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So the Ultimate Planner goes through three departments on its way to finished goods inventory. In each department raw materials, labor and overhead are being added to the planners. In order to calculate a product unit cost, those costs need to be accumulated, as the planner isn’t finished. Each department has an ending inventory of unfinished planners. How can we figure out the costs at each stage of production? The easiest way is to figure out what percentage of the planner is completed, as to the work in that department. We call this the equivalent units of production method of costing: equivalent units = number of partially completed units × Percentage completed At the end of process 1, our planners have their paper and ink ready to be printed. Let’s assume we figure the ending WIP inventory to be 35% complete as to the process. If we have 1000 units in the ending WIP inventory after process 1, this would equal 350, using the formula for equivalent units. We could then add these equivalent units to the ending WIP inventory for process 1. Any units that have been moved into process 2, will be subtracted from the WIP inventory for process 1. There are two ways we can calculate the equivalent units of production for a department or process: weighted-average or FIFO (first in, first out). Weighted AverageIn this method we use the following equation: [latex]\begin{array}{rr}&\text{Units transferred to the next department or to finished goods}\\+&\text{Equivalent units in ending work in process inventory}\\&\hline\\&\text{Equivalent units of production}\end{array}[/latex] One thing to keep in mind when using the weighted average method, we don’t need to compute the equivalent units for the ones transferred out. Those are considered 100% complete for the work done in that department, otherwise they wouldn’t be moving forward to the next process. ExampleIn the current period, we transferred 500 units to process 2, and have 350 equivalent units in our WIP inventory. So our equivalent units of production for the period would be 850 units. Essentially saying, that process 1 completed 850 units to completion of process 1 in this period. Example700 units were transferred from process 1 to process 2. We also have 1000 partially completed units that are 50% complete. We would have 500 equivalent units in our WIP inventory. (1000 × 50%) + 700 units that were transferred out. Our equivalent units of production for the period is 1,200 units (700 + 500). FIFOEquivalent units can also be calculated using the FIFO method. In this method, the units that have been moved to the next process are divided into two parts:
In this method, both the beginning and ending inventory is converted into equivalent units, so there is a bit more work to do. For those units that were in the beginning inventory, we need to figure out how much work was DONE on them in this period to get them to the point of being transferred to the next process. For those items in the ending inventory, it is the same as the weighted-average method, where we need to calculate how much work has been done to them already. ExampleWe have 500 units in our beginning inventory that needed 50% more done to them yet = 250 units We also completed 500 units that were started and finished in this period = 500 units And we have 1000 units that are 25% complete at the end of the period = 250 units So how many units did we complete during the period? 250 + 500 +250 = 1000 units were completed through process 1 for the period. In our next section, we will do a comparison and reconciliation of the same number of products through one process with each of the two methods. Practice QuestionsContribute!Did you have an idea for improving this content? We’d love your input. Improve this pageLearn More Process Costing consists of the following steps: Keep in mind, there are no Generally Accepted Accounting Principles (GAAP) that mandate how we must do a process cost report. We will focus on the calculations involved and
show you an example of a process cost summary report but know there are several ways to present the information, but the calculations are all the same. In the previous page, we discussed the physical flow of units (step 1) and how to calculate equivalent units of production (step 2) under the weighted average method. We will continue the discussion under the weighted average method and calculate a cost per equivalent unit. Step 3: Cost per Equivalent Unit The
formula we will use is notice we are primarily using the dollar costs and not units for this section (except we will use TOTAL equivalent units we calculated in the previous section): We will calculate a cost per equivalent unit for each cost element (direct materials and conversion costs (or direct labor and overhead).  A YouTube element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/ma/?p=74 Example – Jax Company To continue with our previous example, we were given the following information:
We calculated total equivalent units of 11,000 units for materials and 9,800 for conversion. To calculate cost per equivalent unit by taking the total costs (both beginning work in process and costs added this period) and divide by the total equivalent units.
In this example, beginning work in process is zero. This will not always be the case. The problem will provide the information related to beginning work in process inventory costs and units. Step 4: Assign Costs In this next section, we will combine the equivalent units (from step 2) and the cost per equivalent units (step 3) to assign costs to units completed and transferred out (also called cost of goods manufactured) and costs of units remaining ending work in process inventory. The basic formula to assign costs is:
Using the example company, Jax Company, we have the following information:
We would assign costs as follows:
For costs of units completed and transferred, we take the equivalent units for units completed x cost per equivalent unit. We do the same of ending work in process but using the equivalent units for ending work in process. Step 5: Cost Reconciliation Finally, we can check our work. We want to make sure that we have assigned all the costs from beginning work in process and costs incurred or added this period to units completed and transferred and ending work in process inventory. First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for. Both totals should agree. For Jax Company, the cost reconciliation would be:
The full process cost report can be found by clicking Jax_process cost). Contributors and AttributionsCC licensed content, Shared previously
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How do you calculate equivalent units using weighted average?Equivalent units = number of physical units × percentage of completion. Units completed and transferred out are 100 percent complete. Thus equivalent units are the same as the physical units. Equivalent units = number of physical units × percentage of completion.
Why do we need to calculate equivalent units?Calculating the equivalent units of production can help a company understand how much work and money they have put into their manufacturing process. Specifically, it's a way to understand how much money, material and labor have been invested into items that are partially complete.
Why do we use equivalent units in process costing?In process costing, the equivalent units are calculated for easy allocation of manufacturing costs to fully and partially completed units produced. This is used for calculating the number of units at the end of the period.
How are equivalent units calculated in a process costing system?Process costing requires partially completed units in ending work-in-process inventory to be converted to the equivalent completed units (called equivalent units). Equivalent units. are calculated by multiplying the number of physical (or actual) units on hand by the percentage of completion of the units.
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Why we calculate equivalent units in process costing how equivalent units are calculated in weighted
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