Equivalent units

Definition

Equivalent units measure the work done during a period, expressed in fully completed units. This concept helps allocate costs accurately in process costing systems.

5 Must Know Facts For Your Next Test

1. Equivalent units combine partially completed units into full units to standardize cost allocation.
2. They are essential for calculating the cost per unit in process costing systems.
3. The calculation involves determining the stage of completion for both materials and conversion costs.
4. Equivalent units are used to apportion both direct materials and conversion costs (labor and overhead).
5. This metric facilitates comparisons across periods by normalizing different levels of production completion.

Review Questions

• Why are equivalent units important in process costing?
• How do you calculate equivalent units for conversion costs?
• What role do equivalent units play in determining the cost per unit?

Related terms

Process Costing:

A costing method that assigns expenses to each production process or department over a specific period.

Job Order Costing:

A system that allocates costs to individual jobs or batches, suitable for customized production runs.

Conversion Costs:

The combined costs of direct labor and manufacturing overhead incurred to convert raw materials into finished goods.