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Chapter 16: Q6DQ (page 743)

Explain in simple terms the notion of equivalent units of production (EUP). Why is it necessary to use EUP in process costing?

Short Answer

Expert verified

Equivalent units of production reflect the partial and completed work in terms of completed work, and therefore, it helps in determining the total work done.

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01

Definition of Process Costing

The cost method used by the business entity that produces a higher number of products with similar specifications is known as process costing. Under this method, the total cost incurred by the business entity is allocated to each unit by dividing the total cost by the total units produced.

02

Notion of Equivalent units of production

Equivalent units of production can be defined as the expression that reflects the work done by the business entity. It is done by presenting the finished goods and semi-finished goods in terms of finished goods.

03

 Necessity of calculating the equivalent units of production

It is necessary to calculate the equivalent units of production because it helps the business entity determine the total work done and the cost incurred in the production process.

It also allows business entity in the identification the cost incurred in the production of semi-finished goods.

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Most popular questions from this chapter

You hire a new assistant production manager whose prior experience is with a company that produced goods to order. Your company engages in continuous production of homogeneous products that go through various production processes. Your new assistant e-mails you questioning some cost classifications on an internal report—specifically why the costs of some materials that do not actually become part of the finished product, including some labor costs not directly associated with producing the product, are classified as direct costs. Respond to this concern via memorandum.

Match each of the following items A through G with the best numbered description of its purpose.

A. Factory Overhead account.

B. Process cost summary

C.Equivalent units of production

D.Work in Process Inventory account

E. Raw Materials Inventory account

F. Materials requisition

G. Finished Goods Inventory account

1. Notifies the materials manager to send materials to a production department.

2. Holds costs of indirect materials, indirect labor, and similar costs until assigned to production.

3. Holds costs of direct materials, direct labor, and applied overhead until products are transferred from production to finished goods (or another department).

4. Standardizes partially completed units into equivalent completed units.

5. Holds costs of finished products until sold to customers.

6. Describes the activity and output of a production department for a period.

7. Holds costs of materials until they are used in production or as factory overhead.

Question: Is it possible to have under or overapplied overhead costs in a process costing system? Explain.

Elliott Company produces large quantities of a standardized product. The following information is available for its production activities for March.

Units

Cost

Beginning work-in-process inventory

2,000

Beginning work-in-process inventory

Started

20,000

Direct material

\(2,500

Ending work-in-process inventory

5,000

Conversion

6,360

\)8,860

Direct material added

168,000

Status of ending work-in-process inventory

Direct labor added

199,850

Material-percent complete

100%

Overhead applied (140% of direct labor)

279,790

Conversion – percent complete

35%

Total cost to account for

\(656,500

Ending work-in-process inventory

\)84,110

Prepare a process cost summary report for this company showing costs charged to production, unit cost information, equivalent units of production, cost per EUP, and its cost assignment and reconciliation. Use the weighted-average method.

Refer to QS 16-21. Using the FIFO method, assign direct materials costs to the roasting department’s output—specifically, the units transferred out to the mixing department and the units that remain in process in the roasting department at month-end.
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