Equivalent Units – Weighted Average Method
Equivalent units are the number of finished units that would have been prepared had there been no partially completed units in a process.
The concept of equivalent units is applicable to process costing. Since processes are continuous, when a cost of production report is prepared, the unfinished units in the opening work in process or closing work in process are assigned an estimated percentage of completion. Based on this percentage of completion, number of equivalents units is calculated in order to find cost per completed unit.
The calculation of equivalent units depends on the cost flow assumption used i.e. the calculation is different for first-in-first-out and weighted average. In the weighted average method, total equivalent units for the process for a period are calculated using the following formula.
Total equivalent units for a cost component = A + B × C
A = units transferred out to the next department/finished goods
B = units in closing work in process
C = percentage of completion with respect to the relevant cost component
Calculate total equivalents units using the following information.
|Units in opening work in process||10,000|
|Units transferred out||195,000|
|Units in closing work in process||5,000|
|% of completion of closing WIP–direct materials||100%|
|% of completion of closing WIP–conversion costs||60%|
Total equivalent units–direct materials = 190,000 + 5,000 × 100% = 195,000
Total equivalent units–conversion costs = 190,000 + 5,000 × 60% = 193,000