Nelson Industries makes widgets using a two-step process that involves machining first and assembly second. In the Machining Department, all materials are issued at the beginning of the process and conversion costs are incurred uniformly throughout the process. During the period, the Machining Department transferred out 8,600 widgets and had an ending inventory of 4,000 widgets that were 85% complete. Beginning inventory consisted of 6,000 units that were 35% complete. What are the equivalent units of production for materials in the Machining Department? A. 3,400 widgets B. 12,000 widgets C. 6,600 widgets D. 12,600 widgets

The answer is: D

Explanation:

At the end of the financial year, manufacturing companies have to assign costs to the goods which they produced in that period. At year end, the production does not stop, therefore, there could be items still in production at reporting date. In order to give as accurate information as possible, the company has to cost the production items with an estimate of the total items produced. Equivalent units of production refer to the summation of items that have been started and completed during the reporting period and the items still undergoing production at their estimated stage of completion. This provides an approximation of the total units of production, had the incomplete items been counted as complete at their estimated stage of completion.

Example: if 3,000 units were started and completed during the period and 2,000 units were in closing inventory at 60% completion, then the total equivalent units of production would be equal to 4,200 units (3,000 + (2,000*60)).

Using the First in First Out Method:

Equivalent units of Production = Total units completed during the period + Units in Ending WIP

Note1: the question indicates the equivalent units of production for the materials in the Machining Department.

Materials are introduced at the beginning of the production process, making them 100% complete at the end of the period. Equivalent units of production for materials is therefore 12,600 (8,600+4000)

Note2: 8,600 from the above calculation consists of:

Opening balance of 6,000 units at 100% completion - Materials

Started and completed during the period 2,600 units - Materials

4,000 units in the closing balance are 100% complete in terms of Materials