ZeePedia Add to Favourites   |   Contact us


Financial Accounting

<<< Previous COST OF GOODS SOLD STATEMENT Next >>>
 
img
Financial Accounting (Mgt-101)
VU
Lesson-16
COST OF GOODS SOLD STATEMENT
In manufacturing concern, separate books are maintained to keep the record of every single work done in
manufacturing process to ascertain cost incurred on production of goods. This record gives information
about total cost incurred on manufacturing process and per unit cost of goods manufactured. When goods
are produced, these are sold to the customers of the business and goods unsold are taken into stock. At the
end of the financial year, manufacturing concern prepares a statement which gives the brief summary of the
whole process.
This statement shows the value of raw material consumed, amount spent on labour and other factory
expenses, finished goods produced and goods unsold (in stock). Such statement is called `cost of goods
sold statement'. Manufacturing concerns, while presenting financial statements, also present cost of goods
sold statement.
Standard format of cost of goods sold statement is given below:
Raw Material:
O/S Raw Material
+ Purchases
+ Cost Incurred to Purchase RM
- C/S Raw Material
Cost of Material Consumed
Conversion Cost:
+ Direct Labour Cost
+ Factory Overheads
Total Factory Cost
Work in Process
+ O/S of WIP
- C/S of WIP
Cost of Goods Manufactured
Finished Goods
+ O/S of Finished Goods
- C/S of Finished Goods
Cost of Good Sold
Cost of material consumed ­ is the cost of material used for consumption that has been put in the
production process. This head shows the raw material left unused from the previous year(opening stock),
raw material purchased in the current year, expenses incurred in bringing the purchased material into the
business premises and raw material that is not used in the current year(closing stock).
Over Heads are the other costs incurred in relation of manufacturing of goods.
Examples are factory utilities, supervisor salaries, equipment repairs etc.
Total factory cost ­ is the cost of material consumed plus labour and over heads. In other words it is the
total cost incurred in the factory.
Cost of goods manufactured ­ is total factory cost plus opening stock of work in process less closing stock
of work in process.
Cost of goods sold ­ is the cost of goods manufactured plus opening stock of finished goods less closing
stock of finished goods.
Prime/Basic Cost = Cost of Direct Material Consumed + Direct Labour cost
121
img
Financial Accounting (Mgt-101)
VU
Conversion cost
it is the cost incurred to convert raw material to finished goods.
Conversion cost = Labour cost + factory overhead
Example
Using the following data calculate the Cost of Goods Sold of XYZ Co.
Stock levels
O/S Rs.
C/S Rs.
Raw material
100,000
85,000
Work in process
90,000
95,000
Finished goods
150,000
140,000
Purchase of raw material during the period Rs. 200,000
Paid to labour Rs. 180,000 out of which Rs. 150,000 used on production.
Other production costs Rs. 50,000
Solution
XYZ Co.
Cost of Goods Sols Statement
For the period ended-------
Raw Material:
Opening Stock Raw Material
100000
+ Purchases
200000
+ Cost Incurred to Purchase RM
0
- Closing Stock Raw Material
(85000)
Cost of Material Consumed
215000
Conversion Cost
+ Labour Cost
150000
+Factory overhead
50000
200000
Total Factory Costs
415000
Work in process
+ O/S of WIP
90000
+ C/S of WIP
(95000)
Cost of Goods Manufactured
410000
Finished Goods
+ O/S of Finished Goods
150000
+ C/S of Finished Goods
(140000)
Cost of Goods Sold
420000
ILLUSTRATION
Following information of Ahmad & Company is given. Prepare a cost of goods sold statement.
Stock levels
O/S Rs.
C/S Rs.
Raw material
150,000
115,000
Work in process
50,000
55,000
Finished goods
120,000
100,000
Purchase of raw material during the period Rs. 100,000
Transportation charges of items purchased Rs. 5,000
122
img
Financial Accounting (Mgt-101)
VU
Paid to labour Rs. 100,000.
