Percentage of Completion

Definition

The percentage of completion is a measure used in accounting to determine the amount of work that has been completed on a project or production process. It is a crucial concept in the context of conversion costs and equivalent units in an initial processing stage.

5 Must Know Facts For Your Next Test

1. The percentage of completion is used to allocate costs and revenues to the current accounting period, even if a project or production process is not yet complete.
2. In the context of conversion costs, the percentage of completion is used to determine the portion of total conversion costs that should be assigned to the current period's production.
3. Equivalent units are calculated based on the percentage of completion, as they represent the number of fully completed units that could have been produced from the total work done.
4. The total cost of production is calculated by dividing the total costs incurred by the number of equivalent units, which is influenced by the percentage of completion.
5. Accurate estimation of the percentage of completion is crucial for proper cost allocation and financial reporting in manufacturing and construction industries.

Review Questions

• Explain how the percentage of completion is used to determine conversion costs in a production process.
  • The percentage of completion is used to allocate a portion of the total conversion costs (direct labor and manufacturing overhead) to the current accounting period, even if the production process is not yet complete. By multiplying the total conversion costs by the percentage of completion, the company can determine the amount of conversion costs that should be recognized as part of the cost of goods sold for the current period. This ensures that costs are matched with the revenue generated from the partially completed units.
• Describe the relationship between the percentage of completion and the calculation of equivalent units in an initial processing stage.
  • The percentage of completion is a key factor in determining the number of equivalent units in an initial processing stage. Equivalent units represent the number of fully completed units that could have been produced from the total work done, including both finished and partially completed units. The percentage of completion is used to estimate the degree of completion for the partially completed units, which is then used to calculate the equivalent units. This information is crucial for accurately determining the total cost of production and the cost per unit in the initial processing stage.
• Analyze how the percentage of completion impacts the total cost of production in a manufacturing environment.
  • The percentage of completion directly affects the calculation of the total cost of production. By dividing the total costs incurred (including both direct and indirect costs) by the number of equivalent units, the company can determine the cost per unit. The percentage of completion is used to determine the number of equivalent units, as it represents the degree of completion for partially finished goods. A higher percentage of completion will result in more equivalent units, which in turn will lower the cost per unit. Conversely, a lower percentage of completion will lead to fewer equivalent units and a higher cost per unit. Accurately estimating the percentage of completion is crucial for ensuring the total cost of production is properly allocated and reported.

Related terms

Conversion Costs: The costs associated with converting raw materials into finished goods, including direct labor and manufacturing overhead.

Equivalent Units: The number of fully completed units that could have been produced from the total amount of work done, including both finished and partially completed units.

Total Cost of Production: The total cost incurred in the production of goods, including both direct and indirect costs.