Question

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

Short answer

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.

Step-by-step solution

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.

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.

 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.