Equivalent Units FIFO Method

Equivalent units under FIFO method are the number of finished units that
could have been prepared in a process during a period had there been no
unfinished units, either in opening WIP or closing WIP.
Under the FIFO cost flow assumption, it is assumed that the costs that enter
first in the department exit first. The consequence of this assumption is that
the cost of units transferred out first includes the cost of opening WIP and
then the cost of units added during the period. The cost of opening WIP is
carried directly to the units transferred out. Equivalent units are relevant only
for costs incurred during the period: which includes costs incurred on
completing the opening WIP (i.e. the unfinished part), cost incurred on units
started/added and transferred out and cost incurred on units in closing work
in process.
Formula
Equivalent units under FIFO method are calculated using the following
formula:
Equivalent units for each cost component = (100% A) B + C + D E
Where,
A = percentage of completion at the end of last period
B = units in opening work in process
C = units added/started and transferred out
D = percentage of completion of units in closing work in process
E = units in closing work in process
Example
Calculate equivalent units under FIFO method using the data given below:
Units in opening work in process

10,000

Units added

190,000

Units transferred out

195,000

Units in closing work in process

5,000

Percentage of completion of opening WIPdirect materials

80%

Percentage of completion of opening WIPconversion costs

40%

Percentage of completion of closing WIPdirect materials

100%

Percentage of completion of closing WIPconversion costs

60%

Solution

Units in beginning WIP (A)

Direct
Materials

Conversion
Costs

10,000

10,000

% of completion of beginning WIP in previous

80%
period (B)

40%

% of beginning WIP completed this period

[C=100%-B]

20%

60%

Equivalent units in beginning WIP [D=AC]

2,000

6,000

Units started and completed in current period 185,000

185,000

Units closing WIP (E)

5,000

5,000

% of completion of closing WIP (F)

100%

60%

Equivalent units in closing WIP (G=EF)

5,000

3,000

Total equivalent units

192,000

194,000

Equivalent Units Weighted Average Method

Equivalent units are the number of finished units that would have been
prepared had there been no partially completed units in a process.
The concept of equivalent units is applicable to process costing. Since
processes are continuous, when a cost of production report is prepared, the
unfinished units in the opening work in process or closing work in process are
assigned an estimated percentage of completion. Based on this percentage
of completion, number of equivalents units is calculated in order to find cost
per completed unit.
Formula
The calculation of equivalent units depends on the cost flow assumption
used i.e. the calculation is different for first-in-first-out and weighted
average. In the weighted average method, total equivalent units for the
process for a period are calculated using the following formula.
Total equivalent units for a cost component = A + B C
Where
A = units transferred out to the next department/finished goods

B = units in closing work in process

C = percentage of completion with respect to the relevant cost component
Example
Calculate total equivalents units using the following information.
Units in opening work in process

10,000

Units added

190,000

Units transferred out

195,000

Units in closing work in process

5,000

% of completion of closing WIPdirect materials

100%

% of completion of closing WIPconversion costs

60%

Solution
Total equivalent unitsdirect materials = 190,000 + 5,000 100% = 195,000
Total equivalent unitsconversion costs = 190,000 + 5,000 60% = 193,000