Definition: Equivalent units of production (EUP) is a managerial accounting calculation that estimates the number of units that could have been started and completed if all resources were devoted to these units during a period. In other words, this is the highest number of units a factory could produce during a period at a given cost if all efforts were use one type of unit.
What Does Equivalent Units of Production Mean?
Managerial and cost accountants use the equivalent units of production to allocate production costs to units during the manufacturing process. For instance, calculating the cost of goods produced is simple if there is no beginning or ending goods in process inventory. All of the costs incurred during the period would be allocated to the goods because they were all completed.
It is a little different, however when there is a beginning and ending number of units that have been partially finished. These goods in process must have costs allocated to them along with the goods that were finished during the period.
To calculate the cost per equivalent unit formula, you must divide the total production costs assigned in the process by the equivalent units of production. This will give you the cost that can be allocated to each equivalent unit produced during the period.
Once the cost per EU is calculated, the costs are allocated to the goods that were partially finished and completely finished during the period.
Take Pat’s Production, Inc. for example. Pat starts 100 units in his production line each period. At the end, he determines that his 100 units are only 70 percent the way through the production process. Thus, Pat’s equivalent units of production for the period is 70 EUP.