2 6: Process Costing FIFO Method Business LibreTexts

In reconciling total units into production with the total units transferred out/still in process, it is not uncommon for there to be a shortfall. The reason is that many processes may involve scrap, waste, or spoilage (e.g., evaporation, spilling, etc.). Waste and spoilage would be added as a third component needed to balance the lower portion of the quantity schedule column.

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In conclusion, equivalent units of production (EUP) are used in manufacturing and production processes to determine the number of finished goods produced from raw materials and work in process inventory. It is a crucial metric to determine the cost of goods sold and inventory value in a production environment. If the department’s direct labor cost was $103,000 during the month, it’s June direct labor cost per equivalent unit will be $10 ($103,000 divided by 10,300 equivalent units). Accurate record-keeping is crucial for the calculation of equivalent units of production. Companies should maintain detailed records of all inputs and outputs, including raw materials, labor, overhead costs, and any changes in the production process.

3: Equivalent Units (Weighted Average)

• In that case, it can be challenging to determine the equivalent production units for each period.
• The \(6,500\) units completed and transferred out to the finishing department must be \(100\%\) complete with regard to materials and conversion, so they make up \(6,500 (6,500 × 100\%)\) units.
• Conversioncosts are those costs incurred to convert rawmaterials into the final product (meaning, direct labor andoverhead).
• For example, if we have 3 units 1/3 ofthe way complete, we can add them together to make 1 equivalentunit (1/3 + 1/3 + 1/3).
• Equivalent units are computed for this department, and a new cost per unit is computed.

Accurately tracking the number of partially completed units can be difficult, and calculation mistakes can lead to inaccurate results. By tracking the cost of producing equivalent units at each stage, businesses can identify areas where costs can be reduced or optimized, leading to more efficient operations and improved profitability. Companies should allocate joint costs using a consistent method when calculating equivalent production units for joint products. It can help ensure that each product is assigned a fair share of the costs and can help prevent over- or under-reporting of equivalent production units.

Step One: Determining the Stage 2 Units to Which Costs Will Be Assigned

However, the units in ending work in process require more thoughtful consideration. To begin, one needs to identify the total units that are to be considered, no matter turbotax review for 2021 their stage of completion at the beginning and end of the month. For example, ten units in process that are 30% complete equate to three equivalent units of output.

EUP is a valuable tool in manufacturing for cost accounting, inventory management, capacity planning, and performance evaluation. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.

4: Equivalent Unit Calculations

It can help minimize errors and inconsistencies in calculating equivalent production units. In the current period, we transferred 500 units to process 2, and have 350 equivalent units in our WIP inventory. Essentially saying, that process 1 completed 850 units to completion of process 1 in this period.

InDepartment B, the ending units may be in different stages ofcompletion regarding the materials, labor, and overhead costs.Assume that Department B adds all materials at the beginning of theproduction process. Then ending inventory would be 100% complete asto materials since we received all materials at the beginning ofthe process. 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 (\(\$3.97\)).

The individual cost factors can be combined to identify conversion cost and overall cost per equivalent unit. For example, forty units that are \(25\%\) complete would be ten (\(40 × 25\%\)) units that are totally complete. Companies should have clear and well-defined production processes to ensure all production units are accounted for and accurately measured.

Equivalent Unit of Production (EUP) is a measure used in manufacturing and accounting to determine the total number of fully completed units that could have been produced from work in progress during a given period. In manufacturing, a product typically goes through multiple stages of production, and each stage may produce partially completed units of production that need further processing to become fully completed units. The correct manipulation of the data will depend on the inventory method in use. In this illustration, Navarro is assumed to use the weighted-average costing method (other approaches such as FIFO could be used). This simplifies the process because the beginning inventory and current period production can be combined or “averaged” together.

All of the units transferred to the next department must be \(100\%\) complete with regard to that department’s cost or they would not be transferred. When the hickory size 5A drumsticks have completed the shaping process, they are transferred to the packaging department along with the inventory costs of $29,775. The inventory costs of $29,775 were $8,775 for materials and $21,000 for conversion costs and were calculated in Figure 5.6. During the month of July, Rock City Percussion purchased raw material inventory of $2,000 for the packaging department. As with the shaping department, the packaging department tracks its costs and requisitions the raw material from the material storeroom.

However, for now simply know that the cost of “normal” spoilage should be allocated to the inventory of good units, while the cost of excessive waste is charged off as a loss on the income statement. While EUP can help analyze the cost of production, it may not always reflect the actual costs incurred by the business. For example, EUP does not consider the cost of rework or defects, which can significantly impact the overall cost of production. 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%.