In this article we will discuss about the Concept of Equivalent Production:- 1. Concept of Equivalent Production 2. Equivalent Units and Cost Elements.
Concept of Equivalent Production:
Equivalent Production represents the production of a process in terms of completed units. At the end Of any given period there are likely to be partly completed units (work-in-process). It is evident that some of the costs pertaining to this period are attributable to the units which have not been completed.
Just to spread the total costs equitably over part finished and fully complete units the concept of equivalent units is required. The number of equivalent units is the number of equivalent fully complete units which the partly completed units represent.
The following example will make the concept clear.
Let us assume that in a given period production was 3,000 complete units and 800 partly complete units. The partly complete units were deemed to be 75% complete.
Total equivalent production = Complete units + Equivalent units in Work-in-progress
= 3,000 + ¾ of 800 = 3,000 + 600 = 3,600.
The total cost will be spread over the total equivalent production.
So, cost per unit = Total costs + Total equivalent production (units).
Equivalent Units and Cost Elements:
In calculating equivalent units, each cost element must be treated separately and then the cost per unit of each element is added to ascertain the cost of a complete unit.
For the month of January, 1991, production and cost data were as follows:
Production was 1,500 fully complete units and 200 partly complete.
The degree of completion of the 200 units work-in-progress was as follows:
Calculate the total equivalent production, the cost per complete unit and the value of work-in-progress.
Value of completed production = 3,000 x Rs.3.20 = Rs.9,600
Value of work-in-Progress:
Total Cost – Value of completed production = Rs.10,000 – 9,600 = Rs.400
RP Limited furnishes you the following information relating to Process B for the month of October, 1998:
(i) Opening work-in-progress – Nil
(ii) Units introduced 10,000 units Rs.3 per unit
(iii) Expenses debited to the Process
(iv) Normal loss in process = 1% of input.
(v) Closing work-in-process – 350 units Degree of completion – Materials 100% Labour and Overheads 50%
(vi) Finished output – 9,500 units
(vii) Degree of completion of abnormal loss: Materials 10% Labour & Overheads 80%
(viii) Units scrapped as normal loss were sold at Re 1.00 per unit,
(ix) All the units of abnormal loss were sold at Rs.2.50 per unit
1. Statement of Equivalent production;
2. Statement showing the cost of Finished goods, abnormal loss and closing work-in- progress.
3. Process B Account.