equivalent production

EQUIVALENT PRODUCTION

EQUIVALENT PRODUCTION

Equivalent Production represents the production of a process in terms of completed units. In other words it means converting the incomplete production units into its equivalent of complete units. In each process an estimate is made of the percentage completion of any work-in-progress. A production schedule and a cost schedule will then be prepared. The work-in-progress is inspected and an estimate is made of the degree of completion, usually on a percentage basis. It is most important that this estimate is as accurate as possible because a mistake at this stage would affects the stock valuation used in the preparation of final accounts. The formula for equivalent production is:

Equivalent units of work-in-progress = Actual no. of units in process of manufacture x Percentage of work completed

For example: If 20% work has been done on the average of 1,000 units still in process, then 1,000 such units will be equal to 200 completed units. The cost of work-in-progress will be equal to 200 completed units.

STEPS AND PROCEDURE OF COMPUTATION OF EQUIVALENT PRODUCTION

1. Ascertain Equivalent Production in respect of opening work-in-progress, if any. In this case the Equivalent Production is computed by taking into consideration the percentage of work required to finish now in the process. The following formula is used.

Opening WIP (Units) x % of work needed to complete.

2. Find the units introduced and completed and add this to (1). It is calculated as follows:

Units completed and transferred – Opening work-in-progress.

3. Convert the equivalent production of closing work-in-progress and add to the above. The formula is:

Closing work-in-progress (units) x% of work completed.

4. Obtain the total Equivalent Production terms of materials, labour and overhead separately (if degree of completion is different). For this, ‘Statement of Equivalent Production’ is prepared.

5. Find out the net process costs, element wise- materials, labour and overheads.

6. Ascertain the cost per unit of Equivalent Production for each element of cost separately.

Material cost per unit= Material cost/ Equivalent Production in respect of materials

Labour cost per unit = Labour cost/ Equivalent Production in respect of labour

Overhead cost per unit = Overhead cost/ Equivalent Production in respect of overhead

For this purpose ‘Statement of Cost is prepared’

7. Find out the value of opening work-in-progress, finished units and closing work-in-progress. The formula is:

Equivalent Production in respect of materials x Material cost per unit

Equivalent Production in respect of labour x Labour cost per unit

Equivalent Production in respect of overhead x Overhead cost per unit

For this purpose ‘Statement of Evaluation or Apportionment’ is prepared. In short, the following three statements are to be prepared:

1. Statement of Equivalent Production: This statement shows the number of equivalent completed units.

2. Statement of Cost: This statement is prepared to compute the element-wise cost per equivalent unit. For this purpose, the cost of each element is divided by the equivalent units of production of that element.

3. Statement of Evaluation: This statement shows the apportionment of the total process cost to finished output and work-in-progress of the process.

EVALUATION IN DIFFERENT CASES

I. When there is only closing work-in-progress but with no process losses.

Under this case the closing work-in-progress is converted into equivalent units on the basis of estimate as regards degree of completion o materials, labour and production overhead.

II. When there is only closing work-in-progress but with process losses.

In case of normal loss, nothing should be added as equivalent production. However, abnormal loss should be considered as production of good units completed during the period.

III. When there is opening as well as closing work in progress but with no process loss.

Sometimes in a continuous process there will be opening as well as closing work in progress which are to be converted into equivalent of completed units for apportionment of process costs. The procedure of conversion of opening work in progress will vary depending upon whether average cost or FIFO or LIFO method of apportionment of costs is followed.

  • First In First Out Method [FIFO]:

In this method, the assumption is that the incomplete units from the opening stock are completed first and then the units introduced in the process are completed. The costs added in each process during the current period is prorated to the production necessary to complete the opening work in progress, to complete the units added in the process and units in the work in progress. The objective of the first in first out method is to value the inventory at the current costs and as such the main problem is to calculate the equivalent production under this method.

  • Average Method:

Process costs are sometimes computed on the basis of average costs. Where degree of completion of opening work in progress is not given, average method is used. The average process cost is obtained by adding the cost of opening work in progress and the cost of units introduced in the process during the current period and dividing this total cost by total equivalent units obtained by adding the number of units completed and equivalent units of the closing work in progress of each element, material, labor and overheads. The main object of average method is to even out the fluctuations in prices and hence is used when the prices fluctuate widely during a particular period.

  • Weighted Average Method:

If a manufacturing unit is manufacturing two or more products, which are quite dissimilar to each other, weighted average method is used. Under this method, weighted average is computed and used in valuation of the incomplete units.

IV. When there is opening as well as closing work-in-progress but with losses.

Under this equivalent production units regarding opening and closing work in progress are to be calculated with due adjustment for process losses.

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