The units that were completed and transferred out plus the ending inventory equal the total units to account for. The packaging department for Rock City Percussion completed 6,500 units and transferred them into finished goods inventory. Since the maximum number of units to possibly be completed is 8,250 and no units were lost to spoilage, the number of units in the packaging department’s ending inventory must be 1,750. The total of the 6,500 units completed and transferred out and the 1,750 units in ending inventory equal the 8,250 possible units in the packaging department.

Estimating the Percentage of Completion

He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. This video will provide a demonstration of cost assignment under the FIFO method. Wanda didn’t have any study materials before finding CMA Exam Academy so she opted for my Complete Course to gain access to the ultimate toolkit for the CMA exam preparation. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing.

• Process costing is used to figure out how much it costs to produce items that are very similar or identical, like chocolate bars or cans of soda.
• As a result, the number of equivalent units for material costs and for conversion costs remaining in ending inventory is different for the testing and sorting department.
• The objective of using equivalent units is to be able to apportion the costs of production to completed units and partially completed units held in work in process.
• In Department B, the ending units may be in different stages of completion regarding the materials, labor, and overhead costs.

What are the limitations of equivalent units?

In the previous page, we discussed the physical flow of units (step 1) and how to calculate equivalent units of production (step 2) under the weighted average method. We will continue the discussion under the weighted average method and calculate a cost per equivalent unit. First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. Then, we compare the total to the cost assignment in step 4 for units completed and transferred and ending work in process to get total units accounted for. First, we need to know our total costs for the period (or total costs to account for) by adding beginning work in process costs to the costs incurred or added this period. This report shows the costs used in the preparation of a product, including the cost per unit for materials and conversion costs, and the amount of work in process and finished goods inventory.

Formula for Equivalent Units of Production

For example, in the case of chocolate bars, conversion costing means the cost for mixing, molding, and packaging. Work In Progress (WIP) are the products that are still being made and not finished yet. In the case of chocolate bars, WIP means the bars that are partially made and not ready to be sold. The amount transferred out will include materials costs incurred during the current period plus any amount in beginning inventory.

The total of the cost per unit for materials ($1.50) and for conversion costs ($6.90) is the total cost of each unit transferred to the testing and sorting department. For the shaping department, the materials are \(100\%\) complete with regard to materials costs and \(35\%\) complete with regard to conversion costs. The \(7,500\) units completed and transferred out to the finishing department must be \(100\%\) complete with regard to materials and conversion, so they make up \(7,500 (7,500 publication 225 farmer’s tax guide × 100\%)\) units. The \(1,200\) ending work in process units are \(100\%\) complete with regard to material and have \(1,200 (1,200 × 100%)\) equivalent units for material. The \(1,200\) ending work in process units are only \(35\%\) complete with regard to conversion costs and represent \(420 (1,200 × 35\%)\) equivalent units. When the hickory size 5A drumsticks have completed the shaping process, they are transferred to the packaging department along with the inventory costs of $29,775.

In this costing system, costs are tracked for each step, or “process,” in the production, and then the total cost is divided by the number of units produced. It’s useful for companies making large quantities of similar products because it helps them understand cost per item. Equivalent Units of Production is a more accurate method to determine whether the proposed output of the process will be able to meet or exceed that budgeted for. In production, units completed in a period is equivalent to units that got into the finished goods or work-in-progress. From the accounting records, we see that total direct materials transferred to the mixing department in February were $3,575 and that direct labor and manufacturing overhead totaled $3,640. As with calculating the equivalent units and total cost of production in the initial processing stage, there are four steps for calculating these costs in a subsequent processing stage.

A similar process is used to account for the costs completed and transferred. Reconciling the number of units and the costs is part of the process costing system. The reconciliation involves the total of beginning inventory and units started into production. For the shaping department, the materials are 100% complete with regard to materials costs and 35% complete with regard to conversion costs. The 7,500 units completed and transferred out to the finishing department must be 100% complete with regard to materials and conversion, so they make up 7,500 (7,500 × 100%) units.

This helps the factory calculate costs more accurately for the partially finished products. While process costing tracks costs for huge number of identical products, job costing tracks costs for specific, individual jobs or orders, which are often unique. For example, building a custom piece of furniture or a unique construction project would use job costing. In this case, we would track the costs of materials, labor, and overhead for each specific job separately. Both methods help businesses understand and manage their production costs, but they are used in different situations based on the type of products being made.