QUESTION 20 Jeffery Peterson the he receives from you is a production cost repor
ID: 2335934 • Letter: Q
Question
QUESTION 20 Jeffery Peterson the he receives from you is a production cost report. On the report he noted that the department was credited with 2,000 equivalent units in ending inventory. Jeffery was just promoted to the production manager position. He is a itle overwhelmed with the number of reports he has been receiving One such report in ouite upset because he schedu ed ver precsaly to avoidt the roblem of invong history in the department slefery wanits to know why you credited him with 2,000 units when he is fairly confident that he has 4,000 units on hand at the end REQUIRED a brief note to Jeffery that explains why the production cost report shows only 2,000 equivalent units on hand and not the 4,000 units Jeffery claims are on hand. Be thorough and explain why he is off track in his thinking hand Be horough andt 2,000Explanation / Answer
Note to manager:
It has been brought to my attention about your concern that the production cost report is wrong given that you avoid the problem of inventory shortage. I can also assure you that there has been no error on the cost report that was provided to you. I first would like to bring your attention to what is meant by equivalent units of production. An equivalent unit of production is an indication of the amount of work done by manufacturers who have partially completed units on hand at the end of an accounting period .This basically means that not all ending units are completed but all units, both partially completed and fully completed, are included in the equivalent units. For instance, let’s say the department began with no units in inventory and it started and completed 10,000 units. It also started an additional 1,000 units that were 20% complete. The equivalent units of production that will be reported is 10,200. This includes the 10,000 completed units plus 20% of the partially completed 1,000 units.
The production cost report you received that showed the 2,000 units included partially completed units and fully completed units. The second aspect that you must take into consideration is how the production cost report is completed. The production cost report summarizes the production and cost activity within a department for a reporting period. It is a formal summary of the four steps performed to assign costs to units transferred out and units in ending work-in-process (WIP) inventory.
To prepare a production cost report, there are four steps that must be taken.
Step one is to compute the physical unit flow.
Step two is to compute the equivalent units of production.
Step three is to compute unit production costs.
The fourth and last step is to prepare a cost reconciliation schedule.
Production cost reports provide a groundwork for analyzing the productivity of a department. By comparing the quantity and cost data with predetermined goals, top management can also judge whether current performance is meeting planned objectives.
Hope this makes you understand why 2000 equivalent units are included in production cost report