $ 209,791

* $1 rounding error.
 A Comparison of Costing Methods

In a lean production environment, FIFO and

weighted-average methods yield similar
unit costs.
When considering cost control, FIFO is
superior to weighted-average because it
does not mix costs of the current period with
costs of the prior period.