Question

Job order manufacturing and process manufacturing are two major costing systems used in manufacturing. The unique feature for process costing system is the concept of equivalent units. Read chapter 16 and answer below questions: 1) What is meant by equivalent units of production, and why are they important when a process cost accounting system is used

Answer 1

Equivalent Units in process costing refers to the method of making goods that are only partially completed at the end of the period into an equivalent amount of complete goods.

If for instance, goods in Ending Work in Process are 500 units but they are only 70% complete, the Equivalent Units are = 350 units = 500 * 70%.

This is very important because in process costing, costs need to be assigned to goods that were produced and because they cannot be assigned to incomplete goods, the incomplete goods will be made into Equivalent units that costs can be assigned to.