Units Held in Hand versus Equivalent Units

Dear Sir, in response to the concerns you raised, I would like to clarify by elaborating the production costing process used to establish the figure arrived at in the report. The report is a summary of the production activities within the manufacturing department as per the recorded inventory. The department is known for keeping little stock at hand that is incapable of meeting the demand. While processing the costs, the equivalent units are the ones assigned the value and not the physical units as presumed. The units in production in hand are assumed to be unfinished hence the reason why the department still holds on to them. Thus, the costing process mandates the transformation of the incomplete units into combined complete units. This was accomplished by finding the product of the total number of inventory units both complete and incomplete with their percentage of the units completed thus implying that although the units held at hand by the department was 4000 units, the number of units completed were 2000 which would mean that the percentage of completion was 50%.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

When calculating, the product of 50% with 4000 will be equal to 2000 equivalent units which were the indicated cost in the report. The cost report would have reported 4000 equivalent units only if all the inventory units held in hand had been completed thus attaining 100% percent completion. Therefore the figure arrived at was not an estimation nor erroneous but rather an accurate calculation of the inventory using the process described. The reason why we used the particular method was due to its convenience in accounting for whole units than parts of the units. Alternatively, one can use the weighted average formula just to further clarify on the matter and for accuracy purposes. In the weighted average formula, the number of all partially completed units is added up to form the equivalent units. Like in the department, the total number of units held in hand was 4000 units, but only a half of each unit was complete. When you sum up all the half-completed units to form a whole equivalent unit, which in this case will be, (1/2 *4000) the result will be equal to 2000 units. Although this method is time-consuming and strenuous, the conclusions arrived at are the same as the method used previously.

Under the weighted average method, the cost of the equivalent units is calculated by summing up the cost of the beginning the work and the cost incurred during the period of production. The cost per equivalent unit is the use to calculate the cost of ending work in process. The weighted average method consists of long procedures and is time consuming hence the reason why we preferred the formerly explained method. The method formula is to attain equivalent units is thus; (number of partially completed units *percentage of completion) as applied by the department. I apologize for the misunderstanding which was caused by misinformation and poor communication of the system used in making the production cost report. I assure you, sir, of an ethical and accurate procedure which aims at producing figures with certitude to help the management in decision making amongst many other intended objectives.

Units held in hand cannot be used in cost for the sole reason that some of them may be incomplete. Therefore, the figure obtained will be an overstatement since only a portion of the units held in hand would have been completed. The concept is thus irrelevant from an operational point of view as it will influence the process of decision making negatively. Using equivalent units will allow the department to determine the progress made so far in the production process and enable the management to implement decisions meant to improve the process. The amount credited for the 2000 units is thus approved to facilitate the completion of the remaining units. I sincerely hope that this explanation is sufficient enough to instill and maintain your confidence in the department. The department highly apologizes for any inconvenience caused by the misunderstanding and thus extends their gratitude for your understanding.

Regards,

Production Cost Department