Cost Per Equivalent Unit (weighted average method)

In this video we're going to be talking about something called equivalent units and in particular we're going to be discussing the cost per equivalent unit and how you'd go about calculating that. And for those of you kind of already got a background in this area of cost accounting we're actually going to be discussing the weighted average method. There's also a FIFO method that we'll have another video on. So basic concept between this whole idea of equivalent units is that if we transfer during a period if we transfer out of our WIP account our work in process so let's just say WIP we transfer out let's say 25,000 units and then we have we have 10,000 partially completed units partially complete and let's say that these 10,000 here are about 25 percent done 25 percent complete 25 percent done so what we could say is okay well we've kind of got something here in our WIP account even though these aren't aren't finished we can say well they're a quarter of the way through so what we'll do is we'll take this 25 percent and multiply it by the 10,000 and that'll tell us that we have 2,500 equivalent units and I'll just abbreviate that but EU equivalent units 2,500 basically 10,000 times 25 so we've got 2,500 equivalent units that are actually in the WIP account at the end so now we could say well the total and we'll call this equivalent units of production EU of production for that period we'll say is that the 25,000 that were transferred out plus the 2,500 that remain at the end that are equivalent units we add those two together that gives us 27,500 equivalent units of production now it gets a little more complex than this but this is the kind of the basic conceptual framework behind what we're talking about with this idea of equivalent units and we can go ahead and and actually look at the cost the cost per equivalent unit toward the end that's ultimately what the goal is we're shooting for in this this video so let's take an example let's say that we have an automotive plant and we're going to look at the assembly department right so we're just focusing on one department here so and again it's assuming that the firm was doing like process costing and so you have a WIP account for each department you'd have work in process for for the assembly department now I've got some numbers filled in already some given information just just for so I'm not sitting here for an hour here because I know you'd fall asleep by then I sure would so we got our beginning work in process is 50,000 and then we're going to start into production a 700,000 unit right and then the total that we'll have during the period that that are that are kind of being worked on at some point or somehow go through this WIP account in the assembly department that total is going to be 750,000 then we're going to transfer out from our WIP account either could be to another department could be to finished goods they're going to be coming out of the assembly department we're going to be transferring out 600,000 and so that's going to leave us with an ending WIP of 150,000 so that's these are kind of like the background numbers here and now let's get to this idea of equivalent units so what do we need to know first before we can come up with this this equivalent unit figure and we're going to be doing it for direct materials direct labor and manufacturing overhead as you can see there what we need to know is what percent complete these 150,000 units that we have here how much of the that's going to be incurred in terms of direct materials for example on this 150,000 how complete is it have we spent half what we're going to spend on on direct materials already have we pumped in half um or have we only put in a quarter and and so we need to know those things and let's say that uh we'll say 50 percent will be the direct materials so where should i put this we'll put the put a little 50 percent there but i so what we do is we take that 50 percent we're saying okay regarding this 150,000 we've already pumped in uh 50 percent of the direct materials right they're already in product they're good to go and so we take that 150,000 multiply it by 50 percent and that's going to give us 75,000 so we put 75,000 here and now we can kind of kind of disregard that number now because we've already dealt with it so now direct labor and manufacturing overhead let's say for each one uh that it's going to be 25 percent and a lot of times you'll actually see direct labor and manufacturing overhead uh just lumped into those let's say conversion and if you kind of remember from our video on prime costs and conversion costs the direct materials and direct labor when those are together those are called prime costs and when you add direct labor and manufacturing overhead those are conversion costs and so a lot of times people or firms will apply manufacturing overhead based on direct labor hours that'll be the cost driver anyways so in any case we're just going to say here that they're both i have 25 percent in in their ending uh in terms of when we're thinking about the equivalent units and the amount of direct labor that's already been kind of uh you know pumped into this this 150,000 here so we've already incurred 25 percent so with respect to this 150,000 here it's 25 percent complete in terms of the direct labor that's going to need to go on and be attached to that so we just take the 25 percent and we multiply it by this 150,000 and that's going to give us 37,500 okay and it's going to be here we've got the same thing for manufacturing overhead