Professor Jones is concerned that her students do not understand the concept of equivalent units. She has therefore prepared the following questions, to appear on an upcoming examination:Equivalent units are used in a process-costing accounting system.A. Explain the need for equivalent units and why separate equivalent-unit totals are calculated for direct materials and conversion cost.B. If an examination of goods in production at the end of the period revealed 12,000 units that are, on average, 75% complete, would it be correct to say that 9,000 units were finished during the period? Why?Required:Prepare a complete answer key that can be used in grading the examination questions.

Question

What will be an ideal response?

Answer 1

A. Equivalent units are needed as a measure of production volume. At the end of the period, manufacturing costs must be spread over the units produced, and it is incorrect to combine fully completed units with those that are still in production (akin to adding apples and oranges). Separate totals are needed because materials are often introduced at specific points in production whereas conversion is often introduced uniformly throughout manufacturing.
B. No. The units are still in production, so none of these is fully completed. It would be correct to say that the firm has done the work equivalent to manufacturing 9,000 finished units.