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The physical flow of production units through a department and the manufacturing effort expended in a department during a period normally occur in the following order:
• units started in the previous period and finished in the present period,
• units started in the present period and finished in the present period, and
• units started in the present period and not finished in the present period.
Because of these mixed manufacturing efforts, production cannot be measured by counting whole units. Accountants use a concept known as equivalent units of production to measure the quantity of production achieved during a period.
Equivalent units of production (EUP) are an approximation of the number of whole units (deem as fully completed units) of output that could have been produced during a period from the actual effort expended during that period.
EUPs are calculated by multiplying the number of actual but incomplete units produced by the respective percentage degree of completion. The following simple example indicates how equivalent units are calculated.
Assume the cooking department of a company had no beginning inventory in November. During November, the department worked on 220,000 units: 200,000 units were completed and 20,000 units were 40 percent complete at the end of the period. The EUP for the period are 208,000 [(200,000 100%) (20,000 40%)].
