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Equivalent Production and how Equivalent Production is computed?



Equivalent Production: Costs charged to a department come from an analysis of materials used, payroll distribution sheets, and departmental expense analysis sheets. Computation of individual unit costs requires an analysis of closing work in process   to determine its stage of completion. This analysis is usually made by a foreman or is the result of using predetermined formulas.

Materials, labor, and factory overhead have been used on the units in process but not in an amount sufficient to complete them. To assign costs equitably to work-in-process inventory and transferred units, units still in process must be restated in terms of completed units, which is 100% completed units for materials costs but less than 100% for labor and overhead costs.

The figure for partially completed units in process is added to units actually completed to arrive at the equivalent production figure for the period.

This equivalent production figure represents the number of units for which sufficient materials, labor, and overhead were issued or used during a period. Materials, labor, and overhead are divided by the appropriate equivalent production figure to compute unit costs by elements. Should a cost element be at a different stage of completion-with respective units in process, then a separate equivalent production figure must be computed. In many manufacturing processes all materials are issued at the start of production. Unless stated otherwise, the illustrations in this discussion assume such a procedure. Therefore, the units still in process have all the materials needed for their completion. This is not true for labor and factory overhead, for only one half, or 50 percent, of the labor and factory overhead needed to complete the units has been used. In terms of equivalent production, labor and factory overhead in process are sufficient to complete some units as fully completed units.
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