Question

"It is difficult to understand how costs can be assigned to equivalent units when such units do not really exist in a physical form." Discuss

Answer 1

Inventory comprises of raw material, work in progress and finished goods.

Raw materials and finished goods are absolute units.

Coming to work in progress, units for partially completed and partially uncompleted. It's like a semi finished good. The problem is that we have incurred direct material labour and overheads on partially completed goods but expressed as dollars X per unit as a fully completed unit,

And also the cost of production should be assigned to all the absolute units.

But work in progress or not absolute units which are very much required to convert such partly finished goods into to fully finished goods or equivalent production in order to to assign or allocate cost of production.

It shall be found by multiplying number of total units and percentagepercentage of completion of percentage of completion of production.