Equivalent Units in Ending Inventory: Essay Sample

Introduction

Regarding the issue concerning the equivalent units in the ending inventory, I would like to explain to you through a detailed explanation why the production report records 2000 equivalent units even though we have at least twice the inventory in production. The production cost report generally shows the total cost incurred in the production of units, accounting for costs in raw materials and labor. On most occasions, there will be partially completed units during the production process.

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A production cost report has two primary uses; it shows the flow of units and costs through a production center and also shows how the apportionment of costs is done between the wholly completed units and the partially completed units which are still in the ending work in process inventory (Accounting Tools, 2019). Production Cost Report is prepared using the process costing method, which implies that even though we have twice the inventory of 2000 units in production, not all these units are fully complete in all respect.

For example, even though we have introduced the materials for 4000 units, the materials have to undergo the various processing activities in the department, which converts materials into finished goods. And until all the conversion processing is carried out on the materials of 4000 units, these are not considered as fully finished inventory. As per the degree of the conversion process, the equivalent units are calculated. Process costing principles require that the partially completed units are converted to the equivalent complete units, in the case where there is existing ending work in progress at the end of the accounting period. The main reason for using equivalent costs is in the apportionment of costs incurred in production to both completed units and partially completed units (Hermason et al., 2016).

For one to understand the production report, one must understand the definition of both physical units and equivalent units. Physical units refer to all items in the production process regardless of their completion level; parts may be either complete (100 percent) or partially complete (Hermason et al., 2016). Mostly, the equivalent units are calculated from the physical units. Equivalent units of production refer to work in process inventory when the accounting period ends. In any production, the costs that are attached to the elements of products are direct material, direct labor, and production overheads (Garrison et al., 2010). Equivalent units are the number of completed units that the manufacturing firm would produce using the direct materials and labor costs incurred together with production overheads for the partially completed units (Principles of Accounting, 2019).

As stated before, the concept of equivalent units uses a method that involves the expression of partially completed units in a production process to a completed component (Hermason et al.,2016). For example, if there are 500 units with a 30% percent level of completion, then this is equivalent to 150 completed units. This accounting concept is used in the supposition that a production firm incurs the same cost to bring 500 units to 30% percent completion as it would require to produce 150 complete units.

The first step in determining the equivalent units for a company is determining the level of completion of the 4000 units in hand. The completed units are transferred from the production department to the other department. Whereas, the partially completed units are not transferred out. The formula for calculating the equivalent units of production is shown below

Equivalent units =Units completed (100 percent) + (Units in ending inventory *percentage of completion).

Therefore, in our case, the equivalent units (2000) were determined using this formula using the number arrived at when the completed physical units were added to the equivalent completed units (partially completed units multiplied by the percentage of completion). Therefore, when recording the equivalent units at the end of the accounting period, 2000 is the accurate number of total equivalent units.

From the equivalent units of production, it is even easier to compute the unit costs of the materials transferred and the conversion elements (Hermason et al., 2016). To arrive at the average cost unit for each cost element (direct materials, conversion costs, and transfer costs), the following formulas are used

Unit cost for transferred =Total Transferred Costs/Equivalent Units for transferred costs

Unit cost for conversion =Total conversion costs/Equivalent units for conversion costs

Unit cost for materials= Total material costs/ Equivalent units for material costs

Conclusion

In conclusion, the conversion of physical units to equivalent units involves the following main steps; tracing the flow of units in the production department, accounting for completed units, and partially completed units through the determination of the level of completion of the units (Hermason et al., 2016). After that, the total equivalent units are then obtained by adding the completed units, and the equivalent completed units of the partially finished units. I hope that this information will help you in understanding the process followed in computing the equivalent units. The production cost report was done accurately by following the accounting principles concerning managerial accounting analysis. Therefore, the production cost report is accurate and reflects the true inventory of the firm.

References

Accounting Tools (2019). Retrieved from <https://www.accountingtools.com/articles/what-are-equivalent-units-of-production.html

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793. https://www.aaajournals.org/doi/pdf/10.2308/iace.2010.25.4.792

Guerreiro, R., Bruno Cornachione, E., & Catelli, A. (2006). Equivalent units of production: a new look at an old issue. Managerial Auditing Journal, 21(3), 303-316. https://doi.org/10.1108/02686900610653035

Hermason, R., Edwards, J., & Maher, M. (2016). Accounting principles: Managerial accounting. http://cool4ed.calstate.edu/handle/10211.3/180409

Principles of Accounting (2019). Equivalent Units. Retrieved from < https://www.principlesofaccounting.com/chapter-20/equivalent-units/>