Page 290 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 14.4 Equivalent Production

Equivalent production represents the production of a process in terms of completed units. In
other views, it means converting the uncompleted production into its equivalent of completed
units. In every process, an estimate is made of the percentage completion of any work-in-progress.
A production statement and a cost statement will then be prepared.

Notes 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 affect the stock valuation used
in the preparation of final accounts.

The techniques of calculating equivalent production are as follows:

(a) Firstly the opening incomplete or work-in-progress units should be converted into
equivalent units as incomplete.
For example, opening work-in-progress is 500 units which are 60% complete, therefore
only 40% work is to be done on these units in the process. Thus, on these units a cost of
500 × 40% = 200 units will be incurred in the process to complete these,
(b) To above units, add units started and finished during the production period or units
completed in the process. These will be new units introduced less closing units and units
scrapped,
(c) Thereafter, add equivalent units of closing units, and
(d) The total of all these will be equivalent production.

Equivalent unit should be calculated separately for each element of cost (viz. material, labour
and overheads) because the percentage of completion of the different cost component may be
different.
Accounting Procedure

The following procedure is followed when there is work-in-progress:
(1) Find out equivalent production after taking into account of the process losses, degree of
completion of opening and/or closing stock.
(2) Find out net process cost according to elements of costs i.e. material, labour and
overheads.
(3) Ascertain cost per unit of equivalent production of each element of cost separately by
dividing each element of costs by respective equivalent production units.

(4) Evaluate the cost of output finished and transferred work in progress.
The total cost per unit of equivalent units will be equal to the total cost divided by effective
units and cost of work-in-progress will be equal to the equivalent units of work-in-progress
multiply by the cost per unit of effective production. In short the following from steps an
involved.
Step 1 – prepare statement of Equivalent production
Step 2 – prepare statement of cost per Equivalent unit
Step 3 – prepare of Evaluation
Step 4 – prepare process account

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