What is an equivalent unit of production?


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SOURCE: http://www.accountingcoach.com/blog/what-is-an-equivalent-unit-of-production

An equivalent unit of production is an indication of the amount of work done by manufacturers who have partially completed units on hand at the end of an accounting period. Basically the fully completed units and the partially completed units are expressed in terms of fully completed units. To illustrate, let’s assume that a manufacturer usesdirect labor continuously in one of its production departments. During June, the department began with no units in inventory and it started and completed 10,000 units. It also started an additional 1,000 units that were 30% complete at the end of June. This department is likely to state that it manufactured 10,300 (10,000 + 300)equivalent units of product during June.

If the department’s direct labor cost was $103,000 during the month, it’s June direct labor cost per equivalent unit will be $10 ($103,000 divided by 10,300 equivalent units). This means that $100,000 (10,000 X $10) of labor costs will be assigned to the finished units and that $3,000 (300 X $10) will be assigned to the partially completed units.

You will find equivalent units in the production cost reports for the producing departments of manufacturers using a process costing system. Cost accounting textbooks are likely to present the cost calculations per equivalent unit of production under two cost flow assumptions: weighted-average and FIFO.

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