PROCESS COSTING – EQUIVALENT UNITS OF PRODUCTION (EUP)

The concept of equivalent production is basic to process costing. In most cases, not all units are
completed during the period. Thus, there are units still in process at varying stages of production at the
end of the period.

Equivalent units – maybe defined as the partially complete units expressed in terms of fully complete
units.

In process Costing, all units must be expressed in terms of completed plus incomplete units restated in
terms of completed units.

Completed units do not create a problem when equivalent production is computed because they are
always 100% complete as to direct materials, direct labor and factory overhead.

The problem lies in the restatement of incomplete units in terms completed units. To compute EUP, it
must be subdivided into direct materials, direct labor, and factory overhead.

Materials. Percentage
of completion?

WIP, 5,000 UNITS Labor. Percentage of

completion?

Overhead. Percentage of
Completion?

ILLUSTRATION. Computation of EUP

Units received from preceding department 10,000 units

Units completed and transferred, 8,000 units

Units in process, end (60% completed) 2,000 units

Compute the EUP for materials, labor and overhead under the following independent cases:

1. Materials are added 100% at the beginning of the process.

2. Materials are added 100% at the end of the process.
3. Materials are added 50% at the beginning of the process and the remaining 50% when the units
are 40% completed.
4. Materials are added 50% at the beginning of the process, 30% when the units are 20%
complete, and 20% at the end of the process.

*Computation will be during our discussion. You may refer to our worksheet after the discussion.
TWO METHODS OF COMPUTING EUP

1. Weighted Average Method (WAVE) – blends together the units of cost of current period with
the units and cost of previous period.

Formula: EUP = Units Transferred out + (Units in ending inventory x Percentage of completion)

2. First-in First-Out (FIFO) – clearly spares the work done in current period and the work done in
prior period. The equivalent units of production should only include the work done in the
current period only.

Characteristics of the FIFO method of process costing.

1. Divides the units transferred out into two parts.

a. The units completed and transferred that belong to beginning inventory
b. The units completed and transferred out that belong to production started during
the period.
2. Both beginning and ending inventories are essentially converted to an equivalent units
basis.

Formula: EUP = % of Work done (WD) on beginning inventory in current period + Units started
and completed during current period + % of WD on ending inventory in current period.

ILLUSTRATION:

XYZ Company provides you the following data of Department X

Requirement:

1. Compute for EUP for the month of January using WAVE

2. Compute for EUP for the month of January using FIFO

*Computation will be during our discussion. You may refer to our worksheet after the discussion.