Question

What is the primary reason for computing equivalent units? Equivalent units provide a means of:

		allocating costs between production areas.
		determining the cost of outsourcing production.
		determining the number of completed units in ending inventory.
		allocating costs between work-in-process and ending inventory

Answer 1

Equivalent units are used in the production cost reports for the producing departments of manufacturers using a process costing system.

It is the number of completed units of an item that a company could theoretically have produced, given the amount of direct materials, direct labor, and manufacturing overhead costs incurred during that period for the items not yet completed.

Equivalent units of production are usually stated separately for direct materials and all other manufacturing expenses, because direct materials are typically added at the beginning of the production process, while all other costs are incurred as the materials gradually work their way through the production process. Thus, the equivalent units for direct materials are generally higher than for other manufacturing expenses.