because it's also again it's 25 percent of this right so now and i'll just kind of you know cross out these percentages because you know now we've we've got the numbers so we don't need to think about those percentages for the for the moment uh now we can go ahead and say all right what let's add these up to get our equivalent units and so here let me change colors uh for direct materials we'll have 675,000 and i'm just taking the sum of these two numbers right here just adding the 600 and 75 and then for direct labor we'll have 637,500 and then for manufacturing overhead we'll have 637,500 now these are the equivalent units right that's what we're we're dealing in here uh you know we've accounted for the fact that we have some partially completed units in our ending work in process account and we're going and saying okay how complete are we with respect to direct materials how complete are we with respect to direct labor and overhead and and this this is telling us right here uh how complete we are so and then of course don't let these numbers throw you off here these 600,000 uh that's just basically a function of saying that okay we transferred out 600,000 during the period uh so obviously those units were a hundred percent complete so a hundred percent of 600,000 is 600,000 600 for everything so that's just kind of a functional thing that you probably don't even really need to concern yourself with that the only reason we need the 600,000 uh is so you add it uh to the 75 so you basically have the amount transferred out and then the partially completed right we have to apply the percentages because we can't just run this 150,000 across here uh because these things are all these are partial uh completed units so now when we think of our cost per equivalent unit which is what we're going to get to next we're actually going to use these numbers that we calculated here right remember those are our equivalent units and we're going to use them to get the cost per equivalent unit so what we're going to do is actually uh i don't know if you'll be able to see well here we go we've got the equivalent units right here in our new table and again i had to kind of you know put in some given information to save time uh we've got our beginning work in process a total uh for the period direct material and so forth we have all these numbers so now we've got kind of the beginning uh what was started in production during the period and then just the sum of those two numbers right um so now the equivalent units we have to calculate uh this part i should put a little circle there we have to calculate that that's what we just did so i'm just going to draw a little little arrow here and what we're going to do is we're going to take this let's see and bring it down just so you can see it hopefully you can see that bottom line there and this is this is why we just calculated those numbers we're just going to pop them right in and let me choose a different color here let's go with red and so we're going to have 675,000 for direct materials and then we're going to have 637,500 for direct labor and again that's just this number right up here that we just finished calculating and then for manufacturing overhead we're going to have 637,500 now now that we know the equivalent units right and we've actually gone to the trouble and said okay what were our costs right in terms of direct materials direct labor and so forth we had the beginning whip and then what was started in production during the period and then you know the total cost right now and again i should just bear bear mentioning is bears mentioning here that we're using the weighted average method and kind of i won't go into all the details of that but the idea is that some of what's included here in our total cost uh was actually things that were started in production in a previous period so that we've got this beginning whip and that includes some things from from last year or the year before and so on uh so we're basically taking all of this and that's going to be our total cost now if we're using another method called the fivefold method then we would just drill down and specifically look at the specific year in question instead of including things but potentially from prior periods but in any event we're using the weighted average method and so we've got our total cost right here for direct materials direct labor manufacturing overhead and we now know the equivalent units because we just calculated that above based on our percentages of completion for materials labor and overhead and now we just do some simple division here we just say okay we're going to take uh we're going to take these numbers and divide them by these numbers so we'll start out first to get our cost per equivalent unit for the direct materials for right here we'll just take this 2675 or well i should say 2,675,000 and divide it by 675,000 and that's going to give us our cost per equivalent unit and with respect to the direct material and if you calculate that out that's going to be three dollars and 96 cents rounded now we just do the same thing for direct labor to get our cost per equivalent unit with respect to direct labor we just take 1,075,000 and then we divide that by 637,500 which we calculated in the table above that's going to give us a $1.69 okay and then and again that's rounded so it might be a little it's not precise so we take for the manufacturing overhead we take the 2,150,000 and then we divide that by the equivalent units we calculated above which is 637,500 and that's going to give us three dollars and 37 cents