Questions and Answers
What term describes costs that are recognized as expenses only when the related products are sold?
Product costs are treated as expenses in the period they are incurred.
False
What are the three classes of inventories for manufacturing companies?
Raw materials, work in process, finished goods
In the statement of profit and loss, which equation calculates the gross margin?
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What is the formula for calculating Cost of Goods Sold in a Merchandising Company?
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What does the cost of goods manufactured consist of in step 2 of preparation?
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In the Cost of Goods Manufactured Statement, the direct material available for use equals ___ beginning inventory plus ___ purchases.
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Period costs are included as part of the cost of goods sold.
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What is the net operating income derived from in the Cost of Goods Sold statement?
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What is the end result of the Cost of Goods Sold calculation in step 3?
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Study Notes
General Cost Principles
- Costs recognized as expenses in the profit and loss statement correspond to the period benefiting from the cost.
- Product costs incur when acquiring or manufacturing goods, recognized as expenses upon sale.
Cost Classification in SOPL
- Product Costs constitute the Cost of Goods Sold (COGS).
- Period Costs are categorized as Operating Expenses.
Raw Material Usage
- Definition unavailable in the provided text.
Product Costs
- Initially assigned to inventory on the statement of financial position.
- Recognized as COGS only when the related products are sold, not when incurred.
Period Costs
- Also referred to as inventory costs.
- Treated as expenses on the income statement.
Statement of Financial Position
- Manufacturing companies classify inventories into three categories:
- Raw Materials
- Work in Process
- Finished Goods
- Total inventory account consists of these three classes.
Statement of Profit and Loss
- Gross margin derived from sales minus costs.
- Calculation of goods available for use includes beginning balance plus additions to inventory.
- Gross margin is determined by subtracting ending inventory from goods available for use.
- Net income calculated by deducting administrative and selling expenses from gross margin.
Cost of Goods Sold for Merchandising Companies
- Formula:
- Beginning merchandise inventory + Purchases = Ending merchandise inventory + Cost of Goods Sold.
- Rearranged as:
- Cost of Goods Sold = Beginning merchandise inventory + Purchases - Ending merchandise inventory.
Cost of Goods Sold for Manufacturing Companies
- Formula:
- Cost of Goods Sold = Beginning finished goods inventory + Cost of Goods Manufactured - Ending finished goods inventory.
Preparing a Cost of Goods Manufactured Statement
-
Step 1: Calculate direct materials used:
- Beginning inventory of direct materials + Purchases = Direct materials available for use.
- Subtract ending inventory to determine direct materials used for production.
Calculating Cost of Goods Manufactured
-
Step 2:
- Total manufacturing cost derived from adding direct materials, direct labor, and manufacturing overheads.
- Add beginning work in process inventory, then subtract ending work in process to get Cost of Goods Manufactured.
Calculating Cost of Goods Sold
-
Step 3:
- Available finished goods calculated from Cost of Goods Manufactured + Beginning finished goods inventory.
- Subtract ending finished goods to find Cost of Goods Sold, then deduce administrative and selling expenses to arrive at net operating income.
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Description
This set of flashcards covers crucial concepts related to the schedule of cost of goods manufactured, focusing on accounting principles related to product costs and their recognition in financial statements. Use these flashcards to reinforce your understanding of how costs impact profit and loss statements and when they should be recognized as expenses.
