This is the second video of our process costing series. We'll actually be looking at the
computation of equivalent units. So there are three things we need to know when
we're using process costing, we call these the building blocks of process
costing. The first one is the fact that we're not going to distinguish between
all three product costs. Which are direct materials, direct labor, and overhead. In
process costing, we really separate the three into two categories. The first one
being direct materials, the second category being conversion cost, and
recall the conversion cost are made up of your direct labor in your manufacturing
overhead. We'll also need to know the idea of equivalent units which we're
going to talk about here in a second. As well as the inventory flow assumption
that we are considering. We're going to focus on the weighted average inventory
flow assumption for a couple of reasons. Number one, it is the easiest to use.
Companies in the real world mainly use it. First in, first out is a little more
complicated. So it can be more costly, and the the difference in the results is
very negligible between the two. The only difference is how beginning inventory
gets treated. So let's first look at the computation of equivalent units. So here
I've given us a timeline to look at and we can see that we're
looking at golf balls and also we need to know that in process costing,
typically we think of conversion cost as being added evenly throughout the
process of the product. So as we can see here in blue, the conversion costs are
added evenly throughout this process. From beginning until the product is 100%
complete and if we look at materials, we have two different kinds of materials. We
have rubber, which is added at the very beginning of the process, and we have
packaging, which is added at the very end of the process, and we noticed that the
golf balls are 80% complete or 5,000 of them are 80% complete at the end
of the period that we're discussing. So what we see here is, if rubber is added
at the very beginning of the process, then they're all
completed as to rubber. Rubber won't be added anymore during the process. However,
packaging is not added until the very end of the process. So what we can derive
from this information is that we have 5,000 equivalent units as to rubber
because rubber has been completely added at the very beginning of the process.
Packaging however is not added till the end of the process. If we're only 80%
through the process, then none of the packaging has been added. Therefore,
we have no equivalent units as to packaging materials and we need to also
compute equivalent units as to conversion cost. Well conversion cost are
added evenly throughout the process and we've got 5,000 golf balls that
were started but not yet finished and they're 80% complete, than 80%
5,000 golf balls, we've got an equivalent of 4,000
that have been completed, with the amount of costs that have been added. So let's
look at an example that isn't really a product or job, but colleges and
universities use the equivalent unit concept to describe the number of
faculty as well as the number of students. The University of Georgia has
about 2,000 full-time faculty and 400 part-time faculty. Assume the
following: Number one) a full-time faculty member teaches 6 courses per year.
Number two) 100 part-time faculty teach 3courses per year, that will
be our half time faculty, and Number three) we have 300 part-time faculty
that teach 2 courses per year, with a third full-time faculty.
What is the full-time equivalent faculty- the number of equivalent units of
faculty? So I'll like for you to think about this for a second, so I pushed
paused on your player. See if you can come up with a full-time equivalent
faculty number for these 3 statistics here. So the first thing you
would see is a full-time faculty is a full-time faculty. So 2,000 teach 6 out
of 6 classes, making them an actual full-time faculty. So 2,000 are actually
full-time faculty. In number two, we have 100
part-time faculty that teach 3 courses per year, which is actually
exactly half of a full-time faculty. So in number two we have a 100 that
teach 3 out of 6 courses because 6 would be a full-time faculty. So of
the 100, those 100 half time faculty equate to 50 full-time faculty, and in
number three, our third full-time faculty those 300
that teach 2 courses per year equate to 100 full-time faculty. So our
full-time equivalent faculty of the 2400 total faculty is 2150 people.