64 8.4 Determining Equivalent Units

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 Learning Objectives 

  • Understand the concept of an equivalent unit.

Question: The beginning of this chapter describes process costing and the flow of costs through accounts used in a process costing system . The challenge is determining the unit cost of products being transferred out of each departmental work-in-process inventory account. We start the process of determining unit cost information with an important concept, the concept of equivalent units. What are equivalent units, and how are equivalent units calculated?


Question: With the concept of equivalent units now in hand, we can calculate equivalent units for the three product costs—direct materials, direct labor, and manufacturing overhead. Why do we calculate equivalent units separately for direct materials, direct labor, and manufacturing overhead?


Business in action 8.3 – Calculating Full-Time Equivalent Students

The concept of an equivalent unit can be applied to determine the number of full-time equivalent students (FTES) at a school. Colleges use FTES data to plan and make decisions about course offerings, staffing, and facility needs. Although having information about the number of students enrolled (the headcount) is helpful, headcount data do not provide an indication of whether the students are full time or part time. Clearly, full-time students take more classes each term and generally use more resources than part-time students. Thus administrators often prefer to convert enrollment data to FTES.

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Using a simple example to explain this concept, assume 30 students attend school and each takes half a full load of classes. The headcount is 30. However, this is the equivalent of 15 full-time students, or 15 FTES.

To apply this to the real world, let’s look at the enrollment data for Sierra College, a community college located near Sacramento, California. During a recent semester, the student headcount in a specific department at Sierra College was 8,190. Because a large number of students in the department were part time, the full-time equivalent number of students totaled 3,240.

Source: Based on enrollment data from Sierra College.

 Key Takeaway 

  • When units of work-in-process (WIP) inventory exist at the end of the reporting period, process costing requires that these partially completed units be converted to the equivalent completed units (called equivalent units). The equation used to calculate equivalent completed units is as follows:
    Equivalent units = Number of physical units × Percentage of completion (8.4.2)
  • Because direct materials, direct labor, and manufacturing overhead typically enter the production process at different stages, equivalent units must be calculated separately for each of these production costs.

Review problem 8.3

Soap Production Company’s Mixing department shows the following information for the 1,000 units of product remaining in work in process at the end of the period. Assume there was no beginning inventory.

Direct materials
90 percent complete
Direct labor
30 percent complete
Overhead 60 percent complete

Calculate the equivalent units for each of the three product costs—direct materials, direct labor, and overhead.



  1. Partially completed units converted to the equivalent completed units; calculated by multiplying the number of physical units on hand by the percentage of completion of the physical units.


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