Definition: Equivalent units of production are partially completed units expressed in terms of finished goods. At the end of an accounting period, a manufacturer may have a certain quantity of work-in-progress. These goods, which are only partially made, could be said to represent a lower number of finished goods. In other words, work-in-process could be stated in terms of equivalent units of production.
What does Equivalent Units of Production mean?
At the end of the month, a factory has produced 1,000 units of finished goods and had 500 units in production. These 500 units are at an intermediate stage. Half the direct labor, direct material, and manufacturing overheads required to complete the production process have already been consumed. The 500 units of work-in-process can be expressed in equivalent units of production. As 50% of the total cost involved in the manufacturing process has already been incurred, the equivalent units of production of these 500 units is 250 units. This calculation has been carried out in the following manner: Number of units that are at an intermediate stage of production X Percentage of work completed = Equivalent units of production 500 units X 50% = 250 units
Example of Equivalent Units of Production
Green & Co, a manufacturer of lawn mowers, produces 300 units in January 2018. At the end of the month, it has another 40 units in production. About 30% of the cost for direct labor, direct materials, and manufacturing overhead costs associated with producing these 40 units has already been incurred. In terms of equivalent units of production, these 40 partially completed lawn mowers can be expressed as 12 units: Number of units that is at an intermediate stage of production X Percentage of work completed = Equivalent units of production 40 lawn mowers X 30% = 12 lawn mowers Hence, the equivalent units of production for the work-in-process at the end of January 2018 are 12.
In a manufacturing company, partially completed goods can be expressed as equivalent units of production. This is done by multiplying the number of units that are incomplete by the percentage of work completed.