What is the cost per equivalent unit for materials?

Most companies use either the weighted average or first-in-first-out (FIFO) method to assign costs to inventory in a process costing environment. The weighted average methodA method of process costing that includes costs in beginning inventory and current period costs to establish an average cost per unit. Includes costs in beginning inventory and current period costs to establish an average cost per unit. We focus on the weighted average approach here and leave the discussion of the FIFO method to more advanced cost accounting textbooks. All of the materials have been added to the shaping department, but all of the conversion elements have not; the numbers of equivalent units for material costs and for conversion costs remaining in ending inventory are different.

• As described previously, process costing can have more than one work in process account.
• The equivalent unit computation determines the number of units if each is manufactured in its entirety before manufacturing the next unit.
• The equivalent production for each department is determined, which is later used to calculate the cost per unit of each job order by apportioning their total costs on basis of equivalent units.
• It is a little different, however when there is a beginning and ending number of units that have been partially finished.
• At the end of the period, ABC had incurred 35% of the labor and manufacturing overhead costs required to complete the 1,000 green widgets.
• Figure 4.7 “Assigning Costs to Products in Desk Products’ Assembly Department” shows that total costs of $248,000 are assigned to units completed and transferred out and that $138,000 in costs are assigned to ending WIP inventory.

If a unit is completed and transferred out, it’s 100 percent complete. Now, that may seem obvious, but it’s a point that gets lost when accountants start this analysis. https://turbo-tax.org/internal-revenue/ Your approach to complex analysis should be to account for the easy stuff first. The completed and transferred out units are easier to address than work in process.

Step Three: Determining the Cost per Equivalent Unit

The June 30 work in process inventory consisted of 8,000 pounds that were 100% complete with respect to materials and 40% complete with respect to conversion. At the end, he determines that his 100 units are only 70 percent the way through the production process. Thus, Pat’s equivalent units of production for the period is 70 EUP.

In addition, it started 1,000 units but they were only 30% complete at the end of June. The production cost report for this department will indicate that it manufactured 10,300 (10,000 + 300) equivalent units of product during June. Figure 4.8 “Flow of Costs through the Work-in-Process Inventory T-Account of Desk Products’ Assembly Department” shows the flow of costs through the work-in-process inventory T-account for the Assembly department. Note that four key steps were performed for the Assembly department to determine the costs assigned to (1) completed units transferred out to the Finishing department ($248,000) and (2) units in Assembly’s WIP inventory ($138,000).

Calculation of Equivalent Units of Production

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. 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. Kelley Paint Company uses the weighted average method to account for costs of production. Kelley manufactures base paint in two separate departments—Mixing and Packaging.

Once the equivalent units for materials and conversion are known, the cost per equivalent unit is computed in a similar manner as the units accounted for. The costs for material and conversion need to reconcile with the total beginning inventory and the costs incurred for the department during that month. Costs are assigned by multiplying the cost per equivalent unit by the number of equivalent units for direct materials, direct labor, and overhead. As described previously, process costing can have more than one work in process account.

Cost Per Equivalent Unit

All of the costs incurred during the period would be allocated to the goods because they were all completed. Because direct materials, direct labor, and manufacturing overhead typically enter the production process at different stages, equivalent units must be calculated separately for each of these production costs. The equivalent unit calculations are carried forward into the “cost per equivalent unit” schedule. This shows how the combined costs from beginning work in process (assumed at $2,122,500) and current period production (assumed at $7,365,000) are divided by the equivalent units.

At the end of the most recent accounting period, ABC had 1,000 green widgets still under construction. The manufacturing process for a green widget requires that all materials be sent to the shop floor at the start of the process, and then a variety of processing steps are added before the widgets are considered complete. At the end of the period, ABC had incurred 35% of the labor and manufacturing overhead costs required to complete the 1,000 green widgets. Consequently, there were 1,000 equivalent units for materials and 350 equivalent units for direct labor and manufacturing overhead. To calculate the cost per equivalent unit formula, you must divide the total production costs assigned in the process by the equivalent units of production.

Step 2: Formula to compute the cost per equivalent unit of production

Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. In continuous processes, there is work-in-progress at the beginning and end of a period, as well as a degree of completion of closing work-in-progress.