Equivalent units of production measure the work done during the period, expressed in fully completed units. This concept is used to determine the cost per unit of completed product.
The formula to compute equivalent units of production is as follows:
Unit completed and transferred out + equivalent units of ending work in process = equivalent units of production.
To better understand this concept of equivalent units, consider the following two separate examples.
Example 1: The blending departments entire output during the period consists of ending work in process of 4,000 units which are 60% complete as to materials, labor, and overhead. The equivalent units of production for the Blending Department are therefore 2,400 units (4,000 60%).
This method of computing equivalent units is referred to as the weighted-average method. It considers the degree of completion (weighting) of the units completed and transferred out and the ending work in process.
More from this Section
- Capital leases
Capital lease is a contractual arrangement that transfers substantially all the benefits and risks of ownership to the lessee so that the lease is in effect a purchase of the property.
- Internal & External users of Accounting
Internal users of accounting information of those individuals inside a company who plan, organize, and run the business. These include marketing managers, production supervisors...
- Asset Turnover Ratio
The asset turnover ratio analyzes the productivity of a company’s assets. It tells us how many dollars of sales a company generates for each dollar invested in assets.
- Divisible profits
Divisible profits means those profits which can legally be distributed to the shareholders of a company in the form of dividends. It also does not say that only “true profits” can be divided.
- Budgetary control
The use of budgets in controlling operations is known as budgetary control which consists of (a) preparing periodic budget reports that compare actual results with planned...
- Retained earnings restrictions
Retained earnings restrictions are circumstances that make a portion of retained earnings currently unavailable for dividends.
- Notes receivables
Notes receivables are claims for which formal instruments of credit are issued as proof of the debt. A note receivable normally extends for time periods of 60-90 days...