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Cost Accounting

Cost Accounting. Financial Statements Lecture-2. Learning Objective. Concept of financial statement Types of financial statement Financial statements prepared by costing department. Components of Financial Statements.

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Cost Accounting

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  1. Cost Accounting Financial Statements Lecture-2

  2. Learning Objective Concept of financial statement Types of financial statement Financial statements prepared by costing department

  3. Components of Financial Statements Balance Sheet - statement of financial position at a given point in time. Income Statement - incomes minus expenses for a given time period ending at a specified date. Statement of changes in Equity - also known as Statement of Retained Earnings or Equity Statement. Cash FlowsStatement - summarizes inflows and outflows of cash and cash equivalents for a given time period ending at a specified date. Notes - includes: accounting policies, disclosures and other explanatory information.

  4. Forms Of Business Entities Manufacturing Entities Manufacturing entities purchase materials and components and convert them into finished goods. Trading Entities Trading entities purchase and then sell tangible products without changing their basic form. Servicing Entities Servicing entities provide services or intangible products to their customers.

  5. Inventory It is the cost held in material & supplies, work in process and finished goods that will provide economic benefits in future, it is also known as stock. Material & supplies inventory: Direct material inventory, Indirect material inventory (Factory supplies inventory), Shipping supplies inventory, Office supplies inventory Store Work shop Showroom/ Godown Workplace/ Office Godown/ Warehouse Work in process inventory -The inventory of partial/semi finished goods. Finished goods inventory-The goods which have been completed but not yet sold

  6. Entity NameCost Of Goods Sold statement For the year ended_______ Direct Material Consumed Opening inventory *** + Net Purchases *** = Material available for use *** - Closing inventory (***) = Material used *** Add Direct labor Prime cost Add FOH Total factory cost Add Opening Work in process Cost of good to be manufactured Less Closing Work in process Cost of good manufactured Add Opening finish goods Cost of good to be sold Less closing finish goods Cost of good to sold

  7. Elements Of Cost Of Goods Sold Statement Six Elements Cost Material & Supplies Labor FOH Inventories Material & Supplies Work in process Finish goods

  8. Material Consumed 50,000 60,000 110,000 20,000 Direct material opening inventory Add Net purchases Material available for use Less raw material closing stock Direct Material consumed 90,000 Net purchases = Purchases + All receiving &handling expenses – Returns – Discounts and allowances

  9. Prime Cost Direct material Consumed Add Direct labor Prime Cost 90,000 60,000 1,50,000

  10. Total Manufacturing Cost/Total Factory Cost Prime cost 1,50,000 Add Factory Overhead Indirect material 10000 Indirect labor 15000 Electricity bill 5000 Rent of factory 25000 Depreciation of plant &machinery 25000 Total Manufacturing cost 2,30,000 All factory expenses except Direct Material, Direct Labor & other direct production expenses.

  11. Cost Of Goods Manufactured Total factory Cost 230,000 Add Opening Work in process inventory 30,000 Cost of goods to be manufactured 260,000 Less Closing Work in process 50,000 Cost of goods manufactured 210,000 The goods which are in process in last year (Closing WIP) In Next year treated as Opening WIP

  12. Cost Of Goods Sold Cost of goods manufactured 210,000 Add Opening finished goods inventory 100,000 Cost of goods to be sold 310,000 Less Closing finish goods (10,000) Cost of goods sold 300,000 The goods which are completed but not yet sold (Closing Finish goods) In Next year treated as Opening Finish goods

  13. Income statement Sales 600,000 Less Cost of goods sold (300,000) Gross profit 300,000 Less Operating expenses Selling and marketing 50,000 Distribution 30,000 Administrative 20,000 100,000 Operating profit (Financial Expenses) 200,000 Less Interest expense 50,000 Profit before tax 150,000 Less Income Tax 60,000 Net profit / Net Income 90,000

  14. Total Factory CostBased on Applied FOH Cost Direct material Consumed Add Direct labor Prime Cost FOH Applied (150% of Direct Labor Cost) 90,000 60,000 150,000 90,000 240,000

