{"id":31,"date":"2015-06-03T19:09:03","date_gmt":"2015-06-03T19:09:03","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=31"},"modified":"2015-12-27T15:11:27","modified_gmt":"2015-12-27T15:11:27","slug":"equivalent-whole-units","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/equivalent-whole-units\/","title":{"raw":"3.2 Equivalent Units (Weighted Average)","rendered":"3.2 Equivalent Units (Weighted Average)"},"content":{"raw":"
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Essentially, the concept of equivalent units<\/span><\/strong> involves expressing a given number of partially completed units as a smaller number of fully completed units.\u00a0\u00a0 We do this because it is easier to account for whole units then parts of a unit.\u00a0 We are adding together partially completed units to make a whole unit.\u00a0 For example, if we have 3 units 1\/3 of the way complete, we can add them together to make 1 equivalent unit (1\/3 + 1\/3 + 1\/3).\u00a0 We can make this calculation easier by multiplying the units by a percentage of complete.<\/p>\r\n

For example, if we bring 1,000 units to a 40 % state of completion, this is equivalent to 400 units (1,000 x 40%) that are 100%\u00a0\u00a0complete. Accountants base this concept on the supposition that a company must incur approximately the same amount of costs to bring 1,000 units to a 40% level of completion as it would to complete 400 units.<\/p>\r\n

Here is a diagram of the concept of equivalent units. As you examine the diagram, think of the amount of water in the glasses as costs that the company has already incurred.<\/p>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n

\"process<\/a><\/p>\r\n

Now, watch the video for another example.<\/p>\r\n\r\n

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\r\n\r\nhttps:\/\/youtu.be\/IMhBXeb0IsY\r\n\r\n\r\n\r\n\r\n\r\n
Units in Beg. Work in Process<\/td>\r\nUnits Completed and Transferred<\/td>\r\n<\/tr>\r\n
+ Units Started this period<\/span><\/td>\r\n+ Units in End. Work in Process<\/span><\/td>\r\n<\/tr>\r\n
= Total Units<\/td>\r\n= Total Units<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

The total units in each column must agree with one another.\u00a0 This formula explains\u00a0how many units we had to work with (including units in beginning work in process + units started this period) and what happened to those units (units completed or units remain in work in process inventory since there are not complete).<\/p>\r\n

Under the weighted average method, equivalent units are calculated based on 2 things:\u00a0 units completed and transferred out and units in ending work in process inventory.<\/strong><\/p>\r\n

Units completed and transferred are finished units and will always be 100% complete for equivalent unit calculations for direct materials, direct labor and overhead.\u00a0 For units in ending work in process, we would take the units unfinished x a percent complete.\u00a0 The percent complete can be different for direct materials, direct labor or overhead.<\/p>\r\n

Example - Jax Company<\/strong><\/p>\r\n

Assume that Jax Company manufactures and sells a chemical product used to clean kitchen counters and sinks. The company processes the product in two departments. Department A crushes powders and blends the basic materials. Department B packages the product and transfers it to finished goods.\u00a0 We will look at equivalent units for Department B.\u00a0 The June production data for Department B is:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\u00a0<\/strong><\/td>\r\nDepartment B<\/strong><\/td>\r\n<\/tr>\r\n
Beginning work in process<\/td>\r\n-0-<\/td>\r\n<\/tr>\r\n
Units started this period<\/td>\r\n11,000<\/td>\r\n<\/tr>\r\n
Units completed and transferred<\/td>\r\n9,000<\/td>\r\n<\/tr>\r\n
Ending work in process units<\/td>\r\n2,000<\/td>\r\n<\/tr>\r\n
Direct materials<\/td>\r\n$ 1,100<\/td>\r\n<\/tr>\r\n
Direct labor<\/td>\r\n$ 2,880<\/td>\r\n<\/tr>\r\n
Applied overhead<\/td>\r\n$ 8,880<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

