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20-- The Concept of Equivalent Units of Production - YouTube
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I'm Larry Walter this is principles of
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accounting dot-com chapter 20 and we're
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looking at process costing and
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activity-based costing in this specific
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module we're going to consider the
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concepts of equivalent units in the
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previous module we talked about the
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general characteristics of process
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costing now we're going to get into the
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nuts and bolts of process costing and
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that begins by understanding the concept
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of equivalent units and how we're going
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to determine the cost per equivalent
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unit and so an equivalent unit is an
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abstract concept it's simply a physical
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unit expressed in terms of a finished
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unit for example if we have 10 units and
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process that are 30% complete we can
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simply say that that process relates to
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our equates to 3 equivalent units of
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output 30% of 10 none of the 10 units is
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complete it's simply that the equivalent
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amount of work necessary to complete 3
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units is said to be performed now
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recognize that equivalent units is not
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necessarily the same across all factors
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of production we have material labor and
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overhead for example we might be only
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80% complete with respect to materials
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and only 60% complete with respect to
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labor and overhead so we would have more
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equivalent units of material in process
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than we would equivalent units of
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conversion costs in process and that's
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perfectly fine perfectly logical but it
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will cause us to adapt our calculations
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to reflect that fact
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of course if overhead is applied based
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on the labor of the process is
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simplified as I've assumed here that if
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we're 60 percent complete with respect
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to labor I've also assumed were 60
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percent complete with respect to
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overhead as labor is the application
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base I've assumed in this example now
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the textbook has an example for novaro
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steel and I'm simply following along
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with that illustration the first stage
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in the verrell's production process is
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the melting department and so Navaro I'm
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assuming started the month with 300
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thousand tons of ore in process during
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the month they added an additional
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600,000 tons in the process thus there's
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900 thousand total units that must be
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reconciled or accounted for
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or I'm assuming 650,000 tons were
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transferred on to the next department
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leaving 250,000 in process at the end so
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we can then look at a unit
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reconciliation and this is the beginning
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point to get our arms around the total
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units that are involved in a particular
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process during a particular period and
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so here are the 900,000 tons that we
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need to explain or reconcile or
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determine the disposition of and we know
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that 650,000 tons were transferred out
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and we verified that 250 we're still in
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process at the end of the month in the
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Melting department so that nine hundred
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thousand and nine hundred thousand that
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reconciliation is highly important of
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course it's possible that the total
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units that went in are not equal to the
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units that went out and remain in
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process we may have evaporation or
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spillage or spoilage or waste or scrap
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of some type if that's normal in the
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production process we allow for that in
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other words in our reconciliation we
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would say well we had 600,000 units
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transferred out 250,000 units still in
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process and 50,000 simply evaporated if
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that were the case we would then take
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the total cost and assign it to the good
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units we're not going to assign cost to
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the normal spoilage the cost that
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relates to that simply gets pulled in
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and applied to the units that are
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actually making their way toward
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finished goods now that's for normal
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spoilage abnormal spoilage or excessive
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waste we might go ahead and track cost
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for those units assigned cost to those
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units and reconcile those amounts as
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lost components and report that as such
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in the income statement now as with any
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inventory method and process costing is
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an inventory costing method we need to
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adopt a cost flow assumption I'm going
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to use weighted average illustration in
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this particular case we could do this in
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an alternative process called FIFO
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costing we need to do one way or the
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other and so let's look at this under
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the average costing method and we're
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going to average together the cost
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associated with beginning inventory and
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current period production and so the
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left-hand side of the slide this is the
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schedule we just developed the
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reconciliation of the units that existed
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we've already seen we've explained how
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the 900,000 units went into production
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and where they ended
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the end of the month also I'm adding an
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additional fact here the ending work in
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process status the materials a 50%
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injected into the process and the
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conversion cost labor and overhead is 40
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percent complete so we're actually
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complete with respect to the ending work
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in process and here's how this works out
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the 650,000 units that were completed
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and transferred to the next department
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they're 100% complete with respect to
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material labor and overhead but the
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ending work in process 250,000 tonnes
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being 50 percent complete with respect
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to materials gives us the 125,000
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equivalent units of materials and 40
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percent of the 250 thousand gives us the
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100 thousand units of conversion cost
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that means then for the month our
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equivalent units calculations need to be
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based upon 775 thousand tons of direct
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materials and conversion relates to the
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labor and overhead necessarily convert
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seven hundred and fifty thousand
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equivalent units of finished process and
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that information is vital as we go
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forward calculating the cost per
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equivalent unit and so another schedule
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here in some more facts our beginning
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working process contained two million
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one hundred twenty two thousand five
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hundred and then an additional seven
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million 365 was added into process
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during the month distributed between
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material labor and overhead so we've got
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a total cost to account for the actual
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cost signs nine million four eighty
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seven five hundred broken down between
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material labor and overhead and now
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here's where the equivalent units comes
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into play we'll divide each of those
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cost pools by the equivalent units
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related to that cost pool to come up
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with the cost per equivalent unit very
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simply our materials average cost is
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nine dollars a ton our conversion cost
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average is 335 a turn our total cost for
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one complete equivalent unit of output
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is twelve dollars and 35 cents and so
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this is the calculation of the cost per
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equivalent unit these numbers will
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become essential and vital as we go
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forward and in fact we'll incorporate
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this part of this schedule into our
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final cost of production report that
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we'll see in a subsequent module
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