What is Equivalent Units Method?
The equivalent units method converts partly finished work-in-progress into a comparable number of fully completed units, so that production costs can be allocated correctly between finished goods and WIP. It is the core of process costing in continuous-flow industries.
How It Works
- Estimate the percentage completion of WIP for material, labor, and overhead separately
- Equivalent units = Completed units + (WIP units × % complete)
- Cost per equivalent unit = Total costs / Total equivalent units
- Allocate the cost between transferred-out and ending WIP
- Used heavily in petrochemicals, food, beverages, paper, and pharmaceuticals
Saudi Context
Saudi process industries — petrochemicals (SABIC), food (Almarai), paper, pharma — apply the equivalent units method to allocate billions of riyals of production costs each year. SOCPA cost-accounting practice aligns with IFRS inventory measurement.
Example
A Saudi juice plant starts the month with no WIP, completes 100,000 cartons, and ends with 20,000 cartons that are 50% complete on labor and 100% complete on material. Equivalent units = 100,000 + (20,000 × 50%) for labor = 110,000; for material = 120,000. Costs are allocated per equivalent unit and then split between cartons completed and cartons still in WIP.