Percentage of Completion
Percentage Completion Production abilities and processes play a major role in business revenue. Regardless of the product type, it is important for firms to understand everything has a cost. Production and manufacturing are no different. From raw materials to finished goods, allocating adequate funds to proper jobs and/or departments are imminent to business success. Calculating costs per equivalent unit is one method used for ensuring company dollars are distributed efficiently throughout the production process. Cost per equivalent is defined as the unit costs of a product determined by dividing the total production costs by the number of equivalent whole units; used to allocate product costs between processing departments (Edmonds et. al, 2020)
Summary of Calculations
In the given scenario, the following information was provided:
Â· Beginning inventory: 5,500 units
Â· # Units started: 94,500
Â· # Units transferred out: 90,000
Â· Total production costs: $902,400
Â· Target cost per unit: $9.45
Based on the assumption by Ms. Alvarez that ending inventory is approximately 40% complete, beginning inventory 5,500 units was added to the number of units started during the period, 94,500, totaling 100,000 units. Next, the 90,000 units transferred out are 100% complete; meaning 90,000 units * 100% complete = 90,000. This leaves 10,000 units which are multiplied by 40% completion, which equals 4,000 equivalent units. 90,000 plus 4,000 equals 96,000 equivalent units. To determine the cost per equivalent unit, total productions costs $902,400 is divided by 94,000 equivalent units. At 40% completion, the cost per unit is $9.60. Based on Mr. Sawyerâ€™s estimation of inventory being 60% complete, the same calculation was performed. At 60% completion, the cost per equivalent unit came to $9.40. This is a variance of $.20.
Mr. Sawyer has a proven track record of reducing production costs for the company. With the targeted cost per equivalent unit at $9.45, it is clear Mr. Sawyerâ€™s estimation of completion puts his numbers closer to the target. The opportunity to move up the ladder as plant manager is his greatest motive.