Financial Accounting - I – MGT101
VU
Lesson # 16
COST OF GOODS SOLD STATEMENT AND VALUATION OF STOCK
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 labor 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:
Conversion Cost:
Work in Process
Finished Goods
O/S Raw Material
+ Purchases
+ Cost Incurred to Purchase RM
- C/S Raw Material
Cost of Material Consumed
+ Direct Labor Cost
+ Factory Overheads
Total Factory Cost
+ O/S of WIP
- C/S of WIP
Cost of Goods Manufactured
+ 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 labor 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.
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Financial Accounting - I – MGT101
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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 Labor cost
Conversion cost
it is the cost incurred to convert raw material to finished goods.
Conversion cost = Labor 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 labor 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:
Conversion Cost
Opening Stock Raw Material
+ Purchases
+ Cost Incurred to Purchase RM
- Closing Stock Raw Material
Cost of Material Consumed
100000
200000
0
(85000)
+ Labor Cost
+Factory overhead
150000
50000
Total Factory Costs
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 Goods Sold
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215000
200000
415000
90000
(95000
410000
150000
(140000)
420000
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Financial Accounting - I – MGT101
Illustration
VU
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
„ Paid to labor Rs. 100,000.
„ Other production costs(FOH) Rs. 80,000
Solution
Raw Material:
Conversion Cost:
Work in Process:
Finished Goods:
Opening Stock Raw Material
+ Purchases
+ Cost Incurred to Purchase RM
- Closing Stock Raw Material
Cost of Material Consumed
+ Labor
+ Factory Overheads
Total Factory Cost
+ O/S of WIP
- C/S of WIP
Cost of Goods Manufactured
+ O/S of Finished Goods
- C/S of Finished Goods
Cost of Good Sold
150,000
100,000
5,000
(115,000)
140,000
100,000
80,000
320,000
50,000
(55,000)
315,000
120,000
(100,000)
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
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Financial Accounting - I – MGT101
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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 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.
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Financial Accounting - I – MGT101
Weighted average method
VU
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.
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--,
„ 02 Jan 20--,
„ 10 Jan 20--,
Issues:
„ 05 Jan 20--,
„ 06 Jan 20--,
„ 15 Jan 20--,
10 units @ Rs. 150 per unit
15 units @ Rs. 200 per unit
20 units @ Rs. 210 per unit
05 units
10 units
15
FIFO Method of Stock Valuation
Date
Receipts
01-01-20-- 10 @ Rs. 150
02-01-20-- 15 @ Rs. 200
05-01-20-06-01-20-10-01-20-15-01-20--
Issues
Value of Stock
10 x 150 = 1500
10 x 150 = 1500
15 x 200 = 3000
4500
5 @ 150 = 750
750
5 x 150 = 750
15 x 200 = 3000
3750
5 @ 150 = 750
0 x 150 =
0
5 @ 200 = 1000 1750 10 x 200 = 2000
2000
20 @ Rs. 210
10 x 200 = 2000
20 x 210 = 4200
6200
10 @ 200 = 2000
0 x 200 =
0
5 @ 210 = 1050 3050 15 x 210 = 3150
3150
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Financial Accounting - I – MGT101
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Weighted Average Method of Stock Valuation
Date
Receipts
Issues
01-01-20-- 10x150 = 1500
02-01-20-- 15x200 = 3000
05-01-20-5x180 = 900
06-01-20-10x180 = 1800
10-01-20-- 20x210 = 4200
15-01-20--
Value of Stock
1500
1500 + 3000 = 4500
4500 – 900 = 3600
3600 – 1800 = 1800
1800 + 4200 = 6000
Average
Cost
1500/10=150
4500/25=180
3600/20=180
1800/10=180
6000/30=200
15x200 = 3000 6000 – 3000 = 3000 3000/15=200
Effects of valuation method on profit
FIFO Method
• 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
May 7
May 9
May 13
May 18
May 22
May 24
May 27
May 30
Receipts
200 units @ Rs. 50/unit
Issues
60 units
150 units @ Rs. 75/unit
100 units @ Rs. 60/unit
150 units
100 units
100 units @ Rs. 50/unit
200 units
Calculate the value of closing stock by
• FIFO Method
• Average Method
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Financial Accounting - I – MGT101
Solution:
Valuation of Stock by FIFO Method
Date
Receipts
Issues
May 7 200 units
@
Rs.
50/unit
May 9
60 units @ Rs.
50/unit
May 13 150 units
@
Rs.
75/unit
May 18 100 units
@
Rs.
60/unit
May 22
140 units @
Rs. 50/unit
10 units @ Rs.
75/unit
Value of
Stock
200 x 50 =
10,000
VU
Total Remaining
Amount No. of units
10,000
200
Net
Balance
10,000
60 x 50 =
3,000
75 x 150 =
11,250
(3,000)
140
7,000
11,250
290
18,250
60 x 100 =
6,000
6,000
390
24,250
50 x 140 =
7,000
(7,750)
240
16,500
(7,500)
140
9,000
5,000
240
14,000
(12,000)
40
2,000
10 x 75 =
750
May 24
100 units @ 75 x 100
Rs. 75/unit
=7,500
May 27 100 units
50 x 100 =
@
Rs.
5,000
50/unit
May 30
40 units @ Rs. 75 x 40 =
75/unit
3,000
100 units @
Rs. 60/unit
60 x 100 =
60 units @ Rs.
6,000
50/unit
50 x 60 =
3,000
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Financial Accounting - I – MGT101
Valuation of Stock by Weighted Average Method:
Date
May 7
May 9
May 13
May 18
May 22
May 24
May 27
May 30
Receipts Issue Value of
Total
s
Stock Amount(Rs.
)
200 units
200 x 50
10,000
@
Rs.
=
50/unit
10,000
60
60 x 50
(3,000)
units
=
3,000
150 units
150 x 75 7,000+11250
@
Rs.
=
=
75/unit
11,250
18250
100 units
100 x 60 18250+6000
@
Rs.
=
=
60/unit
6,000
24250
150
150 x
(9,330)
units
62.2
=
9330
100
100 x
(6,220)
units
62.2
=
6220
100 units
100 x 50 8,700+5,000
@
Rs.
=
=
50/unit
5,000
13,700
200
200 x
(11,420)
units
57.1
=
11,420
VU
Total
Units
Average
Net Balance
Cost(Rs.)/uni
(Rs.)
t
200
50
10,000
140
140+150
=
290
290+100
=
390
390-150
=
240
7,000
18250/290
=
62.9
24250/390
=
62.2
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24,250
14,920
240-100
=
140
140+100
=
240
240-200
=
40
18,250
8,700
13700/240
=
57.1
13,700
2,280
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