Question

Why are equivalent units needed to properly allocate costs between completed production and production in process?

Answer 1

Equivalent units are needed to properly allocate costs between completed production and production in process because we have to apply the cost incurred to the finished goods and work in process inventory. The Finished goods will be completed in all respect of materials and conversion cost , but the work in process will be partially completed either for Conversion or both for material & Conversion.

As we have allocate the cost incurred to finished goods & work in process inventory that should be based on the stage of Completion of Work in process inventory .Hence, there is a need of Equivalents units so that we can apply the cost per equivalent units ( Costs incurred / Equivalent unit ) to Finished goods and Work in process inventory.