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: O/S Raw Material

Conversion Cost:
Work in Process
Finished Goods
+ 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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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: 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 + Labor 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

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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
„ Paid to labor 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: + Labor 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

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Financial Accounting - I – MGT101 VU
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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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.
• 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
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
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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
• 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

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Solution:
Valuation of Stock by FIFO Method

Date Receipts Issues Value of Total Remaining Net

Stock Amount No. of units Balance
May 7 200 units 200 x 50 = 10,000 200 10,000
@ Rs. 10,000
50/unit
May 9 60 units @ Rs. 60 x 50 = (3,000) 140 7,000
50/unit 3,000
May 13 150 units 75 x 150 = 11,250 290 18,250
@ Rs. 11,250
75/unit
May 18 100 units 60 x 100 = 6,000 390 24,250
@ Rs. 6,000
60/unit
May 22 140 units @ 50 x 140 = (7,750) 240 16,500
Rs. 50/unit 7,000
10 units @ Rs.
75/unit 10 x 75 =
750
May 24 100 units @ 75 x 100 (7,500) 140 9,000
Rs. 75/unit =7,500
May 27 100 units 50 x 100 = 5,000 240 14,000
@ Rs. 5,000
50/unit
May 30 40 units @ Rs. 75 x 40 = (12,000) 40 2,000
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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Valuation of Stock by Weighted Average Method:

Date Receipts Issue Value of Total Total Average Net Balance

s Stock Amount(Rs. Units Cost(Rs.)/uni (Rs.)
) t
May 7 200 units 200 x 50 10,000 200 50 10,000
@ Rs. =
50/unit 10,000
May 9 60 60 x 50 (3,000) 140 7,000
units =
3,000
May 13 150 units 150 x 75 7,000+11250 140+150 18250/290 18,250
@ Rs. = = = =
75/unit 11,250 18250 290 62.9
May 18 100 units 100 x 60 18250+6000 290+100 24250/390 24,250
@ Rs. = = = =
60/unit 6,000 24250 390 62.2
May 22 150 150 x (9,330) 390-150 14,920
units 62.2 =
= 240
9330
May 24 100 100 x (6,220) 240-100 8,700
units 62.2 =
= 140
6220
May 27 100 units 100 x 50 8,700+5,000 140+100 13700/240 13,700
@ Rs. = = = =
50/unit 5,000 13,700 240 57.1
May 30 200 200 x (11,420) 240-200 2,280
units 57.1 =
= 40
11,420

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