SHORT ANSWERS QUESTIONS

Short answers questions

Short answers questions

Explain the concept of equivalent units of production. Why is it necessary to compute equivalent units? Can you think of a non-accounting example where the equivalent units' concept is applied?

Answer: At the year end when there is time to calculate the amount of inventory by the company. There are completed units in the inventory as some of units which are partially completed and they are also known as Work - in - Progress. Company in order to calculate the values of completed values of goods produced compute the values of the goods ino equivalent units of goods completed thus they can be included in the production values and inventory values can be computed (Vanderbeck, 2012).

For two years, Richard Elkins has been the manager of the production department of a company manufacturing toys made of plastic-coated cardboard. One of the toys is a paper doll, whose “clothes” is made of acetate, and stay on the doll with static electricity. The company's sales were mainly to large educational institutions until last year, when the dolls were sold for the first time to a large discount retailer. The dolls were sold out immediately, and enough orders were received to keep the department at full capacity for the immediate future. The fixed costs for the department are $50,000, with $1.50 per unit variable costs. A paper doll and one set of clothes sell for $3. The maximum volume is 80,000 units. With the increased volume, Mr. Elkins is considering two options to improve profitability. One would reduce variable costs to $1.25, and the other would reduce fixed costs to $35,000.

Given the fact that sales are increasing, make a recommendation to Mr. Elkins about which option he should choose. Support your recommendation with a calculation showing ...