A company employs a process costing system for its two-department manufacturing operation using the first-in-first-out (FIFO) inventory method.  When units are completed in department 1, they are transferred to department 2 for completion. Inspection takes place in department 2 immediately before the direct materials are added, when the process is 70% complete with respect to conversion.  The specific identification method is used to account for lost units.

Generally the number of defective units (that is, those failing inspection) is below the normal tolerance limit of 4% of units inspected.  Defective units have minimal value, and the company sells them without any further processing for whatever it can. Generally the amount collected equals, or slightly exceeds, the transportation cost.  A summary of the manufacturing activity for department 2, in units for the current month, is presented below.

The equivalent units for direct materials for the current month would be

A. 175,000 units.

B. 181,500 units.

C. 195,000 units.

D. 200,000 units.

The answer is C, i.e. 20K + (170k - 20k) + 25k

I have no idea why it doesn't include the % of completion. What's more, the DM should be added after the the process is completed with conversion. The beginning inventory is 60% of completion with conversion. How will it be calculated? Thanks