How to Calculate Equivalent Units of Work in Process

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Process costing focuses on the number of processes a company uses to produce goods. The production process is continuous, churning out homogeneous goods until stopped. Equivalent units are those that haven't been completed. While the materials may be complete in the production system, they must still go through conversion processes, transforming the materials into the finished product. Calculating the uncompleted conversion costs is typically the focus of equivalent unit calculation for work in process.

  • Determine the amount of units to account for. Sum the beginning work in process inventory with the units started during the same period to calculate this figure.

  • Subtract the goods completed in the production process. Review the number of completely finished goods during the time period and subtract this figure from the number in Step 1.

  • Review the goods left in the production system. Determine how many processes the goods must go through before they are complete.

  • Divide the remaining number of processes needed to complete units by the total number of production processes. This provides a percentage of completion.

  • Multiply the percentage of completion by the total number of goods left in ending work in process inventory. The result is the equivalent units left to account for in the production process.

Tips & Warnings

  • Actual costs to allocate toward equivalent units depend on the inventory valuation system used by the company. First in, first out and weighted average are the two most common inventory cost methods. Direct materials may also need a calculation for equivalent units. Though not as common as conversion cost calculation, the process is the same as described above. Simply substitute direct materials in place of conversion costs in the process.

References

  • "Cost Management: Strategies for Business Decisions"; Ronald Hilton, et al.; 2006
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