Equivalent Units
A measure converting partially completed units into a fully completed unit equivalent for cost allocation.
What is Equivalent Units?
Equivalent units (also called equivalent units of production) are a concept in process costing that converts partially completed units into a measure that can be used to assign costs fairly. Because process manufacturing produces goods continuously — with some units fully complete and others partially finished at period end — equivalent units translate the work performed on partially completed goods into a 'full unit' equivalent. For example, 200 units that are 50% complete equal 100 equivalent units of work done. Costs per equivalent unit are then calculated and applied to both completed goods and ending work-in-process inventory using the weighted-average or FIFO method.
Example
A paint manufacturer ends the month with 5,000 fully completed gallons and 2,000 gallons that are 40% complete with respect to conversion costs. Equivalent units of conversion = 5,000 + (2,000 × 40%) = 5,800 equivalent units. If total conversion costs are $29,000, the cost per equivalent unit is $5.00, applied to both finished goods and the partially completed ending inventory.