# 5 3 Explain and Compute Equivalent Units and Total Cost of Production in an Initial Processing Stage Principles of Accounting, Volume 2: Managerial Accounting

Ending work in process inventory was 1/3 complete as to conversion costs. Now, check your understanding of the FIFO method of computing ending and work-in-process inventory using process costing. Therefore, there are a few more steps in creating the Production Cost Report.

Use the cost per equivalent unit to assign costs to (1) completed units transferred out and (2) units in ending WIP inventory. The materials need to move from one process to another and end up as the finished product. In units started and completed formula this concept, the costs that entering first will be transferred out first too. FIFO method assumes the working in progress from the previous month will be completed first and then the new products will be finished later.

We do this because it is easier to account for whole units then parts of a unit. For example, if we have 3 units 1/3 of the way complete, we can add them together to make 1 equivalent unit (1/3 + 1/3 + 1/3). We can make this calculation easier by multiplying the units by a percentage of complete. 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.

For those items in the ending inventory, it is the same as the weighted-average method, where we need to calculate how much work has been done to them already. Our equivalent units of production https://personal-accounting.org/ for the period is 1,200 units (700 + 500). Hershey likely uses a process costing system since it produces identical units of product in batches employing a consistent process.

1. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for.
2. We do the same of ending work in process but using the equivalent units for ending work in process.
3. 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.
4. Direct material is added in stages, such as the beginning, middle, or end of the process, while conversion costs are expensed evenly over the process.

The basic concept of process costing is we assume all products consume similar overhead which we need to share the same overhead cost to all of them. They also consume some overhead too, so it comes to these two methods above which we can use to allocate the manufacturing overhead. As you examine the diagram, think of the amount
of water in the glasses as costs that the company has already
incurred. 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.

The percent complete can be different for direct materials, direct labor or overhead. Now that we have figured out how many equivalent units of production via each method, let’s apply the costs. Costs consist of raw materials, direct labor and overhead for each item produced. Sometimes, a great deal of the raw materials have already been put into a product, but it still needs a chunk of labor to move it to the next department. In this case, we may have a different percentage of completion for the raw materials and the conversion costs.

Although this chapter focuses on the Assembly department, the Finishing department would also use the four steps to determine product costs for completed units transferred out and ending WIP inventory. Table 4.2 «Production Information for Desk Products’ Assembly Department» presents information for the Assembly department at Desk Products for the month of May. Review this information carefully as it will be used to illustrate the four key steps.

The percent complete can be different for
direct materials, direct labor or overhead. 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.

Equivalent units of production for materials equals the number of units in each group that had materials added in May. This report shows the costs used in the preparation of a product, including the cost per unit for materials and conversion costs, and the amount of work in process and finished goods inventory. A complete production cost report for the shaping department is illustrated in Figure 5.6. In the current period, we transferred 500 units to process 2, and have 350 equivalent units in our WIP inventory. So our equivalent units of production for the period would be 850 units.

## Cost per Equivalent Unit Calculation

But after the rain stopped, you could empty two of the buckets by filling the other six. (12) Total equivalent units of production for conversion costs equals the sum of the three groups. Before we apply the concept of equivalent units to process costing, check your understanding of how equivalent units are calculated.

## Step Three: Determining the Cost per Equivalent Unit

(2) Group 2 includes 37,400 units that are both started and completed this month. Goals of process costing are to determine a manufacturing department’s cost of finished goods during a month and the cost of work in process at the end of that month. In terms of conversion costs, however, the 1,000 sheets of plywood are only 60% complete, so they are the equivalent of 600 completed sheets in terms of accumulating costs. Therefore, in terms of direct materials, the 1,000 sheets of plywood are 100% complete because all the logs came in at the beginning of the process. Since we are using FIFO method, we first include the entire beginning WIP in the cost of units transferred out and then include units started/added during the period.

## Step 1 – Calculate units to account for

According to the accounting records, direct materials transferred to the mixing department were costed at \$3,575 and direct labor and factory overhead were \$3,640. The mixing department started another 3,250 shells during February, and at the end of the month, there were still 1,000 shells being mixed and prepped for baking. They were only 25% complete as to conversion but 100% of the direct materials had been added (because they are added at the beginning of the process).

## Step 3 – Divide costs by equivalent units

Those are considered 100% complete for the work done in that department, otherwise they wouldn’t be moving forward to the next process. We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory. This step shows that 3,000 units were in WIP inventory on May 1 and 6,000 units were started during May. These 9,000 units will end up in one of two places, either completed and transferred out (to the Finishing department) or not completed and therefore in ending WIP inventory.

Equivalent units of production for conversion costs uses the percentages of conversion costs completed in May that are given to mathematically convert partial units to whole units for costing purposes. The equivalent units of production for conversion costs equals the number of whole units times the percentage of conversion that takes place in May. The second step is to classify the units into one of three groups in the equivalent units of production for materials column based on when they were started and completed according to the information given. Remember the assumption is that materials are added when a batch is started.