Equivalent unit of production is an expression of the scope of work performed by the manufacturer on units of production partially completed at the end of the reporting period.


Generally, fully completed units and partially completed units are expressed in terms of fully completed units. For example, the calculation of the value of goods produced is simple if there are no goods in the process of starting or ending production. All costs incurred during the period will be allocated to assets as they have all been completed.

However, this is a bit different when there is an initial and final number of units that have been partially completed. These goods that are in the process of production should be accounted for together with the assets that have been completed during that period.

Equivalent units are usually specified separately for direct materials and all other production costs, since direct materials are usually added at the beginning of the production process. In contrast, all additional costs arise as materials gradually pave their way through the production process. Thus, equivalent units for direct materials are usually higher than for other production costs.

When costs are assigned to equivalent units of production, direct materials are usually assigned either the weighted average cost of the original stock plus new purchases or the cost of the oldest stock in the inventory (known as the FIFO method).

The simpler of the two methods is the weighted average cost method. The FIFO method is more accurate, but the additional calculations do not represent a reasonable cost and benefit. Consider using the FIFO method only when costs vary significantly from period to period, so management can see trends in costs.