Equivalent units in ending inventory

Business Management

Monique Smalling

Introduction

For this week’s assignment, the following scenario will be addressed. “Davis Skaros has recently been promoted to production manager. 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 knows he had at least twice that many on hand.” The following paper includes a memo to Mr. Skaors that explains why the production cost report showed 2,000 units of inventory and why this was not done in error. This case study also focuses on determining equivalent units in a production unit setting.

Memo

I would first like to thank you for your concern in regards to the 2,000 equivalent units in ending inventory. It is very understandable with the history of your department that someone in your position would make sure that all inventory and production is accurate. I can also assure you that there has been no error on the cost report that was provided to you. I first would like to bring your attention to what is meant by equivalent units of production. “An equivalent unit of production is an indication of the amount of work done by manufacturers who have partially completed units on hand at the end of an accounting period. ( Rehman )” This basically means that not all ending units are completed but all units, both partially completed and fully completed, are included in the equivalent units. For instance, let’s say the department began with no units in inventory and it started and completed 10,000 units. It also started an additional 1,000 units that were 20% complete. The equivalent units of production that will be reported is 10,200. This includes the 10,000 completed units plus 20% of the partially completed 1,000 units. This may seem confusing at first but it gives us an idea of how much work is completed at the end of the marking period. Even if this work is only partially completed. The production cost report you received that showed the 2,000 units included partially completed units and fully completed units. The second aspect that you must take into consideration is how the production cost report is completed. The production cost report summarizes the production and cost activity within a department for a reporting period. It is a formal summary of the four steps performed to assign costs to units transferred out and units in ending work-in-process (WIP) inventory. (Kimmel, 2016) To prepare a production cost report, there are four steps that must be taken. Step one is to compute the physical unit flow. Step two is to compute the equivalent units of production. Step three is to compute unit production costs. The fourth and last step is to prepare a cost reconciliation schedule. Production cost reports provide a groundwork for analyzing the productivity of a department. Managers can use the cost data to assess whether unit costs and total costs are reasonable. By comparing the quantity and cost data with predetermined goals, top management can also judge whether current performance is meeting planned objectives. In other words, this allows us to see if our company is performing as expected.

Conclusion

In conclusion, the production cost report was completed accuarately. There was simply a misunderstanding in how the equivalent units were determined. As mentioned previously, an equivalent unit of production is simply an indication of the amount of work done by manufacturers at the end of a marking period. Mr. Skaros, you can rest assure that the 2,000 equivalent units shown on the cost report represent all units completed as well as those units that were partially completed. If there are any more concerns, please do not hesitate to let me know.

References

What is an equivalent unit of production? | AccountingCoach. (n.d.). Retrieved April, 2017, from https://www.accountingcoach.com/blog/what-is-an-equivalent-unit-of-production

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Accounting: Tools for business decision making (6th ed.). Hoboken, New Jersey: John Wiley & Sons, Inc.

Rehman, A. (n.d.). Cost of Production Report (CPR). Retrieved April, 2017, from http://www.accountingdetails.com/cost_of_production_report.htm