Exercise 17: Equivalent units for materials and conversion costs

Learning objective:
This exercise compares the weighted average method and the FIFO method of computing the equivalent units of production in a process costing system.

Exercise 17 (a) – weighted average vs FIFO method

TK Company has two processing departments – Department X and Department Y. The quantity report for Department X for the most recent month reveals the following information:

Required: Using the quantity report of Department X given above, compute equivalent units for materials and conversion costs under:

1. the weighted average method
2. the FIFO method

Solution

1. Equivalent units for materials and conversion costs – weighted average method

2. Equivalent units for materials and conversion costs – FIFO method

Exercise 17 (b) – weighted average method

For May 2020, the cost department of Abraham Company received the following data from one of its five producing departments:

• Received from preceding department: 50,000 kilograms
• Processed and transferred to next department: 38,000 kilograms
• Work-in-process ending inventory: 12,000 kilograms

In this department, three different types of materials are added to the product received from previous department. The materials are added at three different stages of production as follows:

• Material M-1 is added at the start of the production process
• Material M-2 is added when the process is 25% completed
• Material M-3 is added when the process is 75% completed

The conversion costs are incurred uniformly throughout the production process.

An examination of the work-in-process ending inventory revealed that 3,000 kilograms were 85% processed, 6,000 kilograms were 50% processed, and 3,000 kilograms were 15% processed. There was no unfinished work at the beginning of May.

Required: Compute the equivalent units of production for each type of materials and conversion costs using a weighted average method.

Solution

1. Equivalent units for materials

Explanation:

• Material M-1 is included in all the units in ending inventory because it is added at the start of manufacturing process.
• Material M-2 is included in both 85% and 50% processed units because it is added when the processing is 25% completed.
• Material M-3 is included only in 85% processed units because it is added when the processing is 75% completed.

2. Equivalent units for conversion costs