Equivalent Unit and WIP

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:32AM in AAT student discussion
Hi,

Please can someone help me with work in progress and equivalent units. I think I have grasped process costing with regards to losses and gains but I always get stuck with equivalent units.
If possible can somebody explain it very simply to me because I have read different articles and textbooks on it but I can't seem to get it through to my brain.

Thank you in advance

xChanx

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Equivalent Unit and WIP

    If you have a continuous production line the chances are that at the end of an accounting period some units will be part-completed.
    If you know how much was spent during the period, you know that that money has enabled you to make a number of completed products and some part-completed ones.

    If someone says "how much was the cost per unit of completed products butterfly gal?

    You would need to divide the total input cost by the output. But the output is not straight forward, some is not completed. These need to be treated in terms of their level of completeness. 200 units which are part-completed may have had
      60% of the materials needed to complete them
      60% of the labour time needed to complete them
      and 60% of the overhead needed to complete them

    In this case these 200 units are equivalent to (60% of 200) 120 completed units. And in this case the cost per unit could be calculated by saying
      Total input cost
      total completed units + 120 equivalent units


      Let me know if this is any help.

      If it makes sense the next step is to have the inputs with differing degrees of completeness.
    • System
      System Posts: 100,534 🤖 Admin 🤖
      Re:Equivalent Unit and WIP

      Yeah that does make sense. Thank you, but I have no idea about differing levels of output and how to work out what goes into the process account.

      xchanx
    • System
      System Posts: 100,534 🤖 Admin 🤖
      Re:Equivalent Unit and WIP

      If you had 200 units part-completed.

      I made some sloe gin yesterday, I have used all the matrerials so there is no more to add (this input is 100% used) but I must go and stir it everyday this week so the labour input is only a % say 60% and then there is overhead (say only 30% has been used)

      So to get from the tub of unstirred Sloe Gin to the finished product, I'll need some more labour and some more overhead.

      Going back to our previous example, imagine we have 900 completed units and 200 part-completed (100% material, 60% labour and 30% overhead).

      Now look at the individual input costs (not the total)
        The materials we used this accounting period cost £5,500
        Our labour cost this accounting period was £4,080
        Our overhead cost this accounting period was £38,400

      Next find the cost per unit in terms of each input cost
      Materials: £5,500/1100 equivalent units (900 + 200)

      Labour: £4,080/1020 equivalent units (900 + 60% of 200)
      Overhead: £38,400/960 equivalent units (900 + 30% of 200)


      This gives us
      Materials £5.00 per completed unit
      Labour £4.00 per completed unit
      Overhead £40.00 per completed unit

      So the cost per unit will be £49.00

      And our closing work in progress will be worth
      for materials 200 x £5 = £1000
      for labour 120 x £4 = £480
      for overhead 60 x £40 = £2,400
      A total of £3,880


    • System
      System Posts: 100,534 🤖 Admin 🤖
      Re:Equivalent Unit and WIP

      If you can immagine this is your debit column on the T account
      Inputs:
      Materials: £5,500
      Labour: £4,080
      Overhead: £38,400
      Total: £47,980

      And please imagine this is the credit column on the T account
      Outputs:
      Finished Goods 900 at £49.00 each = £44,100
      Closing Work in progress (as above)= £3,880
      Total: (which agrees fortunately!!) = £47,980

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