Monitoring Your Business With Equivalent Units

Some businesses find units very easily and may be obvious.

Metal processors and stockholders use tonnes…or a smaller measure of weight if the metal is gold.

Lawyers and many other professionals rely on the billable hour or day.

Hospitals can use patient days.

This points us in an interesting direction – you can work with equivalent units.

Imagine a manufacturer that makes three products.

A takes 2 production hours

B takes 3 production hours

And C takes 5 production hours

Since C takes 2 and a half times longer to make than A, it doesn’t make sense to add up the units sold because changes in the proportions would play havoc with our averages.

But we could translate sales of A, B and C into sales of production hours.

So sales of 100 A, 60 B and 50 C becomes 630 production hours

That’s (100 * 2) + (60 * 3) + (50 * 5)

Can you find an equivalent unit easily in your business?

I have seen the same idea applied to express everything as equivalent sales of one product so the 630 hours could be turned into the equivalent of 315 sales of product A (which need two hours each).

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