David Skaros has recently been promoted to production manager. He has just start

Question

David Skaros has recently been promoted to production manager. He has just started to receive various managerial reports, including the production cost report that you prepared. It showed that his department had 2,000 equivalent units in ending inventory. His department has had a history of not keeping enough inventory on hand to meet demand. He has come to you, very angry, and wants to know why you credited him with only 2,000 units when he knows he had at least twice that many on hand.

Instructions

Explanation / Answer

To,

David Skaros,

Production manager.

Sub : equivalent units in ending inventory.

Dear sir,

With reference to above subject, I would like you to know that why production cost report is showing only 2000 units eventhough we have atleast twice the invnetory of 2000 units in hand in production.

Production Cost Report is prepared according to process costing method which implies that though we have introduced the twice the inventory of 2000 units in production, but all these units are not fully complete in in all respect. For example, eventhough we have introduced the materials for 4000 units but these materials have to undergo the various processing in the department which converts materials into finished goods. And untill all the conversion processing are carried out on the materials of 4000 units, these are not considered as fully finished inventory. As per the degree of conversion process, the equivalent units are calculated. This is exactly what I did in production cost report that I have showed to you.

I hope this will clear your misunderstanding.

Thank You

Yours truly,

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