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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.
