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Calculate Equivalent Units of Production (EUP)

Economics

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Question Three

Part a· 4 steps

Prepare Process Account for process July 2019 using the above figures.

  1. Calculate Equivalent Units of Production (EUP)

    • Completed Units: 7,600 litres
    • Closing Work-in-Progress (WIP) Units: 400 litres
    Cost ElementCompleted Units (7,600 litres)Closing WIP (400 litres)Total Equivalent Units
    Materials7,600×100%=7,6007,600 \times 100\% = 7,600400×100%=400400 \times 100\% = 4007,600+400=8,0007,600 + 400 = 8,000
    Labour7,600×100%=7,6007,600 \times 100\% = 7,600400×80%=320400 \times 80\% = 3207,600+320=7,9207,600 + 320 = 7,920
    Overhead7,600×100%=7,6007,600 \times 100\% = 7,600400×80%=320400 \times 80\% = 3207,600+320=7,9207,600 + 320 = 7,920

  2. Calculate Cost Per Equivalent Unit

    • Total Direct Materials Cost: Sh. 32,000
    • Total Direct Labour Cost: Sh. 15,840
    • Total Absorbed Production Overhead Cost: Sh. 23,760
    Cost per EUP (Materials)=Sh. 32,0008,000 units=Sh. 4.00 per unit\text{Cost per EUP (Materials)} = \frac{\text{Sh. } 32,000}{8,000 \text{ units}} = \text{Sh. } 4.00 \text{ per unit} Cost per EUP (Labour)=Sh. 15,8407,920 units=Sh. 2.00 per unit\text{Cost per EUP (Labour)} = \frac{\text{Sh. } 15,840}{7,920 \text{ units}} = \text{Sh. } 2.00 \text{ per unit} Cost per EUP (Overhead)=Sh. 23,7607,920 units=Sh. 3.00 per unit\text{Cost per EUP (Overhead)} = \frac{\text{Sh. } 23,760}{7,920 \text{ units}} = \text{Sh. } 3.00 \text{ per unit} Total Cost per EUP=Sh. 4.00+Sh. 2.00+Sh. 3.00=Sh. 9.00 per unit\text{Total Cost per EUP} = \text{Sh. } 4.00 + \text{Sh. } 2.00 + \text{Sh. } 3.00 = \text{Sh. } 9.00 \text{ per unit}

  3. Calculate Cost of Completed Units and Closing WIP

    • Cost of Completed Units: 7,600 units×Sh. 9.00/unit=Sh. 68,4007,600 \text{ units} \times \text{Sh. } 9.00/\text{unit} = \text{Sh. } 68,400

    • Cost of Closing Work-in-Progress:

      • Materials: 400 units×100%×Sh. 4.00/unit=Sh. 1,600400 \text{ units} \times 100\% \times \text{Sh. } 4.00/\text{unit} = \text{Sh. } 1,600
      • Labour: 400 units×80%×Sh. 2.00/unit=Sh. 640400 \text{ units} \times 80\% \times \text{Sh. } 2.00/\text{unit} = \text{Sh. } 640
      • Overhead: 400 units×80%×Sh. 3.00/unit=Sh. 960400 \text{ units} \times 80\% \times \text{Sh. } 3.00/\text{unit} = \text{Sh. } 960
      • Total Closing WIP Cost: Sh. 1,600+Sh. 640+Sh. 960=Sh. 3,200\text{Sh. } 1,600 + \text{Sh. } 640 + \text{Sh. } 960 = \text{Sh. } 3,200

  4. Prepare the Process Account

    ParticularsLitresAmount (Sh.)ParticularsLitresAmount (Sh.)To Materials8,00032,000By Completed Units7,60068,400To Labour15,840By Closing WIP4003,200To Overhead23,760Total8,00071,600Total8,00071,600\begin{array}{|l|r|r|l|r|r|} \hline \textbf{Particulars} & \textbf{Litres} & \textbf{Amount (Sh.)} & \textbf{Particulars} & \textbf{Litres} & \textbf{Amount (Sh.)} \\ \hline \text{To Materials} & 8,000 & 32,000 & \text{By Completed Units} & 7,600 & 68,400 \\ \text{To Labour} & & 15,840 & \text{By Closing WIP} & 400 & 3,200 \\ \text{To Overhead} & & 23,760 & & & \\ \hline \textbf{Total} & \textbf{8,000} & \textbf{71,600} & \textbf{Total} & \textbf{8,000} & \textbf{71,600} \\ \hline \end{array}

Part d

Discuss briefly how to measure performance in a decentralized company.

In a decentralized company, performance measurement focuses on evaluating the effectiveness of individual divisions or responsibility centers. Key methods include:

  • Return on Investment (ROI): Measures the profitability of an investment center relative to the assets employed, encouraging efficient asset utilization.
  • Residual Income (RI): Calculates the profit an investment center earns above a minimum required return on its operating assets, promoting decisions that increase overall company value.
  • Balanced Scorecard: Provides a comprehensive view of performance by considering financial, customer, internal business process, and learning and growth perspectives, aligning divisional goals with strategic objectives.
  • Transfer Pricing: Establishes prices for internal transfers of goods or services between divisions, influencing the reported profitability of both the selling and buying divisions and motivating managers.
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