ACC640 Week 5 Discussion Forum 1 Equivalent Units

The role of equivalent units in decision-making for a manufacturer is to represent how much money will be saved through rewarding efficiency. It also allows you to compare the costs of two different options and see which one is more economical (Nannan,2020). Ex: If a company has the choice between purchasing a computer for $500 or spending $750 on labor, it would be in the company’s best interest to buy the computer, as this would save them $250. The equivalent unit would show that buying computers versus labor can save up to $750 per day/month, so over time, it will be cheaper and more efficient.

Comparison and contrast

Inventory accumulating methods are often used when handling manufacturing material. One of these methods is the weighted-average method, and its counterpart is the FIFO method. Both these inventory accumulation methods help with accurately calculating costs incurred in production and providing a comprehensive analysis of company performance.

In the weighted-average method, the average inventory is calculated by dividing the total inventory of work-in-process goods by the number of units fabricated during a period. The average cost of goods is obtained by dividing the total cost incurred for production by the number of units produced. In other words, if 100 units are produced at $1 each, the average cost will be $100. The weight to be used depends on how much work has been done on each unit in progress at the beginning of production and differs from company to company (Shah,2020). This method is more accurate as it compares similar types and amounts of work that may have started at different times and are completed at different times during the production process.

It is the sum of the costs of unfinished goods divided by their quantity. The cost per unit equals the total cost multiplied by the number of units in the ending inventory. The total value of each batch’s units equals the cost per unit multiplied by the number of units in the ending inventory. Therefore, FIFO is a very easy method to use as it can be easily computed using theoretical assumptions. However, this method may not be considered an accurate representation of providing realistic financial information as companies may have different average costs for similar batches.