Equivalent units of production are a concept used to understand how much money partially completed products are worth to a company. They are useful for process costing, which is the analysis of money flow within the manufacturing process.
Equivalent units describe how much work has been done on a certain number of physical items. To simply calculate equivalent units, you can multiply the number of physical items by the percentage of the work done on them. For two items that are 50% done, you would have one equivalent unit (2 x 50% = 1). When the items are completely finished, the number of equivalent units is equal to the physical items.
Here is the weighted average method formula:
Equivalent units of production for cost component = (Number of units completed) + (units in progress x percentage of completion for this cost component)
Formula for Equivalent Units of Production
The formula below returns a value for equivalent units of production:
Equivalent units of production = Actual number of units in manufacturing process x Percentage of work completed
Calculation of Equivalent Units of Production
Calculating equivalent units of production involves the following four steps:
First, the equivalent production of opening work-in-progress should be determined by taking into account the degree of work to be performed in the current period.
For example, if the opening work-in-progress is 500 units, 40% complete in all respects, then the degree of work to be performed in the current period is 60%.
In this case, the equivalent production for opening work-in-progress in the period is 300 units (i.e., 500 x 60%).
Secondly, the number of units introduced and completed in the current period should be calculated. This involves deducting the closing work-in-progress from the amount introduced in the process during the current period.
Thirdly, the equivalent units of production for the closing work-in-progress should be determined by considering the number of units of closing work-in-progress and the level of completed work.
If the closing work-in-progress is 800 units, 70% complete in all respects, the equivalent units of production of closing work-in-progress is 560 units (i.e., 800 x 70%).
Finally, the equivalent units of production calculated via the previous three steps should be aggregated to ascertain the total output in terms of equivalent units or equivalent production.
A unit is not transferred out unless it is completed. In this way, every transferred out unit is an equivalent unit.
The units that remain in the ending work-in-process inventory, however, are not complete. Therefore, to convert the work-in-process inventory into equivalent units, it is important to keep the percentage of completion in the calculation.