Processing Costing and Equivalent Units

Processing Costing and Equivalent units

Process costing is an average cost of the units but we have partly completed units in the opening and closing balance it is difficult to calculate the average cost. Therefore the concept of equivalent unit is introduced in the processing cost.

The average cost is calculated by dividing the total cost with the equivalent unit.

Formula of equivalent unit

Physical unit X % of completion

The physical units are multiplied with percentage degree of completion to get the equivalent units.

Example of equivalent unit

We have work in progress which is 100% complete with respect of material and only 40% complete with respect of conversion cost and number of units are 1200.

Solution

                                                                     Equivalent units

Material   1200 X 100 %                                           1200

Conversion Cost  1200X 40%                                      480