Production cost

To : Ms . Mary Mahr

From : Finance Manager

Dated 13 August 2007

Memo

Dear Ms . Mahr

With all due respect , allow me to take the liberty of explaining why your department had 1 ,000 equivalent units in ending inventory whereas you believe that you had twice as many on hand . It has been determined that your department did , indeed , have approximately 2 ,000 units by the end of the accounting period concerned . However , all of the units were unfinished , and only half completed in actuality

The use of equivalent units

is a method of mathematically converting partially completed units of product into an equivalent number of fully completed units ( Process Costing ' 2006 ' Your department had 2 ,000 units of the product that were fifty percent complete by the end of the period . Therefore , we had to convert them into equivalent units in the following manner

2000 units X 50 complete 1000 equivalent units

So as to avoid any confusion between our departments on the subject of equivalent units in future , allow me to further explain that the concept of equivalent units concerns costs incurred , in the form of materials labor and overhead ( Process Costing ' Let us assume that it costs your department 50 to produce 1 unit . If , at the end of the accounting period , your department has only two half completed products , the costs associated with the units would be 50 in see , is the same as a single equivalent unit that accumulates 50 in costs . Moreover , the ending inventory is a book value of goods inputs , or materials available for use or sale at the end of an inventory accounting period ( Ending Inventory ' 2007 . Bearing these definitions in mind , it is impossible for the accountant to place the value of a whole unit on a partially finished product

I hope the issue has been clarified , and we may enjoy many more periods of high productivity in future

Sincerely

Finance Manager

References

Ending Inventory (2007 . Investopedia . Retrieved 13 August 2007 , from

http /www .investopedia .com /terms /e /endinginventory .asp

Process Costing - Chapter 18 (2006 . Accounting Tutorial . Retrieved 13 August 2007 , from

http /www .middlecity .com /ch18 .shtml PAGE

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