Accounting Case Study: Production Cost Report & Equivalent Units

This case study presents a scenario where a production manager, Davis Skaros, misunderstands the concept of equivalent units in his department's production cost report. The student, acting as an accountant, prepares a memo to explain to Mr. Skaros why the report shows only 2,000 equivalent units in ending inventory, despite the manager's belief that there were more units on hand. The memo clarifies that equivalent units are determined by the degree of conversion in the production process, not just the number of physical units. It uses the process costing method to explain how materials are processed in various departments, and that a unit is only considered complete when all conversion testing is done. Furthermore, the memo highlights other reasons for not maintaining enough stock to meet the demand, such as outdated inventory, storage capacity and fees, and the cost of storage. The memo emphasizes the importance of efficient inventory management and the value of prioritizing productive investments. The student assures Mr. Skaros that the cost report was finished accurately and the equivalent units were resolved correctly, clarifying any misunderstanding and offering further assistance if needed. The memo references several academic sources to support the arguments presented.

Running Head: Accounting 1
Accounting
(Student Name)

Accounting 2
MEMO
To,
Mr. Skaros,
Production Manager,
Subject: Equivalent Units in Ending Inventory
Dear Sir,
I would like to inform from the above that the cost estimate shows at least two times the
inventory of 2000 units in production, however, is only 2,000 units per case.
Production Cost Report is prepared according to process costing method which implies
that although we have introduced the inventory of 2000 units in production twice, in all respects
all of these units are not completely complete. For example, while we have implemented 4,000
units of materials, these materials must be processed in various departments which transform
materials into finished products. Until all conversion testing is completed on 4000 devices, they
are not considered a complete inventory. The corresponding units are determined according to
the degree of conversion (Helmers et al., 2020). This is exactly what I did in the cost report I
showed you. Furthermore, there are other reasons as well for not maintaining enough stock to
meet the demand are explained in the below points:
Outdated Inventory: Overstocking on products carries the risk that the product will
become obsolete. This is particularly true in technology sectors like smart phones and
televisions, but there is no exemption from industry. Even the latest game craze for your child
might encourage you to order a ton. If the mood quickly dissipates and the children aren't
looking for a game, you're going to be left with many inventories you can't move.

Accounting 3
Storage Capacity and Fees: Storage capacities and the associated storage charges concern
firms with more than needed inventory. Holding an inventory takes up space and resources.
Companies lose profit by paying labor to keep the storage space, organize the stock and carry the
stock from one place to another. Companies renting storage space lose extra profit by paying
rental fees for storing unused stock (Grant, 2016).
Cost of Storage: The more things you have, the more room you need. Commercial space
per square foot is leased. For contrast to discounts on wholesales purchases, consider the costs on
stores with excess inventory. Further inventory control and monitoring are also important, and
additional staffs are likely needed in the warehouse (Cooper, 2017).
Therefore, to appreciate the analysis, we need to prioritize productive investments and
look at the value of the organization's stock. In the form of an update, we anticipate that the
inventory will be obligatory, and that an item management will help to choose, obtain, search for
and place the product in the store. The stock management will be given some other informed
options for the association's generation and tasks. The beneficial stock management should be
aware of all that takes place when the association is established and should be very proactive
(Eisman et al., 2020).
At the end, the cost report was finished accurately, taking all into account. The way the
comparable units were resolved was essentially wrong. As already mentioned, an identical
production unit is essentially a sign of the manufacturers ' measure of work towards the
conclusion of an inspection period. Mr Skaros, you can rest assured that on a cost report the
2,000 proportional units appeared to all units finished just like the units finished in part. Gladly
don't hesitate to tell me if there are more concerns.
I hope this will clear your misunderstanding.
Thank You
Yours Truly
(Student Name)

Accounting 4
References
Cooper, R. (2017). Target costing and value engineering. London: Routledge.
Eisman, A. B., Kilbourne, A. M., Dopp, A. R., Saldana, L., & Eisenberg, D. (2020). Economic
evaluation in implementation science: Making the business case for implementation
strategies. Psychiatry research, 283.
Grant, D. (2016). Business analysis techniques in business reengineering. Business Process
Management Journal, 22(1), 75-88.
Helmers, R. A., Dilling, J. A., Chaffee, C. R., Larson, M. V., Narr, B. J., Haas, D. A., & Kaplan,
R. S. (2017). Overall cost comparison of gastrointestinal endoscopic procedures with
endoscopist-or anesthesia-supported sedation by activity-based costing techniques. Mayo
Clinic Proceedings: Innovations, Quality & Outcomes, 1(3), 234-241.