Other production costs(FOH) Rs. 80,000
SOLUTION
Raw Material:
Opening Stock Raw Material
150,000
+ Purchases
100,000
+ Cost Incurred to Purchase RM
5,000
- Closing Stock Raw Material
(115,000)
Cost of Material Consumed
140,000
Conversion Cost:
+ Labour
100,000
+ Factory Overheads
80,000
Total Factory Cost
320,000
Work in Process:
+ O/S of WIP
50,000
- C/S of WIP
(55,000)
Cost of Goods Manufactured
315,000
Finished Goods:
+ O/S of Finished Goods
120,000
- C/S of Finished Goods
(100,000)
Cost of Good Sold
335,000
STOCK CARD
Stock card is used to keep the record of what has come in stock and what has gone out of it. Standard
format of stock card is given below:
Stock Account Item 01
Date
Receipts
Qty
Rate
Amount
Date
Issues
Qty
Rate
Amount
Stock card has two parts.
 Receipt side
 Issue side
Both sides have similar columns that include:
 Nature of item to be kept in stock
 Quantity of items
 Rate at which it was purchased
 Total value of items
Receipt side is used to record data of items coming in the stock and issue side is used to record information
of goods issued for manufacturing process.
VALUATION OF STOCK
Any manufacturing organization purchases different material through out the year. The prices of purchases
may be different due to inflationary conditions of the economy. The question is, what item should be issued
first & what item should be issued later for manufacturing. For this purpose, the organization has to make a
123
img
Financial Accounting (Mgt-101)
VU
policy for issue of stock. All the issues for manufacturing and valuation of stock are recorded according to
the policy of the organization. Mostly these three methods are used for the valuation of stock:
 First in first out (FIFO)
 Last in first out (LIFO)
 Weighted average
FIRST IN FIRST OUT (FIFO)
The FIFO method is based on the assumption that the first merchandise purchased is the first merchandised
issued. The FIFO uses actual purchase cost. Thus, if merchandise has been purchased at several different
costs, the inventory (stock) will have several different cost prices. The cost of goods sold for a given sales
transaction may involve several different cost prices.
CHARACTERISTICS
This is widely used method for determining values of cost of goods sold and closing stock.
In the FIFO method, oldest available purchase costs are transferred to cost of goods sold. That
means the cost if goods sold has a lower value and the profitability of the organization becomes
higher.
As the current stock is valued at recent most prices, the current assets of the company have the
latest assessed values.
LAST IN FIRST OUT (LIFO)
As the name suggests, the LIFO method is based on the assumption that the recently purchased
merchandise is issued first. The LIFO uses actual purchase cost. Thus, if merchandise has been purchased at
several different costs, the inventory (stock) will have several different cost prices. The cost of goods sold for
a given sales transaction may involve several different cost prices.
CHARACTERISTICS
This is alternatively used method for determining values of cost of goods sold and closing stock.
In the LIFO method recent available purchase costs are transferred to cost of goods sold. That
means the cost of goods sold has a higher value and the profitability of the organization becomes
lower.
As the current stock is valued at oldest prices, the current assets of the company have the oldest
assessed values.
WEIGHTED AVERAGE METHOD
When weighted average method is in use, the average cost of all units in inventory, is computed after every
purchase. This average cost is computed by dividing the total cost of goods available for sale by the number
of units in inventory. Under the average cost assumption, all items in inventory are assigned the same per
unit cost. Hence, it does not matter which units are sold; the cost of goods sold is always based on current
average unit cost.
CHARACTERISTICS
Under the average cost assumption, all items in inventory are assigned same per unit cost (the
average cost). Hence it does not matter which units are sold first. The cost of goods sold is always
on the current average unit cost.
124
img
Financial Accounting (Mgt-101)
VU
Since all inventories are assigned same cost, this method does not make any effect on the
profitability and does not increase/decrease any asset in the financial statements.
 This is the alternatively used method for determining values of cost of goods sold and closing stock.
