Cost of goods sold

1. 1
COST ACCOUNTING-2
Chapter-1
Cost of Goods Sold (CGS)

2. A glance at the previous semester
• What is cost accounting, and how it is different
from other branches of accounting
• Cost
• How cost is different from expense
• Various classifications of cost
• Cost accounting system
• Job order cost system
• Process cost system
• Workflow for production - selling
• Flow of Manufacturing Cost
• Cost of Production Report

3. Concept of Management and
Function of The Controller
• The management of a business enterprise is
based upon a structure of individuals that belong
to one of three groups:
1. The operating management (foremen and
supervisors)
2. The middle management (department heads,
division/branch managers)
3. The executives (president, vice president)
The existence of these levels suggests that management consists
of people whose activities must be planned and controlled by
top-level directives, decisions, and instructions.

4. Concept of Management and
Function of The Controller
• Planning refers to the construction of an
operating program, comprehensive enough to
cover all phases of operations and detailed
enough so that specific attention may be given to
the program's fulfillment in controllable
segments.
• Control is that force which guides the business
to the predetermined objective(s) by means of
comparison of performance with predetermined
policies and decisions.

5. Concept of Management and
Function of The Controller
Management needs systematic, comparative cost information
as well as analytical cost and profit data to assist in:
1. setting the company's profit goal
2. establishing departmental targets
3. measuring and controlling departmental and functional
activities
4. analyzing and deciding on adjustments and
improvements to keep the entire organization moving
forward in balance toward the set objectives

6. Accounting — The Framework for
Planning and Controlling
• One kind of plan, among several is the budget.
The use of budgets, particularly in connection
with the control phase of management, has been
termed "budgetary control."
• Constant comparison of the budget plan with
actual results not only provides a measure of the
amount of deviation but also reflects the reasons
for variances or differences.

7. The nature of cost accounting
• Cost accounting is considered the key managerial
partner in the planning and control activities,
furnishing management with the necessary
accounting tools to plan, control and evaluate
operations.
• In the control phase, cost accounting deals with
the present, comparing current results with
predetermined standards and budgets.

8. The nature of cost accounting
More specifically, cost accounting is charged with the tasks of:
1. Aiding and participating in the creation and execution of
plans and budgets.
2. Providing management with information in connection with
problems that involve choice from among two or more
alternative courses (decision making).
3. Establishing methods and procedures that permit control and,
if possible, reduction or improvement of costs.
4. Creating inventory values for costing and pricing purposes
and, at times, controlling physical quantities.
5. Determining costs and profit for an accounting period.

9. Determination of the
Cost of Goods Sold

10. Cost of Goods Sold
• It refers to the direct costs of producing the goods sold by
a company. This amount includes the cost of the materials
and labor directly used to create the goods/product.
• It excludes indirect expenses, such as marketing and
distribution costs.
Formula:
Beginning Inventory
+ Purchases
= Cost of Goods Available for Sale
- Ending Inventory
= Cost of Goods sold

11. Cost of Goods Sold
Where:
 Beginning inventory is the amount of inventory on hand
at the beginning of period. This should be the same
amount as the ending inventory of the previous period.
 Purchases are the cost of what the company has
purchased during the accounting period.
 Ending inventory is the balance amount of inventory on-
hand at the end of accounting period.

12. Cost of Goods Sold
Example:
If a company has a beginning inventory of AFN 30,000 and
the purchases totaled 12,000 for that quarter, and the ending
inventory is 8,000, then the total CGS for that quarter will be:
CGS = $30,000 + $12,000 – $8,000 = $34,000
Thus, the total CGS in the 1st quarter of 2023 is $34,000.

