Equivalent Cost per Unit (40% complete)
Equivalent cost per unit = Total Costs / number of equivalent whole units
Total cost = $ 902,400
$ 5,500 + $ 94,500 = 100,000 (work in progress)
100,000 - 90,000 = 10,000
90,000 x 100% = 90,000
10,000 x 40% = 4,000
90,000 + 10 = 100,000
100,000 + 4,000 = 104,000
90,000 – 4,000 = 86,000
Equivalent cost per unit = Total Costs / number of equivalent units
Total cost = $ 902,400
Number of equivalent whole units = 86,000 units
Equivalent cost per unit = $ 902,400/86,000
Equivalent cost per unit = $ 10.5
60 Percent Complete
Work In Progress = 5,500 + 94,500 = 100,000 units
100,000 - 90,000 = 10,000 units
90,000 x 100% = 90,000 units
10,000 x 60 % = 6,000 units
Number of equivalent whole units = 90,000 + 6,000 = 96,000
Equivalent cost per unit = $ 902,400/96,000
Equivalent cost per unit = $ 9.4
Summary of Calculations
Based on the calculation, equivalent units directly affect the production costs of an equivalent unit. The equivalent cost per unit is obtained by dividing the total costs of production by the total number of equivalent per unit. Higher equivalent units encompass a lower cost equivalent cost per unit which establishes the aggregate production costs ( Eker & Aytaç, 2017) . When the percentage of completion is established at 60%, higher equivalent units of the product for ending inventory is achieved. As a result, the equivalent cost per unit will reduce contributing to a decrease in production costs.
On the other hand, establishing the percentage of completion at 40% will contribute to high production costs due to low equivalent units. For instance, at 40% completion, Mr. Sawyers must establish an equivalent cost per unit of $ 10.5 while at 60% completion, he will establish an equivalent cost per unit of $ 9.4. These figures indicate that Mr. Sawyers will save part of the total production cost if he establishes the percentage of completion at 60% rather than at 40%.
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Companies often aim at maximizing saving production costs as much as possible. Similarly, Mr. Sawyers need to maximize its production when he spends less total production costs. If Mr. Sawyers establishes the percentage of completion at 60% rather than at 40%, he will save about $ 1.1 per equivalent unit in relation to costs of production. When the production costs per unit are high, the market price per unit is affected ( Eker & Aytaç, 2017) . Under such circumstances, Mr. Sawyers must set a high price per unit which may discourage potential customers from buying from him. Therefore, Mr. Sawyers should just establish the percentage of completion at 60% rather than at 40% to balance between production costs and the level of income.
In summary, the total production cost of a product depends on where the percentage of completion is established. A higher percentage of completion seems to more favorable to the business than to a lower percentage of completion. Thus, it is imperative for Mr. Sawyers to establish the percentage of completion at 60% rather than at 40%, to reduce total production costs and increase sales volumes.
References
Eker, M., & Aytaç, A. (2017). The Role of ERP in advanced managerial accounting techniques: A conceptual framework 1. Business and Economics Research Journal , 8 (1), 83.
Jiambalvo, J. (2019). Managerial accounting . John Wiley & Sons.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial and managerial accounting . John Wiley & Sons.