The physical flow of units shows:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Units in Beg. WIP<\/td>\r\n-0-<\/td>\r\nUnits Completed and Transferred<\/td>\r\n9,000<\/td>\r\n<\/tr>\r\n
Units Started this period<\/td>\r\n11,000<\/span><\/td>\r\nUnits in End. WIP<\/td>\r\n2,000<\/span><\/td>\r\n<\/tr>\r\n
Total Units<\/td>\r\n11,000<\/td>\r\n\u00a0=<\/td>\r\nTotal Units<\/td>\r\n11,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

The beginning step in computing Department B\u2019s equivalent units for Jax Company is determining the stage of completion of the 2,000 unfinished units (remember units completed and transferred are always 100% complete<\/em>).\u00a0 In Department B,\u00a0the ending units may be in different stages of completion regarding the materials, labor, and overhead costs. Assume that Department B adds all materials at the beginning of the production process. Then\u00a0ending inventory would be 100% complete as to materials since we received all materials at the beginning of the process.<\/p>\r\n

Accountants often assume that units are at the same stage of completion for both labor and overhead. Accountants call the combined labor and overhead costs conversion costs. Conversion costs<\/span><\/strong> are those costs incurred to convert raw materials into the final product (meaning, direct labor and overhead).<\/p>\r\n

Let us assume that, on average, the 2,000 units in ending inventory are 40% complete as to conversion costs. This means that Department B transferred out 9,000 units fully completed and brought 2,000 units to a 40% completion state. Department B now has an equivalent of 800 fully completed units remaining in inventory (800 = 2,000 X 40 per cent).<\/p>\r\n

The equivalent units for materials, labor and overhead would be calculated as:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Materials<\/strong><\/td>\r\nConversion Costs<\/strong><\/td>\r\n<\/tr>\r\n
Units Completed and Transferred<\/td>\r\n9,000<\/td>\r\n9,000<\/td>\r\n<\/tr>\r\n
(9,000 x 100% complete)<\/td>\r\n<\/tr>\r\n
Units in Ending WIP<\/td>\r\n<\/tr>\r\n
\u00a0\u00a0 Materials \u00a0 (2,000 x 100% complete)<\/td>\r\n2,000<\/span><\/td>\r\n<\/tr>\r\n
\u00a0\u00a0 Conversion Cost (2,000 x 40% complete)<\/td>\r\n800<\/span><\/td>\r\n<\/tr>\r\n
Total Equivalent Units<\/strong><\/td>\r\n11,000<\/strong><\/td>\r\n9,800<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

Total\u00a0equivalent units for each cost element\u00a0(materials, conversion cost) is calculated as:<\/p>\r\n

Equivalent units = Units completed + (Units in ending inventory X percent complete)<\/p>\r\n

The key to equivalent units is determining the percent complete, especially for materials can be confusing.\u00a0 Common terms you will see when determine ending work in process percent complete:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Description<\/strong><\/td>\r\n% Complete<\/strong><\/td>\r\n<\/tr>\r\n
Materials added at the beginning of the process<\/td>\r\n100% complete for materials<\/td>\r\n<\/tr>\r\n
Materials added evenly through out the process<\/td>\r\nUse % complete for ending WIP<\/td>\r\n<\/tr>\r\n
Materials added at the end of the process<\/td>\r\n0% complete for materials<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>","rendered":"
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Essentially, the concept of equivalent units<\/span><\/strong> involves expressing a given number of partially completed units as a smaller number of fully completed units.\u00a0\u00a0 We do this because it is easier to account for whole units then parts of a unit.\u00a0 We are adding together partially completed units to make a whole unit.\u00a0 For example, if we have 3 units 1\/3 of the way complete, we can add them together to make 1 equivalent unit (1\/3 + 1\/3 + 1\/3).\u00a0 We can make this calculation easier by multiplying the units by a percentage of complete.<\/p>\n

For example, if we bring 1,000 units to a 40 % state of completion, this is equivalent to 400 units (1,000 x 40%) that are 100%\u00a0\u00a0complete. Accountants base this concept on the supposition that a company must incur approximately the same amount of costs to bring 1,000 units to a 40% level of completion as it would to complete 400 units.<\/p>\n

Here is a diagram of the concept of equivalent units. As you examine the diagram, think of the amount of water in the glasses as costs that the company has already incurred.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

\"process<\/a><\/p>\n

Now, watch the video for another example.<\/p>\n

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