How is the cost per equivalent unit computed?
a. Total equivalent units divided by total costs to account for
b. Total costs to account for divided by total equivalent units
c. Costs in beginning WIP inventory divided by equivalent units in beginning WIP
d. Costs added to production during the month divided by equivalent units in ending WIP
The Correct Answer and Explanation is :
Correct Answer:
b. Total costs to account for divided by total equivalent units
Explanation:
The cost per equivalent unit is a key metric used in process costing to allocate costs to units of production. It represents the cost of producing one “equivalent unit” of a product, where an equivalent unit accounts for partially completed goods as a fraction of a fully completed unit.
The formula to compute the cost per equivalent unit is:
[
\text{Cost per Equivalent Unit} = \frac{\text{Total Costs to Account For}}{\text{Total Equivalent Units}}
]
Breakdown:
- Total Costs to Account For:
- Includes both:
- Costs in the beginning work-in-process (WIP) inventory.
- Costs added during the period (direct materials, direct labor, and manufacturing overhead).
- Total Equivalent Units:
- This includes:
- Fully completed and transferred-out units.
- Equivalent units for ending WIP inventory (partially completed goods expressed as a percentage of completion).
Example:
Suppose a company has:
- Beginning WIP costs: $10,000
- Costs added during the period: $50,000
- Total equivalent units: 5,000 units
The cost per equivalent unit would be:
[
\frac{\text{Total Costs to Account For (10,000 + 50,000)}}{\text{Total Equivalent Units (5,000)}} = \frac{60,000}{5,000} = 12 \, \text{per unit}.
]
Why Option B is Correct:
Dividing total costs to account for by total equivalent units ensures that all costs (beginning inventory and costs added during the period) are proportionately assigned to the units based on their stage of completion. Other options, like dividing costs in beginning inventory or added costs alone, fail to account for the comprehensive cost distribution across all units.
This calculation is vital for accurate cost management and pricing decisions in process industries like manufacturing, textiles, and chemicals.