What are Equivalent Units of Production?

Equivalent Units of Production

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Equivalent Units of Production

Equivalent Units of Production is a term used in cost accounting, particularly in process costing. It is a method used to express a number of partially completed units as a smaller number of fully completed units. It helps in the calculation of costs in a production process where there are units that are not 100% complete.

This concept is particularly useful when a company produces many similar products and wants to calculate the cost of producing each unit of product.

The calculation of equivalent units of production depends on the stage of completion of the products at the beginning and the end of the accounting period and the units started and completed during the period.

For example, if at the end of an accounting period, there are 100 units that are each 50% complete, the company would have 50 equivalent units of production. (100 units * 50% = 50 equivalent units)

This method allows companies to assign costs to products in a standardized way, even when the production process isn’t completed at the end of an accounting period. It helps management to understand the cost per unit and helps in decision making for pricing and cost control.

Example of Equivalent Units of Production

Assume a company that manufactures chairs. At the beginning of March, it had 100 chairs that were 70% complete. During March, the company started production of an additional 400 chairs. By the end of March, it had completed and transferred out 350 chairs to finished goods. The remaining 150 chairs were still in process and were estimated to be 60% complete.

The equivalent units of production for March would be calculated as follows:

  • For the chairs completed and transferred out (350 chairs), these are 100% complete, so we count all of them: 350 chairs.
  • For the chairs still in process at the end of March (150 chairs), these were 60% complete, so they count as 60% of a full chair: 150 chairs * 60% = 90 equivalent units.

Therefore, for the month of March, the company would have produced 350 (from the completed chairs) + 90 (from the partially completed chairs) = 440 equivalent units of production.

This calculation allows the company to spread out its production costs over 440 equivalent units, rather than the actual 500 chairs it worked on, since 150 of those chairs were not yet finished. This method ensures that the costs assigned to each unit more accurately reflect the amount of resources each unit has actually consumed.

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