Equivalent production

By: Sanjeet Yadav

Equivalent units is a cost accounting concept that is used in process costing for cost calculations. It has no relevance from an operational perspective, nor is it useful for any other type of cost derivation other than process costing. In order to determine the true cost of finished goods it is necessary to value the units of work-in-progress. As these units are at various stages of production, hence its valuation is a difficult task. It may be possible that some units may have been recently introduced in production, whereas some units maybe in the last stage of completion.

Definition : “Equivalent units of production is a term applied to the work-in-progress inventory at the end of an accounting period. An equivalent unit of production is an indication of the amount of work done by manufacturers who have partially completed units on hand at the end of an accounting period. Basically the fully completed units and the partially completed units are expressed in terms of fully completed units.”

Valuation of work-in-progress There are two methods :1. Actual Cost basis: In this method, the valuation of WIP is done on the basis of actual amount incurred on these units i.e., the actual amount incurred on these units in respect of material , labour and overheads till the end of the financial year is treated as the value of work-in-progress .This method can be adopted only when the accounts have been kept on such a way that it can disclose the actual cost of incompleted units. Generally , this method is not practiced.

2. Equivalent production basis: In this method , the incompleted units or WIP units are expressed in terms of completed units i.e. they are made equivalent to finished units. After making the incompleted units equivalent to completed units , the cost of these incompleted units are determined on the basis off completed units. In other words , in this method a calculation is done to find out as to how much incompleted units are equal to how many units of completed units .To express the incomplete units into completed units , it is necessary to determine the stage of incomplete units.Equivalent production = Actual number of units In process of manufacture × Percentage of work completed

For example , If in any process 500 units have been introduced out of which 300 units have been completed at the end of the accounting period and on 200 units 60% work has been completed , then 200 incompleted units will be equivalent to 120 ( 200 × 60% ) completed units, and the total completed units in the process will be treated to be 420 ( 300 + 120 )

Calculation of equivalent production of opening work-in-progress Work-in-progress can be valued in three ways• First-in-first-out ( FIFO ) method• Average cost method • LIFO method • FIFO Method - The incompleted units of previous accounting period in

the opening stock are first taken up for completion, and the new units are taken up next, for manufature.as a result of application of this method , no unit of the opening WIP remains incomplete in manufacture , nor such a unit finds place in the closing work-in-progress of current year. Thus , the WIP in the closing stock of the current year has the incomplete units belonging only to the current year , and are, therefore, valued at the current year’s costs.

• Average cost method – Under this method , all the units are taken up together , whether belonging to the opening WIP , or to the new lot started in the current period . So the cost of opening WIP is not separated from the cost of new units , but combined together, as both the types of units Are manufactured together . The average cost is determined by dividing the total cost of all the units by the units manufactured together .• LIFO method – As per this method , the units entering the process

at the end will be completed first. Hence , those units which have been introduced in production during the current year will be treated as completed units and shown at current cost

Procedure for valuation of equivalent production• Preparation of statement of equivalent production: First of all a

statement of equivalent production will be prepared to show the number of equivalent completed units.

• Ascertain of per unit cost of equivalent production: This statement is prepared in order to determine the elementwise cost per equivalent unit.

• Ascertaining the cost of work-in-progress and completed work: In this statement, the apportionment of total process cost is made between finished product and work-in-progress units of the process.

• Process accounts: At the end, the process accounts are prepared.