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Inventories for a Manufacturing Concern
A manufacturing business has three distinct inventory
accounts:
1. Raw Material Inventory:
This inventory account (sometimes called Materials and supplies or
stores) reflects the cost of raw materials and factory supplies the will
be consumed in the manufacturing process.
2. Work in Process Inventory:
This account reflects the cost of raw materials, direct labor, and
manufacturing over head on goods on which manufacturing has
begun but has not been completed at the end of the fiscal period
3. Finish Goods Inventory:
The Finished Goods Inventory account reflects the cost for goods
that have been completed and are ready for sale

14. Raw Materials
Finished Goods
Work-in-Process
(WIP)
Materials waiting to be
processed.
Partially complete
products – material to
which some labor and/or
overhead has been added.
Completed products
awaiting sale.
Manufacturing Cost Flow

15. Manufacturing Cost Flow

16. Relationship Between Inventory and
Cost of Goods Sold
Beginning
Inventory
65,000
Purchases
387,000
Goods Available
for Sale
452,000
+ +
Ending
Inventory
75,000
Still Here Cost of
Goods Sold
$377,000
Sold

17. Cost of Goods Sold Equation
Beginning inventory 65,000
$
+ Purchases of merchandise during the period 387,000
= Cost of goods available for sale 452,000
– Ending inventory 75,000
= Cost of goods sold 377,000
$
Schedule of Cost of Goods Sold

18. 18
Manufacturing Cost Flow
Cost Balance sheet
inventories
Income statement
expenses

19. Cost of
Purchases
Balance Sheet Income
Statement
Raw
Materials
Work-in-
Process
Finished
Goods
• Materials
• Labor
• Overhead
Ending
Inventory
Total Mfg.
Costs
Incurred
Ending
Inventory
Cost of
Goods Mfd.
Ending
Inventory
Cost of
Goods
Sold
Manufacturing Cost Flow

20. Work-in-Process
Raw Materials
Mfg. Overhead
• Material
Purchases
• Direct
Material
• Direct
Material
• Indirect
Material
• Indirect
Material
Manufacturing Cost Flow

21. Manufacturing Cost Flow
21
Next, labor costs and applied manufacturing overhead
cost are added to the job-order cost flows.

22. •Direct
Labor
•Indirect
Material
•Overhead
Applied to
Work in
Process
If actual and applied
manufacturing overhead are not
equal, a year-end adjustment is
required. We will look at the
procedure to accomplish this
later.
•Indirect
Labor
•Direct
Labor
•Overhead
Applied
•Indirect
Labor
Wages Payable Work-in-Process
Mfg. Overhead
•Direct
Material
Manufacturing Cost Flow

23. Manufacturing Cost Flow
23
Now, we are going to complete the goods and
determine its cost (Cost of goods to be sold).

24. •Cost of
Goods
Mfd.
Finished Goods
•Cost of
Goods
Sold
•Cost of
Goods
Mfd.
Cost of Goods Sold
•Cost of
Goods
Sold
Work-in-Process
•Direct
Material
•Direct
Labor
•Overhead
Applied
Manufacturing Cost Flow

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Cost of Goods Sold Statement
The CGS statement can be divided into five distinct parts:
1. Direct Material Section, comprised of beginning inventory,
purchases, any purchase returns or allowances, and ending
inventory.
2. Direct Labor Section; indicating the cost of those employees
whose work can be identified directly with the product
manufactured.
3. Factory overhead, comprised of all those costs that assist in
an indirect manner in the manufacturing of the product.
4. Work in process inventories, representing costs in process at
the beginning and costs still in process at the end of the
period.
5. Finished goods inventories, beginning and ending.

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Cost of Goods Sold Statement
1- Direct Materials 190,000
2- Direct Labor 220,000
3- Factory Overhead 140,000
4- Work in process beginning Inventory 50,000
- Work in process ending inventory (20,000)
= Cost of Goods Manufactured 580,000
5- Finished Goods Inventory
+ Finished Goods beginning Inventory 30,000
Cost of Goods available for Sale 610,000
- Finished Goods Ending Inventory (90,000)
Cost of Goods Sold 520,000
Name of the Business
Cost of Goods Sold Statement
For the period ended Dec 31st 2010

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