Costing with equivalence numbers
For similar varieties, equivalence numbers weight the output; the calculation runs through equivalent units.
Worked example
A brewery makes three varieties. Total costs are £182,560.00. Allocate them with equivalence numbers (variety A is the base).
| Variety | Output (hl) | Equivalence number |
|---|---|---|
| A | 4,300 | 1.0 |
| B | 5,900 | 1.4 |
| C | 800 | 0.6 |
Worked solution
- 1.Equivalent units = 4,300 × 1.0 + 5,900 × 1.4 + 800 × 0.6 = 13,040
- 2.Cost per equivalent unit = £182,560.00 / 13,040 = £14.00
- 3.Variety B: £14.00 × 1.4 = £19.60 per hl
- 4.Variety C: £14.00 × 0.6 × 800 = £6,720.00
Typical mistake: Dividing total cost by total output instead of by equivalent units.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
A brewery makes three varieties. Total costs are £29,532.00. Allocate them with equivalence numbers (variety A is the base).
| Variety | Output (hl) | Equivalence number |
|---|---|---|
| A | 4,800 | 1.0 |
| B | 2,800 | 1.4 |
| C | 600 | 0.8 |
Cost per equivalent unit in £
Cost of variety B per hl in £
Total cost of variety C in £
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Simple: cost per unit = total cost / output
- Two-stage: production cost / units made + admin and selling / units sold
- Equivalence numbers: equivalent units = Σ output × factor; cost per unit = cost per equivalent unit × factor
Typical mistake: Dividing total cost by total output instead of by equivalent units.
Frequently asked questions
What is the typical mistake in "Costing with equivalence numbers"?
Dividing total cost by total output instead of by equivalent units.
When is two-stage costing needed?
When units made and units sold differ, i.e. stock is built up or run down.