Different Costing Approaches in Accounting

This memo addresses the concern regarding the production cost report and why you were only credited with only 2,000 units equivalent units in ending inventory. The key question relayed to me is why the credited amount was not considerably higher compared to what you took into consideration earlier. The main reason why this is the case is linked to process costing and the equivalent units of production. There is usually a confusion between the units partially completed and the units totally completed. Basically, equivalent units of production are utilized by a manufacturer for the expression of partially completed units of product with respect to finished units. They key aim of utilizing equivalent units is to have the ability of apportioning the costs of production to completed units as well as partially completed units held in work process. In essence, the notion of equivalent units takes into account articulating a number of partially completed units as a lesser number of fully completed units. This is done for the reason that it is much simpler to do accounting for whole units rather than parts of a unit. The key reason why you were credited with only 2,000 units is because the production department has several times in part not been keeping sufficient inventory on hand to meet the levels of demand.
Weighted Average and First-in First -Out (FIFO) Costing Methods
The accuracy of the report can be properly explained using the different methods of costing. Using the method of weighted average, the equivalent units happen to be computed on two aspects. First, there is the number of units finished and transferred outside and secondly there is the ending work units inside process inventory. It is imperative to note that the units finished and moved are deemed to be completed units and, at all times, will be hundred percent complete for the computation of equivalent units for direct goods and labor, and also overheads. On the other hand, with respect to the ending work units in process, then the units that are unfinished are multiplied by a percentage of completion. Notably, the percentage of completion can be dissimilar for direct goods and labor, and also the overheads.
On the other hand, under the FIFO method of costing, equivalent units are delineated as the number of completed units that may have been finished within a process and timeframe in the event that there were no unfinished units, either in the opening work process or closing work process. The key supposition made in this particular approach is that the costs that enter the first in the department, in this case the production department, are the ones that exist the first. The implication of this supposition is that the cost of the units that are transferred out first also comprises of the cost of the opening work process and then the cost of units included in the course of the period. The cost of opening work process is shifted directly to the units transferred out. Taking this into consideration, equivalent units are pertinent solely for costs experienced all through the period: which consists of costs sustained on finishing the opening work process, cost incurred on units added and transferred out and cost sustained on units in closing work process (Obaidullah, 2013).
Equivalent units under FIFO method are computed using the following formula:
Equivalent units for every cost component = (100% ? A) * B + C + D * E
In this case:
A is the percentage of completion at the end of last period
B is the number of units in opening work process
C is the number of units added and transferred out
D is the percentage of completion of units in closing work process
E is the number of units in closing work process (Obaidullah, 2013).
One of the key mistakes made by the production department is with regard to the partially completed units. When some of the units started in the course of a period is partially finished at the end of the period, then unit costs cannot be calculated by basically dividing the total costs for a period by the output of the same. Assume the following example:
If 10,000 units were started and finished during a period and another 2,500 units were partly completed, it is imperative to note that in accounting these two items cannot be summed up to determine their unit cost. It is necessary to convert the work in progress into equivalent units of production. In the event that the 2,500 partly finished were 40% complete, this can be expressed as an equivalent production of 1,000 fully finished units. Subsequently, this is added to the finished production of 10,000 units to amount to 11,000 units in total.
Bearing this in mind, it can be noted that this is where the issue arises from your complaints about the report. The mistake that the production department makes is to include both the complete units of production and the partially finished units devoid of converting the work in progress into finished goods (Drury, 2013).



References
Drury, C. M. (2013). Management and cost accounting. New York: Springer.
Obaidullah, J. (2013). Equivalent Units – FIFO Method. Accounting Explained. [Online]. Retrieved March 22, 2018 from: https://accountingexplained.com/managerial/cost-systems/equivalent-units-fifo