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:
- DOC for opening inventory is 40%, i.e. 100%-60%. 60% work has been done in the previous period.
- Fully worked units represent units introduced in the current period and completed in the same period.
- Closing work is only 40% completed, representing work started in the current period but not yet completed.
Material cost:
- DOC for opening inventory is 0%, i.e. 100%-100%. All materials required for the opening inventory were added in the previous period.
- Fully worked units represent units introduced in the current period and completed in the same period.
- 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.