By knowing the equivalent units of production for materials, overhead costs and labor costs, an accountant can estimate how much more money or time is required to finish those products. Calculating equivalent units of production can also help create a financial report or understand where the money in your institution is currently invested. There is a simple formula that is used to calculate the equivalent units of production for those partially completed units. This formula not only applies to materials that are in continuous production, but also to labor costs and overhead costs. The simpler of the two methods is the weighted average method. The FIFO method is more accurate, but the additional calculations do not represent a good cost-benefit trade off. Only consider using the FIFO method when costs vary substantially from period to period, so that management can see the trends in costs.

At the end of the first quarter, there are 500 completed parts and 300 parts that are still in process. The parts maker’s best estimate is that these additional 300 parts are 50 percent completed.

What is a production cost report?

When you use weighted averages, all work accomplished in prior periods is not factored into the equations. Process costing is a method of costing used mainly in manufacturing where units are continuously mass-produced through one or more processes. Examples of this include the manufacture of erasers, chemicals or processed food. The Assembly Department has two inputs and therefore must make two calculations for cost per equivalent unit of production. Exhibit 18A-4 shows the production cost report with the EUP calculations added.

We show this by having a Transferred In column on the production cost report. Equivalent units of production for direct materials total 50,000 because all the direct materials have been added to all 50,000 units worked on during July. Because the direct materials are added at the beginning of the process, if the units are started, then 100% of the materials have been added. A production cost report must be completed for each department. The production cost reports show the calculations for the physical flows and the cost flows of the products. Equivalent units of production is used to measure the amount of materials added to or work done on partially completed units and is expressed in terms of fully complete units.

Cost of Goods Sold

The cost of direct materials placed into production during the month . Direct labor costs totaling $3,500 were incurred in the Molding department, to be paid the next month. The Molding department requisitioned direct materials totaling $2,000 to in a production cost report, units to be accounted for are calculated as be used in production. Assign costs to units transferred out and to units in ending WIP inventory. The Assembly Department has 8,000 units in process on July 1 and starts 42,000 units during the month. Therefore, to account for is 50,000 units.

The company uses a process costing and has two processing departments – department X and department Y. The processing starts in department X where three different chemicals are mixed together in equal proportions. After mixing in department X, the partially completed units are transferred to department Y. The following data has been taken from department X.

 Activity rate = total estimated o cost / TOTAL activity

Percentage of completion estimates for units in ending WIP inventory will increase to 80 percent for direct materials, 85 percent for direct labor, and 90 percent for overhead. An example of how to use Excel to prepare a production cost report follows. Notice that the basic data are at the top of the spreadsheet, and the rest of the report is driven by formulas. Each month, the data at the top are changed to reflect the current month’s activity, and the production cost report takes care of itself.

The specific function costs are called direct labor and are assigned to work‐in‐process inventory. The general factory labor costs are indirect labor costs that are added to factory overhead. Unlike the accounting for payroll under the job order cost system, the employee does not have to be physically involved in making a product to be assigned to a specific function. The accounting for the labor costs for June includes the following journal entries, shown in the following table. Thus, the equivalent units for direct materials are generally higher than for other manufacturing expenses. Process costing assigns expenses to different departments in your business, and it accounts for various cost areas including materials and payroll.

Short Answer

Equivalent units of production refer to the number of units that would be completed if all effort during a period had been applied only to those units that were started and completed in a period. The highest production cost among materials, labor and manufacturing overhead. This must match total costs to be accounted for. Although not an issue in this example, rounding the cost per equivalent unit may cause minor differences between the two amounts. Costs are assigned to completed units transferred out and units in ending WIP inventory using a four-step process. The accountant first finds out how many units have been finished and sent out. Since these items are 100% complete, each unit sent out is one equivalent unit of production.

A schedule that shows that the total costs accounted for equal the total costs to be accounted for. Note that, in the weighted average method, beginning work-in-process inventory is ignored.

Products with a cost of $6,400 are transferred from the Rolling department to the Packaging department. Products with a cost of $5,500 are transferred from the Mixing department to the Rolling department. John, as you know, we have a new competitor that https://online-accounting.net/ is aggressively going after our customers. It looks as if we will have to focus on keeping costs low to compete. The Assembly department is my biggest concern, and it would help if I knew the cost of each desk that goes through this department.

Unlike materials, more labor and overhead will be needed before these units are transferred to another function or to finished goods. The equivalent units for conversion costs are 400 (1,000 units started × 40% complete for labor and overhead). The total conversion costs are divided by 400 to calculate the conversion costs per unit. To calculate total cost per unit, the materials cost per unit is added to the conversion cost per unit. The equivalent units for materials would be the number of units times the percent complete. In this example, all the materials are added at the beginning of the process so 100% of materials for this function are included in all the units at the end of the period. The equivalent units for materials are 1,000 (1,000 units × 100% complete for materials).

Products with a cost of $55,000 are transferred from the Mixing department to the Testing department. Products with a cost of $22,000 are transferred from the Fabrication department to the Packaging department. The cost of goods transferred from the Molding department to the Packaging department totaled $10,000. Review Note 4.22 “Business in Action 4.4” Describe the last two stages of the production process at Hershey. Work in process, finished goods, cost of goods sold. The balance in the factory labor account should be zero at the end of each period.