Example
 Receipts:
01 Jan 20--,
10 units @ Rs. 150 per unit
02 Jan 20--,
15 units @ Rs. 200 per unit
10 Jan 20--,
20 units @ Rs. 210 per unit
 Issues:
05 Jan 20--,
05 units
06 Jan 20--,
10 units
15 Jan 20--,
15
FIFO Method of Stock Valuation
Date
Receipts
Issues
Value of Stock
01-01-20--
10 @ Rs. 150
10 x 150 = 1500 1500
02-01-20--
15 @ Rs. 200
10 x 150 = 1500
15 x 200 = 3000 4500
05-01-20--
5 @ 150 = 750
750
5 x 150 = 750
15 x 200 = 3000 3750
06-01-20--
5 @ 150 = 750
0 x 150 =
0
5 @ 200 = 1000 1750
10 x 200 = 2000 2000
10-01-20--
20 @ Rs. 210
10 x 200 = 2000
20 x 210 = 4200 6200
15-01-20--
10 @ 200 = 2000
0 x 200 =
0
5 @ 210 = 1050 3050
15 x 210 = 3150 3150
Weighted Average Method of Stock Valuation
Date
Receipts
Issues
Value of Stock
Average Cost
01-01-20--
10x150 = 1500
1500
1500/10=150
02-01-20--
15x200 = 3000
1500 + 3000 = 4500
4500/25=180
05-01-20--
5x180 = 900
4500 ­ 900 = 3600
3600/20=180
06-01-20--
10x180 = 1800
3600 ­ 1800 = 1800
1800/10=180
10-01-20--
20x210 = 4200
1800 + 4200 = 6000
6000/30=200
15-01-20--
15x200 = 3000
6000 ­ 3000 = 3000
3000/15=200
Effects of Valuation Method on Profit
FIFO Method
125
img
Financial Accounting (Mgt-101)
VU
Cost of Sales
= 750 + 1750 + 3050  = 5,550
Gross Profit
= 7500 ­ 5550
= 1,950
Weighted Average Method
 Cost of Sales
= 900 + 1800 + 3000  = 5,700
Gross Profit
= 7500 ­ 5700
= 1,300
ILLUSTRATION
Hamid & company is a manufacturing concern. Following is the receipts & issues record for the month of
May, 2002
Date
Receipts
Issues
May 7
200 units @ Rs. 50/unit
May 9
60 units
May 13
150 units @ Rs. 75/unit
May 18
100 units @ Rs. 60/unit
May 22
150 units
May 24
100 units
May 27
100 units @ Rs. 50/unit
May 30
200 units
Calculate the value of closing stock by
 FIFO Method
 Average Method
126
img
Financial Accounting (Mgt-101)
VU
SOLUTION
Valuation of stock by FIFO method
Date
Receipts
Issues
Value of Stock
Total  Remaining  Net
Amount  No. of
Balance
units
May 7
200 units @ Rs.
200 x 50 = 10,000
10,000  200
10,000
50/unit
May 9
60  units
@
Rs.
60 x 50 = 3,000
(3,000)
140
7,000
50/unit
May 13
150 units @ Rs.
75 x 150 = 11,250
11,250
290
18,250
75/unit
May 18
100 units @ Rs.
60 x 100 = 6,000
6,000
390
24,250
60/unit
May 22
140 units @ Rs.
50 x 140 = 7,000
(7,750)
240
16,500
50/unit
10  units  @  Rs.
10 x 75 = 750
75/unit
May 24
100 units @ Rs.
75 x 100 =7,500
(7,500)
140
9,000
75/unit
May 27
100 units @ Rs.
50 x 100 = 5,000
5,000
240
14,000
50/unit
May 30
40  units  @  Rs.
75 x 40 = 3,000
(12,000)
40
2,000
75/unit
100 units @ Rs.
60 x 100 = 6,000
60/unit
60  units  @  Rs.
50 x 60 = 3,000
50/unit
127
img
Financial Accounting (Mgt-101)
VU
Valuation of stock by weighted average method:
Date Receipts Issues
Value of
Total
Total Units
Average
Net
Stock
Amount(Rs.)
Cost(Rs.)/unit Balance(
Rs.)
May 200 units
200 x 50
10,000
200
50
10,000
7 @
Rs.
=
50/unit
10,000
May
60 units  60 x 50
(3,000)
140
7,000
9
=
3,000
May 150 units
150 x 75
7,000+11250
140+150
18250/290
18,250
13 @
Rs.
=
=
=
=
75/unit
11,250
18250
290
62.9
May 100 units
100 x 60
18250+6000
290+100
24250/390
24,250
18 @
Rs.
=
=
=
=
60/unit
6,000
24250
390
62.2
May
150
150 x 62.2
(9,330)
390-150
14,920
22
units
=
=
9330
240
May
100
100 x 62.2
(6,220)
240-100
8,700
24
units
=
=
6220
140
May 100 units
100 x 50
8,700+5,000
140+100
13700/240
13,700
27 @
Rs.
=
=
=
=
50/unit
5,000
13,700
240
57.1
May
200
200 x 57.1
(11,420)
240-200
2,280
30
units
=
=
11,420
40
LIFO METHOD WILL BE DISCUSSED AT SOME LATER STAGE
128
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES