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
- Trading Securities
Companies hold trading securities with the intention of selling them in a short period (generally less than a month). Trading means frequent buying and selling.
- Prior period adjustment
The correction of an error in previously issued financial statements is known as a prior period adjustment. The company makes the correction directly...
- Total labor variance
Total labor variance is the difference between actual hors times the actual rate and standard hours times the standard rate for labor.
- Economic entity assumption
Economic entity assumption is an assumption that requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.
Deferrals are either prepaid expenses or unearned revenues. Companies make adjustments for deferrals to record the portion of the deferral that represents the expense...
- Indirect materials
Indirect materials are those raw materials which cannot be easily associated with the finished product.
- The Journal
The Journal, an accounting record in which transactions are initially recorded in chronological order. The journal is referred to as the book of original entry.