During March, Hanks Manufacturing Equivalent Units Calculation

Equivalent units of materials and conversion costs

During March, Hanks Manufacturing started and completed 30,000 units. In beginning work in process, there were 5,000 units 60 percent complete with respect to conversion costs. Materials are added at the beginning of the process. In EWIP there were 10,000 units 40 percent complete for conversion costs. Using FIFO, the equivalent units of materials and conversion costs are, respectively:

Answer:

Equivalent units

Materials= 40,000 units

Conversion= 36,000 units

Explanation:

Equivalent units are notional whole units which represent incomplete work and are used to apportion cost between work progress and completed work.

Equivalent units = Degree of work done(%) × units of inventory

Conversion cost Equivalent Units:

  • Opening inventory: 40% × 5,000 = 2,000
  • Fully worked units: 100% × 30,000= 30,000
  • Closing inventory: 40% × 10,000= 4,000
  • Total equivalent units: 36,000

Material cost Equivalent Units:

  • Opening inventory: 0% × 5,000 = 0
  • Fully worked units: 100% × 30,000= 30,000
  • Closing inventory: 100% × 10,000= 10,000
  • Total equivalent units: 40,000

Notes:

Conversion cost:

  1. DOC for opening inventory is 40%, i.e. 100%-60%. 60% work has been done in the previous period.
  2. Fully worked units represent units introduced in the current period and completed in the same period.
  3. Closing work is only 40% completed, representing work started in the current period but not yet completed.

Material cost:

  1. DOC for opening inventory is 0%, i.e. 100%-100%. All materials required for the opening inventory were added in the previous period.
  2. Fully worked units represent units introduced in the current period and completed in the same period.
  3. All materials required for the closing inventory were added in the current period, hence 100% degree of completion was used.

What is the significance of equivalent units in manufacturing processes?

Equivalent units are important in manufacturing processes as they provide a measure to allocate costs between work in progress and completed work. By calculating equivalent units, companies can accurately determine the cost of unfinished goods and allocate resources effectively. It helps in managing production costs and optimizing the production process.

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