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Process Costing and Equivalent Units in Accounting

Rigby Limited’s Machining Department had 20 000 units in work in process (WIP) on 1 March. These units were 40 per cent complete with respect to conversion. Direct materials are added at the beginning of the production process, while conversion costs are incurred uniformly throughout the process. An additional 40 000 units were started during March, and 10 000 units were in WIP on 31 March. The units in WIP on 31 March were 20 per cent complete with respect to conversion.

Costs incurred in the Machining Department for March were as follows:

WIP 1 March           Cost incurred during March    Totals

Direct material     \$78 000                        \$252 000                                \$330 000

Conversion             23 200                           132 800                                 \$156 000

\$ 101 200                     \$ 384 800                               \$ 486 000

Required:

1        Using an example, explain the concept of equivalent units. Explain why an understanding of equivalent units is necessary to undertake process costing.

2        Using the weighted average method of process costing, calculate the cost of goods completed and transferred out during March and the cost of WIP at 31 March. Show all workings.

3        Construct an Excel spreadsheet to prepare March’s production report. What is the total cost of completed units if the units in WIP on 31 March are 70 per cent complete with respect to conversion.

In the production, equivalent units is a concept of cost accounting which is applied to the work-in-process inventory at the end of the period (Horngren, 2011). It is considered as the completed units of a product that an organization could theoretically have manufactured, given the amount of direct materials, direct labor and manufacturing overhead costs occurred for that period for the products not yet completed (Drury, 2012). As for example, if it is observed that 100 units of a company is in process but they have only expended 30% of the processing costs, then the company should consider 30 equivalent units of production.
Equivalent units is applied in deriving the process cost related with the manufacturing of a product (Lanen, Anderson and Maher, 2013). This concept has no elation with the operational perspective (Maritz, 2013). This concept is also not important to derive any other cost rather than the process costing.
In this concept, all costs are stated separately such as cost of direct material and other manufacturing expenses.