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Explain Equivalent Units of Production and its computation using weighted average method and FIFO method
Sample Answer
Understanding Equivalent Units of Production and Computation Methods
Introduction
In the realm of production processes, understanding equivalent units of production is essential for assessing work-in-process inventory. Two commonly used methods to compute equivalent units are the weighted average method and the first-in, first-out (FIFO) method. This essay will delve into the concept of equivalent units of production and explain how these two methods are utilized for computation.
Equivalent Units of Production
Equivalent units of production refer to the number of units that could have been completed during a particular accounting period, given the amount of work done in terms of completed units and partially completed units. It is a crucial metric for determining the amount of work accomplished in a period, especially in processes where goods are produced continuously.
Computation using Weighted Average Method
The weighted average method calculates equivalent units of production by combining work done in the current period with the work done in the beginning inventory. To compute equivalent units under this method, the total equivalent units are determined by adding together the equivalent units in beginning inventory and the equivalent units started and completed during the period. The formula for calculating equivalent units using the weighted average method is:
Equivalent Units = Units transferred out + Equivalent units in ending WIP inventory
This method considers the costs and efforts involved in both the beginning and current periods equally, hence the term “weighted average.”
Computation using FIFO Method
The FIFO method, on the other hand, assumes that units started and completed during a period are done so in chronological order. In other words, it considers work done on beginning inventory separately from work done on current period inventory. To compute equivalent units using the FIFO method, the equivalent units in ending work-in-process inventory consist only of partially completed units from the current period. The formula for calculating equivalent units using the FIFO method is:
Equivalent Units = Units started and completed + Equivalent units in ending WIP inventory
This method provides a more precise measurement of work completed during the current period as it separates beginning inventory work from current period work.
Conclusion
In conclusion, understanding equivalent units of production and the computation methods using weighted average and FIFO are vital for accurate cost accounting and inventory valuation. While the weighted average method considers all units equally, the FIFO method provides a more detailed breakdown of work completed in a specific period. Both methods have their advantages and are utilized based on the specific needs of a company’s production process. By grasping these concepts and calculation methods, businesses can make informed decisions regarding their production efficiency and costs.
