Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and

Question

Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Committee (SEC) Tutorial help on Excel® and Word functions can be found on the Microsoft® Office website. There are also additional tutorials via the web offering support for Office products.

Scenario: Davis Skaros has recently been promoted to production manager. The company uses process costing. He has just started to receive various managerial reports, including the production cost report you prepared. It showed his department had 2,000 equivalent units in ending inventory.

His department has had a history of not keeping enough inventory on hand to meet demand. He has come to you, very angry, and wants to know why you credited him with only 2,000 units when he saw on his production line at the end of the month 4,000 units.

Prepare a maximum 300-word response and explain to Mr. Skaros why his production cost report showed only 2,000 equivalent units in ending inventory. In accounting terms, explain to him the concept of equivalent units versus the physical units on the production floor.

Explanation / Answer

In Process costing, goods (being called work in process) is being moved from one process to another process after completion of certain percentage of work in one particular process.

You are seeing physical units of 4000 units on the line however, those 4000 units are not 100% completed units i.e. not moved to finished goods.

Since these 4000 units are only 50% complete with regard to Material and Conversion Cost, my production reports includes only 2000 EQUIVALENT units which means that Physical units are 4000 however they are equivalent to 2000 completed units.

An equivalent unit of production is the indication of amount of work done on the units in hand during one process/period.

However, physical units are count of the units irrespective of completion stage of the same.

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.