E. Equivalent Units.
1. Equivalent units of production measure the work done during the period,
expressed in fully completed units.
2. Companies use this measure to determine the cost per unit of
completed product.
3. Equivalent units of production are the sum of:
4. The weighted-average method is most commonly used to compute
equivalent units of production.
5. This method considers the degree of completion (weighting) of the units
completed and transferred out and the ending work in process.
MANAGEMENT INSIGHT
In recent years more companies have been remanufacturing a wide variety of
products including cell phones, car parts, and medical equipment. Rising
commodity prices and regulations requiring that certain electronic items be recycled
has fueled this trend.
In what ways might the relative composition (materials, labor, and overhead) of a
remanufactured product’s cost differ from that of a newly made product?
Answer: We would expect that the materials costs would be substantially
reduced since the bulk of the physical product is being reused. The
F. Production Cost Report.
1. In order to complete a production cost report, the company must perform
four steps:
a. Compute the physical unit flow.
2. The first step in completing a production cost report requires computing
physical unit flow.
a. The physical units are computed by adding the units started (or
transferred) into production during the period to the units in process
at the beginning of the period. This amount is called the total units
to be accounted for.
3. The second step in completing a production cost report requires computing
equivalent units of production.
a. Each processing department adds materials at the beginning of the
process, and incurs conversion costs uniformly during the process.
4. The third step in completing a production cost report requires computing
unit production costs.
a. Unit production costs are costs expressed in terms of equivalent units
of production.
5. The fourth step in completing a production cost report requires preparing
a cost reconciliation schedule.
a. The company prepares a cost reconciliation schedule to assign total
costs to (1) units transferred out to the next department and (2)
ending work in process.
G. Preparing the Production Cost Report.
1. The production cost report contains both quantity and cost data for a
production department.
b. There are four steps in preparing a production cost report:
(1) Prepare a physical unit schedule.
(2) Compute equivalent units.
*H. Equivalent Units Under FIFO.
1. Under the FIFO method, companies compute equivalent units on a first–
in, first-out basis.
2. Companies assume that the beginning work in process is completed
before new work is started under the FIFO method.
3. Equivalent units are the sum of the work performed to:
a. Finish the units of beginning work in process inventory.
4. The units started and completed during the current period are the units
transferred out minus the units in beginning work in process.
6. As with the weighted-average method, once companies determine the
physical flow of units, they need to compute the equivalent units of
production.
a. When companies add materials at the beginning of the process, no
additional materials costs are required to complete the beginning
work in process. However, sometimes companies add materials
evenly throughout the process. When this occurs, computations for
materials would mirror those for conversion costs.
b. Equivalent units for materials are the sum of:
(1) Units started and finished.
7. The unit production costs are based entirely on the production costs
incurred during the month. The costs in the beginning work in process
are ignored because they were incurred on work done in the preceding
month.
8. In preparing a cost reconciliation schedule under the FIFO method:
a. The cost of the beginning work in process is always assigned to the
goods transferred to the next department (or finished goods, if
processing is complete).
9. The weighted-average method of computing equivalent units is simple to
understand and apply. It will be very similar to the FIFO method when
prices do not fluctuate significantly from period to period.
10. Conceptually, the FIFO method is superior to the weighted-average
method because it measures current performance using only costs
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. Costs are assigned to each specific job in a process cost system.
True False
2. In a process cost system, total costs are determined at the end of a period of time, such
as a month.
True False
3. In a process cost system, the unit cost is total manufacturing costs divided by the
equivalent units produced during the period.
True False
4. The accumulation of the costs of materials, labor, and manufacturing overhead is the
same in a process cost system as in a job order cost system.
True False
5. More materials requisitions are generally required in a process cost system than in a job
order cost system.
True False
6. Equivalent units of production equals units completed and transferred out + units in
beginning work in process.
True False
7. Two equivalent unit computations are necessary—one for materials and the other for
conversion costs.
True False
8. The first step in preparing a production cost report is to compute the equivalent units of
production.
True False
9. The cost reconciliation schedule shows that the total costs accounted for equal the total
costs to be accounted for.
True False
*10. Units in work in process at the beginning of the period are included in units “started and
completed” under the FIFO method.
True False
Multiple Choice
1. Which of the following is not a step in preparing a production cost report?
a. Prepare a cost reconciliation schedule.
b. Compute equivalent units of production.
c. Compute the physical unit flow.
d. Assign costs to particular jobs.
2. A department has no beginning work in process, has started 80,000 units and completed
50,000 units. Its ending work in process is 30,000 units, 60% complete as to conversion
costs and fully complete as to materials. Its equivalent units for conversion costs are
a. 50,000.
b. 80,000.
c. 68,000.
d. 44,000.
3. In process costing, the computation of unit production costs requires
a. the accumulation of material and conversion costs in work in process for each
department or process.
b. the computation of equivalent units for material and conversion costs.
c. both a and b.
d. neither a nor b.
4. Which of the following is not included in a production cost report?
a. Costs accounted for.
b. Entries to assign cost.
c. Units accounted for.
d. Units to be accounted for.
5. Unit costs for materials and conversion costs amount to $4 and $5 respectively. The
ending work in process costs for 8,000 units (100% complete as to material and 70%
complete as to conversion costs) amount to
a. $60,000.
b. $72,000.
c. $44,000.
d. $40,000.
ANSWERS TO QUIZ
True/False
1. False 6. False
Multiple Choice
1. d.
2. c.