5.2 Equivalent Units and Cost per Equivalent Unit

Process costing uses equivalent units to measure production accurately. This concept accounts for partially completed units, enabling proper cost allocation and inventory valuation. It's crucial for calculating costs per unit in manufacturing processes.

Equivalent units are calculated by multiplying physical units by completion percentages for materials, labor, and overhead. The cost per equivalent unit is then determined, allowing for accurate allocation of costs to completed units and work-in-progress inventory.

Understanding Equivalent Units in Process Costing

Concept of equivalent units

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• 

  ...then transfer the costs to their new departments... View original

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• 

  Expressed another way, it looks like this: View original

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• 

  The goal is to allocate the service costs to the production departments (so they can be factored ... View original

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• 

  ...then transfer the costs to their new departments... View original

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• 

  Expressed another way, it looks like this: View original

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• Measure completed production in terms of fully finished units accounts for partially completed units
• Enable accurate cost allocation to work-in-progress facilitates cost per unit calculations allows proper valuation of inventory
• Consist of direct materials and conversion costs (labor and overhead)

Calculation of equivalent units

1. Identify physical units in ending work-in-progress
2. Determine completion percentage for each cost element
3. Multiply physical units by completion percentage

• Materials calculation often 100% complete at beginning of process
• Labor and overhead calculation usually have varying degrees of completion
• Weighted average method combines beginning work-in-progress with current period production
• FIFO method separates beginning work-in-progress from current period production (first-in-first-out)

Cost per equivalent unit

• Formula: $Cost per EU = Total costs / Equivalent units$
• Separate calculations for each cost element (materials, labor, overhead)
• Production efficiency, input costs, waste and spoilage affect cost per equivalent unit

Application in process costing

1. Calculate total costs for the period
2. Determine equivalent units of production
3. Compute cost per equivalent unit
4. Allocate costs to completed units and ending work-in-progress

• Cost of goods completed multiply completed units by cost per equivalent unit
• Valuation of ending work-in-progress apply cost per equivalent unit to partially completed units
• Reconciliation of costs ensure total costs equal sum of completed units and ending work-in-progress (balanced equation)