  15. Cost Of Goods Sold statement For the year ended_______ Direct Material Consumed 90,000 Add Direct labor 60,000 Prime cost 150,000 Add FOH applied (150%of direct labor cost)90,000 Total factory cost240,000 Add Opening Work in process 30,000 Cost of good to be manufactured 270,000 Less Closing Work in process 50,000 Cost of good manufactured220,000 Add Opening finish goods 100,000 Cost of good to be sold 320,000 Less closing finish goods 10,000 Cost of good to sold at normal310,000

  16. Cost Of Goods Sold statement For the year ended_______ Direct Material Consumed 90,000 Add Direct labor 60,000 Prime cost 150,000 Add FOH applied (150%of direct labor cost)90,000 Total factory cost240,000 Add Opening Work in process 30,000 Cost of good to be manufactured 270,000 Less Closing Work in process 50,000 Cost of good manufactured220,000 Add Opening finish goods 100,000 Cost of good to be sold 320,000 Less closing finish goods 10,000 Cost of good to sold at normal310,000 -Overapplied 10000 CGS at actual 300, 000

  17. Under/Over applied FOH cost Applied FOH Cost 90,000 Less Actual FOH Cost 80,000 Over applied FOH cost 10,000

  18. Adjustment of Under/Over applied FOH cost Under/Over applied FOH cost can be adjusted in following costs/profit figures: 1. Entire Production a) Work in process inventory b) Finished goods inventory c) Cost of goods sold 2. Cost of Goods Sold

  19. Income Statement Ratios Gross Margin Rate This ratio identify the ratio of gross margin over sales. Example: 3,00,000 / 6,00,000 * 100 = 50% Gross Profit Sales 100

  20. Income Statement Ratios Net Margin Rate • This ratio identify the ratio of gross margin over sales. • Example: 90,000 / 6,00,000 * 100 = 15% Net Profit Sales 100

  21. Problem-Practice The information relating cost department of BETA corporation is as fallow InventoryJan 1Dec 31 Material 34,000 49,000 Work in process 82,000 42,000 Finish goods 48,000 ? Finish goods inventory Jan 1 300 units Dec 31 420 units Sold during the year 3,380 units at Rs. 220 per unit.

  22. Problem Material Purchase Rs. 3,60,000 Conversion cost 2,14,400 Freight In 8,600 Purchase discount 8,000 Prepare Cost of Goods Sold Statement

  23. Material consumed Direct material opening inventory Rs. 34000 Add Net purchases Material Purchased 3,60,000 Add Freight Inward 8,600 Less Purchase discount 8,000 3,60,600 Material available for use 3,94,600 Less raw material closing stock 49,000 Direct Material consumed 3,45,600

  24. Total Manufacturing Cost Material consumed Rs. 3,45,600 Add Conversion cost 2,14,400 Total factory cost 5,60,000

  25. Cost Of Goods Manufactured Total factory Cost 5,60,000 Add Opening Work in process inventory 82,000 Cost of goods to be manufactured 6,42,000 Less Closing Work in process 42,000 Cost of goods manufactured 6,00,000

  26. Cost Of Goods Sold Cost of goods manufactured 6,00,000 Add Opening finished goods inventory 48,000 Cost of goods to be sold 6,48,000 Less Closing finish goods X Cost of goods sold X

  27. Valuation of Closing Finish Goods Closing finish goods = Closing finish goodsPer unit manufacturing cost

  28. Per Unit Manufacturing Cost Per unit manufacturing cost = Cost of goods manufactured No. of units manufactured

  29. No. Of Units Manufactured No of units manufactured Opening finished goods units + Units manufactured – closing finished goods units = Units sold 300 + X – 420 = 3880 Units manufactured = 3880 + 420 – 300 = 4000

  30. Per Unit Manufacturing Cost Per unit manufacturing cost = Cost of goods manufactured No. of units manufactured 6,00,000 4,000 = 150

  31. Value Of Closing Finish Goods Inventory Closing finish goods = Closing finish goods Per unit manufacturing cost = 420 150 = 63000

  32. Cost Of Goods Sold Cost of goods manufactured 6,00,000 Add Opening finished goods inventory 48,000 Cost of goods to be sold 6,48,000 Less Closing finish goods 63,000 Cost of goods sold 5,85,000

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