Equivalent Units – Weighted Average Method

Equivalent units are the number of finished units that would have been prepared had there been no partially completed units in a process.

The concept of equivalent units is applicable to process costing. Since processes are continuous, when a cost of production report is prepared, the unfinished units in the opening work in process or closing work in process are assigned an estimated percentage of completion. Based on this percentage of completion, number of equivalents units is calculated in order to find cost per completed unit.

Formula

The calculation of equivalent units depends on the cost flow assumption used i.e. the calculation is different for first-in-first-out and weighted average. In the weighted average method, total equivalent units for the process for a period are calculated using the following formula.

Total equivalent units for a cost component = A + B × C

Where
A = units transferred out to the next department/finished goods
B = units in closing work in process
C = percentage of completion with respect to the relevant cost component

Example

Calculate total equivalents units using the following information.

Units in opening work in process10,000
Units added190,000
Units transferred out195,000
Units in closing work in process5,000
% of completion of closing WIP–direct materials100%
% of completion of closing WIP–conversion costs60%

Solution

Total equivalent units–direct materials = 190,000 + 5,000 × 100% = 195,000

Total equivalent units–conversion costs = 190,000 + 5,000 × 60% = 193,000

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork