Understanding Equivalent Units in Process Costing for Accurate Financial Reporting

In a process costing system, which of the following statements regarding the calculation of equivalent unite is true? a. Equivalent units facilitate the assignment of appropriate values to partially completed units for financial statement reporting. b. Cost per equivalent unit is calculated as total number of units divided by total must be equal. manufacturing cost. c. Equivalent units calculated for direct materials and conversion costs d. Equivalent units apply only to the FIFO method of process costing

a. Equivalent units facilitate the assignment of appropriate values to partially completed units for financial statement reporting.

The correct answer to the question is (a) Equivalent units facilitate the assignment of appropriate values to partially completed units for financial statement reporting.

Explanation:

Equivalent units are a key concept in process costing, which is used to determine the cost of manufacturing a large number of identical products. Equivalent units are used to determine the cost of partially completed units in a process costing system. They help in calculating the cost per unit of output by considering the work done on both completed units and partially completed units. The statement (a) is true as equivalent units aid in assigning the appropriate cost to each unit of production, which helps in preparing accurate financial statements.

However, statement (b) is incorrect as cost per equivalent unit is calculated as total manufacturing cost divided by total equivalent units. Statement (c) is partially correct as equivalent units are calculated for both direct materials and conversion costs. On the other hand, statement (d) is incorrect as equivalent units apply to both FIFO and weighted average method in process costing.

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